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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K/A

Amendment No. 1




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

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

For the year ended December 31,
2000

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)


(650) 306-7511

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common stock, $.001 par value


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K/A or any amendment
to this
Form 10-K/A.  o

The aggregate market value of voting stock held
by non-affiliates of the registrant was approximately
$278 million as of February 28, 2001, based upon the
closing price on the Nasdaq National Market reported for such
date. This calculation does not reflect a determination that
certain persons are affiliates of the registrant for any other
purpose and excludes approximately 13,180,000 of the
registrants outstanding common stock held by directors,
officers and stockholders whose ownership exceeds 5% of the
common stock outstanding as of February 28, 2001. Exclusion
of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under
common control with the registrant.

39,645,000 shares of the registrants common
stock, $.001 par value, were outstanding at February 28,
2001.

DOCUMENTS INCORPORATED BY REFERENCE

Part III
Unless otherwise discussed in this Form 10-K/A, portions of
the registrants definitive proxy statement issued in
connection with the registrants annual meeting of
stockholders held on June 7, 2001, are incorporated by
reference to Part III of this report.



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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | ITEM 1. BUSINESS                                                                             
|             | ITEM 2. PROPERTIES                                                                           
|             | ITEM 3. LEGAL PROCEEDINGS                                                                    
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II     
|             | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|             | ITEM 6. SELECTED FINANCIAL DATA                                                              
|             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|PART III    
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|             | ITEM 11. EXECUTIVE COMPENSATION                                                              
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV     
|             | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES  
|Exhibit 23.1



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Explanatory Note

This amendment on Form 10-K/ A amends the
Annual Report of Clarent Corporation (the Company)
on Form 10-K previously filed for the year ended
December 31, 2000 (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 year ended
December 31, 2000 are more fully described in Notes 1 and 7
of Notes to Consolidated Financial Statements. In addition, the
Companys current litigation proceedings are described in
Note 16 of Notes to 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-K/ 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-K/ A. Except as specifically
indicated above, no other information included in the Prior
Report on Form 10-K is amended by the Form 10-K/ 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-K/ A

Year Ended December 31, 2000


TABLE OF CONTENTS

|           |  |                                                                                           |    |          |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | -------- | -- | 
|           |  |                                                                                           |    | Page No.
|           |  |                                                                                           |    |         
|PART I    
|Item 1.    |  | Business                                                                                  |    |          | 3  | 
|Item 2.    |  | Properties                                                                                |    |          | 11 | 
|Item 3.    |  | Legal Proceedings                                                                         |    |          | 12 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |          | 12 | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |          | 12 | 
|Item 6.    |  | Selected Financial Data                                                                   |    |          | 13 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |          | 14 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |          | 23 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                               |    |          | 24 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosures |    |          | 57 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |    |          | 57 | 
|Item 11.   |  | Executive Compensation                                                                    |    |          | 57 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |          | 57 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |          | 57 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |          | 62 | 
|Signatures |  |                                                                                           | 65 |         

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PART I

You should be aware that the following discussion
contains both historical information and forward-looking
statements. Forward-looking statements are statements made about
future events and include projections and other statements about
what may or could happen in the future based on our current
expectations about our business and industry. In some cases,
these statements may be identified by terminology such as
may, will, should,
expect, plan, anticipate,
believe, estimate, predict,
potential, and continue, or the
negatives of such terms, and other comparable terminology. You
should be aware that forward-looking statements involve known
and unknown risks and uncertainties. Our actual results could
differ significantly from those you might expect based on our
forward-looking statements. Factors that may cause or contribute
to such differences include, among others, those discussed under
the captions Business and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. You should also consider the additional risks
described in the section entitled Risk Factors That May
Impact Future Operating Results in our Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2001.




ITEM 1.     BUSINESS

RESTATEMENT OF FINANCIAL STATEMENTS

The Consolidated Financial Statements included in
this Form 10-K/A have been restated, as more fully
described in Note 1 of Notes to Consolidated Financial
Statements. Except for financial statement information and
related disclosures that are specifically related to the
restatement and except as described in the Explanatory Note to
this Form 10-K/A, the information in this Item 1
remains as of the date of the Prior Report.

OVERVIEW

Clarent Corporation is a leading provider of
software-based communications solutions that are designed to
take advantage of the flexibility and universal reach of
Internet Protocol (IP) communications networks, the most
prominent of which is the public network known as the Internet.
Our software-based solutions, in conjunction with our hardware
or equipment provided by others, are designed to 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 (ISPs), Application Service Providers (ASPs),
web-to-phone providers and others employing Internet-based
business models. Traditional telecommunication service
providers  companies that have previously served as
the monopoly or incumbent provider in their region 
and next generation service providers are addressing
business challenges and service demands that result from a
worldwide movement towards deregulation of telecommunications
markets, a trend that has been reinforced by a mandate from the
World Trade Organization (WTO).

Our solutions provide seamless bridges between
the traditional circuit-switched telephone system and Internet
Protocol networks, allowing the use of IP telephony to be
transparent to end user customers using their existing wire line
or wireless telephones. Our solutions deliver a level of voice
quality that can be indistinguishable from the voice quality of
the traditional telephone system.

Using our technology to transmit voice, fax and
data simultaneously, our customers are able to more efficiently
and cost effectively use the available capacity of their
networks. Our clearinghouse solutions also enable
interconnection among communication service providers
networks for resource sharing, minutes exchange and other
applications.

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Our software platform offers service providers an
opportunity to generate new revenue and enhance their
competitive position by offering their customers personalized,
enhanced services and features. Our solutions feature a modular
architecture that permits our customers to add new product and
service features without extensive product cost or development
time.

The end-users that utilize our systems are
increasingly served both by service providers and a community of
partners such as systems integrators and resellers. Our products
have been and are increasingly being deployed to provide
additional service options, flexibility, and cost-savings to
small, medium and large enterprises and to consumers. We believe
that in the future, end-user customers will use communications
services in both new and traditional ways that leverage the
ubiquity of the Internet and related networks and the real-time
response that has become the hallmark of the worldwide web.

We were incorporated in the State of California
on July 2, 1996 and reincorporated in the State of Delaware
on June 24, 1999. We began commercial shipment of our long
distance products in the first quarter of 1997, introduced our
clearinghouse solutions in 1999 and introduced our local access
solution in the fourth quarter of 2000. In August 2000, the
acquisition of ACT Networks, Inc. solidified our commitment to
becoming a leader in the IP communications industry by
fortifying key areas of our organization and expanding our
product portfolio.

CLARENTS TECHNOLOGY AND
PRODUCTS

The Clarent system incorporates both internally
developed and third party technologies. Our architecture is
comprised of three separate elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intelligent Management: the Clarent Command
    Center software is designed to enable a service provider to
    manage its physical network, provision service, intelligently
    route calls, track its subscriber/ customer base and their
    service elections, and bill customers. The Command Center also
    has the capability to link to enhanced service applications
    built by us or by outside application developers.
|
| |  | Call Control/Softswitch: software that is
    designed to enable the set up and teardown of calls and
    associated call management functions. Our call control software
    is embedded in some models of our gateway (hardware) products
    and is provided separately, through our Call Manager
    softswitches, for other gateway models.                                                                                     
|
| |  | Transport (hardware): Our gateway products
    convert voice to packets and to language that the Internet
    understands and then re-assemble the packets back to language
    understood by the traditional phone network.                                                                                                                                                                                                         

This architecture integrates all functions
performed by the Clarent system in a modular, flexible manner
that enables the easy addition or alteration of system
components and features.

In order to implement the Clarent solution in a
long distance network, as shown below, a service provider must
acquire a connection to a local central office switch owned by a
local telephone company and acquire access to the Internet or an
Internet Protocol network. This graphic shows that a service
provider connects the IP telephony gateway to a central office
switch and the Internet, or other IP network, to allow the
Clarent solution to work. The implementation for an enterprise
is similar, except an enterprise usually connects the gateway to
a private branch exchange, commonly known as PBX, instead of a
central office switch.

[CLARENTS LONG DISTANCE SOLUTION DIAGRAM
APPEARS HERE]

Our local access solution, as shown below,
involves a small device located on an end-users premises
that connects on one side to an end-users telephone and on
the other side to a broadband modem, such as a DSL or cable
modem, or directly to the Internet through an Ethernet
connection.

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[DIAGRAM OF CLARENTS LOCAL ACCESS
SOLUTION]

Clarent Command Center

The core of the Clarent solution is the Clarent
Command Center, a centralized client/server software package
that processes network management and back-office functions,
including the routing and pricing of calls, subscriber
management, gateway monitoring and billing. In conjunction with
third-party relational databases, the Clarent Command Center
provides unified, intelligent back-end management functions for
service providers, including user administration, billing,
dynamic call routing, call detail records and class of service.
A single Clarent Command Center can support and control multiple
Clarent gateways. The Clarent Command Center communicates with
Clarent gateways over the Internet or an Internet Protocol
network, and does not require a dedicated connection to each
Clarent gateway. The Clarent Command Center supports
multi-vendor interoperability and can control third-party
gateways from vendors such as Cisco.

By centralizing all network management and
back-office functions, networks using the Clarent system can be
configured and modified quickly and easily. Furthermore, the
Clarent Command Center is designed to be fully redundant through
the use of multiple Clarent Command Centers to enhance network
efficiency and reliability.

Examples of network management and back-office
functions performed by the Clarent Command Center include:



| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Subscription
    management:Subscriber data is stored
    in the database in an easily accessible format. This allows
    telecommunications service providers to access information about
    their subscribers frequently; determine who can use the system
    and what to charge them; and easily modify the information about
    their subscribers.
|
| |  | End-user feature
    control:With the Clarent software
    architecture, the system can be set up to allow the end-user to
    add or remove telecommunications features, such as call waiting,
    additional phone lines, and Caller I.D., through a Web
    browser.                                                                                  

The Clarent Command Center requires the
installation of a third-party relational database that stores
operational support system data for a network of Clarent
gateways. The data stored in the database is used by the Clarent
Command Center to provide comprehensive back-office
functionality. Customers using the Clarent system can develop
their own customized Web interfaces, billing systems and
advanced management tools. The Clarent system is currently
compatible with several third-party databases, including current
releases from Oracle Corporation and Microsoft Corporation.

Examples of the data stored in the relational
database include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Subscriber data:Information about authorized users or subscribers is stored in
    the database. This allows the system to decide who to allow
    access to the system and how to bill them. It also allows for
    customized feature sets for end-users. Service providers can
    easily extract subscriber data from the database so they can
    understand detailed information about the subscribers use
    of the system.                       
|
| |  | Billing information:Billing data is collected and stored in the relational database
    and includes extensive detail on all calls made through the
    network. Invoice generation and reporting programs can be
    developed using standard database reporting tools.                                                                                                                                                                                   
|
| |  | Domain management:Service provider and enterprise customers want to determine what
    calls can be completed within their networks. The Clarent system
    provides these customers with the capability to segment a
    network into domains, or subnetworks within a larger
    network. This means that enterprises can manage part of the
    IP telephony network themselves, with the service provider
    offering overall management capability.

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Clarent Gateways

Our gateways are hardware or integrated hardware
and software products that convert voice, fax or data
communications into packets and transmit the packets over IP
networks. At the destination, another of our gateways converts
these packets back into circuit-switched voice, fax or data. The
Clarent gateway is a bridge between the traditional telephone
network or a PBX on one side and the IP network on the other
side. Typically, a service provider or enterprise will deploy
more than the number of gateways sufficient to handle the
projected call volume to provide gateways for system redundancy.

Our family of gateways includes Clarents
Gateway 400 and Gateway 1200, which are integrated
hardware and software products designed for deployment by
service providers. These gateways have the capacity to handle up
to 360 simultaneous voice calls, fax, and data
transmissions. Our call control software, or softswitch, is
embedded in these gateway products. Our gateway line also
includes the ACT Networks SX 10 (renamed the Clarent
Gateway 400LE) and NetPerformer products. We plan to launch
the new versions of these products in 2001 on platforms that
link these enterprise gateways to our existing softswitch
architecture. In 2001, we also plan to introduce a new, higher
density gateway, the Clarent Backbone High-density
Gateway (BHG) that is designed to handle up to 1,920
simultaneous voice, fax, or data transmissions.

In the spring of 2001, we formally launched a new
line of low-density customer premises gateways (CPGs) for
our local access solution. These gateways, which have the
capacity to handle 2 to 4 simultaneous phone, fax, or data
transmissions, are designed to reside on the end-users
premises. The CPGs will be controlled by our Local Access Call
Manager software.

Our gateways provide the following functionality:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Standard telephony interfaces:Our gateways support many standard
    telephony interfaces and signaling protocols. Available
    telephony interfaces include both analog and digital. Supported
    signaling protocols include MFCR1, MFCR2, PRI-ISDN, and SS7/C7,
    among others.                                                                                                                                                                                                                                                                                                                                           
|
| |  | Caller interface:Our programmable interactive voice response software provides a
    voice interface for prepaid calling card applications, captures
    account codes for specific calls and routes users to specific
    features or options. This software also processes different call
    types based on the number dialed (such as toll-free 800
    numbers), the automatic number identification of the calling
    party or characteristics stored as part of a users record.                                                                                                                                         
|
| |  | Integrated voice, fax and
    data:Our gateways simultaneously
    handle voice, fax and data transmissions through universal
    ports, eliminating the need to dedicate ports to specific types
    of transmissions.                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Compliance with major telecommunication
    standards:Our gateways incorporate
    relevant International Telecommunications Union standards,
    including the H.323, G.723.1, G.729a and G.711 codecs, as well
    as the proprietary AudioCodes, Ltd. NetCoder codecs, among
    others. We also utilize Q.931 signaling for call setup and
    control between the gateways, as specified in H.323. Clarent has
    also developed products to work with the MGCP (Media Gateway
    Control Protocol) standard and is developing products to work
    with Session Initiation Protocol (SIP), a newer industry
    standard.
|
| |  | Low call latency:Our gateways have a measured latency, the lag between
    transmission and reception of a voice message, of approximately
    100 milliseconds, or ms. Even with the addition of a
    typical 100 ms to 150 ms of network-induced latency,
    the total system latency typically experienced with Clarent
    gateways is only between 200 ms to 250 ms.                                                                                                                                                                                                                                                      
|
| |  | Echo cancellation:Clarent gateways employ the G.165 standard to provide
    clear, virtually echo-less voice transmission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Clarent Call Manager

The Clarent Call Manager is an open,
standards-based softswitch product that works in conjunction
with the Clarent Command Center as primary software elements in
the Clarent architecture. Our call control

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software, sold as an integrated element of
Clarents Gateway 400 and 1200 products, manages all
aspects of a single call, or session, including call set up,
call tear down, and other call control functions.


In late 2000, we introduced (in limited release)
our Local Access Call Manager as a stand-alone softswitch
solution. The Clarent Local Access Call Manager is designed to
perform call control for our local access customer premises
gateways. This new product works within our existing
architecture, allowing a local access carrier to interconnect
with other service providers using Clarent-based networks
worldwide as well as with traditional circuit-switched networks.
We recognized our first revenues for sales of our Local Access
Call Manager product in the fourth quarter of 2000, and we
formally launched the Local Access Call Manager in the spring of
2001.

During 2001, we plan to introduce our Backbone
High Density Call Manager (BHCM), which will provide call
control functionally for the Backbone High-density Gateway that
we also plan to introduce in 2001.

Other Clarent Products and Services

The following table provides a summary of
additional Clarent products and services

|                                                             |  |                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product or Service                                           |  | Features                                                                                                                                                                                                                                                                                                                                               
|Clarent clearinghouse products
    including Clarent Connect |  | Provide network interconnection; real-time
    account settlement; least-cost routing of calls; balancing of
    calls between partners; and connection of service providers and
    private networks of companies. Also provide harvesting, sorting,
    grouping and archiving of billing data from individual gateways
    and networks of gateways.
|                                                            
|Clarent SS7/C7 Signaling Server
    Clarent Gatekeeper       |  | Provides seamless connection between a service
    providers network and a Clarent gateway. Allows Clarent
    gateways to interoperate with other vendors gateways using
    industry standard (H.323) protocols.                                                                                                                                   
|                                                            
|Clarent Application Server                                   |  | A centralized system that stores additional
    applications and allows them to work with our products in a
    Clarent-based network.                                                                                                                                                                                                                 
|                                                            
|DynaStar                                                     |  | A protocol mediation platform that allows service
    providers to consolidate, into a central network management
    system, management information from diverse equipment and tools
    (acquired with ACT Networks). As of the date of this filing,
    this product was discontinued.                                                              
|                                                            
|SkyPerformer                                                 |  | Provides interconnection for remote branch
    offices for small to medium size networks in markets where
    geography, or the lack of wire line infrastructure, necessitate
    the use of space-based communications facilities (acquired with
    ACT Networks).                                                                                   
|                                                            
|Clarent Care                                                 |  | Provides software upgrades and worldwide
    technical support to customers seven days a week, 24 hours a day.                                                                                                                                                                                                                                         
|                                                            
|Clarent Education                                            |  | Provides basic and advanced training courses to
    users of our products.                                                                                                                                                                                                                                                                             

Products Under Development

We are developing and testing a number of
products and expect these products to be released during 2001.



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Clarent Backbone High Density Gateway
    (BHG):This Clarent gateway is being
    designed to perform the same functions as our other gateways,
    but is expected to allow up to 1,920 simultaneous calls with

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the capability to bring in phone traffic over a
    larger pipe (a T-3). Clarents BHG is planned
    for release in mid-2001.                                                                                                                                                                                                                                                                                                                                    
|
| |  | Clarent Backbone High-density Call Manager
    (BHCM):This is being designed to
    provide softswitching functionality for our Backbone
    High-density Gateways (BHG) and is planned for release in
    mid-2001.                                                                                                                                                                                                                                                
|
| |  | Clarent
    NetPerformer:A new version of the
    NetPerformer (acquired with ACT Networks) is being designed to
    interoperate with our softswitch architecture and incorporate
    standard signaling session initiation protocol (SIP) and media
    (RTP) protocols. This is planned for release in the later part
    of 2001.                                                                                                                               
|
| |  | Clarent Gatekeeper
    2.0:This upgrade to the Clarent
    Gatekeeper is being designed to allow devices using the SIP
    communications protocol to communicate with Clarent-based
    networks and is planned for release in mid-2001.                                                                                                                                                                                                                           
|
| |  | Clarent Gateway 400LE
    (CG400LE):This upgrade to the SX-10
    product (acquired with ACT Networks) is being designed to enable
    the gateway to interoperate with our softswitch architecture and
    to support DTMF over IP and fax. The CG400LE is planned for
    release mid-2001. An additional enhancement to the CG400LE is
    planned to be available by the end of 2001, which will
    incorporate standard signaling SIP communication protocols.

CUSTOMERS

We began commercial shipments of our products in
March 1997 and, as of December 31, 2000, had shipped
Clarent solutions to approximately 300 telecommunications
service providers in more than 70 countries. We sell our
products directly and through distributors to service providers.

No customer accounted for 10% of net revenue in
2000. In 1999, entities affiliated with AT&T Corporation
accounted for 15% of net revenue and Ji Tong Communications
Co., Ltd. accounted for 10% of net revenue.

SALES

As of the filing of the Prior Report, we had a
global sales organization with sales and support personnel based
in Argentina, Australia, Belgium, Brazil, Canada, Colombia,
France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Mexico, New Zealand, the Peoples Republic of China, Peru,
Poland, Russia, Singapore, South Korea, Spain, Sweden, Taiwan,
the United Kingdom and the United States. Our sales force sold
our products to service providers and enterprises both directly
and through third-party distributors. We are now in the process
of converting our overseas sales organization into
distributorships and have significantly downsized our direct
sales force and operating activities in a number of countries.

Net revenue from U.S. customers represented 33%
of our total net revenue during 2000, 46% during 1999, and 49%
during 1998. During 2000, sales to customers in the Asia-Pacific
region represented 34% of our total net revenue. International
sales represented approximately 67% of total net revenue in 2000
and 54% of total net revenue in 1999. Our international
operations are subject to a variety of risks associated with
conducting business internationally, any of which, could
seriously harm our business, financial condition and results of
operations. These risks include:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | greater difficulty in accounts receivable
    collections;                                                                         
|
| |  | import or export licensing and product
    certification requirements;                                                             
|
| |  | tariffs, duties, price controls or other
    restrictions on foreign currencies or trade barriers imposed by
    foreign countries;
|
| |  | potential adverse tax consequences, including
    restrictions on repatriation of earnings;                                        

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| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in currency exchange rates;                                                                                                      
|
| |  | seasonal reductions in business activity in some
    parts of the world;                                                                      
|
| |  | unexpected changes in regulatory requirements;                                                                                                
|
| |  | burdens of complying with a wide variety of
    foreign laws, particularly with respect to intellectual property
    and license requirements;
|
| |  | difficulties and costs of staffing and managing
    foreign operations;                                                                       
|
| |  | political instability;                                                                                                                        
|
| |  | the impact of recessions in economies outside of
    the United States; and                                                                   
|
| |  | limited ability to enforce agreements,
    intellectual property and other rights in some foreign countries.                                  

COMPETITION

Our market is new, rapidly evolving, highly
competitive and fragmented, and we expect competition to
intensify in the future. We believe that the main competitive
factors in our market are product quality, features, cost and
customer relationships. We believe a critical component to
success in this market is the ability to establish and maintain
strong customer relationships with a wide variety of service
providers around the globe and to facilitate relationships
between those service providers increasing the geographic
coverage of their services.

