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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q/A


Amendment No. 1


(Mark One)



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

For the quarterly period ended March 31,
2001

or



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

For the transition period
from  to

Commission File Number 000-26441

CLARENT CORPORATION

(Exact name of registrant as specified in its
charter)


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

700 Chesapeake Drive

Redwood City, California 94063


(Address of principal executive offices and
zip code)


(650) 306-7511

(Registrants telephone number, including
area code)


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

Yes     þ     No     o


The number of shares outstanding of the
registrants common stock, $0.001 par value, was 40,074,347
at April 30, 2001.

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







1



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                              | CLARENT CORPORATION FORM 10-Q/A INDEX                                                        
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                               
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | SIGNATURES                                                                                   



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EXPLANATORY NOTE

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

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




CLARENT CORPORATION

FORM 10-Q/A INDEX

|                              |  |                                                                                                                                  |    |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                                  |    | Page
|                              |  |                                                                                                                                  |    | No. 
|                              |  |                                                                                                                                  |    |     
|PART I: FINANCIAL INFORMATION
|                             
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                 |    |      | 3  | 
|                              |  | Condensed Consolidated Balance Sheets as of
    March 31, 2001 (restated) and December 31, 2000
    (restated)                   |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of Operations
    for the Three Months Ended March 31, 2001
    (restated) and 2000 (restated) |    |      | 4  | 
|                              |  | Condensed Consolidated Statement of Cash Flows
    for the Three Months Ended March 31, 2001
    (restated) and 2000 (restated)  |    |      | 5  | 
|                              |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                                                               |    |      | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                        |    |      | 18 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                                   |    |      | 24 | 
|Signatures                    |  |                                                                                                                                  | 26 |     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1.     FINANCIAL
STATEMENTS

CLARENT CORPORATION






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands)


|                                         |                                           |                            |                                            |              |         |         |        |          |         |         | 
|---------------------------------------- | ----------------------------------------- | -------------------------- | ------------------------------------------ | ------------ | ------- | ------- | ------ | -------- | ------- | ------- | 
|                                         |                                           | March 31,                  |                                            | December 31,
|                                         |                                           | 2001                       |                                            | 2000        
|                                         |                                           |                            |                                            |             
|                                         |                                           | (Unaudited)                |                                            |             
|                                         |                                           | (Restated)                 |                                            | (Restated)  
|ASSETS                                  
|Current assets:                          |                                           |                            |                                            |              |         |         |        |         
|                                         | Cash and cash equivalents                 |                            | $                                          | 188,095      |         |         | $      | 185,627  |        
|                                         | Short-term investments                    |                            |                                            | 33,043       |         |         |        | 74,987   |        
|                                         | Accounts receivable, gross                |                            |                                            | 24,066       |         |         |        | 28,142   |        
|                                         | Receivables allowance                     |                            |                                            | (6,927       | )       |         |        | (6,973   | )      
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         | Accounts receivable, net                  |                            |                                            | 17,139       |         |         |        | 21,169   |        
|                                         | Inventories                               |                            |                                            | 27,393       |         |         |        | 17,662   |        
|                                         | Prepaid expenses and other current assets |                            |                                            | 5,956        |         |         |        | 5,942    |        
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         |                                           | Total current assets       |                                            |              | 271,626 |         |        |          | 305,387 |        
|Investments                              |                                           |                            | 13,829                                     |              |         |         | 14,479 |         
|Property and equipment, net              |                                           |                            | 46,482                                     |              |         |         | 36,938 |         
|Goodwill, net                            |                                           |                            | 86,237                                     |              |         |         | 93,644 |         
|Purchased intangible assets, net         |                                           |                            | 35,662                                     |              |         |         | 38,057 |         
|Deferred tax assets                      |                                           |                            | 14,663                                     |              |         |         | 14,534 |         
|Other assets                             |                                           |                            | 9,446                                      |              |         |         | 4,517  |         
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         |                                           |                            | Total assets                               |              | $       | 477,945 |        |          | $       | 507,556 | 
|                                         |                                           |                            |                                            |              |         |         |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                           |                            |                                            |              |         |         |        |         
|                                         | Accounts payable                          |                            | $                                          | 23,757       |         |         | $      | 14,337   |        
|                                         | Deferred revenue                          |                            |                                            | 6,256        |         |         |        | 8,528    |        
|                                         | Accrued liabilities                       |                            |                                            | 19,527       |         |         |        | 22,775   |        
|                                         | Customer advances                         |                            |                                            | 19,008       |         |         |        | 2,551    |        
|                                         | Merger related restructuring accrual      |                            |                                            | 6,248        |         |         |        | 6,248    |        
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         |                                           | Total current liabilities  |                                            |              | 74,796  |         |        |          | 54,439  |        
|Deferred tax liabilities                 |                                           |                            | 14,853                                     |              |         |         | 14,534 |         
|Stockholders equity:                    |                                           |                            |                                            |              |         |         |        |         
|                                         | Common stock                              |                            |                                            | 583,580      |         |         |        | 583,328  |        
|                                         | Deferred compensation                     |                            |                                            | (7,720       | )       |         |        | (9,740   | )      
|                                         | Accumulated other comprehensive loss      |                            |                                            | (596         | )       |         |        | (326     | )      
|                                         | Accumulated deficit                       |                            |                                            | (186,968     | )       |         |        | (134,679 | )      
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         |                                           | Total stockholders equity |                                            |              | 388,296 |         |        |          | 438,583 |        
|                                         |                                           |                            |                                            |              |         |         |        |         
|                                         |                                           |                            | Total liabilities and stockholders equity |              | $       | 477,945 |        |          | $       | 507,556 | 
|                                         |                                           |                            |                                            |              |         |         |        |         

See accompanying notes to condensed consolidated
financial statements.

