<PAGE>

    As filed with the Securities and Exchange Commission on November 1, 1999
                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                                ----------------
                              CLARENT CORPORATION
             (Exact name of registrant as specified in its charter)
                                ----------------
<TABLE>
 <C>                              <C>                              <S>
             Delaware                           7372                          77-0433687
 (State or other jurisdiction of    (Primary Standard Industrial           (I.R.S. Employer
  incorporation or organization)     Classification Code Number)          Identification No.)
</TABLE>
                                ----------------
                              700 Chesapeake Drive
                         Redwood City, California 94063
                                 (650) 306-7511
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                                ----------------
                              Jerry Shaw-Yau Chang
                            Chief Executive Officer
                              Clarent Corporation
                              700 Chesapeake Drive
                         Redwood City, California 94063
                                 (650) 306-7511
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                ----------------

                                   Copies to:
       Patrick A. Pohlen, Esq.                 Donna M. Petkanics, Esq.
          COOLEY GODWARD LLP               WILSON SONSINI GOODRICH & ROSATI
        Five Palo Alto Square                  Professional Corporation
         3000 El Camino Real                      650 Page Mill Road
       Palo Alto, CA 94306-2155                Palo Alto, CA 94304-1050
            (650) 843-5000                          (650) 493-9300
                                ----------------

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
                                ----------------

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

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

                        CALCULATION OF REGISTRATION FEE
<TABLE>
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
<CAPTION>
                                                          Proposed
                                           Proposed       Maximum
 Title of Each Class of                    Maximum       Aggregate      Amount of
    Securities to be      Amount To Be  Offering Price    Offering     Registration
       Registered        Registered(1)   Per Share(2)     Price(2)        Fee(2)
-----------------------------------------------------------------------------------
<S>                      <C>            <C>            <C>            <C>
Common Stock, par value
 $0.001................    4,600,000        $75.00      $345,000,000     $95,910
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
(1) Includes 600,000 shares that may be purchased by the underwriters to cover
    over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
    registration fee in accordance with rule 457(c) under the Securities Act of
    1933, based on the average high and low trading price for the Common Stock
    on October 25, 1999.
                               ----------------
   The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting offers to buy these   +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                 SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1999

                                4,000,000 Shares

                       [LOGO OF CLARENT(TM) CORPORATION]

                                  Common Stock

                                   --------

  We are selling 2,837,500 shares of common stock and the selling stockholders
are selling 1,162,500 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.

  The underwriters have an option to purchase a maximum of 600,000 additional
shares, of which 512,500 shares are from us and 87,500 shares are from some of
the selling stockholders, to cover over-allotments of shares.

  Our common stock is listed on the Nasdaq National Market under the symbol
"CLRN." On November 1, 1999, the last reported sale price for the common stock
on the Nasdaq National Market was $92.50 per share.

  Investing in the common stock involves risks. See "Risk Factors" on page 8.

<TABLE>
<CAPTION>
                                                       Underwriting             Proceeds to
                                             Price to  Discounts and  Proceeds    Selling
                                              Public    Commissions  to Clarent Stockholders
                                            ---------  ------------- ---------- ------------
<S>                                         <C>        <C>           <C>        <C>
Per Share..................................    $            $           $           $
Total......................................   $            $           $           $
</TABLE>

  Delivery of the shares of common stock will be made on or about     , 1999,
against payment in immediately available funds.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

           Robertson Stephens

                       Thomas Weisel Partners LLC

                                                      U.S. Bancorp Piper Jaffray

                      This prospectus is dated     , 1999.
<PAGE>

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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary...................   4
Risk Factors.........................   8
Use of Proceeds......................  18
Dividend Policy......................  18
Price Range of Common Stock..........  18
Capitalization.......................  19
Dilution.............................  20
Selected Consolidated Financial
 Data................................  21
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations.......................  22
Business.............................  34
</TABLE>
<TABLE>
<CAPTION>
                                       Page
                                       ----
<S>                                    <C>
Management...........................   47
Certain Transactions.................   56
Principal and Selling Stockholders...   57
Description of Capital Stock.........   59
Shares Eligible for Future Sale......   61
Underwriting.........................   62
Notice to Canadian Residents.........   63
Legal Matters........................   64
Experts..............................   64
Where You Can Find More Information..   64
Index to Consolidated Financial
 Statements..........................  F-1
</TABLE>

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

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.

   "Clarent" is a registered trademark and the Clarent logo and the Clarent
Command Center are trademarks of Clarent Corporation in the United States and
other jurisdictions. All other trademarks or service marks appearing in this
prospectus are trademarks or service marks of the respective companies that
use them.

                                       3
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights selected information contained elsewhere in this
prospectus and does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the Consolidated Financial Statements
and the related Notes before making an investment decision.

                              Clarent Corporation

   We are a leading provider of Internet protocol or IP telephony systems. IP
telephony systems permit the simultaneous transmission of voice, fax and data
over the Internet and similar communications networks. Using our technology to
simultaneously transmit voice, fax and data, our customers are able to more
efficiently and cost-effectively use the available capacity of their networks.
Our existing customers are service providers, including traditional, local,
international and wholesale long distance telephone companies, as well as new
telecommunications service providers. In addition, we have recently begun
selling to enterprises. The IP telephony market is relatively new. Less than 1%
of all voice calls worldwide are currently transmitted using IP telephony.
According to Frost & Sullivan, between 1997 and 2002, the number of call
minutes, including voice, fax and data, transmitted using IP telephony is
expected to have a compound annual growth rate of 325%.

   IP telephony technology and the technology used by traditional telephone
services differ fundamentally in the way the information travels from point to
point through their networks. Using IP telephony, a dedicated connection, or
circuit, between the callers is not required. Instead, the caller's voice is
divided into numerous small packages of information called packets. These
packets are sent over the network intermixed with other packets of data, such
as fax, email or Internet content, to be reassembled at the destination of the
call. In contrast, traditional telephone technology requires that a circuit
between the callers be established and maintained during the length of the
call, and voice, fax and data cannot be transmitted simultaneously over this
circuit.

   Using our IP telephony product, the Clarent system, service providers and
enterprises that manage their own telephony services can deliver a level of
voice quality that is indistinguishable from the voice quality over the
traditional telephone system. In addition, the Clarent system enables the
simultaneous transmission of voice, fax and data. The Clarent system features a
modular architecture that permits our customers to add new product and service
features without extensive product cost or development time. Based on publicly
available data provided by large telecommunications service providers, we
believe our modular architecture enables the provision of new and existing
communications services at a lower cost than the provision of communications
services by traditional telephone companies.

   The Clarent system consists of three distinct components:

  . the Clarent Gateway, an integrated hardware and software product that
    includes network server software that is based on industry standards;

  . the Clarent Command Center, a proprietary client/server software package;
    and

  . a relational database, which is supplied by a third party.

   The Clarent Gateway converts voice, fax and data into packets that can be
transmitted over an IP network, then converts them back into a form recognized
by the traditional telephone system. The Clarent Command Center is the software
that processes the data stored in the third-party relational database. The
Clarent Command Center supports all network management and administration
functions, including the routing and pricing of calls, authentication of
callers and billing, as well as network diagnostic and maintenance functions.

                                       4
<PAGE>


   Our products enable service providers and enterprises to deliver IP
telephony services to end user customers who can continue to use their existing
telephones. Since our products are integrated by telephone companies and other
service providers into systems that take calls from the traditional telephone
system and send these calls over the Internet and similar communications
networks before returning these calls to the traditional telephone system, the
use of IP telephony is transparent to end user customers.

   Our strategic objective is to be the leading provider of comprehensive IP
telephony solutions to telecommunications service providers worldwide.

   Key elements of our strategy include:

  . provide the core technology enabling the delivery of a broad range of IP
    telephony services;

  . increase our penetration of the service provider market;

  . target key growth markets worldwide;

  . promote strategic relationships between our customers;

  . extend our technology leadership position; and

  . deliver added value through customer support and services.

   We began commercial shipment of the Clarent system in March 1997. As of
September 30, 1999, we had shipped the Clarent system to approximately 160
telecommunications service providers in 55 countries worldwide. The Clarent
system has been installed in some of the world's leading service provider
networks, including those of AT&T Corporation, China Telecom, Chunghwa Telecom
(Taiwan), Ji Tong Communications Co., Ltd. (the People's Republic of China),
KDD (Japan), Korea Telecom (South Korea), Pacific Gateway Exchange (United
States), Singapore Telecom, Star Telecom (United States), Telstra (Australia)
and Telia Telecom (Sweden). In 1998, sales to these customers represented
approximately 48% of our $14.6 million in revenue. As of September 30, 1999, we
had an accumulated deficit of $35.4 million.

   We were originally incorporated under the name NetiPhone, Incorporated in
California in July 1996. We changed our name to Clarent Corporation in May
1997, and we reincorporated in Delaware in June 1999. Our headquarters are
located at 700 Chesapeake Drive, Redwood City, California 94063, and our
telephone number is (650) 306-7511. The address of our web site is
"www.clarent.com." Information contained on our web site should not be
considered a part of this prospectus.

                                       5
<PAGE>


                                  The Offering

<TABLE>
<S>                                <C>
Common stock offered by Clarent...  2,837,500 shares
Common stock offered by the
 selling stockholders.............  1,162,500 shares
Common stock to be outstanding
 after this offering.............. 30,457,659 shares(1)
Use of proceeds................... We intend to use the estimated proceeds for
                                   working capital and general corporate
                                   purposes, including increased research and
                                   development, sales and marketing and
                                   general and administrative expenditures. We
                                   may also use a portion of the proceeds for
                                   acquisitions of products and technologies
                                   or for strategic alliances. We will not
                                   receive any proceeds from the shares sold
                                   by the selling stockholders.
Nasdaq National Market symbol..... CLRN
</TABLE>
--------
(1) The number of shares of common stock to be outstanding after this offering
    is based on the number of shares outstanding as of September 30, 1999, and
    does not include the following:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.

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

   Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.

                                       6
<PAGE>


                      Summary Consolidated Financial Data
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    Year ended       Nine months ended
                               Period from         December 31,        September 30,
                         July 2, 1996 (inception) ----------------  --------------------
                           to December 31, 1996    1997     1998       1998       1999
                         ------------------------ -------  -------  ----------- --------
                                                                    (unaudited)
<S>                      <C>                      <C>      <C>      <C>         <C>
Consolidated Statement
 of Operations Data:
 Net revenue............         $    --          $ 3,359  $14,647    $ 8,748   $ 29,245
 Cost of revenue........              --            1,189    6,653      3,645     12,862
                                 -------          -------  -------    -------   --------
 Gross profit...........              --            2,170    7,994      5,103     16,383
 Operating expenses:
  Research and
   development..........             136            1,044    3,356      2,081      6,023
  Sales and marketing...              --            2,046    7,099      4,705     16,166
  General and
   administrative.......             140              639    2,484      1,500      4,402
  Amortization of
   compensation.........              --               --      879        421     17,543
  Settlement expense....              --              570       --         --         --
                                 -------          -------  -------    -------   --------
   Total operating
    expenses............             276            4,299   13,818      8,707     44,134
                                 -------          -------  -------    -------   --------
 Loss from operations...            (276)          (2,129)  (5,824)    (3,604)   (27,751)
 Other income (expense),
  net...................              --               70       32        (49)       569
                                 -------          -------  -------    -------   --------
 Loss before income
  taxes.................            (276)          (2,059)  (5,792)    (3,653)   (27,182)
 Provision for income
  taxes.................              --               --      (40)         3        (83)
                                 -------          -------  -------    -------   --------
 Net loss...............         $  (276)         $(2,059) $(5,832)   $(3,650)  $(27,265)
                                 =======          =======  =======    =======   ========
 Historical basic and
  diluted net loss per
  share(1)..............             N/A          $ (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                                 =======          =======  =======    =======   ========
 Shares used to compute
  historical basic and
  diluted net loss per
  share(1)..............              --              962    3,544      3,099     12,543
                                 =======          =======  =======    =======   ========
 Pro forma basic and
  diluted net loss per
  share(1)..............                                   $ (0.42)   $ (0.28)  $  (1.24)
                                                           =======    =======   ========
 Shares used to compute
  pro forma basic and
  diluted net loss per
  share(1)..............                                    14,048     12,877     21,951
                                                           =======    =======   ========
</TABLE>

<TABLE>
<CAPTION>
                                                            September 30, 1999
                                                          ----------------------
                                                          Actual  As Adjusted(2)
                                                          ------- --------------
<S>                                                       <C>     <C>
Consolidated Balance Sheet Data:
 Cash, cash equivalents and short-term investments....... $57,575    $308,275
 Working capital.........................................  56,342     307,042
 Total assets............................................  90,829     341,529
 Long term portion of debt...............................      91          91
 Total stockholders' equity..............................  67,179     317,879
</TABLE>
--------
(1) See Note 12 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of shares used in computing
    per share data.
(2) Adjusted to reflect the sale of 2,837,500 shares of common stock by Clarent
    in this offering, at an assumed offering price of $92.50 per share and the
    application of the estimated net proceeds after deducting the underwriting
    discounts and commissions and our estimated offering expenses.

                                       7
<PAGE>

                                  RISK FACTORS

   You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. The risks and
uncertainties described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that we currently believe
are immaterial also may impair our business operations. If any of the following
risks occurs, our business, operating results and financial condition could be
seriously harmed. In addition, the trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.

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

   We are an early-stage company in the emerging IP telephony market. We were
founded in July 1996 and have not generated significant revenue to date.
Because of our limited operating history, we have limited insight into trends
that may emerge in our market and affect our business. The revenue and income
potential of the IP telephony market, and our business in particular, are
unproven. As a result of our limited operating history, we have limited
financial data that you can use to evaluate our business. You must consider our
prospects in light of the risks, expenses and challenges we might encounter
because we are at an early stage of development in a new and rapidly evolving
market.

Unless we generate significant revenue growth, our increasing expenses and
negative cash flow will significantly harm our financial position.

  As of September 30, 1999, we had an accumulated deficit of $35.4 million. We
expect to incur operating losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur negative operating cash flow in
the future. We expect to continue to increase capital expenditures and our
research and development, sales and marketing and general and administrative
expenses. We will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive operating cash flow, we may not be able to sustain
or increase profitability or positive operating cash flow on a quarterly or
annual basis.

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

<TABLE>
<CAPTION>
   Period                                                         Operating Loss
   ------                                                         --------------
   <S>                                                            <C>
   July 2, 1996 (inception) to December 31, 1996.................  $  (276,000)
   Year ended December 31, 1997..................................   (2,129,000)
   Year ended December 31, 1998..................................   (5,824,000)
   Nine months ended September 30, 1999..........................  (27,751,000)
</TABLE>

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

   Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. As a result, our future
operating results are difficult to predict. Further, we incur expenses in
significant part on our expectations of our future revenue. As a result, we
expect our expense levels to be relatively fixed in the short run. Therefore,
an unanticipated decline in revenue for a particular quarter may
disproportionately affect our net income (loss) in that quarter.

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

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

   We have experienced significant erosion in the average selling prices of our
products due to a number of factors, including competitive pricing pressures,
rapid technological change and sales discounts. We anticipate

                                       8
<PAGE>

that the average selling prices of our products will decrease and fluctuate in
the future in response to the same factors. Therefore, to maintain or increase
our gross margin, we must develop and introduce new products and product
enhancements on a timely basis. We must also continually reduce our costs of
production. As our average selling prices decline, we must increase our unit
sales volume to maintain or increase our revenue. To date, the erosion in the
average selling prices has not had a material affect on our business. However,
we cannot be certain that the erosion in the average selling prices will not
affect our business in the future. If our average selling prices decline more
rapidly than our costs of production, our gross margin will decline, which
could seriously harm our business, financial condition and results of
operations.

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

   We compete in a new, rapidly evolving and highly competitive and fragmented
market. We expect competition to intensify in the future. We cannot assure you
that we will be able to compete effectively. We believe that the main
competitive factors in our market are product quality, features, cost and
customer relationships. Our current principal competitors include 3Com
Corporation, Cisco Systems, Inc., Lucent Technologies Inc., Nortel Networks
Corporation and VocalTec Communications, Ltd. Many of our large competitors
have stronger relationships with service providers than we do. In addition,
they may be able to compete more effectively because they will be able to add
IP telephony features to their existing equipment or bundle these features as
part of a broader solution. According to one industry source, our market share
in the IP telephony equipment market, as measured by ports shipped, fell from
16.7% in 1998 to 4.0% in the first half of 1999. We also expect that other
companies may enter our market with better products and technologies.

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

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

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

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

   Our future success depends, in large part, on our ability to attract and
retain highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, sales personnel
and marketing personnel, may seriously harm our business, financial condition
and results of operations. We will need to expand our sales operations and
marketing operations in order to increase market awareness of our products and
generate increased revenue. New sales personnel and marketing personnel will
require training and take time to achieve full productivity. In addition, the
design and installation of IP telephony solutions can be complex. Accordingly,
we need highly trained professional services and customer support personnel. We
currently have a small professional services and customer support organization
and will need to increase our staff to support new customers and the expanding
needs of existing customers. Competition for personnel is intense, especially
in the San Francisco Bay Area where we maintain our headquarters. We cannot be
certain that we will

                                       9
<PAGE>

successfully attract and retain additional qualified personnel. In addition,
our key person life insurance policy, covering some of our key employees, may
be insufficient to cover the costs associated with the loss of one of these
employees.

Our failure to manage our rapid growth effectively could negatively affect our
results of operations.