While we believe our products and services are
competitive with or, in some aspects, superior to those of our
competitors, we now have been hampered by disruption resulting
from management and personnel changes and uncertainties related
to the restatement of the financial statements described in
Note 1 of the Notes to Consolidated Financial Statements.
In addition, the restatement of our historical financial
statements and the securities litigation filed against us has
resulted in substantial negative publicity about us, which may
cause some of our potential customers to defer purchases of our
products. We may not be able to retain customers if they lose
confidence in us, and our vendors and lenders may reexamine
their willingness to do business with us.

Our current principal competitors include large
networking equipment manufacturers, such as Cisco Systems, Inc.,
large telecommunications equipment manufacturers, such as Lucent
Inc. and Nortel Networks Corporation, and IP telephony
technology companies, such as Sonus Networks and VocalTec
Communications, Ltd. We also expect new competitors to emerge.
Many of our competitors are substantially larger than we are and
have significantly greater financial, sales and marketing,
technical, manufacturing and other resources, and more
established distribution channels and stronger relationships
with service providers. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in
customer requirements or devote greater resources to the
development, promotion and sale of their products than we can.
In addition, they may be able to compete more effectively
because they will be able to add IP telephony features to their
existing equipment or bundle these features as part of a broader
solution. Furthermore, we believe some of our competitors may
offer aggressive sales terms, including financing alternatives,
which we might not be able to match. These competitors may enter
our existing or future markets with solutions that may be less
expensive, provide higher performance or additional features or
be introduced earlier than our solutions. Given the market
opportunity, we also expect that other companies may enter our
market with better products and technologies. If any technology
that is competing with ours is more reliable or faster or less
expensive or has other advantages over our technology then the
demand for our products and services could decrease.

We expect our competitors to continue to improve
the performance of their current products and to introduce new
products or new technologies. Successful new product
introductions or enhancements by our competitors could reduce
the sales or market acceptance of our products and services,
perpetuate intense price competition or make our products
obsolete. To be competitive, we must continue to invest
significant resources in research and development, sales and
marketing and customer support. We cannot be sure that we

9



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will have sufficient resources to make these
investments or that we will be able to make the technological
advances necessary to be competitive.


Increased competition is likely to result in
price reductions, reduced gross profits and loss of market
share. Our failure to compete successfully against current or
future competitors could seriously harm our business, financial
condition and results of operations.

RESEARCH AND DEVELOPMENT

To maintain our technology leadership position,
we focus our research and development efforts on improving the
functionality and performance of our existing products and
developing new products. We obtain extensive product development
input from our customers and monitor our customers needs
and changes in the marketplace. We are working on key areas,
such as ways to improve the transmission of packets as well as
the interoperability of our products with those of other
vendors. In addition, we are developing improvements to network
management and enhanced end-user features.

We believe our success will depend, in part, on
our ability to develop and introduce new products and
enhancements to our existing products. In the past we have made,
and intend to continue to make, investments in research and
development. Our research and development expenditures totaled
approximately $29.9 million in 2000, $9.2 million in
1999 and $3.4 million in 1998. However, as a result of the
downturn in the telecommunications market and to correct for
what we now know was an overexpansion of our research and
development capacity in anticipation of higher revenue levels,
we have currently downsized our research and development staff
to 77 people.

As of the date of filing of the Prior Report, we
performed much of our research and product development
activities at our principal offices in Redwood City, California.
In addition, through our acquisitions of PEAK Software Solutions
and ACT Networks in 2000, we have acquired research and
development teams based in Calabasas, California; Littleton,
Colorado; Montreal, Canada; and Manassas, Virginia. We currently
have concentrated our research and development activities in
Littleton, Colorado and Montreal, Canada.

If we are unable to develop new products or
enhancements to existing products on a timely basis, or if the
new products or enhancements fail to achieve market acceptance,
our business, financial condition and results of operations
could be seriously harmed.

PATENTS AND INTELLECTUAL PROPERTY

We rely on a combination of copyright, trademark
and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. We currently have one United
States patent issued for our dynamic forward error correction
technology and multiple pending applications in the United
States, Germany, and Japan.

We also enter into confidentiality and
proprietary information and inventions agreements with our
employees and consultants, and control access to and
distribution of our software, documentation and other
proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent
misappropriation of our technology. The laws of some foreign
countries do not protect our proprietary rights to as great an
extent as the laws of the United States, and many United States
companies have encountered substantial infringement problems in
these countries, some of which are countries in which we have
sold and continue to sell products. There is a risk that our
means of protecting our proprietary rights may be inadequate.
For example, our competitors may independently develop similar
technology, duplicate our products or design around our patents,
when or if issued, or our other intellectual property rights. If
we fail to protect our intellectual property adequately, it
would be easier for our competitors to sell competing products.

From time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual
property rights to technologies that are important to us. In
addition, third parties may assert claims or initiate

10



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litigation against us or our manufacturers,
suppliers or customers with respect to existing or future
products, trademarks or other proprietary rights. We have not
conducted an exhaustive search of patents issued to other
companies or organizations. Because of the number of patents
issued and patent applications filed relating to the
transmission of voice over packet-switched networks, we believe
there is a risk that current and potential customers and other
third parties have filed, or in the future will file
applications for, or have received or in the future will
receive, patents or obtain additional intellectual property
rights relating to materials or processes that we use or propose
to use. If these third-party patents or other proprietary rights
have been or are issued, or are otherwise asserted by third
parties, the holders of these patents or other proprietary
rights may bring infringement claims against us. Furthermore,
former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or
proprietary information to us. We may in the future initiate
claims or litigation against third parties for infringement of
our proprietary rights or to determine the scope and validity of
our proprietary rights and the rights of competitors. Any of
these claims, with or without merit, may be time-consuming,
result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing
technology. Alternatively, others may claim that we infringe
their intellectual property rights, and we may be required to
obtain a license or royalty agreement under the intellectual
property rights of those parties claiming the infringement. In
addition, an adverse ruling could result in a negative impact on
our operations, including treble damages or the issuance of an
injunction against us requiring that we cease development and
withdraw some products from the marketplace.


EMPLOYEES

As of December 31, 2000, we had a total of
approximately 848 employees, of which approximately 253 were in
research and development, 400 were in sales, marketing and
customer support and 195 were in finance, administration and
operations. Our future performance depends, in significant part,
upon our ability to attract new personnel and retain existing
personnel in key areas including engineering, technical support
and sales. Competition for these personnel is intense,
especially in the San Francisco Bay Area where we are
headquartered, and we cannot be sure that we will be successful
in attracting or retaining the personnel in the future. None of
our employees is subject to a collective bargaining agreement.
We consider our relationship with our employees to be
satisfactory.

In May 2001, we announced a restructuring program
resulting in a 10% reduction in the number of our regular
employees. In July 2001, we announced an additional reduction of
approximately 27% of our workforce. We announced a further
reduction of approximately 50% of our remaining workforce in
September 2001. In February 2002, we commenced a reduction of
our workforce to approximately 180 employees.




ITEM 2.     PROPERTIES

Our principal offices are located in Redwood
City, California. We occupy approximately 186,100 square feet in
Redwood City, California and approximately 59,000 square feet in
Calabasas, California. The Calabasas lease expires mid-2006. The
leases for the Redwood City facilities for 45,700, 47,100,
42,300 and 51,000 square feet expire in 2003, 2004, 2007 and
2011, respectively. In addition to our California based research
and development and manufacturing facilities, we also lease
45,000 square feet in Littleton, Colorado, 14,000 square
feet in Montreal, Canada and 14,000 square feet in Manassas,
Virginia. Clarent leases sales and support offices both
domestically in New Jersey and Illinois and internationally in
Argentina, Australia, Belgium, Brazil, Canada, France, Germany,
Greece, Hong Kong, Ireland, Italy, Japan, Singapore, South
Korea, Spain, Sweden, Taiwan and the United Kingdom. We also
have three sales and support offices in the Peoples
Republic of China located in Beijing, Shanghai and Guangzhou. We
believe that we currently have adequate space for our
operations, but if we require additional space, we believe that
we will be able to secure such space on commercially reasonable
terms without undue operational disruption.

We are now in the process of consolidating our
operations and closing offices. We currently lease approximately
396,000 square feet of which approximately 89,000 square feet
are occupied and 307,000 square feet are considered to be excess
facilities. The excess facilities are principally located in
California.

11



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ITEM 3.     LEGAL
PROCEEDINGS

As of the date of the Prior Report, we were not a
party to any material legal proceedings, but we are currently a
party to material legal proceedings. Please refer to Note 16 of
Notes to Consolidated Financial Statements and our Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2001 for a description of our current
litigation proceedings.




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

There were no matters submitted to a vote of
security holders during the fourth quarter of 2000.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

Public trading of our common stock commenced on
July 1, 1999. Prior to that date there was no public market
for our common stock. Until January 30, 2002, our common
stock was traded on the Nasdaq National Market under the symbol
CLRN. The following table lists the high and low
sale prices of our common stock for each quarter, as reported by
the Nasdaq National Market.

|                                  |  |      |        |     |  |   |       | 
|--------------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|Quarter Ended:                    |  | High |        | Low
|                                  |  |      |        |    
|2001                              |  |      |        |     |  |   |       | 
|March 31 (through March 27, 2001) |  | $    | 18.81  |     |  | $ | 6.75  | 
|2000                              |  |      |        |     |  |   |       | 
|December 31                       |  | $    | 41.00  |     |  | $ | 10.00 | 
|September 30                      |  | $    | 97.63  |     |  | $ | 30.00 | 
|June 30                           |  | $    | 98.94  |     |  | $ | 29.50 | 
|March 31                          |  | $    | 178.75 |     |  | $ | 67.00 | 
|1999                              |  |      |        |     |  |   |       | 
|December 31                       |  | $    | 110.25 |     |  | $ | 49.50 | 
|September 30                      |  | $    | 54.00  |     |  | $ | 19.88 | 

On March 27, 2001, the last reported sale
price of the common stock on the Nasdaq National Market was
$11.92 per share. As of February 28, 2001, there were
approximately 290 stockholders of record of Clarents
common stock.

Our common stock was delisted from the Nasdaq
Stock Market effective January 30, 2002 based on
Nasdaqs determination that we had violated certain of the
Nasdaq continued listing requirements as a result of the facts
involved in our restatement investigation. Our common stock is
not currently eligible for trading on any public market,
although private transactions involving our stock are now quoted
on the OTC Market Pink Sheets Electronic Quotation Service under
the symbol CLRN.

DIVIDENDS

We have never declared or paid any cash dividends
on our common stock. We intend to retain any future earnings to
fund the development and growth of our business and do not
anticipate paying any cash dividends in the foreseeable future.

12



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ITEM 6.     SELECTED
FINANCIAL DATA

The following selected consolidated financial
data should be read in conjunction with the restated
consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Annual Report on Form 10-K/ A.

|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |     |     | 
|--------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------- | -------- | -------------- | ------- | ---- | ------- | ------ | ------ | ----------- | ------ | ----- | ------ | - | ------ | ----- | ----- | - | ---- | --- | --- | 
|                                                                |                                                |                                         |          |                |         |      |         |        |        | Period from
|                                                                |                                                |                                         |          | July 2, 1996  
|                                                                |                                                | Year ended December 31,                 |          | (inception) to
|                                                                |                                                |                                         |          | December 31,  
|                                                                |                                                | 2000(1)                                 |          | 1999           |         | 1998 |         | 1997   |        | 1996       
|                                                                |                                                |                                         |          |                |         |      |         |        |        |            
|                                                                |                                                |                                        
|                                                                |                                                | (in thousands, except per share amount)
|                                                                |                                                |                                        
|                                                                |                                                | (Restated)                             
|Statement of operations data:                                   |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Net revenue                                                     |                                                | $                                       | 107,931  |                |         | $    | 47,823  |        |        | $           | 14,647 |       |        | $ | 3,359  |       |       | $ |     |    
|Cost of revenue                                                 |                                                |                                         | 58,997   |                |         |      | 20,305  |        |        |             | 6,653  |       |        |   | 1,189  |       |       |   |     |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Gross profit                                                    |                                                |                                         | 48,934   |                |         |      | 27,518  |        |        |             | 7,994  |       |        |   | 2,170  |       |       |   |     |    
|Operating expenses:                                             |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|                                                                | Research and development                       |                                         |          | 29,894         |         |      |         | 9,172  |        |             |        | 3,356 |        |   |        | 1,044 |       |   |      | 136 |    
|                                                                | Sales and marketing                            |                                         |          | 59,301         |         |      |         | 25,111 |        |             |        | 7,099 |        |   |        | 2,046 |       |   |      |    |    
|                                                                | General and administrative                     |                                         |          | 17,404         |         |      |         | 6,877  |        |             |        | 2,484 |        |   |        | 639   |       |   |      | 140 |    
|                                                                | Amortization of deferred compensation          |                                         |          | 6,201          |         |      |         | 19,371 |        |             |        | 879   |        |   |        |      |       |   |      |    |    
|                                                                | Amortization of goodwill and other intangibles |                                         |          | 15,654         |         |      |         | 150    |        |             |        |      |        |   |        |      |       |   |      |    |    
|                                                                | Merger related costs                           |                                         |          | 1,386          |         |      |         |       |        |             |        |      |        |   |        |      |       |   |      |    |    
|                                                                | Purchased in-process research and development  |                                         |          | 31,496         |         |      |         |       |        |             |        |      |        |   |        |      |       |   |      |    |    
|                                                                | Settlement expense                             |                                         |          |               |         |      |         |       |        |             |        |      |        |   |        | 570   |       |   |      |    |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|                                                                |                                                | Total operating expenses                |          |                | 161,336 |      |         |        | 60,681 |             |        |       | 13,818 |   |        |       | 4,299 |   |      |     | 276 | 
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Loss from operations                                            |                                                |                                         | (112,402 | )              |         |      | (33,163 | )      |        |             | (5,824 | )     |        |   | (2,129 | )     |       |   | (276 | )  
|Other income, net                                               |                                                |                                         | 17,097   |                |         |      | 2,512   |        |        |             | 32     |       |        |   | 70     |       |       |   |     |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Loss before income taxes                                        |                                                |                                         | (95,305  | )              |         |      | (30,651 | )      |        |             | (5,792 | )     |        |   | (2,059 | )     |       |   | (276 | )  
|Provision for income taxes                                      |                                                |                                         | (424     | )              |         |      | (132    | )      |        |             | (40    | )     |        |   |       |       |       |   |     |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Net loss                                                        |                                                | $                                       | (95,729  | )              |         | $    | (30,783 | )      |        | $           | (5,832 | )     |        | $ | (2,059 | )     |       | $ | (276 | )  
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Basic and diluted net loss per share                            |                                                | $                                       | (2.73    | )              |         | $    | (1.87   | )      |        | $           | (1.65  | )     |        | $ | (2.14  | )     |       |   | N/A  |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    
|Shares used to compute basic and diluted net loss
    per share |                                                |                                         | 35,063   |                |         |      | 16,457  |        |        |             | 3,544  |       |        |   | 962    |       |       |   |     |    
|                                                                |                                                |                                         |          |                |         |      |         |        |        |             |        |       |        |   |        |       |       |   |      |    



---



|    |                                                              
|--- | -------------------------------------------------------------
|(1) | See Note 1 of Notes to Consolidated Financial
    Statements.

|                                                  |  |                |         |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |     | 
|------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | --- | 
|                                                  |  |               
|                                                  |  | December 31,  
|                                                  |  |               
|                                                  |  | 2000(1)        |         | 1999 |  | 1998 |         | 1997 |  | 1996
|                                                  |  |                |         |      |  |      |         |      |  |     
|                                                  |  |               
|                                                  |  | (in thousands)
|                                                  |  | (Restated)     |         |     
|Balance sheet data:                               |  |                |         |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |     | 
|Cash, cash equivalents and short-term investments |  | $              | 260,614 |      |  | $    | 281,305 |      |  | $    | 11,903 |  |  | $ | 474   |  |  | $ | 147 | 
|Working capital                                   |  |                | 250,948 |      |  |      | 290,227 |      |  |      | 11,531 |  |  |   | 781   |  |  |   | 146 | 
|Total assets                                      |  |                | 507,556 |      |  |      | 335,368 |      |  |      | 25,177 |  |  |   | 2,818 |  |  |   | 244 | 
|Total stockholders equity                        |  |                | 438,583 |      |  |      | 308,842 |      |  |      | 13,764 |  |  |   | 1,334 |  |  |   | 242 | 



---



|    |                                                              
|--- | -------------------------------------------------------------
|(1) | See Note 1 of Notes to Consolidated Financial
    Statements.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

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

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

Revenue
Restatement:



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

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Impact on
Expenses:



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

Financial
Condition:



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

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

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

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Results of Operations

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

|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |    |     | 
|-------------------------------------- | ---------------------------------------------- | ------------------------ | ---- | ---- | --- | ---- | --- | -- | --- |  | --- | -- | --- | 
|                                       |                                                |                         
|                                       |                                                | Year ended December 31, 
|                                       |                                                |                         
|                                       |                                                | 2000                     |      | 1999 |     | 1998
|                                       |                                                |                          |      |      |     |     
|                                       |                                                | (Restated)               |      |      |     |     
|As a percentage of net revenue:        |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       | Product and software                           |                          |      | 87   | %   |      |     | 92 | %   |  |     | 94 | %  
|                                       | Service                                        |                          |      | 13   |     |      |     | 8  |     |  |     | 6  |    
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       |                                                | Total net revenue        |      |      | 100 |      |     |    | 100 |  |     |    | 100 | 
|Cost of revenue:                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       | Product and software                           |                          |      | 47   |     |      |     | 35 |     |  |     | 40 |    
|                                       | Service                                        |                          |      | 8    |     |      |     | 7  |     |  |     | 5  |    
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       |                                                | Total cost of revenue    |      |      | 55  |      |     |    | 42  |  |     |    | 45  | 
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|Gross profit                           |                                                |                          | 45   |      |     |      | 58  |    |     |  | 55  |   
|Operating expenses:                    |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       | Research and development                       |                          |      | 28   |     |      |     | 19 |     |  |     | 23 |    
|                                       | Sales and marketing                            |                          |      | 55   |     |      |     | 53 |     |  |     | 49 |    
|                                       | General and administrative                     |                          |      | 16   |     |      |     | 14 |     |  |     | 17 |    
|                                       | Amortization of deferred compensation          |                          |      | 6    |     |      |     | 41 |     |  |     | 6  |    
|                                       | Amortization of goodwill and other intangibles |                          |      | 14   |     |      |     |   |     |  |     |   |    
|                                       | Merger related costs                           |                          |      | 1    |     |      |     |   |     |  |     |   |    
|                                       | Purchased in-process research and development  |                          |      | 29   |     |      |     |   |     |  |     |   |    
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|                                       |                                                | Total operating expenses |      |      | 149 |      |     |    | 127 |  |     |    | 95  | 
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|Loss from operations                   |                                                |                          | (104 | )    |     |      | (69 | )  |     |  | (40 | ) 
|Other income, net                      |                                                |                          | 15   |      |     |      | 5   |    |     |  |    |   
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|Loss before provision for income taxes |                                                |                          | (89  | )    |     |      | (64 | )  |     |  | (40 | ) 
|Provision for income taxes             |                                                |                          |     |      |     |      |    |    |     |  |    |   
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   
|Net loss                               |                                                |                          | (89  | )%   |     |      | (64 | )% |     |  | (40 | )%
|                                       |                                                |                          |      |      |     |      |     |    |     |  |     |   

Comparison of Years Ended December 31,
2000, 1999 and 1998

Net Revenue

Net revenue increased 126% to $107.9 million
in 2000 from $47.8 million in 1999, following an increase
of 227% from $14.6 million in 1998. The increase in net
revenue for 2000 was primarily attributable to an increase in
product and software sales of 113% to $94.0 million from
$44.2 million in 1999 primarily driven by increased volume
in unit sales of Clarent Gateways, Clarent Command Centers and
new products acquired during the year, including the
NetPerformer products. The increase in demand for our IP-based
communication solution was from both existing and new customers
on a worldwide basis. Service revenue from maintenance and
support increased by 283% to $13.9 million in 2000 from
$3.6 million in 1999. The increase in service revenue
primarily resulted from the increase in product sales as well as
renewal of support contracts with our existing customer base.
The increase in 1999 net revenue was largely due to the increase
in product and software sales by 220% to $44.2 million in
1999 from $13.8 million in 1998. The increased sales volume
was partially offset by the decrease in the average selling
prices of our products. No customer individually accounted for
10% or more of revenue in 2000. In 1999, entities affiliated
with AT&T Corporation accounted for 15% of net revenue and
entities affiliated with Ji Tong Communications accounted for
10% of net revenue.

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Entities affiliated with AT&T Corporation
accounted for 36% of net revenue, and Technet International
accounted for 12% of net revenue in 1998.


Cost of Revenue

Cost of revenue increased 191% to
$59.0 million in 2000 from $20.3 million in 1999,
following an increase of 205% from $6.7 million in 1998.
These increases were primarily attributable to increases in
product and software costs of 202% to $50.6 million in 2000
from $16.7 million in 1999 and of 184% from
$5.9 million in 1998. Service costs also increased 135% to
$8.4 million in 2000 from $3.6 million in 1999 due to
the increases in technical support personnel to service our
increased customer base.