3



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CLARENT CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


(Unaudited)


|                                                                |                                                |                          |         |                    |        |   |        |        |        | 
|--------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | - | ------ | ------ | ------ | 
|                                                                |                                                | Three Months Ended       |         | Three Months Ended
|                                                                |                                                | March 31, 2001           |         | March 31, 2000    
|                                                                |                                                |                          |         |                   
|                                                                |                                                | (Restated)               |         | (Restated)        
|Net revenue:                                                    |                                                |                          |         |                    |        |   |        |       
|                                                                | Product and software                           |                          | $       | 16,624             |        |   | $      | 20,485 |       
|                                                                | Service                                        |                          |         | 4,382              |        |   |        | 2,505  |       
|                                                                |                                                |                          |         |                    |        |   |        |       
|                                                                |                                                | Total net revenue        |         |                    | 21,006 |   |        |        | 22,990 | 
|Cost of revenue:                                                |                                                |                          |         |                    |        |   |        |       
|                                                                | Product and software                           |                          |         | 15,421             |        |   |        | 7,399  |       
|                                                                | Service                                        |                          |         | 3,248              |        |   |        | 1,638  |       
|                                                                |                                                |                          |         |                    |        |   |        |       
|                                                                |                                                | Total cost of revenue    |         |                    | 18,669 |   |        |        | 9,037  | 
|                                                                |                                                |                          |         |                    |        |   |        |       
|Gross profit                                                    |                                                |                          | 2,337   |                    |        |   | 13,953 |       
|Operating expenses:                                             |                                                |                          |         |                    |        |   |        |       
|                                                                | Research and development                       |                          |         | 14,758             |        |   |        | 4,340  |       
|                                                                | Sales and marketing                            |                          |         | 24,825             |        |   |        | 11,055 |       
|                                                                | General and administrative                     |                          |         | 6,523              |        |   |        | 2,441  |       
|                                                                | Amortization of deferred compensation          |                          |         | 2,020              |        |   |        | 1,378  |       
|                                                                | Amortization of goodwill and other intangibles |                          |         | 9,109              |        |   |        | 226    |       
|                                                                |                                                |                          |         |                    |        |   |        |       
|                                                                |                                                | Total operating expenses |         |                    | 57,235 |   |        |        | 19,440 | 
|                                                                |                                                |                          |         |                    |        |   |        |       
|Loss from operations                                            |                                                |                          | (54,898 | )                  |        |   | (5,487 | )     
|Other income, net                                               |                                                |                          | 2,774   |                    |        |   | 4,115  |       
|                                                                |                                                |                          |         |                    |        |   |        |       
|Loss before provision for income taxes                          |                                                |                          | (52,124 | )                  |        |   | (1,372 | )     
|Provision for income taxes                                      |                                                |                          | (165    | )                  |        |   | (25    | )     
|                                                                |                                                |                          |         |                    |        |   |        |       
|Net loss                                                        |                                                | $                        | (52,289 | )                  |        | $ | (1,397 | )     
|                                                                |                                                |                          |         |                    |        |   |        |       
|Basic and diluted net loss per share                            |                                                | $                        | (1.32   | )                  |        | $ | (0.04  | )     
|                                                                |                                                |                          |         |                    |        |   |        |       
|Shares used to compute basic and diluted net loss
    per share |                                                |                          | 39,621  |                    |        |   | 31,448 |       
|                                                                |                                                |                          |         |                    |        |   |        |       

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


(Unaudited)