   Since we began commercial shipment of our products in March 1997, we have
experienced a period of rapid growth and expansion that is significantly
straining all of our resources. From September 30, 1998 to September 30, 1999,
the number of our employees increased from approximately 70 to 230. We expect
our anticipated growth and expansion to continue to place strain on our
management, operational and financial resources. Our inability to manage growth
effectively could seriously harm our business, financial condition and results
of operations. We may not be able to install adequate control systems in an
efficient and timely manner, and our current or planned operational systems,
procedures and controls may not be adequate to support our future operations.
Delays in the implementation of new systems or operational disruptions when we
transition to new systems would impair our ability to accurately forecast sales
demand, manage our product inventory and record and report financial and
management information on a timely and accurate basis.

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

   The IP telephony market is relatively new and evolving rapidly. Less than 1%
of all voice calls worldwide are currently transmitted over IP-based data
networks. Our ability to increase revenue in the future depends on some of both
existing and future circuit-switched telephone network calls moving to IP-based
data networks. The use of IP telephony for voice calls might be hindered by
the:

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

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

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

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

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

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

   At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including IP telephony. We are unable to
predict the impact, if any, that future legislation, legal decisions or
regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services,

                                       10
<PAGE>

which could restrict our business or increase our cost of doing business. The
increasing growth of the IP telephony market and popularity of IP telephony
products and services heighten the risk that governments will seek to regulate
IP telephony and the Internet. In addition, large, established
telecommunications companies may devote substantial lobbying efforts to
influence the regulation of the IP telephony market, which may be contrary to
our interests.

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

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

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

   We have historically derived the majority of our revenue from a small number
of customers, particularly various entities within AT&T. In 1998 entities
affiliated with AT&T Corporation accounted for 36% of our net revenue and
Technet International accounted for 12% of our net revenue. For the nine months
ended September 30, 1999, entities affiliated with AT&T Corporation accounted
for 16% of our net revenue and entities affiliated with Ji Tong Communications
accounted for 15% of our net revenue. None of our customers is obligated to
purchase additional products or services. Accordingly, we cannot be certain
that present or future customers will not terminate their purchasing
arrangements with us or significantly reduce or delay their orders. Any
termination, change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations.

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

   We believe that our future success is dependent upon our ability to expand
our direct sales force and establish successful relationships with a variety of
international distribution partners. To date, we have entered into agreements
with only a small number of distribution partners that accounted for
approximately 18% of net revenue for 1998 and 17% of net revenue for the nine
months ended September 30, 1999. These distribution agreements typically may be
terminated without cause upon 90 days notice. We cannot be certain that we will
be able to reach agreement with additional distribution partners on a timely
basis or at all, or that these distribution partners will devote adequate
resources to marketing, selling and supporting our products. We must
successfully manage our distributor relationships. In 1997 we settled a dispute
with one of our distributors at a cost to us of $570,000, plus future specified
discounts. We cannot guarantee that we will successfully manage our distributor
relationships in the future. Our inability to generate revenue from
distribution partners may harm our business, financial condition and results of
operations.

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

   International sales represented approximately 94% of net revenue in 1997,
48% in 1998 and 52% for the nine months ended September 30, 1999. Our
international operations are subject to a variety of risks associated

                                       11
<PAGE>

with conducting business internationally any of which could seriously harm our
business, financial condition and results of operations. These risks include:

  . greater difficulty in accounts receivable collections;

  . import or export licensing and product certification requirements;

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

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

  . fluctuations in currency exchange rates;

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

  . unexpected changes in regulatory requirements;

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

  . difficulties and costs of staffing and managing foreign operations;

  . political instability;

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

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

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

   We currently have offices in Belgium, France, Germany, Japan, the People's
Republic of China, South Korea, Spain, Taiwan, the United Kingdom and the
United States. We intend to expand the scope of our international operations,
which will require us to enhance our communications infrastructure and may
include the establishment of overseas assembly operations. If we are unable to
expand our international operations effectively and quickly, we may be unable
to successfully market, sell, deliver and support our products internationally.

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

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

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

  . the particular telecommunications market that the customer serves; and

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

Before we receive orders, our customers typically test and evaluate our
products for a period of months or, in some cases, over a year.

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

                                       12
<PAGE>

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

   We have historically received a significant portion of our product orders
near the end of a quarter. Accordingly, a delay in an anticipated receipt or
delivery of a given order past the end of a particular quarter may negatively
impact our results of operations for that quarter. These delays may become more
likely given that we expect that the average size of our customer orders may
increase. As a result, a delay in the recognition of revenue, even from just
one customer, may have a significant negative impact on our results of
operations for a given period. Any delay in sales of our products could result
in a significant decrease in cash flow, which, in turn, could severely affect
our ability to make payments as they come due and could cause our operating
results to vary significantly from quarter to quarter.

Our dependence on independent manufacturers may result in product delivery
delays.

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

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

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

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

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

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

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

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

   Due to our international operations, we incur expenses in a number of
currencies. We do not currently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. Therefore, fluctuations in

                                       13
<PAGE>

the value of foreign currencies could have a negative impact on the
profitability of our global operations, which would seriously harm our
business, financial condition and results of operations. All of our sales,
including international sales are currently denominated in U.S. dollars.
However, we do not expect that future international sales will continue to be
denominated in U.S. dollars. Fluctuations in the value of the U.S. dollar and
foreign currencies may make our products more expensive than local product
offerings.

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

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

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

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

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

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

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

   We believe there is a risk that third parties have filed, or will file
applications for, or have received or will receive, patents or obtain
additional intellectual property rights relating to materials or processes that
we use or

                                       14
<PAGE>

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

Our failure and the failure of our key suppliers and customers to be Year 2000
compliant may negatively impact our business and results of operations.

   The Year 2000 computer issue creates a significant risk for us in at least
four areas:

  . potential warranty or other claims arising from our products for failure
    to be Year 2000 compliant;

  . systems we use to run our business may fail or produce inaccurate
    results;

  . systems used by our suppliers may fail or produce inaccurate results,
    causing operational difficulties for us; and

  . potential customers may reduce spending on IP telephony products as a
    result of significant information systems spending on Year 2000
    remediation or to limit additional changes to their networks during the
    current year.

   If any of these risks materialize, it may seriously harm our business,
financial condition and results of operations.

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

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

Our existing stockholders have voting control over Clarent.

   On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 47.50% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which may have the effect of delaying or preventing a third party
from acquiring control over us.

New investors in our common stock will experience immediate and substantial
dilution.

   The offering price is substantially higher than the book value per share of
our common stock. Assuming an offering price of $92.50 per share, investors
purchasing common stock in this offering will, therefore, incur immediate
dilution of $82.06 in net tangible book value per share of common stock.
Investors will incur additional dilution upon the exercise of outstanding stock
options and warrants.

                                       15
<PAGE>

Our stock price is highly volatile.

   The trading price of our common stock has fluctuated significantly since our
initial public offering in July 1999. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, announcements of strategic partnerships or new customers by
us or our competitors, changes in financial estimates by securities analysts
and other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of our common
stock.

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

   In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Our
acquisition activity may involve us in disputes from time to time. Litigation
that may arise from these disputes may lead to volatility in our stock price
and/or may result in our being the target of securities class action
litigation. Securities litigation may result in substantial costs and divert
management's attention and resources, which may seriously harm our business,
financial condition and results of operations.

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

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

  . authorizing the board of directors to issue additional preferred stock;

  . prohibiting cumulative voting in the election of directors;

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

  . prohibiting stockholder action by written consent; and

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

   We are also subject certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.

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

   If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market during a short period of time, our stock price may decline
significantly. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. After completion of this offering, we will have outstanding
30,457,659 shares of common stock. All of the shares sold in this offering and
our initial public offering, unless held by our affiliates, will be freely
tradeable. All of the remaining shares are subject to lock-up arrangements
between the stockholders and us or the underwriters. Of these shares, 6,258,075
will be eligible for sale in the public market on December 29, 1999, of which
1,716,680 will be eligible for sale subject to volume limitations and manner of
sale restrictions under federal securities laws. 14,321,044 shares will be
eligible for sale in the public market 90 days following the date of this
prospectus subject to volume

                                       16
<PAGE>

limitations and manner of sale restrictions under federal securities laws. The
remaining shares will be available for sale at various times upon the
expiration of applicable holding periods. In addition, we filed a registration
statement on Form S-8 with the Securities and Exchange Commission covering the
10,112,151 shares reserved for issuance under our 1999 amended and restated
equity incentive plan, 1999 non-employee directors' stock option plan and our
1999 employee stock purchase plan. Approximately 1,373,103 of these shares will
be subject to immediately exercisable options (based on options outstanding on
September 30, 1999) 90 days following the date of this prospectus and will be
eligible for sale in the public market 90 days following the date of this
prospectus. Sales of a large number of these shares could have an adverse
effect on the market price for our common stock.

We do not intend to pay dividends.

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth. In addition,
pursuant to our bank credit facility, we cannot pay dividends without our
bank's consent, with limited exceptions. Therefore, we do not expect to pay any
dividends in the foreseeable future.

Special note regarding forward-looking statements.

   Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These statements involve known and
unknown risks and uncertainties, such as our plans, objectives, expectations
and intentions, and other factors that may cause our, or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These
factors are listed under "Risk Factors" and elsewhere in this prospectus.

   In some cases, you can identify forward-looking statements by terminology
such as "expects," "anticipates," "intends," "may," "should," "plans,"
"believes," "seeks," "estimates" or the negative of such terms or other
comparable terminology.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. You
should not place undue reliance on these forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results.

                                       17
<PAGE>

                                USE OF PROCEEDS

   We will not receive any proceeds from the shares sold by the selling
stockholders in this offering. We expect to receive net proceeds of
approximately $250,700,000 from the sale of 2,837,500 shares of common stock,
and an additional $45,400,000 from the sale of 512,500 shares if the
underwriters' over-allotment option is exercised in full, at an assumed
offering price of $92.50 per share.

   We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
research and development expenditures, sales and marketing expenditures, and
general and administrative expenditures.

   The amounts and timing of these expenditures will vary depending on a number
of factors, including the amount of cash generated by our operations,
competitive and technological developments and the rate of growth, if any, of
our business. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies, to lease additional
facilities, or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so at this time.

   The amounts that we actually expend for working capital and other general
corporate purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds in short-term, interest bearing, investment-grade
securities. We cannot predict whether the proceeds will be invested to yield a
favorable return.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. In addition, under our bank credit facility, we cannot
pay dividends without our bank's consent, with limited exceptions. Therefore,
we currently do not anticipate paying any cash dividends in the foreseeable
future.

                          PRICE RANGE OF COMMON STOCK

   Our common stock is traded on the Nasdaq National Market under the symbol
"CLRN." Public trading of the common stock commenced on July 1, 1999. The
following table shows, for the periods indicated, the high and low per share
prices of common stock, as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
                         Quarter Ended                            High    Low
                         -------------                           ------- ------
<S>                                                              <C>     <C>
September 30, 1999.............................................. $ 51.50 $19.88
December 31, 1999 (Through October 29, 1999).................... $100.38 $49.50
</TABLE>

   On October 29, 1999, the last reported sale price of the common stock on the
Nasdaq National Market was $94.875 per share. As of September 30, 1999, there
were approximately 165 stockholders of record of the common stock.

                                       18
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our capitalization as of September 30, 1999:

  . on an actual basis; and

  . as adjusted to give effect to the sale of 2,837,500 shares of common
    stock being sold by us in this offering and to give effect to the receipt
    of the estimated net proceeds from the sale of the shares at an assumed
    offering price of $92.50 per share and the application of the net
    proceeds from the sale.

   Please read the following information in conjunction with the more detailed
Consolidated Financial Statements and Notes of Clarent and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                           September 30, 1999
                                                          ---------------------
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                             (in thousands)
<S>                                                       <C>       <C>
Long term portion of debt................................ $     91   $     91
Stockholders' equity:
  Preferred stock: $0.001 par value, 5,000,000 shares
   authorized; no shares issued and outstanding, actual
   and as adjusted.......................................
  Common stock: $0.001 par value, 50,000,000 shares
   authorized; 27,620,159 issued and outstanding, actual;
   30,457,659 shares issued and outstanding, as
   adjusted..............................................  110,476    361,176
  Deferred compensation..................................   (7,818)    (7,818)
  Accumulated other comprehensive loss(1)................      (47)       (47)
  Accumulated deficit....................................  (35,432)   (35,432)
                                                          --------   --------
    Total stockholders' equity...........................   67,179    317,879
                                                          --------   --------
    Total capitalization................................. $ 67,270   $317,970
                                                          ========   ========
</TABLE>
--------
(1) See Note 1 to the Consolidated Financial Statements for an explanation of
    accumulated other comprehensive loss.

   This table excludes the following shares as of September 30, 1999:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.

                                       19
<PAGE>

                                    DILUTION

   Our net tangible book value as of September 30, 1999 was $67,179,000, or
approximately $2.43 per share. Net tangible book value per share represents the
amount of our total assets less total liabilities, divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering. After
giving effect to the sale of the 2,837,500 shares of common stock being sold by
us in this offering at an assumed offering price of $92.50 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value at
September 30, 1999 would have been $317,879,000, or approximately $10.44 per
share. This represents an immediate increase in pro forma net tangible book
value of $8.01 per share to existing stockholders and an immediate dilution in
net tangible book value of $82.06 per share to new investors of common stock in
this offering. The following table illustrates this dilution on a per share
basis:

<TABLE>
   <S>                                                            <C>   <C>
   Assumed offering price per share..............................       $92.50
     Pro forma net tangible book value per share as of September
      30, 1999................................................... $2.43
     Increase in net tangible book value per share attributable
      to new investors...........................................  8.01
                                                                  -----
   Pro forma net tangible book value per share after offering....        10.44
                                                                        ------
   Dilution in net tangible book value per share to new
    investors....................................................       $82.06
                                                                        ======
</TABLE>

   The following table sets forth, on a pro forma basis as of September 30,
1999, the difference between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing holders of common stock and by the new investors, before deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, at an assumed offering price of $92.50 per share.

<TABLE>
<CAPTION>
                                Shares Purchased  Total Consideration   Average
                               ------------------ --------------------   Price
                                 Number   Percent    Amount    Percent per Share
                               ---------- ------- ------------ ------- ---------
   <S>                         <C>        <C>     <C>          <C>     <C>
   Existing stockholders...... 27,620,159   90.7% $ 93,555,000   26.3%  $ 3.39
   New investors..............  2,837,500    9.3   262,468,750   73.7   $92.50
                               ----------  -----  ------------  -----
     Total.................... 30,457,659  100.0% $356,023,750  100.0%
                               ==========  =====  ============  =====
</TABLE>

   This table excludes the following shares as of September 30, 1999:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.


                                       20
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated balance sheet data as of December 31,
1996 has been derived from consolidated financial statements not included in
this prospectus, which were audited by Ernst & Young LLP, independent auditors.
The selected consolidated statement of operations data for the period from July
2, 1996 (inception) to December 31, 1996, each of the two years in the period
ended December 31, 1998 and the nine months period ended September 30, 1999,
and the related consolidated balance sheet data as of December 31, 1997 and
1998, and September 30, 1999, are derived from the consolidated financial
statements of the company which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this prospectus. The data
should be read in conjunction with the consolidated financial statements. The
selected statement of operations data for the nine months ended September 30,
1998 has been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated financial statements
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, that management considers necessary for a fair
statement of the results for those periods. The operating results for the nine
months ended September 30, 1999 are not necessarily indicative of results that
may be expected for the year ending December 31, 1999 or any other interim
period or future fiscal year.

<TABLE>
<CAPTION>
                            Period from      Year ended       Nine months ended
                           July 2, 1996     December 31,        September 30,
                          (inception) to   ----------------  --------------------
                         December 31, 1996  1997     1998       1998       1999
                         ----------------- -------  -------  ----------- --------
                                                             (unaudited)
                                (in thousands, except per share amounts)
<S>                      <C>               <C>      <C>      <C>         <C>
Consolidated Statement
 of Operations Data:
Net revenue.............       $  --       $ 3,359  $14,647    $ 8,748   $ 29,245
Cost of revenue.........          --         1,189    6,653      3,645     12,862
                               -----       -------  -------    -------   --------
Gross profit............          --         2,170    7,994      5,103     16,383
Operating expenses:
  Research and
   development..........         136         1,044    3,356      2,081      6,023
  Sales and marketing...          --         2,046    7,099      4,705     16,166
  General and
   administrative.......         140           639    2,484      1,500      4,402
  Amortization of
   compensation.........          --            --      879        421     17,543
  Settlement expense....          --           570       --         --         --
                               -----       -------  -------    -------   --------
    Total operating
     expenses...........         276         4,299   13,818      8,707     44,134
                               -----       -------  -------    -------   --------
Loss from operations....        (276)       (2,129)  (5,824)    (3,604)   (27,751)
Other income (expense),
 net....................          --            70       32        (49)       569
                               -----       -------  -------    -------   --------
Loss before income
 taxes..................        (276)       (2,059)  (5,792)    (3,653)   (27,182)
Provision for income
 taxes..................          --            --      (40)         3        (83)
                               -----       -------  -------    -------   --------
Net loss................       $(276)      $(2,059) $(5,832)   $(3,650)  $(27,265)
                               =====       =======  =======    =======   ========
Historical basic and
 diluted net loss
 per share(1)...........         N/A       $ (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                               =====       =======  =======    =======   ========
Shares used to compute
 historical basic and
 diluted net loss per
 share(1)...............          --           962    3,544      3,099     12,543
                               =====       =======  =======    =======   ========
Pro forma basic and
 diluted net loss per
 share(1)...............                            $ (0.42)   $ (0.28)  $  (1.24)
                                                    =======    =======   ========
Shares used to compute
 pro forma basic and
 diluted net loss
 per share(1)...........                             14,048     12,877     21,951
                                                    =======    =======   ========
</TABLE>

<TABLE>
<CAPTION>
                                                  December 31,
                                               ------------------- September 30,
                                               1996  1997   1998       1999
                                               ---- ------ ------- -------------
                                                        (in thousands)
<S>                                            <C>  <C>    <C>     <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $147 $  474 $11,903    $33,870
Working capital...............................  146    781  11,531     56,342
Total assets..................................  244  2,818  25,177     90,829
Long term portion of debt.....................   --     --      --         91
Total stockholders' equity....................  242  1,334  13,764     67,179
</TABLE>
--------
(1) See Note 12 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of shares used in computing
    per share data.