Gross margin decreased to 45% in 2000 from 58% in
1999 and 55% in 1998. The increase in cost of revenue and the
decrease in gross margin for 2000 is largely attributable to
$10.7 million of product costs associated with products
shipped to certain customers in the Asia-Pacific region for
which revenue is not recognizable because we now believe that
these customers either indirectly used Company funds for the
purchase of our products or, to a lesser degree, because certain
customers purportedly had return rights for such products. We
also believe that the products, once delivered to these
customers, will probably not be recoverable. Software sales as a
percentage of net revenue were 33% of sales in 2000 as compared
to approximately 21% in 1999 and 10% in 1998.

We expect a negative impact on our gross margin
from the introduction of new integrated hardware and software
products and new versions of existing integrated hardware and
software products. Our gross margin also has 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 change and we expect
this 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 a lower
gross margin.

Research and Development Expenses

Research and development expenses increased 226%
to $29.9 million in 2000 from $9.2 million in 1999
following an increase of 173% from $3.4 million in 1998. As
a percentage of revenue, research and development expenses
increased to 28% in 2000 from 19% in 1999 and decreased as a
percentage of net revenue to 19% in 1999 from 23% in 1998. The
increases in research and development expenses, both in absolute
dollars and as a percentage of revenue, were primarily
attributable to increases in the number of research and
development personnel in anticipation of higher current period
revenue and higher revenue growth. Research and development
personnel increased to 253 at the end of 2000 from 63 at the end
of 1999 and from 21 at December 31, 1998. The decrease in
research and development expenses as a percentage of net revenue
in 1999 was a result of the significant percentage increase in
revenue from the corresponding period in 1998.

Sales and Marketing Expenses

Sales and marketing expenses increased 136% to
$59.3 million in 2000 from $25.1 million in 1999
following an increase of 254% from $7.1 million in 1998.
The absolute dollar increases in sales and marketing expenses
for 2000 as compared to 1999 and for 1999 as compared to 1998
were primarily attributable to increases in personnel and
related expenses required to implement our sales and marketing
strategy, and to a lesser extent, increased public relations and
other promotional expenses. Sales and marketing expenses, as a
percentage of revenue, increased to 55% for 2000 from 53% in
1999 following an increase from 49% in 1998. This increase is
due to the growth rate of sales and marketing expenses exceeding
the growth rate of net revenue for the period as we added sales
and marketing personnel and spending on promotional activities
in anticipation of higher current period revenue and higher
revenue growth.

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General and Administrative Expenses

General and administrative expenses increased
153% to $17.4 million in 2000 from $6.9 million in
1999 following an increase of 177% from $2.5 million in
1998. The absolute dollar increases in general and
administrative expenses were primarily attributable to increased
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. General and administrative personnel increased to 125 at
the end of 2000 as compared to 41 and 22 at the end of 1999 and
1998, respectively. General and administrative expenses
increased as a percentage of net revenue to 16% in 2000 from 14%
in 1999 primarily due to increases in personnel and related
expenses required to expand operations. In 1998, general and
administrative expenses were 17% of net revenue.

Amortization of Deferred
Compensation

Amortization of deferred compensation expense for
2000 was $6.2 million as compared to $19.4 million in
1999 and $879,000 for 1998. Amortization of deferred
compensation resulted from the granting of stock options and
warrants to purchase common stock as well as the assumption of
stock options through acquisition at prices below the deemed
fair value of our common stock. We expect to amortize deferred
compensation using the graded method through 2004, the vesting
period of the stock options. Compensation charges related to a
warrant provided for consulting services of $12.3 million
and $357,000 were recognized in 1999 and 1998, respectively.
There was no compensation expense related to warrants in 2000.

On February 14, 2001, we cancelled
approximately 2.9 million outstanding options under a
cancellation and re-grant program for employees holding common
stock options with an exercise price per share in excess of the
fair market price of the Companys common stock.
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 other
intangible assets for 2000 was $15.7 million as compared to
$150,000 in 1999. The goodwill and purchased intangible assets
were the result of three purchase business combinations. One was
completed in the fourth quarter of 1999 and two in the third
quarter of 2000. The value of the purchased intangible assets
was determined using independent valuations for both the PEAK
Software Solutions and ACT Networks acquisitions in 2000. We
expect to amortize goodwill and intangible assets using the
straight-line method over periods ranging from three to five
years from the dates of acquisition.

Merger Related Costs

The merger related costs of $1.4 million in
2000 resulted from our acquisition of ACT Networks in the third
quarter of 2000. The merger related costs are primarily accruals
for the disposal of redundant inventory components replaced by
an ACT product and other costs incurred with the integration of
the Clarent and ACT information systems.

Purchased In-Process Research and Development
(IPRD)

The purchased in-process research and development
costs of $31.5 million in 2000 resulted from our
acquisition of ACT Networks in the third quarter of 2000.

The cost of IPRD is based on a fair value
allocation of the purchase price we paid to acquire ACT
Networks. The fair value allocation to in-process research and
development was determined by identifying projects underway at
the time of the ACT merger that required additional efforts to
establish technological feasibility after consummation of the
ACT Networks merger. These projects have identifiable
technological risk factors, which indicate that even though
successful completion is expected, it is not assured. If an

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identified project is not successfully completed,
there is no alternative future use for the project and the
expected future income will not be realized.


Approach Used for Valuation of IPRD

In valuing IPRD, we considered, among other
factors, the stage of completion of the development efforts and
the estimated net present value of cash flows expected to result
from the successful deployment of the new products. The stage of
completion was determined by estimating the costs and time
incurred to date, relative to the costs and time to be incurred
to develop the in-process technology into commercially viable
products. The estimated net present value of cash flows was
based on incremental future cash flows from revenues expected to
be generated by the products being developed, taking into
account the characteristics and applications of the technology,
the size and growth rate of existing and future markets and an
evaluation of past and anticipated product life cycles.
Estimated future cash flows were discounted to arrive at a net
present value and were allocated to IPRD based on the percentage
of completion at the date of acquisition. The after-tax risk
adjusted discount rate used as an assumption in the valuation of
IPRD was 25% and the percentage of completion at the date of
acquisition was estimated as 67%.

Overview of IPRD Purchased from ACT Networks
in August 2000

NetPerformer:A new
version of the NetPerformer is being designed to interoperate
with softswitch architecture and incorporate standard signaling
session initiation protocol (SIP) and media (RTP) protocols.

SX-10:The upgrade
to the SX-10 product (Clarent 400LE Gateway) is being designed
to enable the gateway to interoperate with Clarents
softswitch architecture and to support DTMF over IP and fax. The
CG400LE is planned for release mid-2001. An additional
enhancement to the CG400LE is planned to be available by the end
of 2001, which will incorporate standard signaling SIP
communication protocols.

DynaStar:New
versions of DynaStar, which has traditionally been sold in the
North American market, are being designed to enable the product
to be available for sale in the global marketplace. Development
efforts are also focusing on specific industry interfaces, such
as those required by the power industry, for example. As of the
date of this filing, this product was discontinued.

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. The
following list provides the information regarding the status of
research and development projects at the date of acquisition.

|             |  |                    |     |                |  |               |     |  |  |  |         | 
|------------ |  | ------------------ | --- | -------------- |  | ------------- | --- |  |  |  | ------- | 
|             |  | Estimated Costs to |     |                |  |              
|             |  | Complete at Time   |     | Expected Costs |  | Expected Date
|             |  | of Acquisition     |     | at Completion  |  | of 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 $17.1 million in 2000
as compared to $2.5 million in 1999 and $32,000 in 1998.
The other income was attributable to interest income earned on
our cash, cash equivalents and investments primarily as a result
of the funds raised in our initial and secondary public
offerings during 1999 plus cash of companies acquired in 2000.
Interest income in 1998 was related to cash received from bridge
financing

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obtained during that year. A charge for estimated
impairment of equity investments in private companies of
$1.0 million was recognized in the fourth quarter of 2000
as an offset to other income.


Income Taxes

The provision for income taxes of approximately
$424,000 for 2000, $132,000 for 1999 and $40,000 for 1998
consists of current foreign income taxes provided on the profits
attributable to certain foreign operations. As of
December 31, 2000, we had approximately $157.0 million
of federal and $62.0 million of state net operating loss
carryforwards to offset future taxable income. We also had
federal and state research and development tax credit
carryforwards of approximately $1.1 million and
$1.0 million, respectively, at December 31, 2000. The
difference between available net operating losses and our
accumulated deficit as reported for financial statement purposes
is principally the result of differences in the tax treatment of
deferred compensation, accounts receivable reserves, other
non-deductible accruals and reserves and deferred revenue.

We cannot assure you that we will realize the
benefit of the net operating loss carryforwards and have
therefore set up a valuation allowance against a portion of
these deferred tax assets. The federal and state net operating
loss carryforwards will expire at various dates beginning in
fiscal year 2004 through 2020, if we do not use them. Due to the
change of ownership provisions of the Internal
Revenue Code, the availability of a portion of our net operating
loss and tax credit carryforwards are subject to an annual
limitation against taxable income in future periods.

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
$22.5 million in 2000, $15.9 million in 1999, and
$5.8 million in 1998. The net cash used in operating
activities in 2000 was principally the result of a net loss of
$95.7 million, an increase in inventories of
$4.8 million, an increase in other assets of
$3.9 million, an increase in prepaid expenses and other
current assets of $1.9 million, and a decrease in deferred
revenue of $2.0 million. These amounts were partially
offset by adjustments for depreciation and amortization of
$32.7 million, charges for purchased in-process research
and development of $31.5 million, investment impairments of
$1.0 million, a decrease in accounts receivable of
$9.4 million, and an increase in accounts payable,
compensation related accruals, and accrued liabilities of
$11.2 million. Amortization expense increased significantly
in 2000, compared with prior periods, as a result of the
deferred compensation, goodwill and intangibles related to two
acquisitions completed during the third quarter of 2000. The
increase in inventories was in anticipation of expected growth
in product revenue. The increase in other assets was primarily
the result of deposits related to property leases. The increase
in prepaid expenses and other current assets was the result of
prepayment for tradeshows, customer sales conferences and
prepaid insurance costs. Accounts receivable decreased primarily
because of an increase in the number of customers whose
purchases are accounted for on a cash basis. During the year
ended December 31, 2000, we increased our allowance for
doubtful accounts by $4.7 million, including
$2.1 million related to the acquisition of ACT Networks in
August 2000, to address potential exposures resulting from the
slowdown in the market. The decrease in deferred revenue
resulted from our receipt of payment on previously deferred
revenue transactions. The increase in accounts payable,
compensation related accruals and other accrued liabilities
primarily resulted from increases in inventories and, to a
lesser extent, increases in operating expense levels, in both
cases associated with higher anticipated revenues.

Net cash used in operating activities for 1999
was attributable primarily to a net loss of $30.8 million
and increases in accounts receivable of $15.9 million,
inventory of $4.8 million and prepaid and other assets of
$2.7 million partially offset by depreciation and
amortization of $22.3 million, increases in accounts
payable and accrued liabilities of $10.2 million and
increases in deferred revenue of $5.7 million. The increase
in inventories for 1999 was primarily in anticipation of
expected growth in product revenue as well as a greater need for
evaluation units. The increase in accounts receivable for 1999
is primarily the result of a significant

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portion of our increased sales occurring during
the last quarter of the year. Deferred revenue increased due to
sales that had contingencies, which were not satisfied at
December 31, 1999 as well as increased sales of maintenance
and support contracts.


For 1998, cash used in operating activities was
attributable primarily to a net loss of approximately
$5.8 million, and increases in accounts receivable of
$6.2 million and inventory of $2.7 million offset in
part by depreciation and amortization of $1.4 million and
increases in accounts payable and accrued liabilities of
approximately $3.4 million and an increase in deferred
revenue of approximately $4.3 million. The increase in
accounts receivable was primarily the result of higher sales
levels during the fourth quarter. During the year ended
December 31, 1998, we increased our allowance for doubtful
accounts by $769,000 to address potential exposures related to
an increase in international sales and changes in the
composition of our customer base to include more international
and new entrant customers. Revenue was recognized on sales to
these customers, as collectibility was probable. The increase in
deferred revenue as a result of payment amounts not being fixed
and determinable was $1.4 million in 1998.

Net cash used in investing activities was
$38.5 million in 2000, $58.5 million in 1999, and
$2.2 million in 1998. For 2000, a net $41.3 million of
cash used in investing activities was for the purchase of
investment securities net of sales and maturities. Included in
the net cash used in investing activities during 2000 was a net
$11.0 million invested in long-term investments represented
by interests in various privately held companies and a venture
capital management fund. For 1999, $45.6 million of cash
used in investing activities was for the purchase of investment
securities net of sales and maturities. Net cash of
$33.3 million and $325,000 was provided by business
combinations in 2000 and 1999, respectively. The remaining cash
used in investing activities for each year was for purchases of
property and equipment totaling $30.5 million in 2000,
$13.2 million in 1999, and $2.2 million in 1998.

Net cash provided by financing activities was
$8.1 million in 2000, $301.2 million in 1999 and
$19.5 million in 1998. During 2000, cash provided by
financing activities was primarily from the issuance of common
stock upon the exercise of employee stock options and purchases
under the employee stock purchase plan. For the year ended
December 31, 1999, cash provided by financing activities
was primarily attributable to net proceeds from the issuance of
common stock principally through our initial and secondary
public offerings. In 1998 cash provided by financing activities
was attributable to $14.8 million in proceeds from the
issuance of preferred stock, $2.5 million of short-term
borrowings and $2.6 million of funds received from the
issuance of bridge notes convertible into Series C
preferred stock offset by $550,000 in repayment of those bridge
notes.

As of December 31, 2000, our principal
commitments consisted of obligations outstanding under operating
leases. Although we have no material commitments for capital
expenditures at the date we filed the Prior Report, we
anticipated an increase in capital expenditures and lease
commitments consistent with our anticipated growth in
operations, infrastructure and personnel.

On December 31, 2000, our cash, cash
equivalents, and short-term investment balances was
$260.6 million, which we believed would be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures for at least the following 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.

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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.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 133, Accounting for
Derivative Financial Instruments and for Hedging
Activities (FAS 133) which provides a
comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. FAS 133
is effective for fiscal years beginning after June 15, 2000
and did not have an impact on our results of operations or
financial condition when adopted as we hold no derivative
financial instruments and do not currently engage in hedging
activities. In June 2000, the FASB issued Statement
No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities
(FAS 138). FAS 138 addresses certain
issues related to the implementation of FAS 133 but does
not change the basic model of FAS 133 or further delay the
implementation of FAS 133.

In December 1998, the AICPA issued Statement of
Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions (SOP 98-9). SOP 98-9
requires use of the residual method for recognition
of revenue when vendor-specific objective evidence exists for
undelivered elements but does not exist for delivered elements
of a software arrangement. We adopted the provisions of
SOP 98-9 for applicable transactions entered into beginning
January 1, 2000. The adoption of SOP 98-9 did not have
a material impact on our consolidated financial statements.

In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101). SAB 101 provides guidance on
the recognition, presentation, and disclosure of revenue in
financial statements. In October 2000, the SEC issued additional
written guidance to further supplement SAB 101. We adopted
SAB 101 in the fourth quarter of 2000. SAB 101 did not
have a material impact on our consolidated financial statements.

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

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ITEM 7A.     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 December 31, 2000 we have not experienced
any significant negative impact on our operations as a result of
fluctuations in foreign currency exchange rates. We do not
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 $222 million at December 31, 2000. These
securities are subject to interest rate fluctuations and will
decrease in market value if interest rates increase.

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. We
invest primarily in high-quality, short-term debt instruments
such as U.S. government securities and instruments issued by
high quality financial institutions and companies, including
money market instruments and debt issued by corporations. A
hypothetical 100 basis point increase in interest rates
would result in less than a $200,000 decrease (less than 0.2%)
in the fair market value of our available-for-sale securities.

We have investments in equity securities of
privately held companies for the promotion of business and
strategic objectives of $14.5 million, net at
December 31, 2000. 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. We recorded $1.0 million in
impairment losses during 2000.

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ITEM 8.     FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

CLARENT CORPORATION

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                      |  |   
|----------------------------------------------------- |  | --
|Consolidated Financial Statements:                    |  |   
|Report of Ernst & Young LLP, Independent
    Auditors |  | 25
|Consolidated Balance Sheets                           |  | 26
|Consolidated Statements of Operations                 |  | 27
|Consolidated Statements of Stockholders
    Equity   |  | 28
|Consolidated Statements of Cash Flows                 |  | 30
|Notes to Consolidated Financial Statements            |  | 31
|                                                     
|Financial Statement Schedule:                         |  |   
|For the three years ended December 31, 2000           |  |   
|Schedule II  Valuation and
    Qualifying Accounts   |  | 62

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders
Clarent Corporation

We have audited the accompanying consolidated
balance sheets of Clarent Corporation as of December 31,
2000 and 1999, and the related consolidated statements of
operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed
in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

Since the date of completion of our audit on the
accompanying financial statements and initial issuance of our
report dated January 18, 2001, except for Note 15, for
which the date was February 15, 2001, Clarent Corporation,
as discussed in Note 1, has experienced a substantial
reduction in revenues and a substantial increase in costs that
have adversely affected the Companys current results of
operations and liquidity. Note 1 describes
managements plan to address these issues.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Clarent Corporation at
December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.

The accompanying consolidated financial
statements for the year ended December 31, 2000 have been
restated, as discussed in Note 1.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Jose, California

January 18, 2001,


except for Note 15, as to which the date is
February 15, 
 2001 and Note 1, under the caption Restatement of
Financial 
 Statements, Note 7, under the caption Transactions 
 Related to Asia-Pacific Region, and Note 16, as to which

 the date is April 26, 2002.


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CLARENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)


|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |         |         |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                         |                                                                                                                                                       |                           
|                                         |                                                                                                                                                       | December 31,              
|                                         |                                                                                                                                                       |                           
|                                         |                                                                                                                                                       | 2000                       |                                            | 1999    
|                                         |                                                                                                                                                       |                            |                                            |         
|                                         |                                                                                                                                                       | (Restated)                 |                                            |         
|ASSETS                                  
|Current assets:                          |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         | Cash and cash equivalents                                                                                                                             |                            | $                                          | 185,627  |         |         | $      | 238,724 |        
|                                         | Short-term investments                                                                                                                                |                            |                                            | 74,987   |         |         |        | 42,581  |        
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $6,973 at 2000 and $2,314 at 1999                                                  |                            |                                            | 21,169   |         |         |        | 24,218  |        
|                                         | Inventories                                                                                                                                           |                            |                                            | 17,662   |         |         |        | 8,404   |        
|                                         | Prepaid expenses and other current assets                                                                                                             |                            |                                            | 5,942    |         |         |        | 2,826   |        
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         |                                                                                                                                                       | Total current assets       |                                            |          | 305,387 |         |        |         | 316,753 |        
|Investments                              |                                                                                                                                                       |                            | 14,479                                     |          |         |         | 2,988  |        
|Property and equipment, net              |                                                                                                                                                       |                            | 36,938                                     |          |         |         | 12,696 |        
|Goodwill, net                            |                                                                                                                                                       |                            | 93,644                                     |          |         |         | 2,558  |        
|Purchased intangible assets, net         |                                                                                                                                                       |                            | 38,057                                     |          |         |         |       |        
|Deferred tax assets                      |                                                                                                                                                       |                            | 14,534                                     |          |         |         |       |        
|Other assets                             |                                                                                                                                                       |                            | 4,517                                      |          |         |         | 373    |        
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         |                                                                                                                                                       | Total assets               |                                            | $        | 507,556 |         |        | $       | 335,368 |        
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         | Accounts payable                                                                                                                                      |                            | $                                          | 14,337   |         |         | $      | 8,552   |        
|                                         | Compensation related accruals                                                                                                                         |                            |                                            | 7,948    |         |         |        | 2,991   |        
|                                         | Deferred revenue                                                                                                                                      |                            |                                            | 8,528    |         |         |        | 10,117  |        
|                                         | Merger related restructuring accrual                                                                                                                  |                            |                                            | 6,248    |         |         |        |        |        
|                                         | Other accrued liabilities                                                                                                                             |                            |                                            | 17,378   |         |         |        | 4,866   |        
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         |                                                                                                                                                       | Total current liabilities  |                                            |          | 54,439  |         |        |         | 26,526  |        
|Deferred tax liabilities                 |                                                                                                                                                       |                            | 14,534                                     |          |         |         |       |        
|Commitments and contingencies            |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|Stockholders equity:                    |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         | Preferred Stock, $0.001 par value: 5,000 shares
    authorized; none issued and outstanding                                                           |                            |                                            |         |         |         |        |        |        
|                                         | Common stock, $0.001 par value: 200,000 and
    50,000 shares authorized; 39,350 and 30,986 issued and
    outstanding at 2000 and 1999, respectively |                            |                                            | 583,328  |         |         |        | 353,894 |        
|                                         | Deferred compensation                                                                                                                                 |                            |                                            | (9,740   | )       |         |        | (5,990  | )      
|                                         | Accumulated other comprehensive loss                                                                                                                  |                            |                                            | (326     | )       |         |        | (112    | )      
|                                         | Accumulated deficit                                                                                                                                   |                            |                                            | (134,679 | )       |         |        | (38,950 | )      
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         |                                                                                                                                                       | Total stockholders equity |                                            |          | 438,583 |         |        |         | 308,842 |        
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        
|                                         |                                                                                                                                                       |                            | Total liabilities and stockholders equity |          | $       | 507,556 |        |         | $       | 335,368 | 
|                                         |                                                                                                                                                       |                            |                                            |          |         |         |        |        

See accompanying notes to consolidated financial
statements.