|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |         |         |        |  
|------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ------------------ | ------- | ------ | ------- | ------- | ------- | ------ | -
|                                                                               |                                                                                               | Three Months Ended                                      |                                           | Three Months Ended
|                                                                               |                                                                                               | March 31, 2001                                          |                                           | March 31, 2000    
|                                                                               |                                                                                               |                                                         |                                           |                   
|                                                                               |                                                                                               | (Restated)                                              |                                           | (Restated)        
|Operating activities:                                                          |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               | Net loss                                                                                      |                                                         | $                                         | (52,289            | )       |        | $       | (1,397  | )      
|                                                                               | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                         |                                           |                    |         |        |         |         |        
|                                                                               |                                                                                               | Depreciation                                            |                                           |                    | 4,588   |        |         |         | 1,697   |       
|                                                                               |                                                                                               | Amortization of goodwill and other intangibles          |                                           |                    | 9,802   |        |         |         | 213     |       
|                                                                               |                                                                                               | Amortization of deferred compensation                   |                                           |                    | 2,020   |        |         |         | 1,378   |       
|                                                                               |                                                                                               | Impairment of investments                               |                                           |                    | 650     |        |         |         |        |       
|                                                                               |                                                                                               | Changes in operating assets and liabilities:            |                                           |                    |         |        |         |         |         |       
|                                                                               |                                                                                               |                                                         | Accounts receivable                       |                    |         | 4,016  |         |         |         | 1,836  |  
|                                                                               |                                                                                               |                                                         | Inventories                               |                    |         | (9,753 | )       |         |         | (1,512 | )
|                                                                               |                                                                                               |                                                         | Prepaid expenses and other current assets |                    |         | (14    | )       |         |         | 624    |  
|                                                                               |                                                                                               |                                                         | Deferred tax assets                       |                    |         | (129   | )       |         |         |       |  
|                                                                               |                                                                                               |                                                         | Other assets                              |                    |         | 71     |         |         |         |       |  
|                                                                               |                                                                                               |                                                         | Accounts payable and accrued liabilities  |                    |         | 6,172  |         |         |         | (957   | )
|                                                                               |                                                                                               |                                                         | Customer advances                         |                    |         | 16,457 |         |         |         | 1,191  |  
|                                                                               |                                                                                               |                                                         | Deferred revenue                          |                    |         | (2,272 | )       |         |         | (1,514 | )
|                                                                               |                                                                                               |                                                         | Deferred tax liabilities                  |                    |         | 319    |         |         |         |       |  
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               |                                                                                               | Net cash provided by (used in) operating
    activities |                                           |                    | (20,362 | )      |         |         | 1,559   |       
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Investing activities:                                                          |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               | Purchases of short-term investments                                                           |                                                         |                                           | (15,152            | )       |        |         | (41,808 | )      
|                                                                               | Sale and maturities of short-term investments                                                 |                                                         |                                           | 57,088             |         |        |         | 30,355  |        
|                                                                               | Note receivable from a leasing company                                                        |                                                         |                                           | (5,000             | )       |        |         |        |        
|                                                                               | Purchases of property and equipment                                                           |                                                         |                                           | (14,186            | )       |        |         | (3,478  | )      
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               |                                                                                               | Net cash provided by (used in) investing
    activities |                                           |                    | 22,750  |        |         |         | (14,931 | )     
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Financing activities:                                                          |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               | Proceeds from issuance of common stock                                                        |                                                         |                                           | 252                |         |        |         | 1,016   |        
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|                                                                               |                                                                                               | Net cash provided by financing activities               |                                           |                    | 252     |        |         |         | 1,016   |       
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Effect of exchange rate changes on cash and cash
    equivalents               |                                                                                               |                                                         | (172                                      | )                  |         |        | 95      |        
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Net increase (decrease) in cash and cash
    equivalents                       |                                                                                               |                                                         | 2,468                                     |                    |         |        | (12,261 | )      
|Cash and cash equivalents at beginning of period                               |                                                                                               |                                                         | 185,627                                   |                    |         |        | 238,724 |        
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Cash and cash equivalents at end of period                                     |                                                                                               | $                                                       | 188,095                                   |                    |         | $      | 226,463 |        
|                                                                               |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Supplemental disclosure of non-cash activities:                                |                                                                                               |                                                         |                                           |                    |         |        |         |        
|Preferred stock received in exchange for
    settlement of accounts receivable |                                                                                               | $                                                       |                                          |                    |         | $      | 1,500   |        

See accompanying notes to condensed consolidated
financial statements.

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CLARENT CORPORATION






NOTES TO UNAUDITED CONDENSED
CONSOLIDATED


FINANCIAL STATEMENTS


1.     BASIS OF
PRESENTATION

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

Restatement
of Financial Statements

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

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

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

Revenue
Restatement:



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

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




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

Impact on
Expenses:



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

Financial
Condition:



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

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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




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

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

The following tables summarize the effect of the
restatement for the quarterly period ended March 31, 2001.

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

|                                     |  |                    |         |          |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | -------- |  | - | ------- | -
|                                     |  |                   
|                                     |  | Three Months Ended
|                                     |  | March 31, 2001    
|                                     |  |                   
|                                     |  | As                 |         | As      
|                                     |  | Reported           |         | Restated
|                                     |  |                    |         |         
|Total net revenue                    |  | $                  | 61,192  |          |  | $ | 21,006  |  
|Gross profit                         |  |                    | 42,707  |          |  |   | 2,337   |  
|Loss from operations                 |  |                    | (16,417 | )        |  |   | (54,898 | )
|Net loss                             |  |                    | (13,964 | )        |  |   | (52,289 | )
|Basic and diluted net loss per share |  | $                  | (0.35   | )        |  | $ | (1.32   | )

Condensed Consolidated Balance Sheets Data (in
thousands):

|                                                                                        |  |                |         |          |  |   |         | 
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | -------- |  | - | ------- | 
|                                                                                        |  |               
|                                                                                        |  | March 31, 2001
|                                                                                        |  |               
|                                                                                        |  | As             |         | As      
|                                                                                        |  | Reported       |         | Restated
|                                                                                        |  |                |         |         
|Cash and cash equivalents                                                               |  | $              | 195,095 |          |  | $ | 188,095 | 
|Accounts receivable, net                                                                |  |                | 72,398  |          |  |   | 17,139  | 
|Inventories                                                                             |  |                | 27,370  |          |  |   | 27,393  | 
|Prepaid expenses and other current assets                                               |  |                | 11,956  |          |  |   | 5,956   | 
|Total current assets                                                                    |  |                | 339,862 |          |  |   | 271,626 | 
|Property and equipment, net                                                             |  |                | 46,173  |          |  |   | 46,482  | 
|Deferred tax assets                                                                     |  |                | 16,117  |          |  |   | 14,663  | 
|Total assets                                                                            |  |                | 547,326 |          |  |   | 477,945 | 
|Deferred revenue                                                                        |  |                | 13,242  |          |  |   | 6,256   | 
|Accrued liabilities, customer advances and
    merger
    related restructuring accrual |  |                | 25,265  |          |  |   | 44,783  | 
|Total current liabilities                                                               |  |                | 62,264  |          |  |   | 74,796  | 
|Total stockholders equity                                                              |  |                | 470,209 |          |  |   | 388,296 | 
|Total liabilities and stockholders equity                                              |  |                | 547,326 |          |  |   | 477,945 | 