                                       21
<PAGE>

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

Overview

   We are a leading provider of IP telephony systems. We were incorporated in
July 1996 and commenced sales of our products in March 1997. Prior to March
1997, we had no sales and our operations consisted primarily of various start-
up activities, such as research and development, recruiting personnel and
raising capital. We first recognized revenue from product sales in March 1997.
We generated net revenue of $3.4 million in 1997, $14.6 million in 1998 and
$29.2 million in the nine months ended September 30, 1999. We incurred net
losses of $276,000 in 1996, $2.1 million in 1997, $5.8 million in 1998 and
$27.3 million in the nine months ended September 30, 1999. As of September 30,
1999, we had an accumulated deficit of $35.4 million.

   We generate revenue from sales of our integrated hardware and software
products and from maintenance and support of those products. Revenue derived
from product sales, largely sales of our Clarent Gateway products measured in
the number of ports, constituted 99% of net revenue in 1997, 94% of net revenue
in 1998 and 92% of net revenue in the nine months ended September 30, 1999. A
port is the connection between the traditional telephone system and the IP
telephony system. Each port handles a single call and can have the capacity to
handle 8,000 to 10,000 call minutes per month. Telecommunications service
providers bill their customers based on the minutes transmitted through their
IP telephony systems. Although service revenue does not currently constitute a
material portion of our revenue, we believe service revenue will become an
increasing portion of our revenue. Product revenue is generally recognized upon
shipment. Service revenue includes revenue from implementation and integration
services, system management services, warranty coverage and customer support.
Revenue from implementation and system integration services is recognized as
the services are performed, while revenue from system management services,
warranty coverage and customer support is recognized ratably over the period of
the contract.

   We sell our products primarily through our direct sales force and, to a
lesser extent, through distribution channels. We have sales and support offices
in Belgium, France, Germany, Japan, the People's Republic of China, South
Korea, Spain, Taiwan, the United Kingdom and the United States. We intend to
increase sales through distribution channels. In 1998, we expanded the breadth
of our support services by establishing a professional services group to
provide product installation and customization, technical support, customer
training and product maintenance.

   Net revenue from international sales totaled $3.1 million or approximately
94% of net revenue in 1997, $7.1 million or approximately 48% of net revenue in
1998 and $15.1 million or approximately 52% of net revenue in the nine months
ended September 30, 1999. We expect that over time we may derive a majority of
our revenue from foreign-based service providers, subjecting our revenue stream
to risks from economic uncertainties, currency fluctuations, political
instability and uncertain cultural and regulatory environments.

   Cost of revenue consists of component and material costs, direct labor
costs, warranty costs, royalties, overhead related to manufacturing our
products and customer support costs, as well as materials, travel and labor
costs related to personnel engaged in our service operations. Our gross margin
is affected by changes in the average selling price of our products and the
proportion of our net revenue derived from the sale of software and services.
Software sales, which typically carry higher gross margin than hardware sales,
currently make up only a fraction of our net revenue. However, we expect that
the proportion of software sales will increase in the future. Service sales,
which typically carry a lower gross margin than product sales, currently make
up a small proportion of our net revenue. We expect the proportion of service
revenue to increase in the future. The net impact that the increased proportion
of sales of both software and services will have on our total gross margin
cannot be determined at this time. Furthermore, we expect to derive an
increasing proportion of our net revenue from the sale of our products through
distribution channels. Revenue derived from indirect sales typically carries a
lower gross margin than direct sales. As a result, we expect the increased
proportion of net revenue derived from indirect sales to have a negative impact
on our total gross margin in the future.

                                       22
<PAGE>

   Research and development expenses consist primarily of compensation and
related costs for research and development personnel and expenses for testing
facilities and equipment. We also make separate investments in engineering
personnel and equipment to assure timely response to problems and correction of
stability issues in our products. We expect to continue to make substantial
investments in research and development and anticipate that research expenses
will continue to increase in absolute dollars.

   Sales and marketing expenses consist primarily of compensation and related
costs for sales personnel, marketing personnel, sales commissions, marketing
programs, public relations, promotional materials, travel expenses and trade
show exhibit expenses. We expect to incur substantial expenditures related to
sales and marketing activities, the recruitment of additional sales and
marketing personnel and the expansion of our domestic and international
distribution channels.

   General and administrative expenses consist primarily of salaries and
related expenses, finance, accounting and human resources expenses,
professional fees, bad debt expenses and other general corporate expenses. We
expect general and administrative expenses to increase in absolute dollars as
we add personnel and incur additional costs related to the anticipated growth
of our business and operation as a public company, and increase our exposure to
bad debt expenses arising from obligations to us from our customers,
particularly new entrants.

   We expect each of these operating expense categories, research and
development, sales and marketing and general and administrative, to increase in
absolute dollars. However, the percentage of net revenue that each of these
categories represents will vary depending on the rate of our revenue growth and
investments that may be required to support the development of new products and
our penetration of new markets.

   We have a limited operating history and face a number of risks encountered
by early stage companies. These risks include, among others:

  . the market acceptance of IP telephony solutions;

  . our ability to anticipate and respond to changing market conditions,
    including competition;

  . our ability to retain key customers; and

  . our dependence upon key personnel.

   Also, we had stability issues when we released Version 3.0 of the Clarent
Gateway. These issues have been resolved. To date, product defects have not had
a material impact on our results of operations. We cannot be certain that
product defects will not occur in the future. Management has significantly
increased product development resources and quality assurance test processes to
address stability issues.

   In addition, although our revenue has grown in recent quarters, we cannot be
certain that our revenue will continue to grow or that we will achieve or
maintain profitability in the future. We expect to continue to experience
significant growth in research and development, sales and marketing and general
and administrative expenses as we attempt to expand our business and maintain
or improve our market position. We cannot accurately predict the future growth
rate, if any, or the ultimate size of our market. In addition, our ability to
increase revenue and achieve or maintain profitability depends on a number of
factors outside our control, including the extent to which:

  . our products are able to gain market acceptance;

  . our competitors develop competing products; and

  . our distributors and other marketing partners dedicate resources to
    selling our products.

   Furthermore, we have experienced significant erosion of average selling
prices due to a number of factors, including competitive pricing pressures,
rapid technological change and increases in sales discounts. We anticipate that
the average selling prices of our products will decrease in the future in
response to the same factors. Therefore, to maintain or increase our gross
margin, we must develop and introduce new products and

                                       23
<PAGE>

product enhancements to stabilize our existing products, on a timely basis and
continually reduce our product costs. Our failure to do so will cause our
revenue to grow more slowly and our gross margin to decline, which will
seriously harm our business, financial condition and results of operations.

   Because of continuing and substantial capital expenditures and increasing
research and development, sales and marketing and general and administrative
expenses, we will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive cash flow, we may not be able to sustain or increase
profitability or positive operating cash flow on a quarterly or annual basis.

Results of Operations

   Prior to the first quarter of 1997, our operations were limited and
consisted primarily of start-up activities. Expenses of $276,000 for 1996 were
comprised of payroll and related costs for research and development and general
and administrative personnel. Accordingly, we believe that year-to-year
comparisons of 1996 against 1997, and 1997 against 1998, are not meaningful.

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

<TABLE>
<CAPTION>
                                             Year ended
                                              December       Nine months ended
                                                 31,           September 30,
                                             -------------   -----------------
                                             1997    1998       1998     1999
                                             -----   -----   ----------- -----
                                                             (unaudited)
   <S>                                       <C>     <C>     <C>         <C>
   As a Percentage of Net Revenue:
   Net revenue.............................. 100.0%  100.0%     100.0%   100.0%
   Cost of revenue..........................  35.4    45.4       41.7     44.0
                                             -----   -----      -----    -----
   Gross margin.............................  64.6    54.6       58.3     56.0
   Operating expenses:
     Research and development...............  31.1    22.9       23.8     20.6
     Sales and marketing....................  60.9    48.4       53.8     55.3
     General and administrative.............  19.0    17.0       17.1     15.0
     Amortization of compensation...........    --     6.0        4.8     60.0
     Settlement expense.....................  17.0      --         --       --
                                             -----   -----      -----    -----
       Total operating expenses............. 128.0    94.3       99.5    150.9
                                             -----   -----      -----    -----
   Loss from operations..................... (63.4)  (39.7)     (41.2)   (94.9)
   Other income (expense), net..............   2.1     0.2       (0.6)     2.0
                                             -----   -----      -----    -----
   Loss before income taxes................. (61.3)  (39.5)     (41.8)   (92.9)
   Provision for income taxes...............    --    (0.3)       0.1     (0.3)
                                             -----   -----      -----    -----
   Net loss................................. (61.3)% (39.8)%    (41.7)%  (93.2)%
                                             =====   =====      =====    =====
</TABLE>

 Comparison of Nine Months Ended September 30, 1998 and 1999

 Net Revenue

   Net revenue consists of sales of both our integrated hardware and software
products, as well as revenue generated from the maintenance and support of
those products. Net revenue increased from $8.7 million in the nine months
ended September 30, 1998 to $29.2 million in the nine months ended September
30, 1999. The increase in net revenue was largely due to a 408% increase in
port volume of our Clarent Gateway products sold partially offset by a decrease
of approximately 45% in our average per port selling prices for those products.
Entities affiliated with AT&T Corporation accounted for 35% of net revenue,
Technet International accounted for 17% of net revenue and International
Services Inc. accounted for 10% of net revenue in the nine months ended
September 30, 1998. Entities affiliated with AT&T Corporation accounted for 16%
of net revenue and entities affiliated with Ji Tong Communications accounted
for 15% of net revenue in the nine months ended September 30, 1999.

                                       24
<PAGE>

 Cost of Revenue

   Cost of revenue increased from $3.6 million in the nine months ended
September 30, 1998 to $12.9 million in the nine months ended September 30,
1999. Gross margin decreased from 58% in the nine months ended September 30,
1998 to 56% in the nine months ended September 30, 1999. The decline was a
result of decreases in the average selling prices of our products, offset to a
slight degree by a decrease in the material cost of our products.

   The mix of products we sell will significantly impact our gross margin. 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. However, we expect increased sales
of our software products both in absolute dollars and as a percentage of net
revenue to positively impact our gross margin. The future net impact on our
gross margin from the increased proportion of sales of both software and
services cannot be determined at this time.

 Research and Development Expenses

   Research and development expenses increased from $2.1 million in the nine
months ended September 30, 1998 to $6.0 million in the nine months ended
September 30, 1999. Research and development expenses consist of payroll and
related expenses for research and development personnel, costs related to
systems infrastructure and third-party consultants. The absolute dollar
increases in research and development expenses from period to period were
attributable to increases in the number of research and development personnel.
Research and development expenses decreased as a percentage of net revenue from
24% in the nine months ended September 30, 1998 to 21% in the nine months ended
September 30, 1999.

 Sales and Marketing Expenses

   Sales and marketing expenses increased from $4.7 million in the nine months
ended September 30, 1998 to $16.2 million in the nine months ended September
30, 1999. Sales and marketing expenses consist primarily of payroll and related
expenses for personnel engaged in sales and marketing, as well as public
relations and marketing communications expenditures. The absolute dollar
increase in sales and marketing expenses from period to period was primarily
attributable to a $6.3 million or a 339% increase 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. The
growth rate of sales and marketing expenses exceeded the growth rate of net
revenue for the period because we were adding sales and marketing personnel and
spending on promotional activities in anticipation of increased future sales.

 General and Administrative Expenses

   General and administrative expenses increased from $1.5 million in the nine
months ended September 30, 1998 to $4.4 million in the nine months ended
September 30, 1999. General and administrative expenses consist primarily of
payroll and related costs for general corporate functions, including finance,
accounting, business development, human resources, facilities and
administration, as well as legal fees and fees for professional services. The
increases in general and administrative expenses from period to period were due
to increases in general and administrative personnel expenses, and related
occupancy costs, and to a lesser degree an increase in the charge for the
allowance for doubtful accounts. General and administrative expenses decreased
as a percentage of net revenue from 17% in the nine months ended September 30,
1998 to 15% in the nine months ended September 30, 1999.

 Amortization of Compensation

   Amortization of compensation expense for the nine months ended September 30,
1999 was $17.5 million. Amortization of compensation expense includes $5.3
million from stock compensation charges resulting from

                                       25
<PAGE>

the granting of stock options at prices below the deemed fair value of our
common stock. We expect to amortize additional deferred compensation of $1.8
million in the fourth quarter of 1999, $3.8 million in 2000, $1.7 million in
2001 and $537,000 in 2002.

  Amortization of compensation for the nine months ended September 30, 1999
also includes $12.3 million associated with the granting of a warrant for
advisory services to an investor. We terminated the advisory services
arrangement in June 1999 which caused the unvested portion of the warrant to
become fully vested.

 Fiscal Years Ended December 31, 1997 and 1998

 Net Revenue

   We began generating net revenue in the first quarter of 1997. Net revenue
increased from $3.4 million in 1997 to $14.6 million in 1998. The increase in
net revenue was due to a 667% increase in port volume of our Clarent Gateway
products sold partially offset by a decrease of approximately 52% in our
average per port selling prices for those products. A limited number of
customers have historically accounted for a substantial portion of our net
revenue. Entities affiliated with AT&T Corporation accounted for 46% and
Wherever Computer Technology Company Limited accounted for 35% of net revenue
in 1997. Entities affiliated with AT&T Corporation accounted for 36% and
Technet International accounted for 12% of net revenue in 1998.

 Cost of Revenue

   Cost of revenue increased from $1.2 million in 1997 to $6.7 million in 1998.
Gross margin declined from 65% in 1997 to 55% in 1998. The decline was a result
of decreases in average selling prices in our products, offset to a slight
degree by a decrease in the material cost of our products.

 Research and Development Expenses

   Research and development expenses increased from $1.0 million in 1997 to
$3.4 million in 1998. The absolute dollar increases in research and development
expenses from period to period were attributable to increases in the number of
research and development personnel. Research and development expenses decreased
as a percentage of net revenue from 31% in 1997 to 23% in 1998 because the
growth rate of net revenue exceeded the growth rate of research and development
expenses for the period.

 Sales and Marketing Expenses

   Sales and marketing expenses increased from $2.0 million in 1997 to $7.1
million in 1998. The absolute dollar increases in sales and marketing expenses
from period to period were primarily attributable to a $3.4 million or 67%
increase in personnel and related expenses required to implement our sales and
marketing strategy and, to a lesser extent, increased public relations,
advertising and other promotional expenses. Sales and marketing expenses
decreased as a percentage of net revenue from 61% in 1997 to 49% in 1998
primarily due to increased productivity of our sales personnel and increased
net revenue in such periods.

 General and Administrative Expenses

   General and administrative expenses increased from $639,000 in 1997 to $2.5
million in 1998. The absolute dollar increases in general and administrative
expenses from period to period were due to a $198,000 or 11% increase in
general and administrative personnel expenses, a $371,000 or 20% increase in
professional services fees, a $733,000 or 39% increase in the charge for the
allowance for doubtful accounts and, to a lesser extent, increased facility
expenses to support the growth of our operations.

 Amortization of Compensation

   In connection with some stock option grants in 1998, $2.3 million in
deferred compensation has been recorded. Amortization of compensation expense
reflects the amortization of stock compensation charges

                                       26
<PAGE>

resulting from the granting of stock options at prices below the deemed fair
value of our common stock. These amounts are being amortized using the
accelerated method over the vesting period of the stock options. Of the total
deferred compensation, approximated $522,000 was amortized in 1998.

   Amortization of compensation also includes compensation charges associated
with the granting of a warrant for advisory services to an investor.
Amortization of compensation related to the warrant totaled $357,000 for the
year ended December 31, 1998.

 Settlement Expense

   Settlement expense totaled $570,000 in 1997 and consisted of our legal
expenses and the settlement expense that we paid in connection with a dispute
with one of our distributors. Under the terms of the settlement agreement, we
made cash payments to the distributor of $250,000 and granted the distributor a
5% increase in its existing discount rate for a specific quantity of its
purchases from us in 1998. In addition, under the terms of the settlement
agreement, we issued 45,592 shares of Series C preferred stock to the
distributor at a value of $6.58 per share in August 1998.

 Income Taxes

   In 1997 we incurred net losses for federal and state income tax purposes and
did not recognize any income tax provision or benefit during such period. In
1998 we recorded a provision for income taxes of $40,000 related to current
foreign income tax provided on the profits attributable to our foreign
operations. As of December 31, 1998, we had $2.0 million of federal and $1.4
million of state net operating loss carryforwards to offset future taxable
income. 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 our deferred revenue, which
totaled $4.4 million as of December 31, 1998.

   We cannot assure you that we will realize the benefit of the net operating
loss carryforwards and have therefore set up a full valuation allowance against
these deferred tax assets. The federal and state net operating loss
carryforwards will expire at various dates beginning in fiscal year 2004
through 2018, if we do not use them. Due to the "change of ownership"
provisions of the Internal Revenue Code, the availability of our pre 1998 net
operating loss and tax credit carryforwards are subject to an annual limitation
against taxable income in future periods. Post 1997 net operating loss and tax
credit carryforwards could also be subject to a substantial annual limitation
if future ownership changes should occur. It is likely that the shares to be
issued in this offering will create this type of change.