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CLARENT CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(in thousands, except per share
amounts)


|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |        |        |        | 
|--------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | ------------------------ | ------ | ------- | ------- | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                                |                                                |                        
|                                                                |                                                | Year Ended December 31,
|                                                                |                                                |                        
|                                                                |                                                | 2000                    |                          | 1999   |         | 1998   
|                                                                |                                                |                         |                          |        |         |        
|                                                                |                                                | (Restated)              |                          |        |         |        
|Net revenue:                                                    |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                | Product and software                           |                         | $                        | 93,988 |         |         | $       | 44,182 |        |        | $      | 13,810 |       
|                                                                | Service                                        |                         |                          | 13,943 |         |         |         | 3,641  |        |        |        | 837    |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                |                                                | Total net revenue       |                          |        | 107,931 |         |         |        | 47,823 |        |        |        | 14,647 |       
|Cost of revenue:                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                | Product and software                           |                         |                          | 50,630 |         |         |         | 16,746 |        |        |        | 5,902  |       
|                                                                | Service                                        |                         |                          | 8,367  |         |         |         | 3,559  |        |        |        | 751    |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                |                                                | Total cost of revenue   |                          |        | 58,997  |         |         |        | 20,305 |        |        |        | 6,653  |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Gross profit                                                    |                                                |                         | 48,934                   |        |         |         | 27,518  |        |        |        | 7,994  |       
|Operating expenses:                                             |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                | Research and development                       |                         |                          | 29,894 |         |         |         | 9,172  |        |        |        | 3,356  |       
|                                                                | Sales and marketing                            |                         |                          | 59,301 |         |         |         | 25,111 |        |        |        | 7,099  |       
|                                                                | General and administrative                     |                         |                          | 17,404 |         |         |         | 6,877  |        |        |        | 2,484  |       
|                                                                | Amortization of deferred compensation          |                         |                          | 6,201  |         |         |         | 19,371 |        |        |        | 879    |       
|                                                                | Amortization of goodwill and other intangibles |                         |                          | 15,654 |         |         |         | 150    |        |        |        |       |       
|                                                                | Merger related costs                           |                         |                          | 1,386  |         |         |         |       |        |        |        |       |       
|                                                                | Purchased in-process research and development  |                         |                          | 31,496 |         |         |         |       |        |        |        |       |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|                                                                |                                                |                         | Total operating expenses |        |         | 161,336 |         |        |        | 60,681 |        |        |        | 13,818 | 
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Loss from operations                                            |                                                |                         | (112,402                 | )      |         |         | (33,163 | )      |        |        | (5,824 | )     
|Other income, net                                               |                                                |                         | 17,097                   |        |         |         | 2,512   |        |        |        | 32     |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Loss before provision for income taxes                          |                                                |                         | (95,305                  | )      |         |         | (30,651 | )      |        |        | (5,792 | )     
|Provision for income taxes                                      |                                                |                         | (424                     | )      |         |         | (132    | )      |        |        | (40    | )     
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Net loss                                                        |                                                | $                       | (95,729                  | )      |         | $       | (30,783 | )      |        | $      | (5,832 | )     
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Basic and diluted net loss per share                            |                                                | $                       | (2.73                    | )      |         | $       | (1.87   | )      |        | $      | (1.65  | )     
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       
|Shares used to compute basic and diluted net loss
    per share |                                                |                         | 35,063                   |        |         |         | 16,457  |        |        |        | 3,544  |       
|                                                                |                                                |                         |                          |        |         |         |         |        |        |        |        |       

See accompanying notes to consolidated financial
statements.

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CLARENT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(in thousands)


|                                                                                                                                           |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |         |         |        |  |   |    |   |  |   |        |   |  |   |     |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | ------ | ------------ |  | -------- | ------- | ---------- |  | ------------- | ------ | ------------- |  | ----------- | ------ | ------------- |  | ------- | ------- | ------ |  | - | -- | - |  | - | ------ | - |  | - | --- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                           |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |        
|                                                                                                                                           |  | Convertible     |        |              |  |          |         | Notes      |  |               |        | Accumulated   |  |             |        |              
|                                                                                                                                           |  | Preferred Stock |        | Common Stock |  |          |         | Receivable |  |               |        | Other         |  |             |        | Total        
|                                                                                                                                           |  |                 |        |              |  | Deferred |         | from       |  | Comprehensive |        | Comprehensive |  | Accumulated |        | Stockholders
|                                                                                                                                           |  | Shares          |        | Amount       |  | Shares   |         | Amount     |  | Compensation  |        | Stockholders  |  | Loss        |        | Loss          |  | Deficit |         | Equity
|                                                                                                                                           |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |         |         |       
|Balances as of December 31, 1997                                                                                                           |  |                 | 4,220  |              |  | $        | 3,685   |            |  |               | 5,401  |               |  | $           | 27     |               |  | $       |        |        |  | $ | (9 | ) |  | $ |       |   |  | $ | (34 | ) |  | $ | (2,335 | ) |  | $ | 1,334  |  
|Issuance of Series C Convertible preferred
    stock, net of issuance costs of $159                                                        |  |                 | 2,279  |              |  |          | 14,834  |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 14,834 |  
|Issuance of Series C preferred stock for
    settlement expense                                                                            |  |                 | 45     |              |  |          | 300     |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 300    |  
|Conversion of Series C Bridge notes and
    related accrued interest of $56 to Series C preferred
    stock, net of issuance costs of $129 |  |                 | 320    |              |  |          | 1,977   |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 1,977  |  
|Issuance of warrants in conjunction with
    Series C bridge financing                                                                     |  |                 |       |              |  |          | 228     |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 228    |  
|Exercise of common stock options                                                                                                           |  |                 |       |              |  |          |        |            |  |               | 1,065  |               |  |             | 36     |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 36     |  
|Exercise of common stock warrants                                                                                                          |  |                 |       |              |  |          |        |            |  |               | 768    |               |  |             | 38     |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 38     |  
|Repurchase of common stock                                                                                                                 |  |                 |       |              |  |          |        |            |  |               | (105   | )             |  |             | (5     | )             |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | (5     | )
|Forgiveness of stockholder notes receivable                                                                                                |  |                 |       |              |  |          |        |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   | 9  |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 9      |  
|Deferred compensation related to grant of stock
    options                                                                                |  |                 |       |              |  |          |        |            |  |               |       |               |  |             | 2,293  |               |  |         | (2,293  | )      |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   |       |  
|Compensation related to issuance of warrants for
    services                                                                              |  |                 |       |              |  |          |        |            |  |               |       |               |  |             | 357    |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 357    |  
|Amortization of deferred compensation                                                                                                      |  |                 |       |              |  |          |        |            |  |               |       |               |  |             |       |               |  |         | 522     |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 522    |  
|Comprehensive loss:                                                                                                                        |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |         |         |        |  |   |    |   |  |   |        |   |  |   |     |   |  |   |        |   |  |   |        |  
|Net loss                                                                                                                                   |  |                 |       |              |  |          |        |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   | (5,832 | ) |  |   |    |   |  |   | (5,832 | ) |  |   | (5,832 | )
|Foreign currency translation adjustment                                                                                                    |  |                 |       |              |  |          |        |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   | (34    | ) |  |   | (34 | ) |  |   |       |   |  |   | (34    | )
|                                                                                                                                           |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |         |         |        |  |   |    |   |  |   |        |   |  |   |     |   |  |   |        |   |  |   |        |  
|Comprehensive loss                                                                                                                         |  |                 |       |              |  |          |        |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   | (5,866 | ) |  |   |    |   |  |   |       |   |  |   |       |  
|                                                                                                                                           |  |                 |        |              |  |          |         |            |  |               |        |               |  |             |        |               |  |         |         |        |  |   |    |   |  |   |        |   |  |   |     |   |  |   |        |   |  |   |        |  
|Balances as of December 31, 1998                                                                                                           |  |                 | 6,864  |              |  |          | 21,024  |            |  |               | 7,129  |               |  |             | 2,746  |               |  |         | (1,771  | )      |  |   |   |   |  |   |        |   |  |   | (68 | ) |  |   | (8,167 | ) |  |   | 13,764 |  
|Compensation related to issuance of warrants for
    services                                                                              |  |                 |       |              |  |          |        |            |  |               |       |               |  |             | 12,272 |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 12,272 |  
|Exercise of common stock warrants                                                                                                          |  |                 |       |              |  |          |        |            |  |               | 992    |               |  |             | 50     |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 50     |  
|Exercise of Series C preferred stock warrants                                                                                              |  |                 | 59     |              |  |          | 332     |            |  |               |       |               |  |             |       |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   | 332    |  
|Conversion of preferred stock into common stock                                                                                            |  |                 | (6,923 | )            |  |          | (21,356 | )          |  |               | 13,847 |               |  |             | 21,356 |               |  |         |        |        |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   |       |  
|Deferred compensation related to grant of stock
    options                                                                                |  |                 |       |              |  |          |        |            |  |               |       |               |  |             | 11,318 |               |  |         | (11,318 | )      |  |   |   |   |  |   |       |   |  |   |    |   |  |   |       |   |  |   |       |  

28



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##### Table of Contents



CLARENT CORPORATION


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

(in thousands)


|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | -------- | - | ---------- |  | ------------- | ------ | ------------- |  | ----------- | ------- | ------------- |  | ------- | ------ | ------ |  | - | - |  |  | - | ------- | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |        
|                                                                                                         |  | Convertible     |   |              |  |          |   | Notes      |  |               |        | Accumulated   |  |             |         |              
|                                                                                                         |  | Preferred Stock |   | Common Stock |  |          |   | Receivable |  |               |        | Other         |  |             |         | Total        
|                                                                                                         |  |                 |   |              |  | Deferred |   | from       |  | Comprehensive |        | Comprehensive |  | Accumulated |         | Stockholders
|                                                                                                         |  | Shares          |   | Amount       |  | Shares   |   | Amount     |  | Compensation  |        | Stockholders  |  | Loss        |         | Loss          |  | Deficit |        | Equity
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |       
|Issuance of common stock in initial and secondary
    public offerings, net of issuance costs of $18,515 |  |                 |  |              |  |          |  |            |  |               | 7,566  |               |  | $           | 302,563 |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  | $ | 302,563 |  
|Issuance of common stock for exercise of options
    and employee stock purchase plan                    |  |                 |  |              |  |          |  |            |  |               | 1,409  |               |  |             | 789     |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 789     |  
|Common stock issued in connection with acquisition                                                       |  |                 |  |              |  |          |  |            |  |               | 43     |               |  |             | 2,800   |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 2,800   |  
|Amortization of Deferred compensation                                                                    |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  | $       | 7,099  |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 7,099   |  
|Comprehensive loss:                                                                                      |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Net loss                                                                                                 |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  | $ | (30,783 | ) |  |   |     |   |  | $ | (30,783  | ) |  |   | (30,783 | )
|Foreign currency Translation adjustment                                                                  |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | (29     | ) |  | $ | (29  | ) |  |   |         |   |  |   | (29     | )
|Unrealized loss on securities                                                                            |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | (15     | ) |  |   | (15  | ) |  |   |         |   |  |   | (15     | )
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Comprehensive loss                                                                                       |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | (30,827 | ) |  |   |     |   |  |   |         |   |  |   |        |  
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances as of December 31, 1999                                                                         |  |                 |  |              |  |          |  |            |  |               | 30,986 |               |  |             | 353,894 |               |  |         | (5,990 | )      |  |   |  |  |  |   |         |   |  |   | (112 | ) |  |   | (38,950  | ) |  |   | 308,842 |  
|Common stock for options and employee stock
    purchase plan                                            |  |                 |  |              |  |          |  |            |  |               | 3,388  |               |  |             | 8,113   |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 8,113   |  
|Common stock for acquisitions                                                                            |  |                 |  |              |  |          |  |            |  |               | 4,974  |               |  |             | 221,321 |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 221,321 |  
|Deferred compensation for grant of stock options
    in acquisition                                      |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         | (9,952 | )      |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (9,952  | )
|Exercise of common stock warrants                                                                        |  |                 |  |              |  |          |  |            |  |               | 2      |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        |  
|Amortization of deferred compensation                                                                    |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         | 6,202  |        |  |   |  |  |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 6,202   |  
|Comprehensive income:                                                                                    |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Net loss (restated)                                                                                      |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | (95,729 | ) |  |   |     |   |  |   | (95,729  | ) |  |   | (95,729 | )
|Foreign currency translation adjustment                                                                  |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | (260    | ) |  |   | (260 | ) |  |   |         |   |  |   | (260    | )
|Unrealized gain on securities                                                                            |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  |   | 46      |   |  |   | 46   |   |  |   |         |   |  |   | 46      |  
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Comprehensive loss (restated)                                                                            |  |                 |  |              |  |          |  |            |  |               |       |               |  |             |        |               |  |         |       |        |  |   |  |  |  | $ | (95,943 | ) |  |   |      |   |  |   |          |   |  |   |         |  
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances as of December 31, 2000
    (restated)                                                          |  |                 |  |              |  | $        |  |            |  |               | 39,350 |               |  | $           | 583,328 |               |  | $       | (9,740 | )      |  | $ |  |  |  |   |         |   |  | $ | (326 | ) |  | $ | (134,679 | ) |  | $ | 438,583 |  
|                                                                                                         |  |                 |   |              |  |          |   |            |  |               |        |               |  |             |         |               |  |         |        |        |  |   |   |  |  |   |         |   |  |   |      |   |  |   |          |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

29



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##### Table of Contents



CLARENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |        |        |        |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------ | ------ | ------ | ------ | -
|                                                                 |                                                                                                                          |                                                                                       
|                                                                 |                                                                                                                          | Year Ended December 31,                                                               
|                                                                 |                                                                                                                          |                                                                                       
|                                                                 |                                                                                                                          | 2000                                                                                   |                                                                                  | 1999     |         | 1998  
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |       
|                                                                 |                                                                                                                          | (Restated)                                                                             |                                                                                  |          |         |       
|Operating activities:                                            |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Net loss                                                                                                                 |                                                                                        | $                                                                                | (95,729  | )       |        | $       | (30,783 | )       |         | $      | (5,832 | )     
|                                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities:                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |        |       
|                                                                 |                                                                                                                          | Depreciation and amortization                                                          |                                                                                  |          | 32,725  |        |         |         | 22,330  |         |        |        | 1,395  |       
|                                                                 |                                                                                                                          | Purchased in-process research and development                                          |                                                                                  |          | 31,496  |        |         |         |        |         |        |        |       |       
|                                                                 |                                                                                                                          | Impairment of investments                                                              |                                                                                  |          | 1,000   |        |         |         |        |         |        |        |       |       
|                                                                 |                                                                                                                          | Interest expense from warrant issued in
    conjunction with Series C bridge notes     |                                                                                  |          |        |        |         |         |        |         |        |        | 99     |       
|                                                                 |                                                                                                                          | Preferred stock issued for interest payable                                            |                                                                                  |          |        |        |         |         |        |         |        |        | 56     |       
|                                                                 |                                                                                                                          | Forgiveness of stockholder notes receivable                                            |                                                                                  |          |        |        |         |         |        |         |        |        | 9      |       
|                                                                 |                                                                                                                          | Changes in operating assets and liabilities, net
    of effect of acquired businesses: |                                                                                  |          |         |        |         |         |         |         |        |        |        |       
|                                                                 |                                                                                                                          |                                                                                        | Accounts receivable                                                              |          |         | 9,417  |         |         |         | (15,860 | )      |        |        | (6,166 | )
|                                                                 |                                                                                                                          |                                                                                        | Inventories                                                                      |          |         | (4,763 | )       |         |         | (4,759  | )      |        |        | (2,731 | )
|                                                                 |                                                                                                                          |                                                                                        | Prepaid expenses and other current assets                                        |          |         | (1,926 | )       |         |         | (2,348  | )      |        |        | (353   | )
|                                                                 |                                                                                                                          |                                                                                        | Other assets                                                                     |          |         | (3,892 | )       |         |         | (361    | )      |        |        | 10     |  
|                                                                 |                                                                                                                          |                                                                                        | Accounts payable compensation related accruals
    and other accrued liabilities |          |         | 4,921  |         |         |         | 10,154  |        |        |        | 3,440  |  
|                                                                 |                                                                                                                          |                                                                                        | Merger related restructuring accrual                                             |          |         | 6,248  |         |         |         |        |        |        |        |       |  
|                                                                 |                                                                                                                          |                                                                                        | Deferred revenue                                                                 |          |         | (1,995 | )       |         |         | 5,703   |        |        |        | 4,259  |  
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 |                                                                                                                          | Net cash used in operating activities                                                  |                                                                                  |          | (22,498 | )      |         |         | (15,924 | )       |        |        | (5,814 | )     
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Cash flows from investing activities:                            |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Purchases of short-term investments                                                                                      |                                                                                        |                                                                                  | (221,919 | )       |        |         | (45,759 | )       |         |        |       |       
|                                                                 | Purchases of long-term investments                                                                                       |                                                                                        |                                                                                  | (16,719  | )       |        |         | (3,000  | )       |         |        |       |       
|                                                                 | Sale and maturity of short-term investments                                                                              |                                                                                        |                                                                                  | 191,601  |         |        |         | 3,175   |         |         |        |       |       
|                                                                 | Sale and maturity of long-term investments                                                                               |                                                                                        |                                                                                  | 5,728    |         |        |         |        |         |         |        |       |       
|                                                                 | Purchases of property and equipment                                                                                      |                                                                                        |                                                                                  | (30,466  | )       |        |         | (13,228 | )       |         |        | (2,207 | )     
|                                                                 | Acquisition of businesses, net cash acquired                                                                             |                                                                                        |                                                                                  | 33,316   |         |        |         | 325     |         |         |        |       |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 |                                                                                                                          | Net cash used in investing activities                                                  |                                                                                  |          | (38,459 | )      |         |         | (58,487 | )       |        |        | (2,207 | )     
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Cash flows from financing activities:                            |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Proceeds from (payment of) line of credit                                                                                |                                                                                        |                                                                                  |         |         |        |         | (2,500  | )       |         |        | 2,500  |       
|                                                                 | Proceeds from Series C bridge notes                                                                                      |                                                                                        |                                                                                  |         |         |        |         |        |         |         |        | 2,600  |       
|                                                                 | Principal payment on Series C bridge notes                                                                               |                                                                                        |                                                                                  |         |         |        |         |        |         |         |        | (550   | )     
|                                                                 | Net proceeds from issuance of common stock                                                                               |                                                                                        |                                                                                  | 8,113    |         |        |         | 303,402 |         |         |        | 69     |       
|                                                                 | Net proceeds from issuance of preferred stock                                                                            |                                                                                        |                                                                                  |         |         |        |         | 332     |         |         |        | 14,834 |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 |                                                                                                                          | Net cash provided by financing activities                                              |                                                                                  |          | 8,113   |        |         |         | 301,234 |         |        |        | 19,453 |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                                                          |                                                                                        | (253                                                                             | )        |         |        | (2      | )       |         |         | (3     | )     
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                                                          |                                                                                        | (53,097                                                                          | )        |         |        | 226,821 |         |         |         | 11,429 |       
|Cash and cash equivalents, beginning of year                     |                                                                                                                          |                                                                                        | 238,724                                                                          |          |         |        | 11,903  |         |         |         | 474    |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Cash and cash equivalents, end of year                           |                                                                                                                          | $                                                                                      | 185,627                                                                          |          |         | $      | 238,724 |         |         | $       | 11,903 |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Supplemental disclosure of cash flow information:                |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Cash paid for interest                                                                                                   |                                                                                        | $                                                                                | 6        |         |        | $       | 300     |         |         | $      | 28     |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|Supplemental disclosure of non-cash financing
    activities:    |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Preferred stock received in exchange for
    settlement of accounts receivable                                           |                                                                                        | $                                                                                | 1,500    |         |        | $       |        |         |         | $      |       |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Conversion of bridge notes to Series C
    preferred stock, less unamortized cost of related preferred
    stock warrant |                                                                                        | $                                                                                |         |         |        | $       |        |         |         | $      | 1,921  |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Issuance of preferred stock for settlement expense                                                                       |                                                                                        | $                                                                                |         |         |        | $       |        |         |         | $      | 300    |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Conversion of preferred stock to common stock                                                                            |                                                                                        | $                                                                                |         |         |        | $       | 21,356  |         |         | $      |       |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       
|                                                                 | Issuance of common stock in connection with
    business acquisitions                                                    |                                                                                        | $                                                                                | 221,321  |         |        | $       | 2,800   |         |         | $      |       |       
|                                                                 |                                                                                                                          |                                                                                        |                                                                                  |          |         |        |         |         |         |         |        |       

See accompanying notes to consolidated financial
statements.