8



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Recent
Events

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

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

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

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

2.     FINANCIAL
INSTRUMENTS

Available-for-sale securities are carried at fair
value, with the unrealized gains or losses reported as a
separate component of stockholders equity. Expected
maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay or call
obligations without prepayment penalties. Realized gains and
losses on sales of available-for-sale securities were immaterial
for the three months ended March 31, 2001.

9



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


3.     INVENTORIES

Inventories consist of the following (in
thousands):

|                |  |                |        |                   |  |   |        | 
|--------------- |  | -------------- | ------ | ----------------- |  | - | ------ | 
|                |  | March 31, 2001 |        | December 31, 2000
|                |  |                |        |                  
|                |  | (Restated)     |        | (Restated)       
|Raw materials   |  | $              | 14,968 |                   |  | $ | 10,901 | 
|Work-in-process |  |                | 478    |                   |  |   | 83     | 
|Finished goods  |  |                | 11,947 |                   |  |   | 6,678  | 
|                |  |                |        |                   |  |   |        | 
|                |  | $              | 27,393 |                   |  | $ | 17,662 | 
|                |  |                |        |                   |  |   |        | 

Inventory charges totaling $7.4 million were
taken during the three months ended March 31, 2001,
reflecting product costs associated with products shipped to
certain customers in the Asia-Pacific region for which revenue
was not recognizable, and for which the inventory is not
expected to be recoverable.

4.     INVESTMENTS

The Company invests in equity instruments of
privately held companies for the promotion of business and
strategic objectives. The Company has also invested in a venture
capital management fund. Except for $1.5 million received
in settlement of accounts receivable during 2000, all of the
Companys investments are valued at the cash paid for the
equity received, net of impairment losses. Impairment losses are
recorded when events and circumstances indicate that such assets
might be impaired and the decline in value is other than
temporary. During the first quarter of 2001, the Company
recorded impairment losses of $650,000.

Through March 31, 2001, the Company had
invested $6.8 million in a venture capital management fund.
The Company is committed to invest an additional
$8.2 million in the venture capital management fund in
future periods to be determined by the fund manager. This
investment is recorded at cost as the Company has virtually no
influence over the operating and financial policies of the fund.

5.     COMPREHENSIVE
LOSS

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

|                                   |                                |                    |         |                    |   |   |        |     |  
|---------------------------------- | ------------------------------ | ------------------ | ------- | ------------------ | - | - | ------ | --- | -
|                                   |                                | Three Months Ended |         | Three Months Ended
|                                   |                                | March 31, 2001     |         | March 31, 2000    
|                                   |                                |                    |         |                   
|                                   |                                | (Restated)         |         | (Restated)        
|Net loss                           |                                | $                  | (52,289 | )                  |   | $ | (1,397 | )  
|Other comprehensive income (loss): |                                |                    |         |                    |   |   |        |    
|                                   | Translation adjustments        |                    |         | (262               | ) |   |        | 93  |  
|                                   | Unrealized loss on investments |                    |         | (8                 | ) |   |        | (45 | )
|                                   |                                |                    |         |                    |   |   |        |    
|Comprehensive loss                 |                                | $                  | (52,559 | )                  |   | $ | (1,349 | )  
|                                   |                                |                    |         |                    |   |   |        |    

6.     INCOME
TAXES

The provision for income taxes of $165,000 for
the three months ending March 31, 2001 consists principally
of foreign income tax provided on the profits attributable to
the Companys foreign operations. The Companys
effective tax rates differed from the combined federal and state
statutory rates due primarily to acquisition charges that were
non-deductible for tax purposes.

10



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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


7.     STOCKHOLDERS
EQUITY

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

On February 14, 2001, the Company cancelled
outstanding options for approximately 2.9 million shares of
common stock under a cancellation and re-grant program for
employees. Replacement options to purchase approximately 635,000
shares of common stock were granted to employees on
February 15, 2001 at the fair market value of $13.625 per
share. These shares will vest in full on August 15, 2001
and will expire if unexercised on November 15, 2001.

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

8.     SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION

The Company operates in one industry segment. The
Company designs, develops and sells Internet protocol telephony,
or IP telephony, systems. Net revenue for non-U.S. locations is
substantially the result of export sales from the U.S.