                                       27
<PAGE>

Quarterly Results of Operations

   The following tables present some consolidated statements of operations data
for our seven most recent quarters ended September 30, 1999, in dollars and as
a percentage of net revenue. In management's opinion, this unaudited
information has been prepared on the same basis as the audited annual
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. You should read this
information in conjunction with the consolidated financial statements,
including the related notes, included elsewhere in this prospectus. The results
of operations for any quarter are not necessarily indicative of results that we
might achieve for any subsequent periods.

<TABLE>
<CAPTION>
                                                   Quarter Ended
                          --------------------------------------------------------------------------
                          Mar. 31,  June 30,   Sept. 30,  Dec. 31,   Mar. 31,   June 30,   Sept. 30,
                            1998      1998       1998       1998       1999       1999       1999
                          --------  --------   ---------  --------   --------   --------   ---------
                                         (in thousands, except percentages)
<S>                       <C>       <C>        <C>        <C>        <C>        <C>        <C>
Consolidated Statement
 of Operations Data:
Net revenue.............   $2,396   $ 3,083     $ 3,269   $ 5,899    $ 6,714    $  9,304    $13,227
Cost of revenue.........      780     1,396       1,469     3,008      3,281       4,146      5,435
                           ------   -------     -------   -------    -------    --------    -------
Gross profit............    1,616     1,687       1,800     2,891      3,433       5,158      7,792
Operating expenses:
  Research and
   development..........      540       698         843     1,275      1,566       1,991      2,466
  Sales and marketing...    1,182     1,553       1,970     2,394      4,025       5,623      6,518
  General and
   administrative.......      176       554         770       984      1,357       1,272      1,773
  Amortization of
   compensation.........        2        84         335       458      1,980      13,662      1,901
                           ------   -------     -------   -------    -------    --------    -------
   Total operating
    expenses............    1,900     2,889       3,918     5,111      8,928      22,548     12,658
                           ------   -------     -------   -------    -------    --------    -------
Loss from operations....     (284)   (1,202)     (2,118)   (2,220)    (5,495)    (17,390)    (4,866)
Other income (expense),
 net....................      (40)     (101)         92        81         16        (163)       716
                           ------   -------     -------   -------    -------    --------    -------
Loss before income
 taxes..................     (324)   (1,303)     (2,026)   (2,139)    (5,479)    (17,553)    (4,150)
Provision for income
 taxes..................       --         1           2       (43)        --         (11)       (72)
                           ------   -------     -------   -------    -------    --------    -------
Net loss................   $ (324)  $(1,302)    $(2,024)  $(2,182)   $(5,479)   $(17,564)   $(4,222)
                           ======   =======     =======   =======    =======    ========    =======
As a Percentage of Net
 Revenue:
Net revenue.............      100%      100%        100%      100%       100%        100%       100%
Cost of revenue.........       33        45          45        51         49          45         41
                           ------   -------     -------   -------    -------    --------    -------
Gross margin............       67        55          55        49         51          55         59
Operating expenses:
  Research and
   development..........       23        23          26        22         23          21         19
  Sales and marketing...       49        50          60        40         60          60         49
  General and
   administrative.......        7        18          24        17         20          14         13
  Amortization of
   compensation.........       --         3          10         8         30         147         14
                           ------   -------     -------   -------    -------    --------    -------
   Total operating
    expenses............       79        94         120        87        133         242         95
                           ------   -------     -------   -------    -------    --------    -------
Loss from operations....      (12)      (39)        (65)      (38)       (82)       (187)       (36)
Other income (expense),
 net....................       (2)       (3)          3         2         --          (2)         5
                           ------   -------     -------   -------    -------    --------    -------
Loss before income
 taxes..................      (14)      (42)        (62)      (36)       (82)       (189)       (31)
Provision for income
 taxes..................       --        --          --        (1)        --          --         (1)
                           ------   -------     -------   -------    -------    --------    -------
Net loss................      (14)%     (42)%       (62)%     (37)%      (82)%      (189)%      (32)%
                           ======   =======     =======   =======    =======    ========    =======
</TABLE>


   Our operating expenses, excluding amortization of compensation, have
increased significantly in absolute dollars, but not as a percentage of net
revenue, in each quarter since inception as we have transitioned from the
development stage to the commercialization of our products and services and
expansion of our business. We expect to incur an increase in operating expenses
in the future as we attempt to expand our business. To the extent that these
expenses are not accompanied by an increase in net revenue, our business,
results of operations and financial condition could be adversely affected.

                                       28
<PAGE>

   In the quarters subsequent to March 31, 1998, we experienced a significant
decrease in average selling prices which decreased our gross margin percentage
through the quarter ended December 31, 1998. Gross margin percentage for the
quarters ended June 30 and September 30, 1999 increased primarily due to lower
product costs.

   We expect our operating results to fluctuate significantly in the future as
a result of a variety of factors, many of which are outside our control.
Consequently, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful, and as a result, you should not rely
on them as an indication of future performance.

Liquidity and Capital Resources

   Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which totaled $18.9 million in aggregate
net proceeds through September 30, 1998. We have also financed our operations
through lines of credit, of which $2.5 million was outstanding as of September
30, 1998 and $4.1 million is outstanding as of September 30, 1999.

   Net cash used in operating activities was $276,000 in 1996, $2.3 million in
1997, $5.8 million in 1998, $4.3 million for the nine months ended September
30, 1998 and $9.4 million for the nine months ended September 30, 1999. For
1997, cash used in operating activities was attributable primarily to a net
loss of $2.1 million, an increase in trade accounts receivable of $777,000 and
an increase in inventory of $889,000 due to anticipated growth in expected
product revenues, offset in part by increases in accounts payable and accrued
liabilities of $1.3 million. For 1997 the increase in accounts receivable was
entirely related to our increase in sales. For 1998, cash used in operating
activities was attributable primarily to a net loss of approximately $5.8
million, and increases in trade accounts receivable of $6.2 million and
inventory of $2.7 million. For 1998, 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. There was no deferred
revenue recognized on sales to these customers, as collectibility was probable
under the software revenue recognition rules.

   In addition, we deferred recognition of revenue on some sales where
collectibility was not probable because of the fact that in some sales
arrangements, payment terms are for periods that are longer than our normal
terms. Because we have not established a payment history with some of these
customers, we concluded that the fees in these arrangements were not "fixed and
determinable" as defined by the software revenue recognition rules. For these
arrangements, we perform normal credit checks but concluded that revenue should
be deferred until such time as payments become due or probable. The amount of
deferred revenue as a result of not meeting the fixed and determinable criteria
totaled $1.4 million at December 31, 1998 and $4.3 million at September 30,
1999. No provision for doubtful accounts has been established for these
deferred revenue arrangements. The cash used in operating activities was offset
in part by depreciation of approximately $516,000, amortization of compensation
of $879,000 and increases in accounts payable and accrued liabilities of
approximately $3.4 million and an increase in deferred revenue of approximately
$4.3 million for the year ended December 31, 1998.

   Net cash used in operating activities for the nine months ended September
30, 1998 was attributable primarily to a net loss of approximately $3.7 million
and increases in trade accounts receivable of $4.5 million and inventory of
$1.7 million partially offset by depreciation of $229,000, increases in
accounts payable and accrued liabilities of $726,000 and increases in deferred
revenue of $4.3 million. Net cash used in operating activities for the nine
months ended September 30, 1999 was attributable primarily to a net loss of
approximately $27.3 million and increases in trade accounts receivable of $8.3
million and inventory of $1.8 million partially offset by depreciation of $1.6
million, amortization of compensation of $17.5 million, increases in accounts
payable and accrued liabilities of $5.4 million and increases in deferred
revenue of

                                       29
<PAGE>

$5.0 million. The increase in inventory for the nine months ended September 30,
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 the nine months ended September 30, 1999 is primarily the result
of increased sales which occurred during the last month of the quarter. In
addition we increased our allowance for doubtful accounts to address the
increase in our accounts receivable balance.

   Net cash used in investing activities was approximately $95,000 in 1996,
$555,000 in 1997, $2.2 million in 1998, $1.4 million for the nine months ended
September 30, 1998 and $33.6 million for the nine months ended September 30,
1999. For the nine months ended September 30, 1999, $26.7 million of cash used
in investing activities was for the purchase of short and long term securities.
For each of these periods, the remaining cash used in investing activities was
also attributable to purchases of property and equipment.

   Net cash provided by financing activities was $518,000 in 1996, $3.2 million
in 1997, $19.5 million in 1998, $12.0 million for the nine months ended
September 30, 1998 and $64.9 million for the nine months ended September 30,
1999. For 1996 and 1997, cash provided by financing activities was attributable
principally to proceeds from the issuance of preferred stock. 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. For the nine months ended September 30, 1998, cash provided by financing
activities was attributable primarily to $9.9 million of proceeds from the
issuance of preferred stock and $2.6 million in proceeds from the issuance of
bridge notes, offset by $550,000 in repayment of bridge notes. For the nine
months ended September 30, 1999, cash provided by financing activities was
attributable primarily to $1.6 million in proceeds from our line of credit and
equipment term loan facility, $332,000 of proceeds from the issuance of
preferred stock and $62.8 million of proceeds from the issuance of common stock
principally through our initial public offering.

   As of September 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate a substantial increase in capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We also may establish additional
operations as we expand globally.

   From July 2, 1996 through December 31, 1998, we issued warrants to purchase
160,266 shares of Series C preferred stock at prices ranging from $5.59 to
$6.58 per share and 1,760,000 shares of common stock at a price of $0.05 per
share. All of these warrants for shares of common stock and Series C preferred
stock have been exercised as of September 30, 1999. In June 1999, we granted a
warrant to purchase 3,000 shares of common stock, which remains outstanding.
See Notes 3 and 5 of Notes to Consolidated Financial Statements.

   In February 1998, we obtained $2.6 million in bridge financing in the form
of promissory notes from several investors and other parties. In June 1998,
approximately $2.1 million of the promissory notes were converted to Series C
preferred stock and the remainder was repaid.

   In May 1998, we established a $5.0 million line of credit with a financial
institution. The effective interest rate on this credit facility is equal to
one-half of one percentage point above the prime rate. Borrowings under this
agreement are limited to our eligible receivable base. The terms of the line of
credit agreement establish affirmative and negative covenants, under which we
must maintain certain financial ratios and reporting practices. We failed to
comply with financial covenants related to the liquidity, tangible net worth
and the maximum permitted loss required under the agreement as of December 31,
1998. The financial institution waived these events of default. On February 16,
1999, the financial institution increased the line of credit to $7.0 million,
extended an additional $3.0 million equipment term loan facility, and revised
these financial ratios.

                                       30
<PAGE>

As of September 30, 1999, $4.1 million was outstanding under this line of
credit and $182,000 was outstanding under the equipment term loan facility. At
September 30, 1999, we had $2.9 million unused under our line of credit and
$2.8 million unused under our equipment term loan facility.

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

Year 2000 Compliance

   Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish between 20th and 21st century dates. This may result in software
failures or the creation of erroneous results.

   We have conducted a Year 2000 readiness review for the prior and current
versions of our products. The review includes assessment, implementation,
including remediation, modifications, where necessary, of current product
versions, validation testing and contingency planning. We continue to respond
to customer questions about prior versions of our products on a case-by-case
basis.

   We have largely completed all phases of this plan for the prior and current
versions of our products. As a result, all current versions of our products are
"Year 2000 compliant," as defined below, when configured and used in accordance
with the related documentation, and provided that the underlying operating
system of the computer on which our products run and any other software used
with or in the computer on which our products run, prior versions of our
products are also Year 2000 compliant. We are also supplying our customers who
use prior versions of our products with software updates for the third party
supplied software components of our products to make those versions Year 2000
compliant. We have tested our products on all platforms and all versions of
operating systems that we currently support.

   We define "Year 2000 compliant" as the ability to:

  . correctly handle date information needed for the December 31, 1999 to
    January 1, 2000 date change;

  . function according to the product documentation provided for this date
    change, without changes in operation resulting from the advent of a new
    century, assuming correct configuration;

  . where appropriate, respond to two-digit date input in a way that resolves
    the ambiguity as to century in a disclosed, defined and predetermined
    manner;

  . if the date elements in interfaces and data storage specify the century,
    store and provide output of date information in ways that are unambiguous
    as to century; and

  . recognize the Year 2000 as a leap year.

   We have tested software obtained from third parties that is incorporated
into our products, and we have received assurances from our primary vendors
that licensed software is Year 2000 compliant. We re-verified the assurances
from primary vendors during October 1999.

                                       31
<PAGE>

   Our internal systems include both our information technology, or IT, and
non-IT systems. We have made an assessment of our material internal IT systems,
including both our own software products and third-party software and hardware
technology. We completed our initial inventory/assessments of our non-IT
systems as of September 30, 1999. We have completed the inventory/assessment of
licensed software included in our products and have confirmed that the licensed
software that we incorporate in our products is Year 2000 compliant. We have
not initiated an assessment of our non-material internal IT systems. This
confirmation has been achieved through a combination of internal testing,
vendors' Year 2000 Readiness Disclosures, and an ongoing certification program
addressing all of our suppliers and vendors.

   Despite testing by us and by current and potential clients, and assurances
from developers of products incorporated into our products, our products, IT
systems, and non-IT systems may contain undetected errors or defects associated
with Year 2000 date functions. Known or unknown errors or defects in our
products or IT and non-IT systems could result in delay or loss of revenue,
diversion of development resources, damage to our reputation, or increased
service and warranty costs, any of which could materially adversely affect our
business, operating results or financial condition. Some industry analysts have
predicted significant litigation regarding Year 2000 compliance issues, and we
are aware of such lawsuits against other software vendors. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.

   Our total costs incurred through September 30, 1999, are approximately
$500,000. We expect that we could incur additional costs with respect to our
Year 2000 compliance efforts. In addition, we may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal IT and non-IT systems.

   We do not currently have any information concerning the Year 2000 compliance
status of our customers. If our current or future customers fail to achieve
Year 2000 compliance or if they divert technology expenditures to address Year
2000 compliance problems, our business could suffer.

   We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. We may incur additional costs
related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for our products,
product engineering and customer satisfaction. In addition, we may experience
material problems and costs with Year 2000 compliance that could adversely
affect our business, results of operations, and financial condition.

   We have developed a contingency plan to address situations that may result
if we are unable to achieve Year 2000 readiness of our critical operations. We
are also subject to external forces that might generally affect industry and
commerce, such as utility or transportation company Year 2000 compliance
failures and related service interruptions.

Recent Accounting Pronouncements

   In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9. "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", or 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 will be required to comply
with the provisions of SOP 98-9 for transactions entered into beginning January
1, 2000. The adoption of SOP 98-9 is not expected to have a material impact on
our consolidated financial statements.

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 denominated in U.S. dollars and therefore
are not subject to

                                       32
<PAGE>

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 September 30, 1999, we have
not experienced any significant negative impact on our operations as a result
of fluctuations in foreign currency exchange rates.

   We have an investment portfolio of fixed income securities, including those
classified as cash equivalents of $53.6 million at September 30, 1999. These
securities are subject to interest rate fluctuations and will decrease in
market value if interest rates increase.

   We also have financial market risk on the interest rate associated with our
short term debt. At September 30, 1999, our financial market risk related to
this debt was immaterial.

                                       33
<PAGE>

                                    BUSINESS

Overview

   We are a leading provider of Internet protocol or IP telephony systems. IP
telephony systems permit the simultaneous transmission of voice, fax and data
over the Internet and similar communications networks. Using our technology to
simultaneously transmit voice, fax and data, our customers are able to more
efficiently and cost-effectively use the available capacity of their networks.
Existing customers include traditional, local, international and wholesale long
distance telephone companies, as well as new telecommunications service
providers. Traditional telecommunications service providers are companies that
have previously served as the monopoly or incumbent provider in their region.
New telecommunications service providers are companies that have started to
offer telecommunications services in the last three to five years in countries
that have deregulated their telecommunications markets. In addition, we have
recently begun selling to enterprises, in particular, large corporations with
multiple locations and high long distance calling costs. Using our products,
enterprises should be able to reduce their telecommunications services costs
compared to the costs they previously incurred for similar services using the
traditional telephone system. The IP telephony market is relatively new. Less
than 1% of all voice calls worldwide is currently transmitted using IP
telephony systems primarily over the Internet. According to Frost & Sullivan,
between 1997 and 2002, the number of call minutes, including voice, fax and
data, transmitted using IP telephony systems is expected to have a compound
annual growth rate of 325%.

   Using our IP telephony product, the Clarent system, service providers and
enterprises that manage their own telephony services can deliver a level of
voice quality that is indistinguishable from the voice quality over the
traditional telephone system. In addition, the Clarent system enables the
simultaneous transmission of voice, fax and data. The Clarent system features a
modular architecture that permits our customers to add new product and service
features without extensive product cost or development time. Based on publicly
available data provided by large telecommunications service providers, we
believe our modular architecture enables the provision of new and existing
communications services at a lower cost than the provision of communications
services by traditional telephone companies.

   The Clarent system consists of three distinct components:

  . the Clarent Gateway, an integrated hardware and software product that
    includes network server software that is based on industry standards;

  . the Clarent Command Center, a proprietary client/server software package;
    and

  . a relational database, which is supplied by a third party.

   Our products enable our customers to deliver IP telephony services to end
user customers who can continue to use their existing telephones. Since our
products are integrated by telephone companies and other service providers into
systems that take calls from the traditional telephone system and send these
calls over the Internet and other Internet protocol networks before returning
these calls to the traditional telephone system, the use of IP telephony is
transparent to end user customers. Our products can be accessed from cellular
as well as traditional telephones. As a result, end users do not have to
purchase additional telephone equipment to make IP telephony calls. Currently,
IP telephony is not commonly offered incorporating satellite transmissions or
using cable lines.