30



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##### Table of Contents



CLARENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

NOTE 1.     THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Restatement of Financial Statements
    (financial information with respect to dates or periods after
    December 31, 2000 are unaudited)

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.                                                                                                                
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                      

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following tables summarize the effects of the
restatement for the year ended December 31, 2000:

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

|                                 |  |                   |         |             |  |   |          |  
|-------------------------------- |  | ----------------- | ------- | ----------- |  | - | -------- | -
|                                 |  |                  
|                                 |  | Year Ended       
|                                 |  | December 31, 2000
|                                 |  |                  
|                                 |  | As Reported       |         | As Restated
|                                 |  |                   |         |            
|Total net revenue                |  | $                 | 151,581 |             |  | $ | 107,931  |  
|Gross profit                     |  |                   | 91,734  |             |  |   | 48,934   |  
|Loss from operations             |  |                   | (70,274 | )           |  |   | (112,402 | )
|Net loss                         |  |                   | (54,101 | )           |  |   | (95,729  | )
|Basic and diluted loss per share |  | $                 | (1.54   | )           |  | $ | (2.73    | )

Consolidated Balance Sheets Data (in thousands):

|                                           |  |                   |         |             |  |   |         | 
|------------------------------------------ |  | ----------------- | ------- | ----------- |  | - | ------- | 
|                                           |  |                  
|                                           |  | December 31, 2000
|                                           |  |                  
|                                           |  | As Reported       |         | As Restated
|                                           |  |                   |         |            
|Accounts receivable, net                   |  | $                 | 61,610  |             |  | $ | 21,169  | 
|Inventories                                |  |                   | 17,487  |             |  |   | 17,662  | 
|Prepaid expenses and other current assets  |  |                   | 11,342  |             |  |   | 5,942   | 
|Total current assets                       |  |                   | 351,053 |             |  |   | 305,387 | 
|Property and equipment, net                |  |                   | 36,630  |             |  |   | 36,938  | 
|Deferred tax assets                        |  |                   | 15,988  |             |  |   | 14,534  | 
|Total assets                               |  |                   | 554,368 |             |  |   | 507,556 | 
|Deferred revenue                           |  |                   | 13,947  |             |  |   | 8,528   | 
|Merger related restructuring accrual       |  |                   | 8,656   |             |  |   | 6,248   | 
|Other accrued liabilities                  |  |                   | 12,782  |             |  |   | 17,378  | 
|Total current liabilities                  |  |                   | 57,670  |             |  |   | 54,439  | 
|Total stockholders equity                 |  |                   | 482,164 |             |  |   | 438,583 | 
|Total liabilities and stockholders equity |  |                   | 554,368 |             |  |   | 507,556 | 

In connection with the restatement, the Company
reclassified $2.4 million of merger related restructuring
accrual to other accrued liabilities to more properly reflect
charges against that accrual that had been incorrectly taken
against other accrued liabilities.

Recent Events
(unaudited)

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

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Description
of Business

The Company is a leading provider of
software-based communications solutions that are designed to
take advantage of the flexibility and universal reach of
Internet Protocol (IP) communications networks, the most
prominent of which is the public network known as the Internet.
Clarent customers include telecommunications service providers
and enterprises in over 70 countries throughout the globe.

Basis of
Consolidation

The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated.

Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.

Revenue
Recognition

Revenue is recognized at the time of shipment of
the products when persuasive evidence of an arrangement exists,
the fee is fixed and determinable, when no significant
contractual obligations or acceptance terms, if any, remain
outstanding and collection of the resulting receivable is deemed
probable. Service revenue, which is substantially all
maintenance revenue, is generally deferred and, in most cases,
recognized when the services are performed. Maintenance revenue
is recognized ratably over the service period obligations, which
are typically one to two years. Cash payments received in
advance of product or service revenue are recorded as customer
advances. Amounts billed or received in advance of satisfying
all revenue recognition criteria are classified as deferred
revenue in the accompanying balance sheets.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Concentrations
of Credit Risk and Credit Evaluations

Financial instruments, which subject the Company
to concentrations of credit risk, primarily consist of cash,
short and long term investments and accounts receivable. The
Company maintains its cash and cash equivalents principally in
domestic financial institutions of high-credit standing. The
Companys receivables are derived primarily from sales of
software and hardware products and services to companies
primarily in the domestic and international telecommunications
arena. Approximately 7% of the accounts receivable at
December 31, 2000 were from the Asia-Pacific region, 42%
from Europe, Middle East and Africa and 51% from the Americas.
The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. Reserves are
maintained for potential credit losses.

A limited number of customers have historically
accounted for a substantial portion of the Companys
revenue. No customer accounted for 10% or more of net revenue
for the year ended December 31, 2000. Two customers,
AT&T Corporation and Ji Tong Communications Co. Ltd.,
accounted for 15% and 10%, respectively, of net revenue for the
year ended December 31, 1999 and two customers, AT&T
Corporation and Technet, were 10% and 12%, respectively, of the
accounts receivable balance at December 31, 1999. Two
customers, AT&T Corporation and Technet International,
accounted for 36% and 12%, respectively, of net revenue for the
year ended December 31, 1998.

Cash
Equivalents and Short-Term Investments

The Company considers all highly liquid
investment securities with maturity from date of purchase of
three months or less to be cash equivalents and investment
securities with maturity from date of purchase of more than
three months but less than one year to be short-term investments.

Management determines the appropriate
classification of debt and equity securities at the time of
purchase and reevaluates such designation as of each balance
sheet date. To date, all investments have been classified as
available-for-sale and are carried at fair value with unrealized
gains and losses reported net-of-tax as a separate component of
comprehensive income. Realized gains and losses on
available-for-sale securities are included in interest income.
The cost of securities sold is based on specific identification.
Premiums and discounts are amortized over the period from
acquisition to maturity and are included in investment income
along with interest and dividends.

Other
Investments

Other investments primarily consist of strategic
investments of less than 20% equity interest in certain
companies. Clarent does not have the ability to exercise
significant influence over any of these companies, therefore
they are recorded at cost and are accounted for under the cost
method of accounting. Realized gains and losses are recorded in
interest and other income when the related investments are sold.
Clarents investments in privately held companies are
regularly assessed for impairment through review of operations
and indications of continued viability. Reviews of operations to
assess carrying values include evaluation of operating
performance, financing status, liquidity prospects and cash flow
forecasts. Impairment losses are recorded when events and
circumstances indicate that such assets might be impaired and
the decline in value is other than temporary.

Inventories

Inventories are stated at the lower of cost or
market on a first-in, first-out basis.

Property and
Equipment

Property and equipment are stated at cost.
Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the
assets. Estimated useful lives ranging from one to three years

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

are used for computer equipment, purchased
software, production and engineering equipment and five years
for office equipment, furniture and fixtures. Leasehold
improvements are depreciated over the shorter of five years or
the remaining term of the applicable lease.

Intangible
Assets

Intangible assets consist of assembled workforce,
customer base, purchased technology and goodwill related to the
acquisitions of ACT Networks, Inc., PEAK Software Solutions,
Inc. and Global Media Concepts, a Belgium corporation. These
acquisitions were accounted for as purchases and are further
described in Note 2. Goodwill and other intangible assets are
amortized, on a straight-line basis, over the estimated useful
lives of the assets, which generally range from three to five
years. Purchased in-process research and development without
alternative future use is charged to operations at the date of
acquisition.

The Company records impairment losses on
intangible assets when events and circumstances indicate that
such assets might be impaired and the estimated fair value of
the asset is less than its recorded amount. Conditions that
would trigger an impairment assessment include material adverse
changes in operations or the Companys decision to abandon
acquired products, services or technologies. Measurement of fair
value would be based on discounted cash flows at the
Companys incremental borrowing rate and would include a
factor for the probability that the impaired product, service or
technology would be successful. As of the date of the Prior
Report, no such impairment had occurred.

Software Development Costs Statement of Financial
Accounting Standards No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. These costs have not been significant
to date.

Stock-Based
Compensation

The Company accounts for stock-based awards to
employees under the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25), and has adopted the disclosure-only alternative of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS
123).

Advertising
Expenses

The Company expenses advertising costs in the
period in which they are incurred. Advertising expenses for
2000, 1999 and 1998 were $6.5 million, $2.6 million
and $706,000, respectively.

Income
Taxes

Income tax expense is based on reported earnings
before income taxes. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.

Foreign
Currency Translation

Assets and liabilities of the Companys
wholly-owned foreign subsidiaries are translated from their
respective functional currencies at exchange rates in effect at
the balance sheet date, and revenues and expenses are translated
at average exchange rates prevailing during the year. Resulting
translation adjustments are reflected as a separate component of
stockholders equity. Foreign currency transaction gains
and losses, which have been immaterial, are included in results
of operations.

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##### Table of Contents



CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Comprehensive
Loss

The Company reports comprehensive income or loss
in accordance with Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 establishes standards
for reporting comprehensive income and its components in
financial statements. At December 31, 2000 and 1999,
comprehensive loss included foreign currency cumulative
translation adjustments and unrealized gains and losses on
available for sale investments. At December 31, 1998, the
Companys comprehensive loss consisted entirely of foreign
currency cumulative translation adjustments. Comprehensive loss
is reflected in the consolidated statements of
stockholders equity, net of related income tax effects.

Development
Costs

Since January 1, 1999, the Company has
accounted for internal use software costs, including website
development costs, in accordance with Statement of Position
98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use
(SOP 98-1). In accordance with SOP 98-1,
the Company capitalizes its costs to develop software for its
website and other internal uses when preliminary development
efforts are successfully completed, management has authorized
and committed project funding and it is probable that the
project will be completed and the software will be used as
intended. Costs incurred prior to meeting these criteria,
together with costs incurred for training and maintenance, are
expensed. Costs incurred for upgrades and enhancements that are
probable to result in additional functionality are capitalized.
All capitalized costs are amortized to expense over their
expected useful lives. Costs required to be capitalized under
SOP 98-1 have been insignificant to date. Prior to the
adoption of SOP 98-1, costs incurred by the Company to
develop, enhance, manage, monitor, and operate its website were
expensed as incurred.

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), which provides a comprehensive and
consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and is not
anticipated to have a material impact on the Companys
results of operations or financial condition when adopted, as
the Company holds no derivative financial instruments and does
not engage in hedging activities. In June 2000, the FASB issued
Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities
(SFAS 138). SFAS 138 addresses certain
issues related to the implementation of SFAS 133 but does
not change the basic model of SFAS 133 or further delay the
implementation of SFAS 133.

In December 1998, the AICPA issued Statement of
Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions (SOP 98-9). SOP 98-9
requires use of the residual method for recognition
of revenue when vendor-specific objective evidence exists for
undelivered elements but does not exist for delivered elements
of a software arrangement. The Company adopted the provisions of
SOP 98-9 for applicable transactions entered into beginning
January 1, 2000. The adoption of SOP 98-9 did not have
a material impact on the Companys consolidated financial
statements.

In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101). SAB 101 provides guidance on
the recognition, presentation, and disclosure of revenue in
financial statements. In October 2000, the SEC issued additional
written guidance to further supplement SAB 101. The Company
adopted SAB 101 in the fourth quarter of 2000. SAB 101 did
not have a material impact on the Companys consolidated
financial statements.

In March 2000, the Financial Accounting Standards
Board issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation  an
Interpretation of APB 25 (FIN 44).
FIN 44

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

NOTE
2.     ACQUISITIONS

On August 10, 2000, the Company acquired ACT
Networks, Inc., a leading provider of multi-service access and
voice/data integration products that enable the convergence of
voice, video and data onto one managed network.

Under the terms of the acquisition agreement,
each outstanding share of ACT Networks common stock was
exchanged for 0.4198 of a share of Clarent common stock. The
exchange ratio was based upon an ACT Networks stock value of
$14.00 per share divided by Clarents five trading day
average closing price ending on and including August 9,
2000 of $33.35 per share. The Company issued approximately
$150.0 million of stock for the outstanding shares of ACT
Networks and assumed stock options to purchase approximately
1.1 million shares of Clarents common stock with an
aggregate fair value of $27.0 million. The ACT Networks
acquisition has been accounted for as a purchase and
accordingly, results of operations and the estimated fair value
of the assets acquired and liabilities assumed are included in
Clarents financial statements from the date of acquisition.

The ACT Networks acquisition cost, allocation of
excess purchased cost over the fair value of net assets acquired
and the related life of the intangible assets are as follows (in
thousands, except for asset life):

|                                                                             |                                     |                  |         |            |  |  |  |   | 
|---------------------------------------------------------------------------- | ----------------------------------- | ---------------- | ------- | ---------- |  |  |  | - | 
|                                                                             |                                     | Acquisition Cost |         | Asset Life
|                                                                             |                                     |                  |         |           
|                                                                             |                                     |                  |         | (in years)
|Value of common stock and stock options issued                               |                                     | $                | 176,789 |            |  |  |  |  
|Transaction costs                                                            |                                     |                  | 7,008   |            |  |  |  |  
|Merger related restructuring costs                                           |                                     |                  | 8,885   |            |  |  |  |  
|                                                                             |                                     |                  |         |            |  |  |  |  
|                                                                             |                                     |                  | 192,682 |            |  |  |  |  
|Less fair value of net tangible assets acquired                              |                                     |                  | (68,950 | )          |  |  |  |  
|                                                                             |                                     |                  |         |            |  |  |  |  
|Excess purchase cost over the fair value of net
    tangible assets acquired |                                     | $                | 123,732 |            |  |  |  |  
|                                                                             |                                     |                  |         |            |  |  |  |  
|Excess purchase cost was allocated to the
    following:                     |                                     |                  |         |            |  |  |  |  
|                                                                             | Assembled workforce                 |                  | $       | 6,642      |  |  |  | 3 | 
|                                                                             | Customer base                       |                  |         | 19,276     |  |  |  | 5 | 
|                                                                             | Developed technology                |                  |         | 13,860     |  |  |  | 5 | 
|                                                                             | In-process research and development |                  |         | 31,496     |  |  |  |  | 
|                                                                             | Goodwill                            |                  |         | 42,506     |  |  |  | 5 | 
|                                                                             | Deferred compensation               |                  |         | 9,952      |  |  |  | 4 | 
|                                                                             |                                     |                  |         |            |  |  |  |  
|                                                                             |                                     | $                | 123,732 |            |  |  |  |  
|                                                                             |                                     |                  |         |            |  |  |  |  

The fair value assigned to the purchased
in-process research and development in the allocation of
purchase cost included research and development projects for
which technological feasibility had not been

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

achieved and no future alternative uses had been
established. The Company computed its valuations of in-process
research and development using a discounted cash flow analysis
on the anticipated income stream to be generated by the
purchased technology. This allocation of fair value was charged
to operations at the date of acquisition in the third quarter of
2000 and totaled $31.5 million.

In valuing in-process research and development,
the Company considered, among other factors, the stage of
completion of the development efforts and the estimated net
present value of the cash flows expected to result from the
successful deployment of the new products. The stage of
completion was determined by estimating the costs and time
incurred to date relative to the costs and time to be incurred
to develop the in-process technology into commercially viable
products. The estimated net present value of cash flows was
based on incremental future cash flows from revenues expected to
be generated by the products being developed, taking into
account the characteristics and applications of the technology,
the size and growth rate of existing and future markets and an
evaluation of past and anticipated product life cycles.
Estimated future cash flows were discounted to arrive at a net
present value and were allocated to in-process research and
development based upon the percentage of completion at the date
of acquisition.

In valuing the developed technology of
$13.9 million the expected future cash flows from the
existing developed technologies were discounted taking into
account the characteristics and applications of the products,
the size of existing markets, growth rates of existing and
future markets, as well as an evaluation of past and anticipated
product-life cycles.

To determine the value of the assembled workforce
of $6.6 million the Company evaluated the workforce in
place at the acquisition date and utilized the cost approach to
estimate the value of replacing the workforce. Costs considered
in replacing the workforce included costs of identifying,
recruiting and interviewing candidates, as well as the cost of
training new employees. These costs were then summed up and
tax-affected to estimate the value of the assembled workforce.

To determine the value of the customer base of
$19.3 million the Company utilized the avoided cost
approach. Under this approach, the fair value of the acquired
customer relationships is equal to the costs which the acquirer
will avoid spending in recreating similar functional customer
relationships. Costs considered in recreating the customer base
included the amount of costs and time that sales, marketing,
development and corporate personnel would have to spend in order
to acquire the customer base.

Current accruals for merger related restructuring
costs relating to the ACT Networks acquisition of
$6.2 million remained outstanding at December 31,
2000. These accruals are to provide $4.0 million for the
costs of exiting non-cancelable operating leases for the
Calabasas manufacturing facility, $1.3 million for
involuntary employee termination costs related to approximately
twenty-five duplicative management personnel and manufacturing
employees in the ACT organization and $933,000 in fixed asset
disposition costs for disposal of manufacturing equipment and
leasehold improvements in the Calabasas facility. These costs
are related to a plan that existed at the time of the
acquisition to exit the manufacturing activities performed at
the Calabasas facility through discontinuation of certain
product lines and outsourcing the manufacturing of the remaining
products. The Company has identified a contract manufacturer and
expects to be ceasing production at the Calabasas facility by
June 30, 2001.

The following summary prepared on an unaudited
pro forma basis reflects the condensed consolidated results of
operations of the Company, excluding the charge for purchased
in-process research and development, as if the acquisition of
ACT Networks had occurred at the beginning of 1999 and does not
purport to be indicative of what would have occurred had the
acquisition been made as of the beginning of 1999 or of results
which may occur in the future. Amortization of goodwill,
purchased intangible assets and deferred compensation are
included for both years.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma results of operations combine the
consolidated results of operations of the Company (excluding the
charge for purchased in-process research and development) and
the historical results for ACT Networks for the years ended
December 31, 2000 and 1999 (in thousands, except per share
data):

|                                                                   |  |                         |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | - | ------- | -
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31,
|                                                                   |  |                        
|                                                                   |  | 2000                    |         | 1999
|                                                                   |  |                         |         |     
|                                                                   |  | (Restated)              |         |     
|Pro forma net revenue                                              |  | $                       | 163,212 |      |  | $ | 98,300  |  
|Pro forma net loss                                                 |  | $                       | (82,799 | )    |  | $ | (63,207 | )
|Basic and diluted pro forma net loss per share                     |  | $                       | (2.10   | )    |  | $ | (3.05   | )
|Denominator for basic and diluted pro forma
    net loss per share |  |                         | 39,462  |      |  |   | 20,690  |  

On July 24, 2000 the Company completed the
acquisition of PEAK Software Solutions, Inc., a software
development firm specializing in building IP-based, carrier
class data and telecommunications infrastructure software. The
acquisition added approximately 56 software engineers to
Clarents research and development headcount. Under the
terms of the agreement, each outstanding share of PEAK stock was
exchanged for 0.8636 of a share of Clarent common stock and cash
of approximately $25.00 per share, and the Company paid PEAK
approximately $1.5 million to retire certain PEAK
obligations. The Company issued approximately $44.5 million
in stock and paid $16.7 million in cash. The operating
results of PEAK have been included in the statements of
operations from the date of acquisition. This acquisition was
accounted for using the purchase method and was not included in
the calculation of pro forma results as it was not classified as
a significant acquisition.

On October 25, 1999, the Company acquired
all the outstanding stock of Global Media Concept N.V., a
Belgium based distributor of the Companys products. The
purchase consideration totaled $2.8 million and consisted
of 43,487 shares of the Companys common stock with a
fair value of $64.39 per share and acquisition costs of
approximately $140,000. A total of 17,394 shares of the
Companys common stock are held in escrow until April 2001.
The purchase consideration allocated to the fair value of the
assets acquired and goodwill of $2.7 million is being
amortized over its estimated useful life of three years. The
operating results of Global Media Concept are included in the
consolidated financial statements from the acquisition date.
This acquisition was accounted for using the purchase method and
was not included in the calculation of pro forma results as it
is not considered to be material to the operating results of the
Company.

NOTE 3.     BALANCE
SHEET DETAILS

Accounts receivable are comprised of the
following at December 31, (in thousands):

|                                     |  |            |        |      |  |   |        |  
|------------------------------------ |  | ---------- | ------ | ---- |  | - | ------ | -
|                                     |  | 2000       |        | 1999
|                                     |  |            |        |     
|                                     |  | (Restated) |        |     
|Accounts receivable                  |  | $          | 28,142 |      |  | $ | 26,532 |  
|Less allowance for doubtful accounts |  |            | (6,973 | )    |  |   | (2,314 | )
|                                     |  |            |        |      |  |   |        |  
|                                     |  | $          | 21,169 |      |  | $ | 24,218 |  
|                                     |  |            |        |      |  |   |        |  

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories are comprised of the following at
December 31, (in thousands):

|                |  |            |        |      |  |   |       | 
|--------------- |  | ---------- | ------ | ---- |  | - | ----- | 
|                |  | 2000       |        | 1999
|                |  |            |        |     
|                |  | (Restated) |        |     
|Raw materials   |  | $          | 10,901 |      |  | $ | 7,347 | 
|Work in process |  |            | 83     |      |  |   |      | 
|Finished goods  |  |            | 6,678  |      |  |   | 1,057 | 
|                |  |            |        |      |  |   |       | 
|                |  | $          | 17,662 |      |  | $ | 8,404 | 
|                |  |            |        |      |  |   |       | 

Inventory charges totaling $10.6 million
were taken during the year ended December 31, 2000,
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.