Net revenue by geographic region based on
customer location was as follows (in thousands):

|                                  |                                |                    |   |                    |        |  |   |       |        | 
|--------------------------------- | ------------------------------ | ------------------ | - | ------------------ | ------ |  | - | ----- | ------ | 
|                                  |                                | Three Months Ended |   | Three Months Ended
|                                  |                                | March 31, 2001     |   | March 31, 2000    
|                                  |                                |                    |   |                   
|                                  |                                | (Restated)         |   | (Restated)        
|Net revenue by geographic region: |                                |                    |   |                    |        |  |   |      
|                                  | United States                  |                    | $ | 7,933              |        |  | $ | 9,823 |       
|                                  | Other Americas                 |                    |   | 1,153              |        |  |   | 649   |       
|                                  | Europe, Middle East and Africa |                    |   | 5,293              |        |  |   | 5,820 |       
|                                  | Asia Pacific                   |                    |   | 6,627              |        |  |   | 6,698 |       
|                                  |                                |                    |   |                    |        |  |   |      
|                                  |                                | Total              |   | $                  | 21,006 |  |   | $     | 22,990 | 
|                                  |                                |                    |   |                    |        |  |   |      

9.     NET LOSS PER
SHARE

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

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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


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

|                                     |                                     |                                                          |       |                    |        |   |       |        |        | 
|------------------------------------ | ----------------------------------- | -------------------------------------------------------- | ----- | ------------------ | ------ | - | ----- | ------ | ------ | 
|                                     |                                     | Three Months Ended                                       |       | Three Months Ended
|                                     |                                     | March 31, 2001                                           |       | March 31,2000     
|                                     |                                     |                                                          |       |                   
|                                     |                                     |                                                         
|                                     |                                     | (In thousands, except per share amounts)                
|                                     |                                     | (Restated)                                               |       | (Restated)        
|Numerator:                           |                                     |                                                          |       |                    |        |   |       |       
|                                     | Net loss                            |                                                          | $     | (52,289            | )      |   | $     | (1,397 | )     
|                                     |                                     |                                                          |       |                    |        |   |       |       
|Denominator:                         |                                     |                                                          |       |                    |        |   |       |       
|                                     | Weighted average shares outstanding |                                                          |       | 39,621             |        |   |       | 31,898 |       
|                                     | Less shares subject to repurchase   |                                                          |       |                   |        |   |       | (450   | )     
|                                     |                                     |                                                          |       |                    |        |   |       |       
|                                     |                                     | Denominator for basic and diluted net loss per
    share |       |                    | 39,621 |   |       |        | 31,448 | 
|                                     |                                     |                                                          |       |                    |        |   |       |       
|Basic and diluted net loss per share |                                     | $                                                        | (1.32 | )                  |        | $ | (0.04 | )     
|                                     |                                     |                                                          |       |                    |        |   |       |       

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

10.     RELATED PARTY
TRANSACTIONS

Transactions
With Management and Others

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

Note
Receivable from a Leasing Company

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

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

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

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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


remarketing agreement. As of September 30,
2001 operating expenses for Clarent Finance had been immaterial.

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

Transactions
Related to Asia-Pacific Region

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

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

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

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

From April to July 2001, an additional
$43.0 million was transferred by the Asia-Pacific regional
office to Great MinCom and Articula in violation of the
Companys financial control procedures. After transfer of
these funds, the Company received promissory notes in exchange
for the cash. These promissory notes are: a promissory note from
Articula in the amount of $3.0 million (bearing interest of
4.15% per annum from May 3, 2001); a promissory note from
Great MinCom in the amount of $2.4 million (bearing
interest of 4.15% per annum from May 21, 2001); and a
convertible promissory note from Articula and Great MinCom in
the amount of $37.6 million (bearing interest of 5.0% per
annum from July 25, 2001 and due in January 2002). At the
same time as the execution of the $37.6 million convertible
promissory note, the Company entered into a Strategic Partner
Agreement with Articula and Great MinCom as of July 25,
2001, pursuant to which

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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Articula and Great MinCom, among other things,
agreed to provide sales and marketing support to the Company and
to use the Company as their exclusive supplier of VoIP products.

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

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

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

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

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

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##### Table of Contents



CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


revenue associated with the original recording of
revenue of such products and expensed the associated inventory
in the same period that the revenue was originally recognized.

Indebtedness
of Management

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

11.     RECENT
ACCOUNTING PRONOUNCEMENTS

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

12.     RESTRUCTURING
AND MERGER RELATED ACCRUALS

On August 10, 2000, the Company acquired ACT
Networks, Inc. (ACT Networks), a leading provider of
multi-service access and voice/data integration products that
enable the convergence of voice, video and data onto one managed
network. In accordance with a plan that existed at the time of
the acquisition, the Company established $6.2 million in
accruals for merger related restructuring costs. During the
quarter ended March 31, 2001 the Company had no activity
related to its merger related restructuring accrual. At
March 31, 2001, $6.2 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, $1.3 million for
involuntary employee termination costs related to approximately
twenty-three duplicative management personnel and manufacturing
employees in the ACT Networks organization and $933,000 in fixed
assets disposition costs for disposal of manufacturing equipment
and leasehold improvements in the Calabasas facility. These
costs relate to the plan to exit the manufacturing activities
currently performed at the Calabasas facility through
discontinuation of certain product lines and outsourcing the
manufacturing of the remaining products. The Company has started
working with a contract manufacturer and expects to be ceasing
production at the Calabasas facility by June 30, 2001.

13.     CUSTOMER
ADVANCES

As of March 31, 2001, the Company received
funds totaling $19.0 million from certain customers in the
Asia-Pacific region. These payments are currently recorded as
customer advances. These advances consist of funds received from
customers, and the Company now believes that these funds may be
subject to refund, because (i) the Company is aware of a
purported return right with respect to certain products or
(ii) the customer has not accepted possession of certain
products.