   We began commercial shipment of the Clarent system in March 1997. As of
September 30, 1999, we had shipped the Clarent system to approximately 160
telecommunications service providers in 55 countries worldwide. The Clarent
system has been installed in some of the world's leading service provider
networks, including those of AT&T Corporation, China Telecom, Chunghwa Telecom
(Taiwan), Ji Tong Communications Co., Ltd. (the People's Republic of China),
KDD (Japan), Korea Telecom (South Korea), Pacific Gateway Exchange (United
States), Singapore Telecom, Star Telecom (United States), Telstra (Australia)
and Telia Telecom (Sweden).


                                       34
<PAGE>

Industry Background

   The telecommunications industry has historically followed a path of
development based on the belief that voice and data require separate
technologies and network resources. Traditional telephone systems were, and are
still, built around an architecture that requires a dedicated connection, or
circuit, in order for a call to be completed. This technology requires the
circuit to remain dedicated between calling parties for the entire duration of
a call. Most data today is transmitted over Internet protocol-based networks.
These networks are more efficient because they do not require a dedicated
circuit for the entire path of the call. In a network using Internet protocol,
the voice, fax or data is divided into packets that are simultaneously sent to
a final destination where they are reassembled back to their original form. In
this type of network, multiple types of information including voice, fax and
different forms of data can travel through the network at the same time. The
improvements in the technologies used in data networks have led to an increase
in use of this type of network to transmit both voice and data. The IP
telephony market emerged from these technological advances. Recent developments
in IP telephony technology have significantly bridged the voice quality gap
between the traditional telephone system, which is commonly referred to as a
circuit-switched system, and IP telephony systems. The differences between a
circuit-switched call and an IP telephony call is illustrated in the diagram
below.

 [Graphic depicting the differences between a circuit-switched and IP telephony
                                     call]
   [A phone call transmits signals that direct a series of switches to open a
dedicated circuit to second phone. The dedicated circuit carries the electronic
 signals through the line. The phones transists the signals back into speech.]
    [Unlike the traditional circuit switched phone call, which travels on a
    dedicated circuit, the electronic signals go to a Clarent Gateway, which
 converts them into small packets of digital information. The packets may take
 different routes to their destination. After traveling through the IP network,
   the packets are converted back into electronic signals by another Clarent
                  Gateway and put back on the phone network.]

   Today a voice call placed over an IP telephony network can sound virtually
indistinguishable from the same call made over the traditional telephone
system. What distinguishes IP telephony technology, however, is that it allows
service providers to simultaneously send voice, fax and data transmissions over
their networks and enables them to quickly add and use additional features and
services without the need for costly network upgrades. In contrast, changes to
the traditional telephone system are costly and difficult. For example, based
on estimates from the International Engineering Consortium, we believe the
recent integration of such basic

                                       35
<PAGE>

services as caller ID and call return services into the traditional telephone
system took over a decade to accomplish and hundreds of millions of dollars to
implement in the United States alone. In addition, new end user devices, such
as cable modems, digital subscriber line (DSL) modems and wireless phones that
can also be Internet access devices offer cost and feature benefits to
consumers. IP telephony technology allows phone calls to be made through these
devices.

   The added flexibility and cost-effectiveness of IP telephony networks are
particularly important in an increasingly deregulated and competitive market
environment. Deregulation acts as a catalyst for the rapid deployment of these
services by allowing new service providers to quickly enter formerly regulated
markets and by forcing existing service providers to rapidly respond to the
challenge of competition. According to a 1998 Frost & Sullivan report, the
total number of worldwide voice minutes running over Internet protocol-based
data networks is expected to grow from 6.3 million in 1997 to 8.8 billion in
2002, representing a compound annual growth rate of 325% for the period.
Accordingly, spending on IP telephony equipment is projected to grow from $47.3
million in 1997 to $3.2 billion in 2002, representing a compound annual growth
rate of 132%.

   We believe a significant market opportunity now exists for the makers of IP
telephony systems. We believe that none of our competitors to date has
developed a comprehensive solution that incorporates the functionality that
service providers require to provide end-to-end service. Some vendors have
developed products that embed the instructions on where to route the IP
telephony call in the same equipment that provides the IP telephony technology.
This approach limits service providers' flexibility to make modifications to
their networks because any modification must be made at several different
points throughout the network.

   Some IP telephony vendors may offer IP telephony products that allow calls
to be made from traditional telephones. We believe that these vendors may not
have an architecture that also supports calls transmitted through cable modems
or calls using other new end user devices.

   In addition, some IP telephony vendors now allow enterprises to use IP
telephony for calls that are made from one company location to another.
However, if that enterprise's end users want to call a non-company location,
those calls must get routed over the traditional phone system.

   Many vendors only provide limited billing and network management data. This
data is gathered and formatted in a simplistic fashion, limiting the ability of
service providers to manage sophisticated networks or to bill using any pricing
structure they desire. Also, these simplistic billing systems make it difficult
to connect service providers' networks to the networks of other service
providers.

   Some router, switch and IP telephony companies have formed partnerships with
billing and network management technology providers in order to provide even
the most basic operational support solution to service providers. A router is a
device that routes packets over the Internet or other Internet protocol
networks. A switch is a device that takes multiple incoming calls and places
these calls onto fewer lines. This partnering necessitates integration, which
can be technologically difficult, time consuming and expensive.

   Many IP telephony vendors require dedicated ports for voice, fax or data. A
port is the connection between the traditional telephone system and the IP
telephony system. Each port handles a single call. Systems that use dedicated
ports are inefficient and more costly because more ports are needed to handle
the different types of transmissions anticipated. In addition, many vendors do
not have the technical capability to integrate these ports with the traditional
telephone system so that the ports can correctly interpret busy signals, dial
tones and disconnects. This means that service providers cannot accurately bill
for the call. Furthermore, the inability to integrate well with the traditional
telephone system makes it more difficult for end-users to gain the benefits of
this technology because they have to dial separate phone numbers or use multi-
step dialing processes.

   In order to compete effectively in the emerging market for IP telephony
services, service providers need a solution that provides the following
attributes. The solution must be cost-effective and combine a high level of
functionality with a flexible architecture designed to support growth, new
features and the ability to make calls

                                       36
<PAGE>

using new end user devices. This solution must enable service providers and
enterprises to deliver clear and robust voice quality that can be merged
efficiently with fax and data IP telephony services. The solution must also
possess comprehensive back-office features to allow service providers to
operate and manage a viable communications business. We also believe that
enterprises need a solution that enables their end users to take advantage of
the benefits of IP telephony for voice calls, fax and data transmissions made
both within and outside of their organization. Some service providers and their
customers, as well as enterprises and their end users, will use these features
to support connections with other networks, while others will use these
features to connect to an intermediary, like an IP telephony clearinghouse, to
facilitate the exchange of IP telephony calls. These clearinghouses enable
service providers to exchange calls between multiple destinations worldwide
without having to enter into individual agreements with other service providers
in each geographic region. A clearinghouse also performs the associated
accounting and settlement services for its members. The solution must allow
service providers and enterprises to centrally make changes to their network as
this technology continues to evolve. The solution must also be able to
incorporate feature enhancements because there will be many and varied new
feature requests as this technology continues to evolve. The solution must also
be transparent to end users and easy to use. Finally, we expect that customers
will prefer a solution that is technologically advanced enough to allow service
providers and enterprises to quickly adapt their entire IP telephony network to
emerging standards. We believe that although some of our competitors may offer
some of these attributes, with others offering a few other attributes, none of
our competitors offers all of the above attributes.

The Clarent Solution

   We have developed a comprehensive IP telephony solution that offers the
following key benefits:

   Traditional telephone system voice quality and simultaneous voice, fax and
data transmission. Calls over a Clarent network that sound indistinguishable
from a traditional telephone system call. In addition, the Clarent system
enables the simultaneous transmission of voice, fax and data traffic. These
features are enabled by using standard compression and echo cancellation
technologies and our proprietary packet technologies.

   Rapid, low-cost deployment and maintenance. The Clarent system provides a
comprehensive solution that can be rapidly put into use by service providers
with a modest initial capital investment. By centralizing management and
distributing functionality, the Clarent system allows service providers to
perform network administration in an economical manner.

   Transparent and secure interconnection with different networks. The Clarent
system is designed to support the seamless interconnection between other
networks that use Clarent's products and the traditional telephone system. This
includes bridging an enterprise's private IP telephony network with a
telecommunications service provider-based IP telephony network and IP telephony
global clearinghouses so the enterprise can take advantage of IP telephony for
calls made within or outside of its business. This includes interconnecting to
the traditional telecommunications service providers' networks, commonly known
as the SS7 network. These interconnections provide a level of security that
enables service providers to exchange large volumes of calls and billing data
with each other and with their business customers. This process requires that
only relevant transaction information is disclosed, either bilaterally or
through an intermediary, such as an IP telephony clearinghouse.

   Complementary processing of calls and centralized network management
functions. The Clarent system provides centralized processing of such network
functions as the authentication of callers, billing, routing and pricing of
calls and network diagnostics and maintenance. Because we provide both the call
processing and operational support functions in a network, we can effect
system-wide enhancements and new features quickly and efficiently.

   Adaptability to changing standards and technologies. The Clarent system is
comprised of distinct units that can be spread across a network. Compared to a
circuit-switched network, a network using a Clarent system may be modified
quickly to accommodate new features, support new protocols or handle new end-
user devices, such as cable modems and IP telephones, as they become widely-
used or available.

                                       37
<PAGE>

Strategy

   Our objective is to be the leading provider of comprehensive IP telephony
solutions to service providers and enterprises worldwide. Key elements of our
strategy include the following:

   Provide the core technology enabling the delivery of a broad range of IP
telephony services. We have designed the Clarent system to provide service
providers and enterprises with a unified technology platform for the effective
and rapid delivery of a broad range of IP telephony services. This will enable
service providers and enterprises to offer their customers or end users a wide
array of value-added services, including virtual private networks and
worldwide roaming, using the Clarent system. An additional element of our
strategy is to increase the level of technological interoperability of our
products with those of other vendors to expand the breadth of opportunities
our products can address. An example of this strategy is to allow enterprises
to enable their end users to use IP telephony for voice calls, fax and data
transmissions made both within and outside their organization.

   Increase our penetration of service provider market. We plan to increase
the sales of our products by expanding our relationships with existing
customers and by capturing new customer relationships. We have shipped our
solutions to approximately 160 telecommunications service providers, including
several of the world's leading long distance carriers. We believe the demand
for our products will increase as new and existing customers increasingly
derive revenue from IP telephony-based services.

   Target key growth markets worldwide. We will continue to focus our sales,
marketing and customer service and support efforts on key growth markets for
IP telephony services. We currently maintain a global sales and customer
service and support presence, with offices in Belgium, France, Germany, Japan,
the People's Republic of China, South Korea, Spain, Taiwan, the United Kingdom
and the United States, focusing on both service provider and enterprise
customers. We believe that international markets represent particularly
attractive early markets for our products and services due to rapid
telecommunications deregulation and increasing demand for network capacity. We
will continue to add sales, marketing and customer service and support
resources in these regions and will respond to emerging opportunities in these
markets.

   Promote strategic relationships between our customers. We will continue to
promote the formation of bilateral alliances and clearinghouse arrangements
between our customers based on the Clarent system. For example, AT&T
Corporation, Pacific Gateway Exchange, Telia Telecom, ISPhone, Startec and
Rapid Link have established international IP telephony clearinghouses based on
the Clarent system. We expect other service providers in different geographic
regions to continue to establish bilateral relationships with other Clarent
customers or join additional clearinghouses. We believe these relationships
will lead to increased installations of our products in both existing and new
customers' networks.

   Extend our technology leadership position. We believe we have established a
technology leadership position in the market for IP telephony solutions, and
we intend to extend this position by leveraging our distinct architecture. Our
architecture is a component-based technology that segregates the call
processing and network management functions in the Clarent system. We believe
that our architecture differentiates the Clarent system from competing
vendors' systems by enabling service providers to implement and manage new
features and services across a network with a minimum level of service
disruption.

   Deliver added value through customer support and services. To drive the
rapid deployment of our solutions, we will continue to assist our customers in
the installation of our IP telephony systems and provide comprehensive ongoing
technical support, training and other services. We expect to continue to build
our internal professional services organization and explore additional
relationships with potential global services partners as a means of generating
additional revenue.

                                      38
<PAGE>

Products and Technology

   The Clarent system incorporates internally-developed and third-party
technologies, including our proprietary packet handling technology. This
technology 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. As shown below, the Clarent system is comprised of
three distinct components:

  . the Clarent Gateway;

  . the Clarent Command Center; and

  . a third-party relational database.

   In order to implement the Clarent system, 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 telephone
gateway to a central office switch and the Internet, or other Internet Protocol
network, to allow the Clarent solution to work. The implementation for an
enterprise is the same, except an enterprise usually connects the gateway to a
private branch exchange, commonly known as PBX, instead of a central office
switch.

[Graphic depicting the architectural structure of our solution, the Clarent
System]

 Clarent Gateway

   The Clarent Gateway is an integrated hardware and software product that
converts voice, fax and data into packets that can be sent over Internet
protocol networks, then transmits these packets over the network. At the
destination, another Clarent Gateway converts these packets back into circuit-
switched voice, fax and data. The

                                       39
<PAGE>

Clarent Gateway is connected on one side to the traditional telephone network,
or to a PBX, and on the other side to the Internet protocol network. Each
Clarent Gateway currently has the capacity to handle up to 120 simultaneous
voice calls, fax and data transmissions. Typically, a service provider or
enterprise will deploy a number of gateways sufficient to handle the projected
call volume and for system redundancy. The Clarent Gateway provides the
following functionality:

   Standard telephony interfaces. The Clarent Gateway supports many standard
telephony interfaces and signaling protocols. Available telephony interfaces
include both analog and digital. Supported signaling protocols include MFR1,
MFCR2, PRI-ISDN, Feature Group D 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. Clarent Gateways simultaneously handle
voice, fax and data transmissions through universal ports, eliminating the need
to dedicate ports to specific types of transmissions. A universal port can
handle any type of call that comes to it, either a voice, fax or data.
Conversely, a dedicated port can only handle a single type of call, either
voice or fax or data. Universal and dedicated ports each handle one call at a
time, but a universal port can handle any type of call. Universal ports are
more flexible and cost-efficient.

   Compliance with major telecommunications standards. Clarent 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.

   Low call latency. Clarent 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 Command Center

   The Clarent Command Center is a centralized client/server software package
that processes network management and back-office functions, including the
routing and pricing of calls, user management, gateway monitoring and billing.
A single Clarent Command Center can support more than one Clarent Gateway. The
Clarent Command Center does not have a dedicated connection to each Clarent
Gateway. Instead it communicates with Clarent Gateways over the Internet or an
Internet protocol network. By centralizing all network management and
back-office functions, networks that use 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:

   Dynamic routing of calls. Calls are directed to specified groups of
gateways. In the event that a specified group of gateways is unavailable for a
particular destination, the Clarent Command Center will automatically route the
call to the specified backup group of gateways for completion. Furthermore, if
there are no gateways for a particular destination, the Clarent Command Center
can always route the call through the circuit-switched network, so that call
completion can be guaranteed.


                                       40
<PAGE>

   Call pricing. The Clarent Command Center supports a wide range of pricing
options for service provider and enterprise customers. Service providers are
able to customize their pricing schemes to their business needs and offer
different rates for the same routes based on individual call or user
characteristics. Enterprise customers are able to charge calls back to
different internal departments. Examples of pricing options supported by the
Clarent Command Center include time-of-day rates and drop-off rates, which are
reduced rates after the first minute of a call. Rates can also be varied, based
on the identity of the caller, the calling number or the called number, such as
toll-free numbers.

 Relational Database

   The Clarent system also 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. The Clarent
system is currently compatible with specific databases, including current
releases from Oracle Corporation and Microsoft Corporation. As a result,
customers using the Clarent system can develop their own customized Web
interfaces, billing systems and advanced management tools. Examples of the data
stored in the relational database include:

   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 this capability to segment a network into
domains, or "subnetworks" within a larger network.

 Other Clarent Products and Services

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


<TABLE>
<CAPTION>
  Product or Service               Features
  <C>                              <S>
  Clarent Connect                  Provides network interconnection; real-time
                                   account settlement; least-cost routing of
                                   calls; balancing of calls between partners;
                                   and connecting service providers and private
                                   networks of companies
-------------------------------------------------------------------------------
  Clarent Clearinghouse Products   Harvest, sort, group and archive billing
                                   data from individual gateways or networks of
                                   gateways
-------------------------------------------------------------------------------
  Clarent SS7/C7 Gateway Signaling Provides seamless connection between a
                                   service provider's network and a Clarent
                                   Gateway
-------------------------------------------------------------------------------
  Clarent Care                     Provides software upgrades and worldwide
                                   technical support to customers seven days a
                                   week, 24 hours a day
-------------------------------------------------------------------------------
  Clarent University               Provides basic and advanced training courses
                                   to users of Clarent technology
</TABLE>


 Products Under Development

   We are developing a new architecture called Clarent Open Network Environment
(Clarent ONE). We believe that this new architecture will provide the
foundation for Clarent products going forward. Clarent ONE is also being
designed to introduce a variety of open, standards-based products targeted to
allow consumers to use new end user devices to make IP telephony calls.

                                       41
<PAGE>

   We are currently designing a suite of products based on the Clarent ONE
architecture expected to be released in phases during the next 18 months. These
products include:

  . Clarent ClearView
  . Clarent Gatekeeper
  . Clarent Call Manager
  . Clarent Application Programming Interfaces (APIs)
  . Clarent high density gateway

   Clarent ClearView. Clarent ClearView is designed to provide network
management capabilities to customers and tools that allow customers to build
their own network management features.