Property and equipment is comprised of the
following at December 31, (in thousands):

|                                               |  |      |         |      |  |   |        |  
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                                               |  | 2000 |         | 1999
|                                               |  |      |         |     
|Production and engineering equipment           |  | $    | 19,734  |      |  | $ | 5,255  |  
|Computer equipment and purchased software      |  |      | 17,390  |      |  |   | 5,086  |  
|Leasehold improvements                         |  |      | 8,248   |      |  |   | 4,131  |  
|Office equipment, furniture and fixtures       |  |      | 4,536   |      |  |   | 1,551  |  
|                                               |  |      |         |      |  |   |        |  
|                                               |  |      | 49,908  |      |  |   | 16,023 |  
|Less accumulated depreciation and amortization |  |      | (12,970 | )    |  |   | (3,327 | )
|                                               |  |      |         |      |  |   |        |  
|                                               |  | $    | 36,938  |      |  | $ | 12,696 |  
|                                               |  |      |         |      |  |   |        |  

Goodwill and purchased intangible assets are
comprised of the following at December 31, (in thousands):

|                              |  |      |         |      |  |   |       |  
|----------------------------- |  | ---- | ------- | ---- |  | - | ----- | -
|                              |  | 2000 |         | 1999
|                              |  |      |         |     
|Goodwill                      |  | $    | 106,728 |      |  | $ | 2,708 |  
|Purchased intangible assets   |  |      | 41,856  |      |  |   |      |  
|                              |  |      |         |      |  |   |       |  
|                              |  |      | 148,584 |      |  |   | 2,708 |  
|Less accumulated amortization |  |      | (16,883 | )    |  |   | (150  | )
|                              |  |      |         |      |  |   |       |  
|                              |  | $    | 131,701 |      |  | $ | 2,558 |  
|                              |  |      |         |      |  |   |       |  

The following table details the classification of
amortization of goodwill and purchased intangible assets as
reported in the Consolidated Statements of Operations (in
thousands):

|                   |  |                        |        |      |  |      |     |  |  |   |   | 
|------------------ |  | ---------------------- | ------ | ---- |  | ---- | --- |  |  | - | - | 
|                   |  |                       
|                   |  | Year Ended December 31
|                   |  |                       
|                   |  | 2000                   |        | 1999 |  | 1998
|                   |  |                        |        |      |  |     
|Cost of revenue    |  | $                      | 1,079  |      |  | $    |    |  |  | $ |  | 
|Operating expenses |  |                        | 15,654 |      |  |      | 150 |  |  |   |  | 
|                   |  |                        |        |      |  |      |     |  |  |   |   | 
|                   |  | $                      | 16,733 |      |  | $    | 150 |  |  | $ |  | 
|                   |  |                        |        |      |  |      |     |  |  |   |   | 

41



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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accumulated other comprehensive loss, net of
related taxes, are comprised of the following at
December 31, (in thousands):

|                                          |  |      |      |      |  |   |      |  
|----------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                          |  | 2000 |      | 1999
|                                          |  |      |      |     
|Unrealized gain (loss) on securities, net |  | $    | 31   |      |  | $ | (15  | )
|Foreign currency translation adjustment   |  |      | (357 | )    |  |   | (97  | )
|                                          |  |      |      |      |  |   |      |  
|                                          |  | $    | (326 | )    |  | $ | (112 | )
|                                          |  |      |      |      |  |   |      |  

NOTE 4.     FINANCIAL
INSTRUMENTS

Estimated fair values of financial instruments
are based on quoted market prices. The following is a summary of
available-for-sale securities at December 31, (in
thousands):

|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |         | 
|------------------------ | ---------------------- | --------- | ------- | ---------- |  | ---------- | -- | ---------- |  | - | --- | --- | - | - | ------- | ------- | 
|                         |                        |          
|                         |                        | 2000     
|                         |                        |          
|                         |                        |           |         | Gross      |  | Gross      |    |           
|                         |                        | Amortized |         | Unrealized |  | Unrealized |    |           
|                         |                        | Cost      |         | Gains      |  | Losses     |    | Fair Value
|                         |                        |           |         |            |  |            |    |           
|Commercial paper         |                        | $         | 126,142 |            |  | $          | 36 |            |  | $ | (9  | )   |   | $ | 126,169 |        
|Government securities    |                        |           | 62,833  |            |  |            | 6  |            |  |   | (2  | )   |   |   | 62,837  |        
|Market auction preferred |                        |           | 33,529  |            |  |            |   |            |  |   |    |     |   |   | 33,529  |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         |                        | $         | 222,504 |            |  |            | 42 |            |  | $ | (11 | )   |   | $ | 222,535 |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|Classified as:           |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         | Cash equivalents       |           | $       | 147,559    |  |            | $  |           |  |   | $   | (11 | ) |   | $       | 147,548 | 
|                         | Short-term investments |           |         | 74,945     |  |            |    | 42         |  |   |     |    |   |   |         | 74,987  | 
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         |                        | $         | 222,504 |            |  | $          | 42 |            |  | $ | (11 | )   |   | $ | 222,535 |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        

|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |         | 
|------------------------ | ---------------------- | --------- | ------- | ---------- |  | ---------- | -- | ---------- |  | - | --- | --- | - | - | ------- | ------- | 
|                         |                        |          
|                         |                        | 1999     
|                         |                        |          
|                         |                        |           |         | Gross      |  | Gross      |    |           
|                         |                        | Amortized |         | Unrealized |  | Unrealized |    |           
|                         |                        | Cost      |         | Gains      |  | Losses     |    | Fair Value
|                         |                        |           |         |            |  |            |    |           
|Money market fund        |                        | $         | 477     |            |  | $          |   |            |  | $ | (3  | )   |   | $ | 474     |        
|Commercial paper         |                        |           | 206,188 |            |  |            | 52 |            |  |   | (40 | )   |   |   | 206,200 |        
|Government securities    |                        |           | 44,189  |            |  |            | 4  |            |  |   | (28 | )   |   |   | 44,165  |        
|Market auction preferred |                        |           | 22,255  |            |  |            |   |            |  |   |    |     |   |   | 22,255  |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         |                        | $         | 273,109 |            |  | $          | 56 |            |  | $ | (71 | )   |   | $ | 273,094 |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|Classified as:           |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         | Cash equivalents       |           | $       | 227,496    |  |            | $  | 56         |  |   | $   | (27 | ) |   | $       | 227,525 | 
|                         | Short-term investments |           |         | 42,613     |  |            |    |           |  |   |     | (32 | ) |   |         | 42,581  | 
|                         | Investments            |           |         | 3,000      |  |            |    |           |  |   |     | (12 | ) |   |         | 2,988   | 
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        
|                         |                        | $         | 273,109 |            |  | $          | 56 |            |  | $ | (71 | )   |   | $ | 273,094 |        
|                         |                        |           |         |            |  |            |    |            |  |   |     |     |   |   |         |        

The contractual maturities of the Companys
long-term investments at December 31, 1999 were between one
and two years. 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 years
ended December 31, 2000, 1999 and 1998.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

NOTE 5.     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 the $1.5 million
investment noted in the paragraph below, all of the
Companys investments are valued at the cash paid for the
equity received. These investments are included as long-term
investments in the balance sheet and are accounted for under the
cost method when ownership is less than 20% and there are no
indicators of control. For these non-quoted investments, the
Company regularly reviews operating performance, financing
status, liquidity prospects and cash flow forecasts in assessing
carrying values. 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 2000, the
Company provided $1.0 million for estimated impairment
losses on investments.

During 2000, the Company reduced its accounts
receivable by accepting preferred stock with a value of
$1.5 million in one of its privately held customers as an
alternative to cash payment.

During 2000, the Company has invested
$8.7 million in various privately held companies and
$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 during 2001.

During 2000, the Company recorded revenues of
$5.2 million from certain customers in which the Company
had an investment. Revenues from these customers have been
recorded at the value of the products and services sold.

NOTE 6.     SHORT-TERM
BORROWINGS

In February 1998, the Company obtained
$2.6 million in bridge financing from certain investors and
other parties. The financing was obtained via promissory notes
convertible into shares of the Companys Series C
preferred stock issued by the Company at a conversion price of
$6.58 per share, at the option of the note holders. In
conjunction with this bridge financing, the Company issued to
the bridge financing investors warrants to purchase
59,266 shares of the Companys Series C preferred
stock at an exercise price of $5.593 per share (including a
discount of 15%). The warrants had a contractual life of
10 years. At the date of grant, the value ascribed to the
warrants (using the Black-Scholes valuation method with the
following assumptions; expected life of 10 years, exercise
price of $5.593, stock price on date of grant of $6.58, expected
dividend yield of 0%, risk-free interest rate of 6%, and
expected volatility of .3) was approximately $228,000, of which
approximately $99,000 was recorded by the Company as additional
interest expense over the period the debt was outstanding. The
remaining $129,000 was recorded as issuance costs upon the
conversion to Series C preferred stock. The effective
interest rate of the bridge promissory notes, as adjusted for
the ascribed value of the bridge financing warrants, was
approximately 24.3%. In June 1998, $2,050,000 of the bridge
financing and approximately $56,000 of related accrued interest
was converted into 319,999 shares of the Companys
Series C preferred stock. The Company repaid the remaining
$550,000 of the bridge financing and all related accrued
interest in June 1998. In May and June 1999, investors purchased
59,266 shares of Series C preferred stock under these
warrants.

At December 31, 1999, the Company had a
$7.0 million line of credit with a financial institution of
which no amount was outstanding. The line of credit expired on
February 16, 2000. In June 1999, in connection with this
line of credit, the financial institution received a fully
vested warrant for 3,000 shares of common stock at an
exercise price equal to the fair value price of $15.00 per
share. This warrant was exercised in June, 2000 for
2,213 shares of common stock.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

NOTE 7.     RELATED
PARTY TRANSACTIONS



| |                                            
| | -------------------------------------------
| | Transactions With Management and
    Others

In June 1997, the Company entered into an
agreement for advisory services with WK Technology Fund, a
Taiwanese corporation (the Advisory Services
Agreement), one of whose principals was at the time of
execution of the Advisory Services Agreement a member of the
Companys Board of Directors. The advisory services
contemplated by the Advisory Services Agreement primarily
related to business strategy for the Company and were to be
performed over a four-year term. As consideration for the
advisory services, the Company granted to WK Technology
Fund a warrant to purchase up to 1,400,000 shares of the
Companys common stock at an exercise price of $0.05 per
share. The warrant had a life of five years. Under the terms of
the warrant, (i) 175,000 shares of the stock subject
to the warrant vested on the 6-month anniversary of the warrant
effective date and (ii) the remaining shares subject to the
warrant vested over the subsequent 42 months, provided that
the shares subject to the warrant became fully vested and
exercisable 30 days prior to the closing of the
Companys public offering. The Board of Directors
terminated the Advisory Services Agreement in June 1999 and
elected to have the unvested portion of the warrant become fully
vested. WK Technology Fund purchased 408,328 shares of
the Companys common stock under this warrant in August
1998 and the remaining 991,672 shares in July 1999. The
Company valued the warrant using the guidance in the Financial
Accounting Standards Boards Emerging Issues Task Force
Issue 96-18. The value of the warrant was determined using
the Black-Scholes valuation method. The inputs used included the
exercise price of the warrant of $0.05, the value of the
Companys common stock at each vesting date, expected
dividend yield of 0%, risk free interest rate of 6.0%, expected
volatility of 0.3 and the contractual life of the warrant of
five years. The Company has recorded compensation charges
totaling $12.3 million and $357,000 for the years ended
December 31, 1999 and 1998, respectively, in connection
with this warrant. These amounts are included in amortization of
deferred compensation in the consolidated statements of
operations.

Also in connection with the Advisory Services
Agreement, WK Technology Fund agreed to assist the Company in
identifying, evaluating, and recommending an outside director
for the Company. As consideration for these services, the
Company granted WK Technology Fund a fully vested warrant to
purchase up to 360,000 shares of the Companys common stock
at $0.05 per share upon successfully obtaining an outside
director in February 1998. The fair market value of the
Companys common stock on the date of this grant was $0.05
per share. During August 1998, WK Technology Fund exercised the
option to purchase 360,000 shares of the Companys common
stock under this warrant.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Transactions Related to Asia-Pacific Region
    (financial information with respect to dates or periods after
    December 31, 2000 are unaudited)

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.

44



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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.

NOTE 8.     INCOME
TAXES

The Companys pretax income (loss) from
operations related to non-U.S. operations consists of a loss of
approximately $14.8 million for 2000, and income of
approximately $279,000 and $81,000 for 1999 and 1998,
respectively.

The provision for income taxes consisted of the
following (in thousands):

|                       |                                  |              |   |      |  |      |   |     |  |  |   |    | 
|---------------------- | -------------------------------- | ------------ | - | ---- |  | ---- | - | --- |  |  | - | -- | 
|                       |                                  |             
|                       |                                  | December 31,
|                       |                                  |             
|                       |                                  | 2000         |   | 1999 |  | 1998
|                       |                                  |              |   |      |  |     
|                       |                                  | (Restated)   |   |      |  |     
|Foreign tax provision: |                                  |              |   |      |  |      |   |     |  |  |   |   
|                       | Current                          |              | $ | 424  |  |      | $ | 132 |  |  | $ | 40 | 
|                       |                                  |              |   |      |  |      |   |     |  |  |   |   
|                       | Total provision for income taxes |              | $ | 424  |  |      | $ | 132 |  |  | $ | 40 | 
|                       |                                  |              |   |      |  |      |   |     |  |  |   |   

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes differs from the
amount computed by applying the statutory federal income tax
rate (35% for 2000 and 1999 and 34% for 1998) to income before
taxes. The sources and tax effects of the differences are as
follows (in thousands):

|                                                        |                 |              |         |      |  |      |         |     |  |   |        |    | 
|------------------------------------------------------- | --------------- | ------------ | ------- | ---- |  | ---- | ------- | --- |  | - | ------ | -- | 
|                                                        |                 |             
|                                                        |                 | December 31,
|                                                        |                 |             
|                                                        |                 | 2000         |         | 1999 |  | 1998
|                                                        |                 |              |         |      |  |     
|                                                        |                 | (Restated)   |         |      |  |     
|Tax benefit at Federal statutory rate                   |                 | $            | (33,357 | )    |  | $    | (10,653 | )   |  | $ | (1,969 | ) 
|Loss for which no benefit is currently
    recognizable |                 |              | 8,866   |      |  |      | 10,653  |     |  |   | 1,969  |   
|Non-deductible acquisition costs                        |                 |              | 5,926   |      |  |      |        |     |  |   |       |   
|Non-deductible in-process R&D                           |                 |              | 11,509  |      |  |      |        |     |  |   |       |   
|Foreign losses not benefited                            |                 |              | 5,652   |      |  |      |        |     |  |   |       |   
|Non-deductible stock compensation expense               |                 |              | 1,750   |      |  |      |        |     |  |   |       |   
|Foreign (loss) income at other than U.S.
    rates      |                 |              | (45     | )    |  |      | 132     |     |  |   | 40     |   
|Other, net                                              |                 |              | 123     |      |  |      |        |     |  |   |       |   
|                                                        |                 |              |         |      |  |      |         |     |  |   |        |   
|                                                        | Total provision |              | $       | 424  |  |      | $       | 132 |  |   | $      | 40 | 
|                                                        |                 |              |         |      |  |      |         |     |  |   |        |   

Significant components of the Companys
deferred tax assets are as follows (in thousands):

|                          |                                                |              |         |        |  |  |         |       | 
|------------------------- | ---------------------------------------------- | ------------ | ------- | ------ |  |  | ------- | ----- | 
|                          |                                                |             
|                          |                                                | December 31,
|                          |                                                |             
|                          |                                                | 2000         |         | 1999  
|                          |                                                |              |         |       
|                          |                                                | (Restated)   |         |       
|Deferred tax assets:      |                                                |              |         |        |  |  |         |      
|                          | Net operating loss carryforwards               |              | $       | 58,672 |  |  | $       | 5,760 | 
|                          | Tax credit carryforwards                       |              |         | 2,146  |  |  |         | 900   | 
|                          | Deferred revenue                               |              |         | 506    |  |  |         | 1,761 | 
|                          | Deferred compensation                          |              |         | 13,297 |  |  |         | 3,166 | 
|                          | Accounts receivable reserve                    |              |         | 3,443  |  |  |         | 2,163 | 
|                          | Accruals and reserves not currently deductible |              |         | 8,269  |  |  |         | 1,835 | 
|                          |                                                |              |         |        |  |  |         |      
|Gross deferred tax assets |                                                |              | 86,333  |        |  |  | 15,585  |      
|Valuation allowance       |                                                |              | (71,799 | )      |  |  | (15,585 | )    
|                          |                                                |              |         |        |  |  |         |      
|                          | Total deferred tax assets                      |              | $       | 14,534 |  |  | $       |      | 
|                          |                                                |              |         |        |  |  |         |      
|Deferred tax liabilities: |                                                |              |         |        |  |  |         |      
|                          | Acquired intangibles                           |              |         | 14,534 |  |  |         |      | 
|                          |                                                |              |         |        |  |  |         |      
|                          | Total deferred tax liabilities                 |              | $       | 14,534 |  |  | $       |      | 
|                          |                                                |              |         |        |  |  |         |      

Financial Accounting Standards Board Statement
No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based
upon the weight of available evidence, which includes the
Companys historical operating performance and the
carryback potential, the Company has determined that a valuation
allowance continues to be necessary.

As of December 31, 2000, the Company had
federal and state net operating loss carryforwards of
approximately $157.0 million and $62.0 million,
respectively. As of December 31, 2000, the Company also had
federal and state research and development tax credit
carryforwards of approximately $1.1 million and
$1.0 million, respectively. The net operating loss and tax
credit carryforwards will expire at various dates beginning in
2004 through 2020, if not utilized. Utilization of the net
operating loss and tax credit

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

carryforwards may be subject to annual
limitations due to the ownership change limitations provided by
the Internal Revenue Code and similar state provisions.

The valuation allowance increased by
$56.2 million and $12.4 million during the years ended
December 31, 2000 and 1999, respectively. Substantially all
of the valuation allowance is related to stock option
deductions, the benefit of which will be credited to additional
paid in capital when realized.

NOTE
9.     COMMITMENTS AND
CONTINGENCIES

The Company leases its principal office
facilities under noncancelable operating lease agreements that
have initial terms ranging from three to ten years. As of
December 31, 2000, minimum lease payments under all
noncancelable lease agreements with initial terms in excess of
one year were as follows (in thousands):

|                             |  |                  |        | 
|---------------------------- |  | ---------------- | ------ | 
|Year Ended December 31       |  | Operating Leases
|                             |  |                 
|2001                         |  | $                | 11,851 | 
|2002                         |  |                  | 12,486 | 
|2003                         |  |                  | 11,801 | 
|2004                         |  |                  | 8,987  | 
|2005                         |  |                  | 6,330  | 
|Thereafter                   |  |                  | 25,821 | 
|                             |  |                  |        | 
|Total minimum lease payments |  | $                | 77,276 | 
|                             |  |                  |        | 

Rent expense was approximately $5.2 million,
$2.0 million and $492,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

From time to time, the Company may be subject to
claims, which arise in the normal course of business. Depending
on the amount and timing, an unfavorable resolution of a matter
could materially affect the Companys future results of
operations or cash flows in a particular period.

NOTE
10.     STOCKHOLDERS
EQUITY

Preferred
Stock

The Companys Certificate of Incorporation
authorizes 5.0 million shares of preferred stock. There was
no preferred stock issued at December 31, 2000 or 1999.

Common
Stock

In July 1996, 5.4 million shares of common
stock were issued to the Companys two remaining founders.
The outstanding shares were subject to transfer restrictions
through June 1999 and were subject to repurchase at the issuance
price upon the occurrence of certain events, including
termination of employment. The Companys right of
repurchase expired in July 2000.

In July and November 1999, the Company completed
initial and secondary public offerings, respectively. The
initial public offering raised net proceeds of
$62.7 million from issuance of 4.6 million shares of
common stock, and included 600,000 over-allotment shares at
$15.00 per share. Upon the closing of the initial public
offering, approximately 6.9 million shares of the
Companys convertible preferred stock were automatically
converted into approximately 13.8 million shares of common
stock. Net proceeds from the secondary offering were
$239.9 million from the issuance of approximately
3 million shares of common stock, including 128,125
over-allotment shares at $85.00 per share.

In February 2000, the Companys stockholders
authorized an amendment to the restated certificate of
incorporation to increase the authorized number of shares of
common stock to 200 million from 50 million

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares. A total of 13.5 million shares were
reserved for issuance under employee benefit plans as of the
date of the Prior Report.

NOTE 11.     EMPLOYEE
BENEFIT PLANS

Stock Option
Plans

The Companys 1999 Amended and Restated
Equity Incentive Plan (the 1999 Incentive Plan) was
adopted in 1996. As of December 31, 2000 an aggregate of
16,792,465 shares of common stock were authorized for issuance
under the 1999 Incentive Plan. In addition, a total of 1,235,795
shares of common stock were authorized for issuance under other
employee option plans assumed with the acquisition of ACT
Networks, Inc. in August 2000.