14.     SUBSEQUENT
EVENTS  EQUITY INCENTIVE PLAN AND
RESTRUCTURING

Amendment to
Employee Option Plan

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

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Restructuring

On May 14, 2001, the Company announced a
reduction in workforce by approximately 10% and a streamlining
of its operations to achieve cost savings and operating
efficiencies in accordance with previously stated goals. The
Company expects to take a one-time restructuring charge relating
to the reduction in workforce, assets and excess facilities of
approximately $20.0 million in the second quarter 2001.

15.     SUBSEQUENT
EVENT  LITIGATION

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

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

In October and November 2001, four shareholder
derivative actions were filed against the Company, three in the
Delaware Chancery Court and one in California Superior Court. In
November 2001, the three Delaware shareholder derivative actions
were consolidated into a single action. The plaintiffs in these
actions claim to be suing on the Companys behalf and name
various of the Companys current and former officers and
directors as defendants. The complaints assert several claims,
including breach of fiduciary duties, corporate waste, abuse of
control, unjust enrichment, usurpation of corporate
opportunities and mismanagement, resulting from, among other
things, the Companys reporting of allegedly false
financial statements concerning the Companys results of
operations for the second, third and fourth quarters of 2000 and
the first and second quarters of 2001, the Companys
alleged failure to disclose information regarding the
Companys

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CLARENT CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


operations and the defendants alleged
failure to implement and maintain adequate internal financial
controls. The complaints seek unspecified monetary damages and
other relief. The plaintiff in the California action has
commenced discovery against the defendants. However, the Company
is seeking a protective order relating to certain of the
discovery requests. Discovery has not commenced in the Delaware
action. On March 23, 2002, the Companys Board of
Directors formed a special litigation committee of the Board of
Directors to investigate the plaintiffs allegations. No
trial date has been set in either action.

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

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

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

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

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

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

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

Overview

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

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

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

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

Revenue
Restatement:



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

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Impact on
Expenses:



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

Financial
Condition:



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

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

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

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##### Table of Contents



Results of Operations

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

|                                       |                                                |                          |      |                    |     |  |     |    |     | 
|-------------------------------------- | ---------------------------------------------- | ------------------------ | ---- | ------------------ | --- |  | --- | -- | --- | 
|                                       |                                                | Three Months Ended       |      | Three Months Ended
|                                       |                                                | March 31, 2001           |      | March 31, 2000    
|                                       |                                                |                          |      |                   
|                                       |                                                | (Restated)               |      | (Restated)        
|As a percentage of net revenue:        |                                                |                          |      |                    |     |  |     |   
|                                       | Product and software                           |                          |      | 79                 | %   |  |     | 89 | %  
|                                       | Service                                        |                          |      | 21                 |     |  |     | 11 |    
|                                       |                                                |                          |      |                    |     |  |     |   
|                                       |                                                | Total net revenue        |      |                    | 100 |  |     |    | 100 | 
|Cost of revenue:                       |                                                |                          |      |                    |     |  |     |   
|                                       | Product and software                           |                          |      | 73                 |     |  |     | 32 |    
|                                       | Service                                        |                          |      | 16                 |     |  |     | 7  |    
|                                       |                                                |                          |      |                    |     |  |     |   
|                                       |                                                | Total cost of revenue    |      |                    | 89  |  |     |    | 39  | 
|                                       |                                                |                          |      |                    |     |  |     |   
|Gross profit                           |                                                |                          | 11   |                    |     |  | 61  |   
|Operating expenses:                    |                                                |                          |      |                    |     |  |     |   
|                                       | Research and development                       |                          |      | 70                 |     |  |     | 19 |    
|                                       | Sales and marketing                            |                          |      | 118                |     |  |     | 48 |    
|                                       | General and administrative                     |                          |      | 31                 |     |  |     | 11 |    
|                                       | Amortization of deferred compensation          |                          |      | 10                 |     |  |     | 6  |    
|                                       | Amortization of goodwill and other intangibles |                          |      | 43                 |     |  |     | 1  |    
|                                       |                                                |                          |      |                    |     |  |     |   
|                                       |                                                | Total operating expenses |      |                    | 272 |  |     |    | 85  | 
|                                       |                                                |                          |      |                    |     |  |     |   
|Loss from operations                   |                                                |                          | (261 | )                  |     |  | (24 | ) 
|Other income, net                      |                                                |                          | 13   |                    |     |  | 18  |   
|                                       |                                                |                          |      |                    |     |  |     |   
|Loss before provision for income taxes |                                                |                          | (248 | )                  |     |  | (6  | ) 
|Provision for income taxes             |                                                |                          | (1   | )                  |     |  |    |   
|                                       |                                                |                          |      |                    |     |  |     |   
|Net loss                               |                                                |                          | (249 | )%                 |     |  | (6  | )%
|                                       |                                                |                          |      |                    |     |  |     |   

Net Revenue

Net revenue decreased 9% to $21.0 million in
the three months ended March 31, 2001 from
$23.0 million in the three months ended March 31,
2000. The decrease in product and software sales is attributable
to weak global economic conditions, including, in particular,
the downturn of the telecommunications market, resulting in a
significant decline in capital expenditures by our customers
offset in part by revenues from a suite of products acquired
from ACT Networks in August 2000. Service revenue from
maintenance and support increased by 75% to $4.4 million in
the three months ended March 31, 2001, from
$2.5 million for the same three months of 2000. The
increase in service revenue is attributable to the renewal of
support contracts with existing customers and higher sales
during the second half of fiscal 2000. No customer accounted for
10% or more of net revenue for the three months ended
March 31, 2001.