   Clarent Gatekeeper. The Clarent Gatekeeper will be designed to allow Clarent
gateways to interoperate with other vendors' gateways.

   Clarent Call Manager. The Clarent Call Manager is an open, standards-based
product that will be designed to allow new end user devices to make calls
through IP telephony networks.

   Clarent Application Programming Interfaces (APIs). Clarent APIs will be
designed to allow software developers to build new end user applications to
work with our products.

   Clarent high density gateway. The Clarent high density gateway will be
designed to perform the same functions as the current Clarent Gateway, but will
be designed to allow 1,500 to 2,000 simultaneous calls in a gateway that
currently handles up to 120 simultaneous calls.

Customers

   We began commercial shipments of our products in March 1997 and, as of
September 30, 1999, had already shipped Clarent Systems to approximately 160
telecommunications service providers in 55 countries. We sell our products
directly and through distributors to service providers.

   The following table is a list of our top 15 customers by revenue for 1998:

<TABLE>
   <S>                        <C>                                   <C>
   AT&T Corporation           Hemisphere Communications Corporation Sprint Corporation
   AT&T GCSI Inc.             IT&E Overseas, Inc.                   Star Telecom
   AT&T Jens Corporation      Korea Telecom International           Technet International, Inc.
   Bitro Telecommunications,  Rapid Link Telecommunications         Telecomet International Inc.
    Inc.
   Dacom International Inc.   Singapore Telecommunications Ltd.     Telia Telecom
</TABLE>

   In 1998 sales to these customers represented approximately 70% of our
revenues. Entities affiliated with AT&T Corporation accounted for 36% of net
revenue and Technet International accounted for 12% of net revenue in 1998.
Entities affiliated with AT&T Corporation accounted for 16% of net revenue and
entities affiliated with Ji Tong Communications Co., Ltd. accounted for 15% of
net revenue in the first nine months of 1999.

Customer Case Studies

   The following case studies illustrate how certain of our customers have
deployed our products.

   Jens Corporation (a subsidiary of Japan Telecom as of September 1, 1999,
previously owned by AT&T Corporation). Jens Corporation offered its customers
IP telephony services using the Clarent system in September 1997. Its first
service offering, AT&T @Phone, is a prepaid and postpaid calling card service
that initially allowed consumers in Japan to call 57 other countries around the
world. By the fall of 1998, Jens Corporation had expanded this service to
provide voice and fax service to 224 countries. Using the Clarent system, Jens
Corporation has been able to provide international long distance telephone
services to customers in Japan, a market in which it had previously not been
able to provide service

                                       42
<PAGE>

using circuit-switched technology. We believe that the success of AT&T @Phone
stems from its ability to offer a lower priced international long distance
alternative compared to existing circuit-switched services.

   Rapid Link Telecommunications. Rapid Link Telecommunications, an
international telecommunications service provider based in Atlanta, Georgia,
launched commercial long distance service using the Clarent system in the fall
of 1998. The initial service launched was a prepaid long distance calling card
service between Asia, Europe and the United States. Rapid Link
Telecommunications is expanding its IP telephony network by setting up
bilateral partnerships with major international telecom carriers offering IP
telephony services in their geographic regions. The first partnership was
signed with Korea Telecom International in November 1998, and the second
partnership was announced with Telecom Malaysia in September 1999.

   Telia Telecom. Telia Telecom, the leading telecommunications service
provider in Scandinavia and the incumbent telephone company in Sweden, began
commercial IP telephony trials in the summer of 1998 using the Clarent system.
After testing our products against those of seven other vendors, Telia Telecom
selected the Clarent system, based on its differentiating features. These
differentiating features included voice quality and the flexibility of the
Clarent Command Center. Telia launched its service in February 1999. At that
same time, Telia Telecom also launched Europe's first IP telephony
clearinghouse, using the Clarent system, for international IP telephony calls.
Since then, Telia Telecom has recruited approximately 15 service providers to
join the clearinghouse.

   Sybase, Inc. Sybase, Inc., a leading enterprise software company, is
currently using the Clarent system at selected sites worldwide. At these sites
the company's employees are using Sybase, Inc.'s existing PBX, which connects
to a Clarent Gateway, to make IP telephony calls within Sybase, Inc. When
calling outside Sybase, Inc.'s internal network, the company calls are routed
through the Clarent Gateways in the AT&T Global Clearinghouse's IP telephony
network. By implementing the Clarent system into its corporate network, Sybase,
Inc. anticipates realizing a significant reduction in its telecommunications
costs.

Sales, Marketing and Customer Service and Support

 Sales

   We currently have a global sales organization with sales and support offices
in Belgium, France, Germany, Japan, the People's Republic of China, South
Korea, Spain, Taiwan, the United Kingdom and the United States. Our sales force
sells our products to service providers and enterprises both directly and
through third-party distributors. Direct sales accounted for 82% of our net
revenue for the year ended December 31, 1998 and 83% for the nine months ended
September 30, 1999. In addition, we have 13 third party distributors in 10
countries. Our arrangements with these distributors provide discount levels,
target geographic sales regions and other material terms. In addition, we
believe that our value added reseller (VAR) relationship with Siemens will
expand our sales opportunities because of the size and geographic presence of
Siemens' sales force.

 Marketing

   Our marketing organization develops strategies and implements programs to
support the sale of our products. Our current marketing efforts include a
number of programs designed to increase industry visibility, including
press/analyst tours, trade shows and events, speaking engagements and ongoing
interaction with analysts and the media as well as targeted marketing programs.
In particular, we have established a partner marketing program to enhance
members' ability to develop applications and complementary technology to work
with our products and to encourage the growth of minutes exchange networks or
clearinghouses based on our technology. Additional programs include our
customer summit, which provides the opportunity for our customers to meet each
other and learn more about the Clarent system. We also undertake joint
marketing programs with our clearinghouse customers to help them build their
customer base.

 Customer Service and Support

   We believe that customer service and support are critical to maintaining
existing customer relationships and developing relationships with new
customers. Our professional services group performs the following functions:

  . pre-sales support;


                                       43
<PAGE>

  . product installation and customization;

  . technical support and consulting services;

  . customer training; and

  . product maintenance.

   In addition to our sales and support offices in North America, Asia and
Europe, we have established a support center in the United States that provides
support seven days a week, 24 hours a day. We also currently partner with
Equant Integration Services, Inc., a supplier of international network support
services, to provide global call center and technical support to our customers.

Competition

   We compete in a new, rapidly evolving and highly competitive and fragmented
market. 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 international service providers and to facilitate
relationships between those service providers to increase the geographic
coverage of their services.

   Our current principal competitors include large networking equipment
manufacturers, such as 3Com Corporation and Cisco Systems, Inc., large
telecommunications equipment manufacturers, such as Lucent Technologies Inc.
and Nortel Networks Corporation, and IP telephony technology companies, such as
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. According
to one industry source, our market share in the IP telephony equipment market,
as measured by ports shipped, fell from 16.7% in 1998 to 4.0% in the first half
of 1999. If any technology that is competing with ours is more reliable,
faster, 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 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 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
margins 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

                                       44
<PAGE>

extensive product development input from our customers and monitor our
customers' needs and changes in the marketplace. We are currently 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, significant investments in
research and development. Our engineering, research and development
expenditures totaled approximately $136,000 in 1996, $1.0 million in 1997, $3.4
million in 1998 and $6.0 million for the nine months ended September 30, 1999.

   We perform our research and product development activities at our principal
offices in Redwood City, California. As of September 30, 1999, we had 53
employees in our research and development department. 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.

Manufacturing and Assembly

   Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control and packaging and
shipping. We assemble and test our products at our facilities in Redwood City,
California. Based on volume, geographic or customer requirements, we may begin
outsourcing some assembly and test functions. We have developed an assembly
process that enables us to configure our products to be adapted to different
customer specifications at the final assembly stage. This flexibility is
designed to reduce both our assembly cycle time and our need to maintain a
large inventory of finished goods. We believe that the efficiency of our
assembly process to date is largely due to our product architecture and our
commitment to assembly process design. However, this assembly process involves
some risks, including the potential absence of adequate capacity and reduced
control over delivery schedules, manufacturing yields, quality and costs.

   We test our products both during and after the assembly process using
internally-developed product assurance testing procedures. Although we
generally use standard components for our products and try to maintain
alternative sources of supply, some key components are purchased from sole or
single source suppliers for which alternative sources are not currently
available. We may experience supply problems in the future from any of our
suppliers, which could delay our ability to assemble and ship our products and
seriously harm our business, financial condition and results of operations.

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 do not have any United States patents issued for any of our
technology, although we do have four United States applications, one German
application and one Japanese application on file.

   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

                                       45
<PAGE>

patents, when or if issued, or our other intellectual property rights. If we
fail to adequately protect our intellectual property, 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
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 substantial, including treble damages or the issuance of an injunction
against us requiring that we cease development and withdraw some products from
the marketplace. Limitations on our ability to market our products and delays
and costs associated with monetary damages and redesigns in compliance with an
adverse judgment or settlement could harm our business, financial condition and
results of operations.

Employees

   As of September 30, 1999, we had a total of approximately 230 employees, of
which approximately 53 were in research and development, 100 were in sales,
marketing and customer support and 77 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 this
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.

Facilities

   We occupy approximately 86,000 square feet of space in Redwood City,
California. The term of the lease for 14,000 square feet of this facility
expires in December 1999, 25,000 square feet expires in December 2003 and the
remaining 47,000 square feet expires in October 2004. In addition to our
principal office space in Redwood City, California, we also lease sales and
support offices in Illinois and internationally in Belgium, France, Germany,
Japan, the People's Republic of China, South Korea, Spain, Taiwan and the
United Kingdom. We believe that existing facilities are adequate for our needs
through calendar year 1999 and are currently in the process of locating
additional space to meet our expected requirements thereafter. If we require
additional space, we believe that we will be able to secure such space on
commercially reasonable terms without undue operational disruption.

Legal Proceedings

   We are not currently a party to any material legal proceedings.

                                       46
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors and their ages as of September 30,
1999, are as follows:

<TABLE>
<CAPTION>
Name                             Age                  Position
----                             ---                  --------
<S>                              <C> <C>
Jerry Shaw-Yau Chang............  40 Chief Executive Officer, President and
                                      Director

Richard J. Heaps................  47 Chief Operating Officer, Chief Financial
                                      Officer, General Counsel and Secretary

Michael F. Vargo................  39 Senior Vice President, Chief Technology
                                      Officer and Director

Mark E. McIlvane................  46 Senior Vice President, Worldwide Sales

Heidi H. Bersin.................  44 Senior Vice President, Corporate Marketing
                                      and Communications

Mong Hong (Mahan) Wu............  40 Senior Vice President and General Manager,
                                      Asia Pacific

Wen Chang Ko(1)(2)..............  50 Director

Syaru Shirley Lin(1)(2).........  31 Director

William R. Pape.................  49 Director
</TABLE>
---------------------
(1) Member of the audit committee
(2) Member of the compensation committee

   Mr. Chang, one of our co-founders, has served as our President and Chief
Executive Officer and as a director since our inception in July 1996. From
March 1996 through June 1996, Mr. Chang worked as the system architect for
Relations Software, a developer of network and applications monitoring
software. From September 1994 through February 1996, Mr. Chang served as a
Senior Software Engineer at OnLive! Technologies, Inc., a developer of on-line
communications technology. Prior to September 1994, Mr. Chang spent seven years
at Centura Software Corporation, formerly Gupta Corporation, a supplier of
client/server application development and deployment technology, as a manager
and developer of Centura Software Corporation's client/server database
solution. Mr. Chang holds a B.S. degree in control engineering from National
Chiao-Tung University and an M.S. degree in computer science from Pennsylvania
State University. Mr. Chang's brother-in-law, Shoon Shen Tony Wang, serves as
our Controller of the Asia Pacific region.

   Mr. Heaps has served as our Chief Operating Officer, Chief Financial
Officer, General Counsel and Secretary since September 1998. From July 1997
through August 1998, Mr. Heaps worked as an independent consultant and headed a
private consulting firm and law practice serving Silicon Valley-based high-
technology companies. From October 1987 through July 1997, Mr. Heaps served in
various management positions at Centura, most recently serving as Senior Vice
President of Business Development and General Counsel. Mr. Heaps is a member of
the State Bar of California and a member of the board of directors of the
Children's Discovery Museum of San Jose. Mr. Heaps holds a B.A. degree in
economics and mathematics from Yale University and J.D. and M.B.A. degrees from
Stanford University.

   Mr. Vargo, one of our co-founders, has served as a Senior Vice President
since July 1999 and as our Chief Technology Officer and as a director since our
inception in July 1996. From April 1996 through June 1996, Mr. Vargo served as
a Senior Software Engineer at Oracle Corporation, a leading provider of
relational databases. From January 1995 through April 1996, Mr. Vargo served as
a Senior Software Engineer at OnLive! Technologies, Inc. From January 1992
through December 1994, Mr. Vargo served as a Senior Software Engineer at
Centigram Corporation, a voice messaging equipment manufacturer. Prior to
Centigram Corporation, Mr. Vargo spent seven years at Pacific Bell. Mr. Vargo
holds a B.S. degree in electrical engineering and an M.E. degree in electrical
engineering from California State Polytechnic University at Pomona.

                                       47
<PAGE>

   Mr. McIlvane has served as our Senior Vice President, Worldwide Sales since
July 1999, having previously served as our Vice President, Worldwide Sales
since July 1997. From January 1993 through June 1997, Mr. McIlvane served as
Vice President of Sales and Marketing for Comverse Technology, Inc., a
manufacturer of high-performance voice processing computers for network-based
telecommunications service providers. Prior to Comverse Technology, Inc., Mr.
McIlvane served in various senior positions at Applied Communications, Inc., a
wholly owned subsidiary of U.S. WEST, Inc. and Bell & Howell Corporation.
Mr. McIlvane holds a B.S. degree in business and economics from MacMurray
College.

   Ms. Bersin has served as our Senior Vice President, Corporate Marketing and
Communications since July 1999, having previously served as our Vice President,
Marketing since February 1997. From 1983 through January 1997, Ms. Bersin
served in various management positions at Pacific Bell and Pacific Bell
Information Services, including Director of Pacific Bell Information Services
from 1986 to 1997. Ms. Bersin holds a B.A. degree from Stanford University and
an M.B.A. degree from Yale University.

   Mr. Wu has served as our Senior Vice President and General Manager, Asia
Pacific since July 1999, having previously served as our Vice President and
General Manager of the Asia Pacific region since April 1997. From January 1996
through March 1997, Mr. Wu served as the Regional Sales Manager of Computer
Sales Operations for Hewlett-Packard Company, a measurement and computer
equipment manufacturer, in Asia, except Japan, and Australia after Hewlett-
Packard Company acquired Convex Computer Corporation, a supercomputer
manufacturer, where Mr. Wu served as General Manager of the Asia Pacific
region, except Japan, from January 1994 through December 1995. Mr. Wu holds a
B.S. degree in electrical engineering and an M.B.A. degree from National Chiao-
Tung University.

   Mr. Ko has served as a director since June 1997. Since 1990, Mr. Ko has
served as Chairman of the WK Technology Funds and also served as Chairman of
the Taipei Venture Capital Association from 1992 to 1995. From 1977 to 1990,
Mr. Ko served in various management positions at Hewlett-Packard Taiwan Ltd.,
most recently serving as Chairman and President from 1979 to 1990. From 1974 to
1977, Mr. Ko served in various positions at IBM in the United States, most
recently serving as Research and Development Project Manager from 1975 to 1977.
Mr. Ko holds a B.S. degree in electrical engineering from National Cheng Kung
University and an M.S. degree in system science from Michigan State University.

   Ms. Lin has served as a director since July 1998. Since 1993, Ms. Lin has
been employed by Goldman Sachs (Asia) Limited. She currently serves as an
executive director in the Principal Investment Area, which manages several
principal investment funds. From 1990 to 1993, Ms. Lin worked for Morgan
Stanley & Co. in New York and Hong Kong. Ms. Lin is also a non-executive
director of Hung Hing Printing Group Limited, a publicly listed company on the
Hong Kong Stock Exchange. Ms. Lin holds a B.A. degree from Harvard University.

   Mr. Pape has served as a director since October 1999. Since June 1998, Mr.
Pape has been involved in several startups. In 1982, Mr. Pape co-founded
Verifone and from 1982 to 1998 served in a variety of senior positions,
including Senior Vice President, Chief Information Officer, Vice President
Product Marketing and Vice President Software Development. Prior to co-founding
Verifone, Mr. Pape was a principal at Innovative Software Applications, and an
Assistant Professor of Decision Sciences at the University of Hawaii School of
Business. Mr. Pape holds an A.B. degree in psychology from Stanford University.
He holds two advanced degrees from the University of Hawaii, an M.A. in social
psychology and an M.A. in communications.

   Executive officers are appointed by the board of directors and serve until
their successors are qualified and appointed. There are no family relationships
among any of our directors or executive officers.

Board Composition

   The number of directors is currently set at five. In accordance with the
terms of our amended and restated certificate of incorporation, the terms of
the office of the board of directors are divided into three classes, with each
class holding office for staggered three year terms: Class I directors' terms
will expire at the annual meeting of stockholders to be held in 2000, Class II
directors' terms will expire at the annual meeting of

                                       48
<PAGE>

stockholders to be held in 2001, and Class III directors' terms will expire at
the annual meeting of stockholders to be held in 2002. The Class I director is
Ms. Lin. The Class II directors are Mr. Ko and Mr. Vargo, and the Class III
directors are Mr. Chang and Mr. Pape.

   At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our amended and restated certificate of
incorporation provides that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control.
Although our directors may be removed for cause by the affirmative vote of the
holders of a majority of the common stock, our amended and restated certificate
of incorporation provides that holders of two-thirds of the common stock must
vote to approve the removal of directors without cause.