The provisions of the 1999 Incentive Plan
automatically increase the number of shares available for
issuance by 2.5% of the Companys outstanding shares per
year, or a lesser amount as determined by the Board of
Directors. The calculation is based upon the outstanding shares
of Clarent common stock on January 31 of each year from
2000 through 2004. The 1999 Incentive Plan provides for the
grant of incentive stock options, non-statutory stock options,
restricted stock purchase awards, stock bonuses and stock
appreciation rights to Clarents and its affiliates
employees, including officers and employee directors.
Non-statutory stock options are available to be granted to
consultants and non-employee directors. As of December 31,
2000 no restricted stock purchase awards, stock bonuses or stock
appreciation rights are granted and outstanding under the 1999
Incentive Plan.

Under the 1999 Incentive Plan, options to
purchase common stock may be granted at no less than the fair
market value on the date of the grant (110% of fair market value
in certain instances,) as determined by the Board of Directors,
based upon the closing sale price of the Companys common
stock on the Nasdaq National Market. The Company executes
individual option agreements under the plan and the shares
underlying the options generally vest either at 25% of the total
grant after the completion of the first twelve full months of
employment with the remainder vesting monthly over three years
thereafter or vesting is monthly over a four year period.
Options generally have a 10 year life. Certain stock
options (Performance Options) issued under the 1999
Incentive Plan vest over a time period determined by the Board
of Directors; however, under the terms of the original option
agreements, the vesting could be accelerated based on
achievement of certain performance criteria. For the years ended
December 31, 1999 and 1998 the Board of Directors granted
Performance Options to purchase 279,500 and 492,000 shares of
common stock to certain employees at an exercise price equal to
the fair market value on the date of grant. These options vest
in seven years, but the vesting could be accelerated based on
the achievement of the performance criteria. The accelerated
vesting schedule provides that the grants will vest over a
48 month term. There were no performance options granted
during 2000. At December 31, 2000 there were
13.0 million shares of common stock reserved for issuance
under employee option plans.

In July 1999, the Company adopted the 1999
Non-employee Directors Equity Incentive Plan (the
Directors Plan) to provide for the automatic
grant of options to purchase shares of common stock to the
Companys non-employee directors who are not any of the
Companys affiliates employees or consultants
(non-employee director). The Directors Plan is
administered by the Board, and may be delegated to a committee.
Options granted under the Directors Plan are at 100% of
the fair market value of the common stock on the date of grant.
The aggregate number of shares of common stock to be issued
under the Directors Plan was increased to 500,000 shares
in June 2000. Under the terms of the Directors Plan, as
amended in June 2000, each non-employee director, shall, upon
the date of initial appointment, be granted an option to
purchase 35,000 shares of common stock. In addition, on the day
following each annual meeting of stockholders, each non-employee
director shall be granted an option to purchase 15,000 shares of
common stock. This annual grant shall be reduced pro rata for
each quarter during the preceding year that was prior to

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the non-employee directors appointment. The
options granted under the terms of the amended Directors
Plan vest and become exercisable at the rate of 1/24 per month
over a two year period.

The terms of the plan prior to the June 2000
amendment, provided for each non-employee director to be granted
automatically, an option to purchase 5,000 shares upon their
appointment and 2,000 shares of common stock for each regular
meeting, commencing with the third regular meeting subsequent to
the date of appointment. Prior to the amendment, options granted
under the Directors Plan were fully vested and became
exercisable upon the date of grant. As of December 31, 2000
there have been approximately 135,000 non-statutory stock
options granted under the Directors Plan and there were
approximately 365,000 shares of common stock reserved for future
issuance under the Directors Plan.

A summary of option plan activity follows (in
thousands, except price per-share amounts):

|                             |                                     |               |       |                     |   |                |        |        |   |   |       |       | 
|---------------------------- | ----------------------------------- | ------------- | ----- | ------------------- | - | -------------- | ------ | ------ | - | - | ----- | ----- | 
|                             |                                     |               |       |                    
|                             |                                     |               |       | Options Outstanding
|                             |                                     |               |       |                    
|                             |                                     | Shares        |       |                     |   | Weighted-     
|                             |                                     | Available for |       | Number of           |   | Average       
|                             |                                     | Grant         |       | Shares              |   | Exercise Price
|                             |                                     |               |       |                     |   |               
|Balance at December 31, 1997 |                                     |               | 2,180 |                     |   |                | 5,019  |        |   | $ | 0.03  |      
|                             | Additional shares reserved          |               |       | 3,303               |   |                |        |       |   |   |       |      | 
|                             | Granted                             |               |       | (3,031              | ) |                |        | 3,031  |   |   | $     | 0.62  | 
|                             | Exercised                           |               |       |                    |   |                |        | (1,065 | ) |   | $     | 0.04  | 
|                             | Canceled                            |               |       | 511                 |   |                |        | (511   | ) |   | $     | 0.13  | 
|                             |                                     |               |       |                     |   |                |        |        |   |   |       |      
|Balance at December 31, 1998 |                                     |               | 2,963 |                     |   |                | 6,474  |        |   | $ | 0.31  |      
|                             | Additional shares reserved          |               |       | 1,155               |   |                |        |       |   |   |       |      | 
|                             | Granted                             |               |       | (3,082              | ) |                |        | 3,082  |   |   | $     | 20.78 | 
|                             | Exercised                           |               |       |                    |   |                |        | (1,362 | ) |   | $     | 0.14  | 
|                             | Canceled                            |               |       | 98                  |   |                |        | (98    | ) |   | $     | 18.90 | 
|                             |                                     |               |       |                     |   |                |        |        |   |   |       |      
|Balance at December 31, 1999 |                                     |               | 1,134 |                     |   |                | 8,096  |        |   | $ | 7.90  |      
|                             | Additional shares reserved          |               |       | 6,870               |   |                |        |       |   |   |       |      | 
|                             | Granted or assumed with acquisition |               |       | (6,795              | ) |                |        | 6,795  |   |   | $     | 52.05 | 
|                             | Exercised                           |               |       |                    |   |                |        | (3,225 | ) |   | $     | 1.74  | 
|                             | Canceled                            |               |       | 986                 |   |                |        | (986   | ) |   | $     | 45.27 | 
|                             | Repurchased                         |               |       | 105                 |   |                |        |       |   |   | $     | 0.05  | 
|                             |                                     |               |       |                     |   |                |        |        |   |   |       |      
|Balance at December 31, 2000 |                                     |               | 2,300 |                     |   |                | 10,680 |        |   | $ | 34.40 |      
|                             |                                     |               |       |                     |   |                |        |        |   |   |       |      

50



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##### Table of Contents



CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
concerning options outstanding and exercisable at
December 31, 2000 (in thousands, except contractual life
and prices):

|                         |  |                     |        |                     |  |             |       |           |  |               |      |  |  |  |       |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | ------------------- |  | ----------- | ----- | --------- |  | ------------- | ---- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |                     |        |                    
|                         |  | Options Outstanding |        | Options Exercisable
|                         |  |                     |        |                    
|                         |  |                     |        | Weighted-           |  |            
|                         |  |                     |        | Average             |  |            
|                         |  |                     |        | Remaining           |  |            
|                         |  |                     |        | Weighted-           |  | Contractual |       | Number of |  |              
|                         |  | Number of           |        | Average             |  | Life        |       | Exercise  |  | Weighted     
|Range of Exercise Prices |  | Shares              |        | Exercise Price      |  | (in Years)  |       | Shares    |  | Average Price
|                         |  |                     |        |                     |  |             |       |           |  |              
|$ 0.02  $  1.50         |  |                     | 2,790  |                     |  | $           | 0.06  |           |  |               | 7.33 |  |  |  | 908   |  |  | $ | 0.36  | 
|$ 1.51  $ 26.00         |  |                     | 2,710  |                     |  | $           | 14.27 |           |  |               | 7.58 |  |  |  | 1,007 |  |  | $ | 14.62 | 
|$26.01  $ 46.90         |  |                     | 2,670  |                     |  | $           | 39.57 |           |  |               | 9.18 |  |  |  | 233   |  |  | $ | 35.44 | 
|$46.91  $125.00         |  |                     | 2,510  |                     |  | $           | 88.30 |           |  |               | 9.14 |  |  |  | 396   |  |  | $ | 91.89 | 
|                         |  |                     |        |                     |  |             |       |           |  |               |      |  |  |  |       |  |  |   |       | 
|$ 0.02  $125.00         |  |                     | 10,680 |                     |  | $           | 34.40 |           |  |               | 8.28 |  |  |  | 2,544 |  |  | $ | 23.47 | 
|                         |  |                     |        |                     |  |             |       |           |  |               |      |  |  |  |       |  |  |   |       | 

At December 31, 1999, options to purchase
1,662,000 shares were exercisable at a weighed average exercise
price of $0.91. Options to purchase 1,236,000 shares were
exercisable at December 31, 1998 at a weighted average
exercise price of $0.05.

Employee Stock Purchase
Plan

In July 1999, the Company adopted the 1999
Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, the Board of Directors or a committee
may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the
Purchase Plan. Eligible employees can elect to contribute a
percentage of up to 10% of their gross earnings during each
purchase period, subject to the IRS annual limitation. The
offering period for any offering will be no more than
27 months. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair
market value of the common stock on the commencement date of
each offering period or the relevant purchase date. Pursuant to
the Purchase Plan, the Company issued 46,926 shares in 1999 and
162,587 in 2000. At December 31, 2000 there were 390,487
shares reserved for future issuance under the Purchase Plan.

In the event of certain changes in control, the
Board of Directors has discretion to provide that each right to
purchase common stock will be assumed or an equivalent right
will be substituted by the successor corporation, or that such
rights may continue in full force and effect, or that all sums
collected by payroll deductions be applied to purchase stock
immediately prior to the change in control. The Purchase Plan
will terminate at the Boards discretion or when all of the
shares reserved for issuance under the Purchase Plan have been
issued.

Employee 401(k)
Plans

The Company has pretax savings plans that qualify
under Section 401(k) of the Internal Revenue Code. Under
the plans, participating employees may defer up to 25% of their
pretax salary but not more than statutory limits. The Company
may elect to make matching contributions to the plans. For the
year ended December 31, 2000 the Company contributed
approximately $200,000 in matching contributions. For the years
ended December 31, 1999 and 1998 the Company made no
matching contributions and incurred immaterial expenses related
to the plans.

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amortization of Deferred
Compensation

The Company has recorded amortization of deferred
compensation charges of approximately $6.2 million,
$19.4 million and $879,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Amortization of deferred compensation resulted from the granting
of stock options and warrants to purchase common stock at prices
below the deemed fair value of Clarents common stock
including those granted in conjunction with assuming stock
option plans in an acquisition. The compensation related to
stock options is being amortized using the graded method over
the vesting periods of the individual stock options, generally
four years.

Pro Forma Disclosure of the
Effect of Stock-Based Compensation

The Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value
accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the
exercise price of the Companys employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

The fair value of each option grant prior to the
initial public offering was estimated on the date of grant using
the minimum value method. Options granted subsequent to the
initial public offering were valued using the Black-Scholes
valuation model. The following weighted average assumptions were
used:

|                                 |  |              |       |      |  |      |      |   |  |  |     |  
|-------------------------------- |  | ------------ | ----- | ---- |  | ---- | ---- | - |  |  | --- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2000         |       | 1999 |  | 1998
|                                 |  |              |       |      |  |     
|Expected dividend yield          |  |              | 0.0   | %    |  |      | 0.0  | % |  |  | 0.0 | %
|Risk-free interest rate          |  |              | 5.5   | %    |  |      | 5.8  | % |  |  | 5.4 | %
|Expected life of option in years |  |              | 4.0   |      |  |      | 4.0  |   |  |  | 4.2 |  
|Volatility                       |  |              | 172.0 | %    |  |      | 60.0 | % |  |  | 0.0 | %

If compensation cost for the Companys
stock-based compensation plan had been determined based on the
fair value at the grant dates for awards under this plan
consistent with the method provided for under FAS 123, then the
Companys net loss and loss per share would have been as
indicated in the pro forma amounts below (in thousands, except
per share amounts):

|                                                  |  |                          |          |      |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                  |  |                         
|                                                  |  | Years Ended December 31,
|                                                  |  |                         
|                                                  |  | 2000                     |          | 1999 |  | 1998
|                                                  |  |                          |          |      |  |     
|                                                  |  | (Restated)               |          |      |  |     
|Net loss as reported                              |  | $                        | (95,729  | )    |  | $    | (30,783 | ) |  | $ | (5,832 | )
|Pro forma net loss                                |  | $                        | (171,516 | )    |  | $    | (33,437 | ) |  | $ | (5,869 | )
|Net loss per share as reported, basic and diluted |  | $                        | (2.73    | )    |  | $    | (1.87   | ) |  | $ | (1.65  | )
|Pro forma net loss per share                      |  | $                        | (4.89    | )    |  | $    | (2.03   | ) |  | $ | (1.66  | )

The weighted average fair value of options
granted to employees during the years ended December 31,
2000, 1999 and 1998, were approximately $53.51, $10.75 and
$0.125, respectively. For purposes of pro forma disclosures, the
minimum value of the stock grants and stock options is deemed
amortized over the grant vesting period.

NOTE 12.     SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION

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

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                      |                                |                         |   |        |        |      |   |        |        |  |   |       |        | 
|--------------------- | ------------------------------ | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ----- | ------ | 
|                      |                                |                        
|                      |                                | Year Ended December 31,
|                      |                                |                        
|                      |                                | 2000                    |   | 1999   |        | 1998
|                      |                                |                         |   |        |        |     
|                      |                                | (Restated)              |   |        |        |     
|Product and software: |                                |                         |   |        |        |      |   |        |        |  |   |      
|                      | United States                  |                         | $ | 30,334 |        |      | $ | 20,365 |        |  | $ | 6,716 |       
|                      | Asia-Pacific                   |                         |   | 33,168 |        |      |   | 15,999 |        |  |   | 6,170 |       
|                      | Europe, Middle East and Africa |                         |   | 21,591 |        |      |   | 6,819  |        |  |   | 725   |       
|                      | Other Americas                 |                         |   | 8,895  |        |      |   | 999    |        |  |   | 199   |       
|                      |                                |                         |   |        |        |      |   |        |        |  |   |      
|                      |                                | Total                   |   | $      | 93,988 |      |   | $      | 44,182 |  |   | $     | 13,810 | 
|                      |                                |                         |   |        |        |      |   |        |        |  |   |      
|Service revenue:      |                                |                         |   |        |        |      |   |        |        |  |   |      
|                      | United States                  |                         | $ | 5,778  |        |      | $ | 1,733  |        |  | $ | 469   |       
|                      | Asia-Pacific                   |                         |   | 3,307  |        |      |   | 1,417  |        |  |   | 332   |       
|                      | Europe, Middle East and Africa |                         |   | 3,341  |        |      |   | 408    |        |  |   | 15    |       
|                      | Other Americas                 |                         |   | 1,517  |        |      |   | 83     |        |  |   | 21    |       
|                      |                                |                         |   |        |        |      |   |        |        |  |   |      
|                      |                                | Total                   |   | $      | 13,943 |      |   | $      | 3,641  |  |   | $     | 837    | 
|                      |                                |                         |   |        |        |      |   |        |        |  |   |      

For the years ended December 31, 2000, 1999
and 1998, customers based in the United States contributed 33%,
46% and 49% of total net revenue. During 2000, customers based
in Hong Kong accounted for approximately $12.9 million of
total net revenue, representing approximately 12% of total net
revenue. During 1999, revenue from no individual country other
than the United States accounted for more than 10% of net
revenue. During 1998, customers located in Japan accounted for
approximately $3.1 million of total net revenue,
representing approximately 21% of total net revenue.

NOTE 13.     NET LOSS
PER SHARE

The Company follows the provisions of Statement
of Financial Accounting Standards No. 128, Earnings
Per Share. Basic and diluted net loss per share is
computed by dividing net loss by the weighted average number of
common shares outstanding during the period less outstanding
nonvested shares. Outstanding nonvested shares are not included
in the computations of basic and diluted net loss per share
until the time-based vesting restrictions have lapsed.

The following table sets forth the computation of
basic and diluted net loss per share (in thousands, except per
share amounts):

|                                     |                                                          |                         |       |         |   |      |       |         |   |   |       |        |  
|------------------------------------ | -------------------------------------------------------- | ----------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------ | -
|                                     |                                                          |                        
|                                     |                                                          | Year Ended December 31,
|                                     |                                                          |                        
|                                     |                                                          | 2000                    |       | 1999    |   | 1998
|                                     |                                                          |                         |       |         |   |     
|                                     |                                                          | (Restated)              |       |         |   |     
|Numerator:                           |                                                          |                         |       |         |   |      |       |         |   |   |       |       
|                                     | Net loss                                                 |                         | $     | (95,729 | ) |      | $     | (30,783 | ) |   | $     | (5,832 | )
|                                     |                                                          |                         |       |         |   |      |       |         |   |   |       |       
|Denominator:                         |                                                          |                         |       |         |   |      |       |         |   |   |       |       
|                                     | Weighted average common shares outstanding               |                         |       | 35,153  |   |      |       | 17,751  |   |   |       | 6,248  |  
|                                     | Less shares subject to repurchase                        |                         |       | (90     | ) |      |       | (1,294  | ) |   |       | (2,704 | )
|                                     |                                                          |                         |       |         |   |      |       |         |   |   |       |       
|                                     | Denominator for basic and diluted net loss per
    share |                         |       | 35,063  |   |      |       | 16,457  |   |   |       | 3,544  |  
|                                     |                                                          |                         |       |         |   |      |       |         |   |   |       |       
|Basic and diluted net loss per share |                                                          | $                       | (2.73 | )       |   | $    | (1.87 | )       |   | $ | (1.65 | )     
|                                     |                                                          |                         |       |         |   |      |       |         |   |   |       |       

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has excluded all convertible
preferred stock, warrants for convertible preferred stock and
common stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common
share because all such securities are anti-dilutive for all
periods presented. The total number of shares excluded from the
calculations of diluted net loss per share, in thousands, were
5,637, 8,718 and 24,158 for the years ended December 31,
2000, 1999 and 1998, respectively.

NOTE
14.     QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)

Summarized quarterly financial information for
2000 and 1999 is as follows (in thousands, except per share
data):

|                                                |  |                      |        |          |  |              |        |             |  |          |        |          |  |          |         |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | -------------------- | ------ | -------- |  | ------------ | ------ | ----------- |  | -------- | ------ | -------- |  | -------- | ------- | -------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                |  |                     
|                                                |  | 2000  Quarter Ended
|                                                |  |                     
|                                                |  |                      |        |          |  |              |        |            
|                                                |  | March 31             |        | June 30  |  | September 30 |        | December 31
|                                                |  |                      |        |          |  |              |        |            
|                                                |  | Reported             |        | Restated |  | Reported     |        | Restated    |  | Reported |        | Restated |  | Reported |         | Restated
|                                                |  |                      |        |          |  |              |        |             |  |          |        |          |  |          |         |         
|Net revenue                                     |  | $                    | 24,583 |          |  | $            | 22,990 |             |  | $        | 28,313 |          |  | $        | 20,486  |          |  | $ | 45,523  |   |  | $ | 27,221  |   |  | $ | 53,162  |   |  | $ | 37,234  |  
|Gross profit                                    |  |                      | 14,634 |          |  |              | 13,953 |             |  |          | 17,213 |          |  |          | 9,792   |          |  |   | 25,257  |   |  |   | 10,835  |   |  |   | 34,630  |   |  |   | 14,354  |  
|Loss from operations                            |  |                      | (4,806 | )        |  |              | (5,487 | )           |  |          | (3,912 | )        |  |          | (11,616 | )        |  |   | (44,089 | ) |  |   | (58,594 | ) |  |   | (17,467 | ) |  |   | (36,705 | )
|Net (loss) income                               |  |                      | (716   | )        |  |              | (1,397 | )           |  |          | 228    |          |  |          | (7,476  | )        |  |   | (39,503 | ) |  |   | (53,508 | ) |  |   | (14,110 | ) |  |   | (33,348 | )
|Basic and diluted net earnings (loss) per share |  | $                    | (0.02  | )        |  | $            | (0.04  | )           |  | $        | 0.01   |          |  | $        | (0.23   | )        |  | $ | (1.08   | ) |  | $ | (1.47   | ) |  | $ | (0.36   | ) |  | $ | (0.85   | )

|                                     |  |                      |        |         |  |              |         |             |  |   |        |   |  |   |        |  
|------------------------------------ |  | -------------------- | ------ | ------- |  | ------------ | ------- | ----------- |  | - | ------ | - |  | - | ------ | -
|                                     |  |                     
|                                     |  | 1999  Quarter Ended
|                                     |  |                     
|                                     |  | March 31             |        | June 30 |  | September 30 |         | December 31
|                                     |  |                      |        |         |  |              |         |            
|Net revenue                          |  | $                    | 6,714  |         |  | $            | 9,304   |             |  | $ | 13,227 |   |  | $ | 18,578 |  
|Gross profit                         |  |                      | 3,433  |         |  |              | 5,158   |             |  |   | 7,792  |   |  |   | 11,135 |  
|Loss from operations                 |  |                      | (5,495 | )       |  |              | (17,390 | )           |  |   | (4,866 | ) |  |   | (5,412 | )
|Net loss                             |  |                      | (5,479 | )       |  |              | (17,564 | )           |  |   | (4,222 | ) |  |   | (3,518 | )
|Basic and diluted net loss per share |  | $                    | (1.00  | )       |  | $            | (2.73   | )           |  | $ | (0.17  | ) |  | $ | (0.13  | )



|         |                                                                
|-------- | ---------------------------------------------------------------
|NOTE 15. | SUBSEQUENT EVENTS  STOCK
    CANCELLATION AND RE-GRANT PROGRAM

On February 14, 2001, the Company cancelled
approximately 2.9 million outstanding options under a
cancellation and re-grant program for employees holding common
stock options with an exercise price per share in excess of the
fair market price of the Companys common stock.
Replacement options to purchase common stock of approximately
635,000 shares 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.



|         |                                   
|-------- | ----------------------------------
|NOTE 16. | SUBSEQUENT EVENTS 
    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

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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CLARENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

On April 26, 2002, certain former
shareholders of PEAK Software Solutions, Inc.
(PEAK), some of whom are current employees of the
Company, including a key employee of the Company, filed a
lawsuit against the Company in Colorado state court. The
complaint alleges claims of 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 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

The information required by this item is
incorporated by reference from the information under the
captions Information Concerning Solicitation and
Voting, Election of Directors and
Section 16(A) Beneficial Ownership Reporting
Compliance contained in our definitive proxy statement
filed with the SEC on April 24, 2001 in connection with
solicitation of proxies for our annual meeting of stockholders
held June 7, 2001 (the Proxy Statement).