Cost of Revenue

Cost of revenue increased 107% to
$18.7 million in the three months ended March 31, 2001
from $9.0 million in the three months ended March 31,
2000. Product and software costs increased by 108% to
$15.4 million in the three months ended March 31, 2001
from $7.4 million in the same period of 2000. Service costs
increased by 98% to $3.2 million in the three months ended
March 31, 2001 from $1.6 million in the same period of
2000, due to the increases in technical support personnel to
service an anticipated increased customer base.

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Gross margin decreased to 11% for the first
quarter of 2001, compared to 61% for the corresponding period in
2000 and 39% for the fourth quarter of 2000. The decrease in
gross margin largely resulted from the $7.4 million of
product costs associated with products shipped to certain
customers in the Asia-Pacific region for which revenue was not
recognizable because we now believe that these customers
indirectly used Company funds for the purchase of our products
and, to a lesser degree, because certain customers purportedly
had return rights for such products. We believe that such
products, once delivered to the customer, will probably not be
recoverable. The decrease in gross margin was also the result of
a higher rate of increase in costs associated with increased
headcount as compared to the rate of increase of revenue for the
period.

The mix of products we sell significantly impacts
our gross margin. The decrease in sales of our software products
both in absolute dollars and as a percentage of revenue has
negatively impacted our gross margin. We expect a continuing
negative impact on gross margin from the introduction of new
hardware products and new versions of existing 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 and rapid
technological changes, and we expect these to continue. We
expect gross margin to be adversely affected by increases in
material or labor costs, costs related to maintaining higher
inventory balances, changes in the geographical mix of customers
and changes in the channels of distribution. We expect to
continue to increase the percentage of sales to distributors,
which generally results in lower gross margins.

Research and Development Expenses

Research and development expenses increased 240%
to $14.8 million in the three months ended March 31,
2001 from $4.3 million in the three months ended
March 31, 2000. Research and development expenses increased
as a percentage of revenue to 70% for the three months ended
March 31, 2001 from 19% in the three months ended
March 31, 2000. The increases in research and development
expenses both in absolute dollars and as a percentage of revenue
from period to period, were attributable to increases in the
number of research and development personnel to 278 at
March 31, 2001 from 76 at March 31, 2000 in
anticipation of higher current period revenue and higher revenue
growth, and to the decrease in net revenue.

Sales and Marketing Expenses

Sales and marketing expenses increased 125% to
$24.8 million in the three months ended March 31,
2001, from $11.1 million in the three months ended
March 31, 2000. The absolute dollar increase in sales and
marketing expenses was primarily attributable to an increase in
personnel to 486 at March 31, 2001, from 199 at
March 31, 2000. The change was also due to expenses
required to implement our sales and marketing strategy and
increased public relations and other promotional expenses
including increased participation in our annual customer summit.
Sales and marketing expenses as a percentage of revenue
increased to 118% for the three months ended March 31, 2001
from 48% in the three months ended March 31, 2000. The
increase in sales and marketing costs as a percentage of revenue
is attributable to the growth rate of sales and marketing
expenses compared to a decrease in net revenue for the period as
we added sales and marketing personnel and spending on
promotional activities in anticipation of higher current period
revenue and higher revenue growth.

General and Administrative Expenses

General and administrative expenses increased
167% to $6.5 million in the three months ended
March 31, 2001, from $2.4 million in the three months
ended March 31, 2000. General and administrative expenses
as a percentage of revenue increased to 31% for the three months
ended March 31, 2001 from 11% for the three months ended
March 31, 2000. The absolute dollar increase in general and
administrative expenses from period to period was largely
attributable to an increase in personnel and related expenses
required to build the infrastructure to support a larger
organization based on anticipated higher current period revenue
and higher revenue growth. The general and administrative
headcount increased to 153 at March 31, 2001, as compared
to 64 at March 31, 2000.

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Amortization of Deferred
Compensation

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

On February 14, 2001, the Company cancelled
outstanding options for approximately 2.9 million shares of
common stock under a cancellation and re-grant program for
employees. Replacement options to purchase approximately 635,000
shares of common stock were granted to employees on
February 15, 2001, at the fair market value of $13.625 per
share. These shares vested in full on August 15, 2001, and
expired unexercised on November 15, 2001.

Amortization of Goodwill and Other
Intangibles

Amortization of goodwill and purchased intangible
assets for the three months ended March 31, 2001, was
$9.1 million as compared to $226,000 for the three months
ended March 31, 2000. The goodwill and purchased intangible
assets were the result of three purchase business combinations.
One purchase was completed in the fourth quarter of 1999 and two
in the third quarter of 2000. The value of the purchased
intangible assets was determined using independent valuations
for both the PEAK and ACT Networks acquisitions in 2000. We are
amortizing the goodwill and purchased intangible assets using
the straight-line method over periods ranging from three to five
years from the dates of acquisition.