Board Committees

   The compensation committee consists of Mr. Ko and Ms. Lin. The compensation
committee:

  . reviews and approves the compensation and benefits for our executive
    officers and grants stock options under our equity incentive plans; and

  . makes recommendations to the board of directors regarding compensation
    matters.

   The audit committee consists of Mr. Ko and Ms. Lin. The audit committee:

  . makes recommendations to the board of directors regarding the selection
    of independent auditors;

  . reviews the results and scope of the audit and other professional
    services provided by our independent auditors;

  . reviews the independence of the independent auditors; and

  . reviews and evaluates our internal control functions.

Compensation Committee Interlocks and Insider Participation

   The members of our compensation committee are Mr. Ko and Ms. Lin. None of
the members of the compensation committee of the board of directors is
currently or has been, at any time since our formation, one of our officers or
employees.

   On February 24, 1998, we issued secured convertible subordinated promissory
notes with an aggregate principal amount of $2,600,000 and warrants to purchase
an aggregate of 59,266 shares of Series C preferred stock at an exercise price
of $5.59, in a private placement debt and equity financing with

  . WK Technology Fund and entities affiliated with WK Technology Fund,

  . Alice Wang, the spouse of Mr. Chang, one of our co-founders and chief
    executive officer,

  . Daniel Warmenhoven, one of our directors, who has since resigned from the
    board of directors, and

  . one unaffiliated investor.

These warrants were exercised prior to completion of our initial public
offering and all outstanding shares of preferred stock automatically converted
into shares of common stock upon the completion of our initial public offering.

   In connection with this financing we issued notes evidencing an aggregate
principal amount of $2,000,000 and warrants to purchase an aggregate of 45,590
shares of Series C preferred stock to entities affiliated with WK Technology
Fund. $2,050,000 of the promissory notes were converted into shares of Series C
preferred stock on June 11, 1998.

   On June 11, 1998 and December 7, 1998, we issued an aggregate of 2,644,241
shares of Series C preferred stock, at a per share price of $6.58, in a private
placement equity financing with entities affiliated with WK Technology Fund and
several unaffiliated investors. In connection with this financing we issued an
aggregate of 312,194 shares in connection with the conversion of promissory
notes by entities affiliated with

                                       49
<PAGE>

WK Technology Fund. All outstanding shares of preferred stock automatically
converted into shares of common stock upon the completion of our initial public
offering. We also entered into a voting agreement with some of our stockholders
in connection with the sale of our Series C preferred stock. In connection with
the voting agreement, we issued warrants to purchase 101,000 shares of our
Series C preferred stock at an exercise price of $6.58 per share to each of:

  . WK Technology Fund III; and

  . The Goldman Sachs Group, L.P., the predecessor to The Goldman Sachs
    Group, Inc., and affiliated investment partnerships, which are affiliated
    with Goldman Sachs (Asia) Limited. Ms. Lin, one of our directors, is an
    executive director of Goldman Sachs (Asia) Limited.

These warrants expired upon the completion of our initial public offering.

Director Compensation

   Directors who are also executive officers do not receive any additional
compensation for serving as members of the board of directors or any committee
of the board of directors. Non-employee directors who join the board of
directors after our initial public offering are expected to receive an initial
option to purchase 5,000 shares of common stock and all non-employee directors
are expected to receive an option to purchase 2,000 shares of common stock
under our 1999 non-employee directors' stock option plan at each regular
meeting of the board of directors, beginning with the third meeting after our
initial public offering or after the initial grant of 5,000 shares.

Executive Compensation

   The following table sets forth information for the year ended December 31,
1998, regarding the compensation of our chief executive officer and each of our
four most highly-compensated executive officers whose salary and bonus for the
year ended December 31, 1998 were in excess of $100,000 on an annualized basis:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-Term
                                 Annual Compensation           Compensation Awards
                        ------------------------------------- ---------------------
Name and Principal                             Other Annual   Securities Underlying     All Other
Position                Salary($)(1) Bonus($) Compensation(2)      Options(#)       Compensation($)(3)
------------------      ------------ -------- --------------- --------------------- ------------------
<S>                     <C>          <C>      <C>             <C>                   <C>
Jerry Shaw-Yau Chang
 President and Chief
 Executive Officer.....   $110,000        --          --                  --                  --
Richard J. Heaps(4)
 Chief Operating
 Officer, Chief
 Financial Officer,
 General Counsel and
 Secretary.............     67,500   $ 6,160          --             400,000                  --
Michael F. Vargo
 Chief Technology
 Officer...............    131,875     7,500          --                  --                  --
Mark E. McIlvane
 Vice President,
 Worldwide Sales.......    202,717    20,000      $7,800             160,000              $2,000
Mong Hong (Mahan) Wu
 Vice President and
 General Manager, Asia
 Pacific...............    131,640    26,145          --                  --                  --
</TABLE>
---------------------
(1) Mr. McIlvane's salary consists of a salary of $150,000 and sales
    commissions of $52,717.
(2) Consists of reimbursement of automobile expenses.
(3) Consists of life insurance premiums.
(4) Mr. Heaps started his employment with us in September 1998. Mr. Heaps would
    have earned a salary of $180,000 if he had been employed by us for the
    entire year.

                                       50
<PAGE>

                       Option Grants in Last Fiscal Year

   The following table sets forth certain information relating to stock options
awarded to each of the named executive officers during the fiscal year ended
December 31, 1998. All such options were awarded under the 1999 amended and
restated equity incentive plan.
<TABLE>
<CAPTION>
                                                                     Potential Realizable
                                                                       Value at Assumed
                                                                    Annual Rates of Stock
                                                                    Price Appreciation for
                                     Individual Grants               Stock Option Term(2)
                         ------------------------------------------ ----------------------
                         Number of
                         Securities % of Total
                         Underlying  Options   Exercise
                          Options    Granted   Price Per Expiration
Name                      Granted   in 1998(1)   Share      Date        5%         10%
----                     ---------- ---------- --------- ---------- ---------- -----------
<S>                      <C>        <C>        <C>       <C>        <C>        <C>
Jerry Shaw-Yau Chang....       --        --         --          --          --          --
Richard J. Heaps........  400,000      13.2%    $0.75     08/27/08  $9,473,368 $15,262,455
Michael F. Vargo........       --        --         --          --          --          --
Mark E. McIlvane........  160,000       5.3      0.329    07/20/08   3,856,707   6,172,342
Mong Hong (Mahan) Wu....       --        --         --          --          --          --
</TABLE>

---------------------
(1) The total number of options granted to our employees in fiscal year 1998
    was 3,030,896.
(2) In order to comply with the rules of the Securities and Exchange
    Commission, we are including the gains or "option spreads" that would exist
    for the respective options we granted to the named executive officers. We
    calculate these gains based upon the initial public offering price of
    $15.00 per share appreciating at 5% and 10% compounded annually from the
    date of the option grant until the termination date of the option. These
    gains do not represent our estimate or projection of the future common
    stock price.


   Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option
                                     Values

   The following table sets forth the number and value of securities underlying
unexercised options held by the named executive officers at December 31, 1998:

<TABLE>
<CAPTION>
                                                   Number of Securities
                                                  Underlying Unexercised     Value of Unexercised
                                                        Options at          In-the-Money Options at
                           Shares                    December 31, 1998       December 31, 1998(1)
                          Acquired      Value    ------------------------- -------------------------
Name                     on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>         <C>         <C>           <C>         <C>
Jerry Shaw-Yau Chang....        --           --         --           --            --           --
Richard J. Heaps........        --           --         --      400,000            --   $5,700,000
Michael F. Vargo........        --           --         --           --            --           --
Mark E. McIlvane........        --           --    324,882      175,118    $4,846,790    2,589,820
Mong Hong (Mahan) Wu....   221,664   $3,319,418     11,668      326,668       174,728    4,891,853
</TABLE>
---------------------
(1) The amount set forth represents the difference between the fair market
    value of the underlying common stock using the initial public offering
    price of $15.00 per share and the exercise price of the option, multiplied
    by the number of shares underlying the option.

Employment Agreements

   In June 1997, we entered into an employment agreement with Mark E. McIlvane,
Senior Vice President, Worldwide Sales. The agreement was amended on June 1,
1998. The amended agreement provides for an annual base salary of $150,000. Mr.
McIlvane is also eligible to receive sales commissions. The sales commissions
are based upon the sales plan that sets out the quota attainment standards and
the associated percentage of revenue to be paid as sales commissions. The sales
plan's objectives include attaining revenue

                                       51
<PAGE>

that exceeds our business plan. Under the sales plan's provisions, commissions
are paid monthly based on product and service revenue. A higher commission
percentage can be earned if revenue exceeds quota targets. There is no limit to
the amount of commission that can be earned. The agreement also provides Mr.
McIlvane with incentive stock options to purchase an aggregate of 500,000
shares of common stock. Of those options, 40,000 shares vested immediately upon
the signing of the amendment to the employment agreement, 370,000 shares are
subject to time-based vesting over a four-year period and 90,000 shares are
subject to certain milestone-based vesting, but must vest by August 1, 2004.
The agreement provides that Mr. McIlvane is employed "at-will," and the
employment relationship may be terminated for any reason at any time, but if we
terminate Mr. McIlvane's employment without cause, we must pay Mr. McIlvane a
severance payment equal to 100% of his annual salary.

   In August 1998, we entered into an employment agreement with Richard J.
Heaps, Chief Operating Officer, Chief Financial Officer, General Counsel and
Secretary. The agreement provides for an annual base salary of $180,000. Mr.
Heaps is also eligible to receive a $40,000 annual performance bonus based on
quarterly goals and objectives agreed upon by him and the chief executive
officer. The amount of the bonus will be reviewed and reset in each subsequent
year. The agreement also provides Mr. Heaps with an incentive stock option to
purchase 400,000 shares of common stock, which is subject to time-based vesting
over a four-year period. In the event Mr. Heaps is terminated without cause or
constructively terminated within 18 months of any change of control, between
50% to 100% of the outstanding options then held by Mr. Heaps will accelerate
and vest, depending on how long Mr. Heaps had been employed with us prior to
termination. "Constructive termination" is defined in the agreement as a
voluntary termination of employment after his duties or benefits are materially
reduced. The agreement provides that Mr. Heaps is employed "at-will," and the
employment relationship may be terminated for any reason at any time, but if we
terminate Mr. Heaps' employment without cause or if Mr. Heaps voluntarily
terminates his employment after his duties or benefits are materially reduced,
we must pay Mr. Heaps a severance payment equal to up to 100% of his annual
salary, depending on the amount of time Mr. Heaps has been employed by us.

Stock Plans

   1999 Amended and Restated Equity Incentive Plan. Our 1999 amended and
restated equity incentive plan was adopted in October 1996, amended in May
1997, May 1998 and October 1998, and amended and restated by the board of
directors in April 1999. An aggregate of 11,358,170 shares of common stock
currently are authorized for issuance under the equity incentive plan. However,
on January 31 of 2000, 2001, 2002, 2003 and 2004, respectively, the aggregate
number of shares of common stock that are available for issuance under the
equity incentive plan will automatically be increased by that number of shares
of common stock equal to 2.5% of our outstanding shares of common stock on that
date or a lesser amount as determined by the board of directors for each year.

   The equity incentive plan provides for the grant of incentive stock options,
as defined under the amended Internal Revenue Code of 1986, to employees,
including officers and employee directors, and non-statutory stock options,
restricted stock purchase awards, stock bonuses and stock appreciation rights
to our and our affiliates' employees, including officers and employee
directors, directors and consultants. The equity incentive plan is administered
by the compensation committee of our board of directors which determines the
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.

   The terms of options granted under the equity incentive plan may not exceed
ten years. Our compensation committee determines the exercise price of options
granted under the equity incentive plan. However, the exercise price for an
incentive stock option and a non-statutory stock option cannot be less than
100% of the fair market value of the common stock on the date of the option
grant. Options granted under the equity incentive plan vest at the rate
specified in the option agreement. Generally, the right to exercise 25% of the
total number of shares granted vests 12 months after the date of option grant,
with the remainder vesting monthly over three years thereafter, such that an
option is fully vested on the fourth anniversary of the date of

                                       52
<PAGE>

the option grant. Generally, the optionee may not transfer a stock option other
than by will or the laws of descent or distribution. However, an optionee may
designate a beneficiary who may exercise the option in the event of the
optionee's death or disability. Unless the terms of an optionee's option
agreement provide for an earlier termination, in the event of the optionee's
cessation of his or her relationship with us due to death or disability, the
optionee's beneficiary may exercise any vested options after the date of the
cessation for up to 18 months after death and 12 months after disability after
the date of such cessation. If the optionee's relationship with us ceases for
any reason other than the optionee's death or disability, the optionee may
exercise any vested options during a minimum of 30 days following such
cessation. Generally, the same terms and conditions that govern the vesting and
exercise of non-statutory options shall apply to stock appreciation rights, and
stock appreciation rights shall generally be subject to the same terms and
conditions applicable to the particular option grant to which these rights
pertain.

   No incentive stock option, may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of our
total combined voting power or that of any of our affiliates, unless the option
exercise price is at least 110% of the fair market value of the stock subject
to the option on the date of grant and the term of the option does not exceed
five years from the date of the grant. In addition, the aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year, under the equity incentive plan and all
of our other stock plans and those of our affiliates, may not exceed $100,000.
Pursuant to Section 162(m) of the Internal Revenue Code, no person may be
granted options under the equity incentive plan covering more than 720,000
shares of common stock in any calendar year.

   Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the equity incentive plan. Our compensation committee has the
authority to reprice outstanding options or to offer optionees the opportunity
to replace outstanding options with new options for the same or a different
number of shares. Both the original and new options will count toward the
Section 162(m) limitations set forth above. Shares subject to stock
appreciation rights exercised in accordance with the incentive plan will not be
available for subsequent issuance under the incentive plan.

   If there is any sale of all or substantially all of our assets, any merger
or any consolidation in which we are not the surviving corporation, or a like
transaction involving us, all outstanding awards under the equity incentive
plan either will be assumed or substituted for by any surviving entity. If the
surviving entity determines not to assume or substitute for such awards, the
vesting of stock awards held by persons still serving us or our affiliates will
be accelerated as to all of the shares and the awards will terminate if not
exercised prior to the sale of assets, merger or consolidation.

   As of September 30, 1999, 2,118,145 shares of common stock had been issued
upon the exercise of options granted under the equity incentive plan, options
to purchase 7,934,275 shares of common stock were outstanding and as of
September 30, 1999, 1,305,750 shares remained available for future grant. The
equity incentive plan will terminate on April 7, 2009, unless terminated by our
board of directors before then. As of September 30, 1999, 7,000 stock
appreciation rights had been granted and no stock bonus or restricted stock has
been granted under the equity incentive plan.

   1999 Non-Employee Directors' Stock Option Plan. In April 1999, our board of
directors adopted the 1999 non-employee directors' stock option plan to provide
for the automatic grant of options to purchase shares of common stock to our
non-employee directors who are not any of our affiliates' employees or
consultants. Our board of directors administers the directors' plan, but may
delegate the administration to a committee.

   The aggregate number of shares of common stock that may be issued under
options granted under the directors' plan is 300,000 shares. Under the terms of
the directors' plan each person who is elected or appointed for the first time
to be a non-employee director after our initial public offering automatically
shall, upon the date of his or her initial election or appointment to be a non-
employee director by our board of

                                       53
<PAGE>

directors or stockholders, be granted an option to purchase 5,000 shares of
common stock. In addition, on the day of each regular meeting of the board of
directors, commencing with the third regular meeting subsequent to the date of
our initial public offering or the date of each non-employee directors' initial
grant under the director's plan, each person who is then serving as a non-
employee director automatically shall be granted an option to purchase 2,000
shares of common stock.

   The exercise price of the options granted under the directors' plan will be
equal to the fair market value of the common stock on the date of grant. No
option granted under the directors' plan may be exercised after the expiration
of ten years from the date it was granted. Options granted under the directors'
plan vest and become exercisable immediately. Options granted under the
directors' plan generally are non-transferable. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with us or any of our affiliates,
whether as one of our non-employee directors or subsequently as our affiliates'
employee, director or consultant, ceases for any reason, the vested option may
be exercised as provided in the option agreement, which is three months
generally, 12 months in the event of optionee's disability and 18 months in the
event of optionee's death.

   As of September 30, 1999, no options have been granted under the directors'
plan.

   1999 Employee Stock Purchase Plan. In April 1999, our board of directors
approved the 1999 employee stock purchase plan covering an aggregate of 600,000
shares of common stock. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. 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. The offering period for
any offering will be no more than 27 months.

   Under the purchase plan, employees are eligible to participate if they are
employed by us or one of our affiliates designated by our board of directors
and are employed at least 20 hours per week and at least five months per year.
Employees who participate in an offering will have the right to purchase up to
the number of shares of common stock purchasable with a percentage designated
by our board of directors, up to 10%, of an employee's earnings withheld
pursuant to the purchase plan and applied, on specified dates determined by the
board of directors, to the purchase of shares of common stock. 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. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with us.

   In the event of changes in control, our 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 will be applied to purchase stock immediately prior to the
change in control. The purchase plan will terminate at the board of directors'
discretion or when all of the shares reserved for issuance under the purchase
plan have been issued.

   As of September 30, 1999, no shares of common stock have been purchased
under the purchase plan, although rights to purchase have accrued since our
initial public offering. The first purchase date under the purchase plan is
November 15, 1999.

Description of 401(k) Plan

   401(k) Plan. We maintain the Clarent Corporation 401(k) Retirement Plan for
eligible employees. In order to be a participant in the 401(k) plan, an
employee must have attained age 18. A participant may contribute up to 25% of
his or her total annual compensation to the 401(k) plan, or up to a statutorily
prescribed annual limit, if less. The annual limit for 1999 is $10,000. Each
participant is fully vested in his or her deferred salary contributions.
Participant contributions are held and invested by the 401(k) plan's trustee.