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by this item is
incorporated by reference from the information under the
captions Executive Compensation, Compensation
of Directors and Employment Severance and Change of
Control Agreements and Option Repricing
Information contained in the Proxy Statement.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT

The information required by this item is
incorporated by reference from the information under the caption
Security Ownership of Certain Beneficial Owners and
Management contained in the Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

Transactions Between a Company Employee and
a Member of the Board of Directors

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 the loan.

Transactions With Management and
Others

The Company has entered into indemnity agreements
with certain of its current and former officers and directors,
which provide, among other things, that the Company will
indemnify such officers or directors, under the circumstances
and to the extent provided for in the indemnity agreements,
against expenses, damages, judgments, fines and settlements
resulting from actions or proceedings of which the officer or
director is or may be made a party by reason of his or her
position as a director, officer or other agent of the Company,
and otherwise to the full extent permitted under Delaware law
and the Companys bylaws.

In March 2001, the Company and Richard Heaps
entered into a separation and consulting agreement. The
agreement provides that Mr. Heaps resign as the
Companys Chief Operating Officer, Chief Financial Officer,
Secretary and General Counsel on a date determined in the
Companys sole discretion, and that he resign his
employment with the Company effective April 30, 2001.
Mr. Heaps is entitled to any bonus for the year ended
December 31, 2000 approved by the Companys Board of
Directors. The agreement also provides that Mr. Heaps will
act as a consultant to the Company from May 1, 2001 to
August 1, 2002 (the Heaps Consulting Period).
In consideration for the consulting services provided during the
Heaps Consulting

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Period, Mr. Heaps will receive an aggregate
sum of $275,000 and standard Company benefits available to
senior executives through June 1, 2002. During the Heaps
Consulting Period, Mr. Heaps will receive a continuation of
vesting for options granted to him on August 27, 1998.
Mr. Heaps options granted on March 8, 1999 and
February 15, 2001 and his option to be granted on
August 17, 2001 pursuant to the Companys Regrant
Program will continue to vest through June 17, 2002.


In March 2001, the Company and Simon Wong entered
into an employment agreement. The agreement provides that
Mr. Wong will become the Companys Chief Financial
Officer with an annual base salary of $190,000. Mr. Wong is
eligible to receive an annual merit bonus of up to $80,000, to
be determined at the Companys sole discretion. The
agreement also provides Mr. Wong with an incentive stock
option to purchase 125,000 shares of the Companys Common
Stock, subject to monthly vesting over a four-year period.
Mr. Wongs employment is at-will and the
employment relationship may be terminated for any reason at any
time. However, in the event the Company terminates
Mr. Wongs employment without cause, including within
twelve months after a change in control of the Company, the
Company shall: (i) pay Mr. Wong severance equal to
twelve months of his then current base salary; and
(ii) either accelerate the vesting of Mr. Wongs
unvested options by an additional nine months or continue the
vesting of his options for an additional nine months.

In November 2001, the Company and Mr. Wong
amended and restated his employment agreement with the Company.
Pursuant to the agreement, Mr. Wong was to resign his
position as the Companys Chief Financial Officer and
accept a position as the Companys Senior Vice President of
Finance, effective November 17, 2001. The agreement
provides that Mr. Wong will receive an annual salary in the
amount of $200,000 and a bonus of $60,000, plus any additional
amount necessary to make such cash bonus payable to
Mr. Wong equal to $60,000 after all taxes and withholding
on the bonus payment (the Tax Gross-up Amount). In
addition, the agreement provides that, in certain events,
including termination of Mr. Wongs employment without
cause, and conditioned upon Mr. Wong giving the Company a
general release of claims, Mr. Wong is to receive the
following severance benefits from the Company: (1) payment
of $172,500 plus, if such termination is prior to March 31,
2002, the amount of salary he would have received under the
agreement through March 31, 2002 (the Severance
Payment), and (2) at the option of the Company,
either a nine-month acceleration of vesting of the option
previously granted to Mr. Wong by the Company, or a
nine-month extension of the time over which his option would
vest after his termination from the Company. The remaining
benefits to be provided to Mr. Wong under the agreement were the
same as those provided in his initial employment agreement with
the Company.

In January 2002, the Company and Mr. Wong
entered into an amendment to the amended and restated employment
agreement. The amendment provides that Mr. Wongs
employment with the Company would be terminated by the Company
without cause effective January 8, 2002. Under the
amendment, Mr. Wong is entitled to the Severance Payment,
Tax Gross-up Amount and an additional payment of benefits,
which, together with the foregoing payments equals $268,302.
Mr. Wong also received nine-months of acceleration of
vesting of the option previously granted to him by the Company
in accordance with his amended and restated employment agreement
described above. As consideration for the amendment,
Mr. Wong signed a general release releasing the Company
from any claims that Mr. Wong may have against the Company.

In March 2001, the Company and Barry Forman
entered into an employment agreement. The agreement provides
that Mr. Forman will become the Companys Executive
Chairman with an annual base salary of $280,000. Mr. Forman
is also eligible to receive the following bonuses: (i) $50,000
if the Company fully meets its revenue targets for the year
ending December 31, 2001; and (ii) an additional
$100,000 if the Company fully meets its net profit targets for
the year ending December 31, 2001. The agreement also
provides Mr. Forman with a nonstatutory stock option to
purchase 600,000 shares of the Companys Common Stock. The
option will vest over four years, with twenty-five percent (25%)
of the shares vesting on the one-year anniversary of the vesting
commencement date. This option is not subject to, and is granted
outside the Companys 1999 Amended and Restated Equity
Incentive Plan, and was granted to induce Mr. Forman to
enter into the employment agreement with the Company. The
Company will provide Mr. Forman with suitable living
accommodations within a reasonable distance of the
Companys corporate headquarters during the time that
Mr. Formans primary residence is in Seattle,
Washington. Mr. Formans employment is

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at-will and the employment
relationship may be terminated for any reason at any time.
However, in the event the Company terminates
Mr. Formans employment without cause or
Mr. Forman terminates his employment for good reason, the
Company shall: (i) pay Mr. Forman severance equal to
twelve months of his base salary; (ii) reimburse
Mr. Forman for the cost of continuing his health insurance
pursuant to COBRA for twelve months after his termination date;
and (iii) either accelerate the vesting of
Mr. Formans unvested option by an additional twelve
months or continue the vesting of the option for an additional
twelve months from his termination date. If Mr. Forman
terminates his employment without good reason after the one year
anniversary of the employment date, Mr. Forman shall
receive a continuation of vesting of his options for twelve
months from his termination date, provided that: (i) during
the period of this continuation of vesting, Mr. Forman will
not be eligible for a stock option grant under the
Companys 1999 Non-Employee Directors Stock Option
Plan and (ii) this continuation of vesting shall cease
immediately if Mr. Forman ceases to be a director on the
Companys board of directors.


In July 2001, the Company and
Mr. Forman entered into a separation and consulting
agreement. The agreement provides that Mr. Forman resign
his positions as the Companys President and Executive
Chairman and his employment with the Company effective
July 19, 2001. Mr. Forman is not entitled to any bonus
for the year ended December 31, 2001 or thereafter. The
agreement also provides that Mr. Forman will act as a
consultant to the Company from July 20, 2001 to
March 5, 2002 (the Forman Consulting Period),
and Mr. Forman is to serve as a Director on the
Companys board of directors at least through the end of
the Forman Consulting Period. In consideration for the
consulting services provided during the Forman Consulting
Period, Mr. Forman will receive an aggregate sum of
$175,000 and standard Company benefits available to senior
executives. During the Forman Consulting Period, Mr. Forman
will receive an acceleration of vesting for the option granted
to him on March 2, 2001, so that his shares will vest on a
monthly basis, at a rate of 1/ 48th of the total shares subject
to the option, beginning as of March 5, 2001 and continuing
through the Forman Consulting Period. In the event of a Change
in Control of the Company (as defined below) during the Forman
Consulting Period, Mr. Forman is entitled to receive a lump
sum payment of any unpaid consulting fees within ten business
days of the Change in Control, and the vesting of his option
shall be accelerated so that all shares pursuant to his option
that would have been vested at the end of the Forman Consulting
Period will be fully vested upon the Change in Control. Change
in Control is defined in the agreement to mean the occurrence of
any of the following events: (1) a sale of all or
substantially all of the assets of the Company, (2) a
merger or consolidation in which the Company is not the
surviving corporation, (3) a reverse merger in which the
Company is the surviving corporation but the shares of common
stock of the Company outstanding immediately preceding the
merger are converted by virtue of the merger into other
property, or (4) an acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the
Exchange Act of 1934, as amended (the Exchange Act),
or any comparable successor provisions (excluding any employee
benefit plan, or related trust, sponsored or maintained by the
Company or an affiliate) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors. In
consideration for the agreement, Mr. Forman agreed to
release the Company from all claims arising on or prior to the
date of the agreement, and further agreed to sign a supplemental
release upon the conclusion of the Forman Consulting Period,
releasing the Company from all claims arising during the Forman
Consulting Period. In October 2001, the Company and
Mr. Forman entered into an amendment to the agreement to
clarify that the releases given by Mr. Forman in the
agreement and the supplemental release would not apply to any
breach by the Company of the agreement or of the Indemnity
Agreement entered into between Mr. Forman and the Company in
November 2000.

In April 2001, the Company adopted a
three-tiered system of employee severance and change in control
benefit plans covering non-executive employees (the
Employee Severance Plan), executive officers (the
Executive Severance Plan) and senior executive
officers (the Senior Executive Severance Plan) of
the Company. The Employee Severance Plan and the Executive
Severance Plan provide for certain benefits if an eligible
individuals employment with the Company is involuntarily
terminated without cause within 13 months after a change in
control of the Company. Under the Employee Severance Plan and
Executive Severance Plan, specified employees are eligible to
receive cash payments, continuation of health coverage and

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acceleration of vesting of stock options. The
Senior Executive Severance Plan provides for certain benefits if
an eligible individuals employment with the Company is
involuntarily terminated without cause or constructively
terminated within 13 months after a change in control of
the Company. Under the Senior Executive Severance Plan,
specified employees are eligible to receive cash payments equal
to 24 months of base salary, continuation of health
insurance for up to 24 months and 36 months
acceleration of vesting of stock options.


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 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

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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 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.

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PART IV




ITEM 14.     EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

(a)



| |     |                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Index to Financial Statements 
     The Financial Statements required by this item are submitted in
    Part II, Item 8 of this report.

(2) Financial Statements Schedules



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following financial statement schedule of
    Clarent Corporation for the years ended December 31, 2000,
    1999 and 1998 should be read in conjunction with the
    Consolidated Financial Statements of Clarent Corporation.
|
| | Schedule II  Valuation and
    Qualifying Accounts                                                                                                                                                                                
|
| | Allowance For Doubtful Accounts (in thousands):                                                                                                                                                                                    

|                        |  |             |       |            |  |            |       |             |  |               |       |  |  |   |        |   |  |   |       | 
|----------------------- |  | ----------- | ----- | ---------- |  | ---------- | ----- | ----------- |  | ------------- | ----- |  |  | - | ------ | - |  | - | ----- | 
|                        |  |             |       |           
|                        |  | Additions   |       |           
|                        |  |             |       |           
|                        |  | Balances at |       | Charged to |  | Charged to |       |             |  |              
|                        |  | Beginning   |       | Costs and  |  | Other      |       | Deductions/ |  | Balances at  
|Year Ended December 31, |  | of Period   |       | Expenses   |  | Accounts*  |       | Write-Offs  |  | End of Period
|                        |  |             |       |            |  |            |       |             |  |              
|2000  restated**       |  | $           | 2,314 |            |  | $          | 3,144 |             |  | $             | 2,737 |  |  | $ | (1,222 | ) |  | $ | 6,973 | 
|                        |  |             |       |            |  |            |       |             |  |               |       |  |  |   |        |   |  |   |       | 
|1999                    |  | $           | 807   |            |  | $          | 1,523 |             |  |               |      |  |  | $ | (16    | ) |  | $ | 2,314 | 
|                        |  |             |       |            |  |            |       |             |  |               |       |  |  |   |        |   |  |   |       | 
|1998                    |  | $           | 38    |            |  | $          | 803   |             |  |               |      |  |  | $ | (34    | ) |  | $ | 807   | 
|                        |  |             |       |            |  |            |       |             |  |               |       |  |  |   |        |   |  |   |       | 



---



| |                                             
| | --------------------------------------------
| | (*) Allowances assumed through acquisitions.

(**) See Note 1 of Notes to Consolidated
Financial Statements for information on the restatement.

All other schedules have been omitted because
they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.

(3) Exhibits

|        |      |             |  |                                                                                                                                                                                                                                                    
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Merger and Reorganization,
    dated as of May 1, 2000, among Clarent Corporation, Copper
    Merger Sub, Inc. and ACT Networks, Inc.(1)(7)                                                                                  
|        | 2.2  |             |  | Amendment No. 1, dated as of June 30,
    2000, to the Agreement and Plan of Merger and
    Reorganization(1)(7)                                                                                                                                   
|        | 3.1  |             |  | Amended and Restated Certificate of Incorporation
    (including Certificate of Designation of Series A Junior
    Participating Preferred Stock), as amended, of the registrant(3)                                                                
|        | 3.2  |             |  | Bylaws of the registrant(2)                                                                                                                                                                                                                        
|        | 4.1  |             |  | Specimen Common Stock Certificate(2)                                                                                                                                                                                                               
|        | 4.2  |             |  | Amended and Restated Investor Rights Agreement,
    dated June 11, 1998 (as amended December 7, 1998 and
    April 8, 1999)(2)                                                                                                                     
|        | 4.3  |             |  | Founder Stock Purchase Agreement, dated
    July 2, 1996(2)                                                                                                                                                                                        
|        | 4.4  |             |  | Rights Agreement dated as of February 7,
    2001 between the registrant and Wells Fargo Bank Minnesota,
    N.A.(3)                                                                                                                               
|        | 4.5  |             |  | Shareholders Agreement dated as of
    July 24, 2000, by and among Clarent, Cadmium Acquisition
    Corp., certain shareholders of PEAK Software Solutions, Inc. and
    Larry Schwartz as Shareholders Agent and Purchaser
    Representative(9)
|        | 10.1 |             |  | Form of Indemnity Agreement between the
    registrant and its directors and officers(2)                                                                                                                                                           

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|        |       |             |  |                                                                                                                                                                                                                     
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.2  |             |  | 1999 Amended and Restated Equity Incentive Plan,
    as amended, and Form of Stock Option Grant Notice and
    Agreement(4)                                                                                         
|        | 10.3  |             |  | 1999 Non-Employee Directors Stock Option
    Plan, as amended, and Form of Nonstatutory Stock Option(4)                                                                                                            
|        | 10.4  |             |  | 1999 Employee Stock Purchase Plan and Offering
    Document(5)                                                                                                                                                      
|        | 10.5  |             |  | Employment Agreement, dated June 9, 1997, by
    and between the registrant and Mark E. McIlvane (as amended
    June 9, 1998)(2)                                                                                   
|        | 10.6  |             |  | Employment Agreement, dated August 1, 1998,
    by and between the registrant and Richard J. Heaps(2)                                                                                                               
|        | 10.7  | **          |  | OEM Purchase Agreement, dated effective as of
    December 1, 1998, by and between the registrant and
    AudioCodes, Ltd.(2)                                                                                       
|        | 10.8  |             |  | Master Maintenance and Support Services Agreement
    and Statement of Work, dated December 29, 1998, by and
    between the registrant and Equant Integration Services, Inc.(2)                                    
|        | 10.9  |             |  | Lease Agreement, dated August 12, 1998, by
    and between the registrant and Seaport Center Associates, LLC(2)                                                                                                     
|        | 10.10 |             |  | Sublease, dated May 27, 1998, by and between
    the registrant and Unwired Planet, Inc.(2)                                                                                                                         
|        | 10.11 |             |  | Customer Agreement, dated June 25, 1998, by
    and between the registrant and Technet International(2)                                                                                                             
|        | 10.12 |             |  | General Agreement for the Procurement of Data
    Processing Equipment, Services and Supplies, the License of
    Software, dated as of September 17, 1998 by and between the
    registrant and AT&T Corporation(2)
|        | 10.13 |             |  | Lease Agreement, dated March 31, 2000, by
    and between the registrant and Metropolitan Life Insurance
    Company(6)                                                                                             
|        | 10.14 |             |  | Lease Agreement, dated February 9, 2001, by
    and between the registrant and Metropolitan Life Insurance
    Company(11)                                                                                          
|        | 10.15 |             |  | Lease Agreement, dated April 28, 2000, by
    and between PEAK Software Solutions, Inc. and
    A & S Burger Investments, LLC(11)                                                                                   
|        | 10.16 |             |  | ACT Networks, Inc. 1987 Stock Option Plan(8)                                                                                                                                                                        
|        | 10.17 |             |  | ACT Networks, Inc. 1993 Stock Option Plan(8)                                                                                                                                                                        
|        | 10.18 |             |  | ACT Networks, Inc. 1995 Stock Option/ Stock
    Issuance Plan(8)                                                                                                                                                    
|        | 10.19 |             |  | ACT Networks, Inc. 1997 Stock Incentive Plan(8)                                                                                                                                                                     
|        | 10.20 |             |  | ACT Networks, Inc. 1997 Non-Executive Officer
    Stock Option/ Stock Issuance Plan(8)                                                                                                                              
|        | 10.21 |             |  | Forms of Stock Option Agreement, Written
    Compensation Agreement and Addendum to Stock Option Agreement
    for certain non-plan stock option grants by ACT Networks, Inc.
    to Messrs. Sadr and Weisman(8)    
|        | 10.22 |             |  | Office Lease dated April 15, 1999 by and
    between ACT Networks, Inc. and Malibu Canyon Office Partners,
    LLC(10)                                                                                              
|        | 21.1  |             |  | Subsidiaries of the registrant(11)                                                                                                                                                                                  
|        | 23.1  |             |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                                                              



---



|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  | Portions have been omitted pursuant to an
    application for confidential treatment                                                                                        
|   
|(1) | Exhibits to this agreement have been omitted but
    will be furnished to the Commission upon request.                                                                      
|   
|(2) | Incorporated by reference to the Exhibits filed
    with the registrants Registration Statement on
    Form S-1 (No. 333-76051).                                           
|   
|(3) | Incorporated by reference to the Exhibits filed
    with the registrants Current Report on Form 8-K filed
    with the Commission on February 15, 2001
    (No. 000-26441).
|   
|(4) | Incorporated by reference to the Exhibits filed
    with the registrants Registration Statement on
    Form S-8 (No. 333-42812).                                           

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##### Table of Contents





|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Incorporated by reference to the Exhibits filed
    with the registrants Registration Statement on
    Form S-8 (No. 333-89139).                
|   
|(6) | Incorporated by reference to the Exhibits filed
    with the registrants Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2000.
|   
|(7) | Incorporated by reference to the Exhibits filed
    with the registrants Registration Statement on
    Form S-4 (No. 333-38216).                
|   
|(8) | Incorporated by reference to the Exhibits filed
    with the registrants Registration Statement on
    Form S-8 (No. 333-44466).                
|   
|(9) | Incorporated by reference to the Exhibits filed
    with the registrants Quarterly Report on Form 10-Q
    for the quarter ended June 30, 2000. 



|     |                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Exhibits filed
    with ACT Networks, Inc.s Annual Report on Form 10-K
    for the fiscal year ended June 30, 1999.
|    
|(11) | Previously filed.                                                                                                                                    

(b) Reports on Form 8-K



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amendment No.1 to Form 8-K dated
    August 10, 2000, was filed by the registrant on
    October 24, 2000 to report under Item 7 consolidated
    financial statements of the registrant and ACT Networks, Inc.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report on Form 10-K/ A to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Redwood City, County of San Mateo,
State of California, on May 8, 2002.



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



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

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

































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Exhibit Index

|        |      |             |  |                                                       
|------- | ---- | ----------- |  | ------------------------------------------------------
|Exhibit |      | Description
|        |      |            
|        | 23.1 |             |  | Consent of Ernst & Young LLP, Independent
    Auditors









































66