Status of R&D Projects Acquired From ACT
Networks

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

|             |  |                 |     |            |  |            |     |  |  |  |         | 
|------------ |  | --------------- | --- | ---------- |  | ---------- | --- |  |  |  | ------- | 
|             |  | Estimated Costs |     |            |  |           
|             |  | to Complete     |     | Expected   |  | Expected  
|             |  | at Time of      |     | Costs at   |  | Date of   
|             |  | Acquisition     |     | Completion |  | Completion
|             |  |                 |     |            |  |           
|             |  |                 |     |           
|             |  | (In millions)   |     |           
|NetPerformer |  | $               | 3.9 |            |  | $          | 3.9 |  |  |  | Q3 2001 | 
|SX-10        |  | $               | 0.8 |            |  | $          | 0.8 |  |  |  | Q4 2001 | 
|DynaStar     |  | $               | 0.8 |            |  | $          | 0.8 |  |  |  | Q2 2001 | 

Other Income, Net

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

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Provision for Income Taxes

The provision for income taxes of $165,000 for
the three months ended March 31, 2001, and $25,000 for the
three months ended March 31, 2000 consist principally of
foreign income tax provided on the profits attributable to the
Companys foreign operations. Our effective tax rates
differed from the combined federal and state statutory rates due
primarily to acquisition charges that were non-deductible for
tax purposes.

Liquidity and Capital Resources

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

Net cash used in operating activities was
$20.4 million in the three months ended March 31,
2001, compared to net cash of $1.6 million provided by
operating activities during the same period of 2000. The net
cash used in operating activities in 2001 was principally the
result of a net loss of $52.3 million an increase in inventories
of $9.8 million, and a decrease in deferred revenue of
$2.3 million, which was partially offset by adjustments for
amortization and depreciation of $16.4 million, investment
impairment of $650,000, an increase in customer advances of
$16.5 million, a decrease in accounts receivable of
$4.0 million, and an increase in accounts payable and
accrued liabilities of $6.2 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 payable and accrued liabilities primarily
resulted from increases in inventories and, to a lesser extent,
increases in operating expense levels, in both cases associated
with the higher anticipated revenues than the level of the
restated revenue. The increase in inventories was in
anticipation of expected growth in product revenue. The decrease
in deferred revenue resulted from decreases in amounts deferred
for maintenance revenue. The increase in customer advances
resulted from our receipt of funds from customers that we now
believe may be subject to refund, because of (i) a
purported return right or (ii) the customer has not
accepted possession of certain products. Accounts receivable
decreased as a result of a decrease in revenues.

Net cash provided by operating activities was
$1.6 million in the first quarter of 2000, compared with
$4.0 million used in operating activities in the same
period in 1999. Net cash provided by operating activities for
the first quarter of 2000 was attributable primarily to a net
loss of approximately $1.4 million, which was more than
fully offset by depreciation of $1.7 million, amortization
of $1.6 million, a decrease in accounts receivable of $1.8
million, a decrease in prepaid expenses and other current assets
of $624,000, and an increase in customer advances of
$1.2 million. These amounts were partially offset by an
increase in inventories of $1.5 million, decreases in
accounts payable and accrual liabilities of $957,000, and a
decrease in deferred revenue of $1.5 million. The increase
in inventory for the first quarter was primarily in anticipation
of expected growth in product revenue as well as a greater need
for evaluation units. The decrease in accounts receivable for
the first quarter of 2000 is primarily the result of collection
of aged receivable balances.

Net cash from investing activities was
approximately $22.8 million in the first three months of
2001 as compared to $14.9 million used in investing
activities for the same period in 2000. For the first three
months of 2001, $41.9 million of cash from investing
activities resulted from the sale and maturity of investments,
net of purchases, as compared to $11.4 million invested in
the purchase of investment securities net of sales and
maturities during the same period in 2000. Cash used in
investing activities during the first quarter of 2001 included a
note receivable of $5.0 million from a leasing company
that, as of the date of this filing, we have acquired. Cash used
in investing activities also includes purchases of property and
equipment and expenditures on leasehold improvements totaling
$14.2 million, which were based on anticipated higher
current period revenue and higher revenue growth. Cash used for
the purchase of property and equipment for the three months
ended March 31, 2000, was $3.5 million.

Net cash from financing activities was $252,000
in the three months ended March 31, 2001 as compared to
$1.0 million for the same period in 2000. The cash provided
by financing activities was solely from the exercise of employee
stock options.

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

On March 31, 2001, our cash, cash
equivalents and short-term investment balance was
$221.1 million, which we believed would be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.

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

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

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




ITEM 3.     QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Market Risk

Our financial market risk includes risks
associated with international operations and related foreign
currencies. We anticipate that international sales will continue
to account for a significant portion of our consolidated
revenue. Our international sales are largely denominated in U.S.
dollars and therefore are not subject to material foreign
currency exchange risk. Expenses of our international operations
are denominated in each countrys local currency and
therefore are subject to foreign currency exchange risk;
however, through March 31, 2001 we have not experienced any
significant negative impact on our operations as a result of
fluctuations in foreign currency exchange rates. We do not
currently engage in any hedging activities or use derivative
financial instruments.

We have an investment portfolio of fixed income
securities, including those classified as cash equivalents, of
approximately $180 million at March 31, 2001. These
securities are subject to interest rate fluctuations and will
decrease in market value if interest rates increase.

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. We
invest primarily in high-quality, short-term debt

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instruments such as U.S. government securities
and instruments issued by high quality financial institutions
and companies including money market instruments and debt issued
by corporations. A hypothetical 100 basis point increase in
interest rates would result in less than a $200,000 decrease
(less than 0.2%) in the fair market value of our
available-for-sale securities.


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

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CLARENT CORPORATION






SIGNATURES


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



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



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

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

Date: May 8, 2002

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