                                       54
<PAGE>

We may make discretionary contributions as a percentage of participant
contributions, subject to established limits. To date, we have not made any
contributions to the 401(k) plan on behalf of the participants. The 401(k) plan
is intended to qualify under Section 401 of the Internal Revenue Code, so that
contributions by us or our employees to the 401(k) plan, and income earned on
the 401(k) plan contributions, are not taxable to employees until withdrawn
from the 401(k) plan, and so that our contributions, if any, will be deductible
by us when made.

Limitation of Liability and Indemnification Matters

   Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of the fiduciary duties as a director except for
liability

  . for any breach of the director's duty of loyalty to us or to our
    stockholders,

  . for acts or omissions not in good faith or that involve intentional
    misconduct or a knowing violation of law,

  . for unlawful payments of dividends or unlawful stock repurchases or
    redemptions as provided in Section 174 of the Delaware General
    Corporation Law or

  . for any transaction from which the director derives an improper personal
    benefit.

   Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our officers, employees and other agents to the full
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence and gross negligence on the part of an indemnified
party. Our bylaws also require us to advance expenses incurred by directors and
executive officers in connection with the defense of any action or proceeding,
subject to several exceptions, arising out of the status or service as one of
our directors or executive officers upon an undertaking by that party to repay
these advances if it is ultimately determined that the party is not entitled to
indemnification. Furthermore, our bylaws authorize us to enter into
indemnification agreements with our directors, officers, employees and agents
and we intend to enter into these agreements. A copy of the form of the
indemnity agreement has been filed as an exhibit to the registration statement.
We also maintain directors' and officers' liability insurance.

   At present we are not aware of any pending material litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. Furthermore, we are not aware of
any material threatened litigation or proceeding that may result in a claim for
such indemnification.

   We are aware that the Securities and Exchange Commission considers
indemnification for liabilities arising under the Securities Act to be against
public policy. Even if our indemnification of our directors, officers and
controlling persons is permitted under indemnification agreements, it would be
unenforceable as a matter of public policy.

                                       55
<PAGE>

                              CERTAIN TRANSACTIONS

   On March 25, 1997 and June 10, 1997, we sold an aggregate of 3,220,000
shares of Series B preferred stock at a per share price of $1.00, in a private
placement equity financing with several unaffiliated investors and one of our
directors, including:

  . an aggregate of 900,000 shares purchased by entities affiliated with WK
    Technology Fund, a principal stockholder, of which Mr. Ko, one of our
    directors, is Chairman; and

  . 900,000 shares purchased by Mr. Ko.

   These shares of preferred stock converted into shares of common stock upon
the completion of our initial public offering.

   On June 6, 1997, we entered into an employment agreement with Mr. McIlvane,
our Senior Vice President, Worldwide Sales.

   On June 3, 1997, we entered into an Advisory Services Agreement with WK
Technology Fund under which WK Technology Fund agreed that it would provide us
with business advisory services and finder services to identify, evaluate and
recommend outside director candidates. As compensation for these services, we
agreed to issue WK Technology Fund a warrant to purchase 1,400,000 shares of
common stock that vested monthly or immediately 30 days prior to the closing of
our initial public offering at an exercise price of $0.05 per share and a
warrant to purchase 360,000 shares of common stock that was exercisable on the
date of issuance at an exercise price of $0.05. On June 10, 1999 the board of
directors accelerated the vesting of the warrants and terminated the Advisory
Services Agreement. WK Technology Fund exercised these warrants prior to the
completion of our initial public offering.

   On August 1, 1998, we entered into an employment agreement with Mr. Heaps,
our Chief Operating Officer Chief Financial Officer, General Counsel and
Secretary.

   On December 7, 1998, we entered into an agreement with Intel Corporation
under which we agreed to collaborate on certain technical, public relations and
marketing activities. We agreed to allow Intel to purchase our products at the
same prices as the best price that we offer to any customer for similar
products and pursuant to similar terms and conditions at the time of Intel's
order. Intel can terminate the agreement at its convenience after September 30,
1999, without cause and both parties can terminate the agreement for cause upon
giving a 30-day notice and allowing for a 60-day cure period. Intel is one of
our principal stockholders.

   We intend to enter into indemnification agreements with our directors and
executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. We also intend to execute
such agreements with our future directors and executive officers.

   We believe that the foregoing transactions were in our best interest. As a
matter of policy the transactions were, and all future transactions between us
and any of our officers, directors or principal stockholders will be, approved
by a majority of the independent and disinterested members of the board of
directors, will be on terms no less favorable to us than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes.

                                       56
<PAGE>

                       PRINCIPAL AND SELLING STOCKHOLDERS

   The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of our common stock offered by this prospectus:

  . each stockholder who is known by us to own beneficially more than 5% of
    our common stock;

  . each of our named executive officers;

  . each of our directors;

  . all of our directors and executive officers as a group; and

  . each selling stockholder.

   Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their shares of our common
stock, except to the extent authority is shared by spouses under applicable
law. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Applicable percentage ownership is based on
27,620,159 shares of common stock outstanding as of September 30, 1999,
together with options for that stockholder that are currently exercisable or
exercisable within 60 days of September 30, 1999. In computing the number and
percentage of shares beneficially owned by a person, shares of common stock
subject to options currently exercisable, or exercisable within 60 days of
September 30, 1999 are counted as outstanding, while these shares are not
counted as outstanding for computing the percentage ownership of any other
person. The percentage of shares outstanding after the offering is calculated
after giving effect to the issuance of 2,837,500 shares of common stock offered
by this prospectus, assuming no exercise of the underwriters' over-allotment
option. If the underwriters exercise the over-allotment option in full, the
executive officers will sell 87,500 shares of common stock.

<TABLE>
<CAPTION>
                                                      Shares
                                                Beneficially Owned
                            Shares Issuable     Prior to Offering
                              pursuant to     (Including the Number                         Shares
                          Options Exercisable of Shares Shown in the                  Beneficially Owned
                            within 60 days        First Column)                         After Offering
                           of September 30,   -------------------------  Number of    ------------------
Name of Beneficial Owner         1999            Number      Percent   Shares Offered   Number   Percent
------------------------  ------------------- ------------- ------------------------- ---------- -------
<S>                       <C>                 <C>           <C>        <C>            <C>        <C>
WK Technology Funds(1)
 6F, No.15
 Section 2, Tiding
 Avenue
 Taipei 114, Taiwan.....              0           5,075,568     18.38%     500,000     4,575,568  15.02%
1998 Wang/Chang Family
 Revocable Trust(2)
 c/o Clarent Corporation
 700 Chesapeake Drive
 Redwood City,
 California 94063.......              0           2,668,558      9.66       15,000     2,653,558   8.71
1998 Vargo Family Trust
 c/o Clarent Corporation
 700 Chesapeake Drive
 Redwood City,
 California 94063.......              0           2,564,000      9.28       75,000     2,489,000   8.17
The Goldman Sachs Group,
 Inc.(3)
 85 Broad Street
 New York, New York
 10004 .................              0           2,127,658      7.70      400,000     1,727,658   5.67
Intel Corporation
 2200 Mission Boulevard
 Santa Clara, California
 95052 .................              0           1,519,756      5.50            0     1,519,756   4.99
Jerry Shaw-Yau
 Chang(4)...............              0           2,668,558      9.66       15,000     2,653,558   8.71
Richard J. Heaps........        135,000             135,400         *       45,000        90,400      *
Michael F. Vargo(5).....              0           2,564,000      9.28       75,000     2,489,000   8.17
Mark E. McIlvane........        369,934             370,803      1.32       37,500       332,934   1.08
Heidi H. Bersin(6)......        150,000             618,750      2.23       45,000       573,750   1.87
Mong Hong (Mahan) Wu....         46,666             561,666      2.03       45,000       516,666   1.69
Wen Chang Ko(7).........              0           6,875,568     24.89      500,000     6,375,568  20.93
Syaru Shirley Lin(8)....              0           2,127,658      7.70      400,000     1,727,658   5.67
William R. Pape.........          5,000               5,000         *            0         5,000      *
All officers and
 directors as a group
 (9 persons)(9).........                         15,927,034     56.23    1,162,500    14,764,534  47.50
</TABLE>
--------
  * Represents beneficial ownership of less than one percent of the common
    stock.

                                       57
<PAGE>

(1) Consists of 663,514 shares held by WK Global Fund Ltd., 1,004,670 shares
    held by WK Technology Fund, 926,134 shares held by WK Technology Fund II,
    1,097,336 shares held by WK Technology Fund III, 783,914 shares held by WK
    Technology Fund IV and 600,000 shares held by WK Technology Fund V. Mr. Ko
    is the chairman and a beneficial owner of each of the above entities and
    exercises sole voting and dispositive powers with respect to the shares
    held of record by the WK Technology Funds.
(2) Consists of 2,664,000 shares held by the 1998 Wang/Chang Family Revocable
    Trust and 4,558 shares held by Alice Wang, one of the trustees of the 1998
    Wang/Chang Family Revocable Trust.
(3) Consists of 1,519,756 shares held by The Goldman Sachs Group, Inc., 140,930
    shares held by Bridge Street Fund 1998, L.P. and 466,972 shares held by
    Stone Street Fund 1998, L.P. Bridge Street Fund 1998, L.P. and Stone Street
    Fund 1998, L.P. are affiliates of The Goldman Sachs Group, Inc. The Goldman
    Sachs Group, Inc. is the general partner or managing general partner of
    each of these investment partnerships. The Goldman Sachs Group, Inc.
    disclaims beneficial ownership of the shares owned by these investment
    partnerships to the extent attributable to partnership interests therein
    held by persons other than The Goldman Sachs Group, Inc. and its
    affiliates. Each of these investment partnerships shares voting and
    investment power with some of its respective affiliates.
(4) Consists of 2,664,000 shares held by the 1998 Wang/Chang Family Revocable
    Trust, of which Mr. Chang is a trustee, and 4,558 shares held by Alice
    Wang, Mr. Chang's spouse.
(5) Consists of 2,564,000 shares held by the 1998 Vargo Family Trust, of which
    Mr. Vargo is a trustee.
(6) Consists of 468,750 shares held by the Bersin Family Trust, of which Ms.
    Bersin is a trustee.
(7) Includes 5,075,568 shares held by the WK Technology Funds. Mr. Ko is the
    chairman of the WK Technology Funds. Mr. Ko disclaims beneficial ownership
    of these shares except to the extent of his proportional partnership
    interest therein.
(8) Consists of 2,127,658 shares held by The Goldman Sachs Group, Inc. and its
    affiliated entities. Ms. Lin is an executive director in the Principal
    Investment Area of Goldman Sachs (Asia) Limited. Ms. Lin disclaims
    beneficial ownership of these shares.
(9) Includes an aggregate of 5,075,568 shares held by the WK Technology Funds,
    2,664,000 shares held by the 1998 Wang/Chang Family Revocable Trust,
    2,564,000 shares held by the 1998 Vargo Family Trust, 468,750 shares held
    by the Bersin Family Trust, 2,127,658 shares held by The Goldman Sachs
    Group, Inc. and its affiliated entities and 4,558 shares held by Alice
    Wang.

                                       58
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value.

Common Stock

   As of September 30, 1999, there were 27,620,159 shares of common stock
outstanding held of record by approximately 165 stockholders. There will be
30,457,659 shares of common stock outstanding after giving effect to the sale
of the shares of common stock offered by this prospectus. This number assumes
no exercise of the underwriters' over-allotment option.

   The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor. In the event
of our liquidation, dissolution or winding up, holders of the common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of common stock have no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully-paid and nonassessable.

Preferred Stock

   We are authorized to issue 5,000,000 shares of undesignated preferred stock.
Our board of directors has the authority to issue the undesignated preferred
stock in one or more series and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued series of undesignated preferred stock and to fix the
number of shares constituting any series and the designation of these series,
without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing any
change in control without further action by the stockholders and may adversely
affect the voting and other rights of holders of common stock, and the
likelihood that the holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control. At present, we have no plans to issue any shares of
preferred stock.

Registration Rights of Certain Holders

   The holders of 17,698,014 shares of common stock or their transferees are
entitled to some rights with respect to the registration of these shares under
the Securities Act. These rights are provided under the terms of an agreement
between us and the holders of registrable securities. Subject to some
limitations in this agreement, the holders of the registrable securities may
require, on two occasions at any time after one year from the effective date of
our initial public offering, that we use our best efforts to register the
registrable securities, except for the 5,228,000 shares held by the founders,
for public resale, provided that the proposed aggregate offering price exceeds
$10,000,000. If we register any of our common stock either for our own account
or for the account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in this offering. All fees, costs and expenses of such
registrations must be borne by us and all selling expenses, including
underwriting discounts, selling commissions and stock transfer taxes, relating
to registrable securities must be borne by the holders of the securities being
registered.

Delaware Law and Some Charter Provisions

   We are subject to the provisions of Section 203 of the Delaware Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested

                                       59
<PAGE>

stockholder" for a period of three years after the date that the person became
an interested stockholder unless, with some exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control without further action by the stockholders. In
addition, upon completion of this offering, some provisions of our charter
documents, including a provision eliminating the ability of stockholders to
take actions by written consent, may have the effect of delaying or preventing
changes in control or management, which could harm the market price of our
common stock. Our stock option and purchase plans generally provide for
assumption of such plans or substitution of an equivalent option of a successor
corporation or, alternatively, acceleration of vesting of shares issued
pursuant to stock grants, upon a change of control or similar event. The board
of directors has authority to issue up to 5,000,000 shares of preferred stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the common stock will be subject to,
and may be harmed by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in control. Furthermore, this
preferred stock may have other rights, including economic rights senior to the
common stock, and, as a result, the issuance of this preferred stock could harm
the market value of the common stock. We have no present plan to issue shares
of preferred stock.

Transfer Agent and Registrar

   Norwest Bank Minnesota, N.A. is the transfer agent and registrar for our
common stock.


                                       60
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Future sales of substantial amounts of common stock in the public market, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through an offering of equity securities.

   After this offering, we will have outstanding 30,457,659 shares of common
stock. Of these shares, the 4,000,000 shares to be sold in this offering or
4,600,000 shares if the underwriters' over-allotment option is exercised in
full, together with 4,600,000 shares sold in our initial public offering, will
be freely tradable in the public market without restriction under the
Securities Act, unless such shares are held by "affiliates" of Clarent, as that
term is defined in Rule 144 under the Securities Act.

   The remaining 21,857,659 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold the restricted shares in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act, as summarized below.

   Pursuant to the "lock-up" agreements between our stockholders and either
Clarent or the underwriters, holders of 16,284,290 shares of the restricted
shares have agreed not to offer, sell, pledge or otherwise dispose of, directly
or indirectly, or announce their intention to do the same, any common stock of
Clarent or security convertible into, or exchangeable or exercisable for any
security of Clarent for a period of 90 days from the date of this offering.
However, if the holder of the restricted shares is an individual, he or she may
transfer any such securities either during his or her lifetime or on death by
will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively the holder of the securities and/or a
member of his or her immediate family. We also have entered into an agreement
with the underwriters that we will not offer, sell or otherwise dispose of
common stock for a period of 90 days from the date of this offering. On the
date of the expiration of the lock-up agreements, 14,321,044 of the restricted
shares will be eligible for immediate sale, subject to some volume, manner of
sale and other limitations under Rule 144. In addition, 6,258,075 shares that
are currently subject to lock-up agreements entered into in connection with our
initial public offering will become freely tradeable on December 29, 1999. The
remaining shares will be available for sale at various times upon the
expiration of applicable holding periods, of which 1,716,680 shares are subject
to volume, manner of sale and other restrictions under Rule 144.

   Following the expiration of the lock-up periods, some shares issued upon
exercise of options we granted prior to the date of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act. Additionally, 1,373,103 shares subject to vested options as of
the date 90 days after the completion of this offering will be available for
sale subject to compliance with Rule 701 and upon the expiration of the lock-up
periods. Rule 701 permits resales of such shares in reliance upon Rule 144
under the Securities Act but without compliance with the restrictions,
including the holding-period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of

  . 1% of the then-outstanding shares of common stock or

  . the average weekly trading volume of the common stock during the four
    calendar weeks preceding the filing of a Form 144 with respect to the
    sale.

   Sales under Rule 144 are also subject to some manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

                                       61
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated      , 1999, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, BancBoston Robertson Stephens Inc., Thomas Weisel Partners LLC and
U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the following
respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                       Number of
        Underwriter                                                     Shares
        -----------                                                    ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation.............................
   BancBoston Robertson Stephens Inc..................................
   Thomas Weisel Partners LLC.........................................
   U.S. Bancorp Piper Jaffray Inc.....................................
                                                                       ---------
     Total............................................................ 4,000,000
                                                                       =========
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.

   We and some of the selling stockholders who are our executive officers have
granted to the underwriters a 30-day option to purchase on a pro rata basis up
to 600,000 additional shares, of which 512,500 shares will be from us and
87,500 shares will be from our executive officers, at the public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $     per share. The
underwriters and selling group members may allow a discount of $     per share
on sales to other broker/dealers. After the public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay:

<TABLE>
<CAPTION>
                                       Per Share                       Total
                             ----------------------------- -----------------------------
                                Without          With         Without          With
                             Over-Allotment Over-Allotment Over-Allotment Over-Allotment
                             -------------- -------------- -------------- --------------
   <S>                       <C>            <C>            <C>            <C>
   Underwriting discounts
    and commissions payable
    by us..................     $               $            $              $
   Expenses payable by us..     $               $            $              $
   Underwriting discounts
    and commissions payable
    by the selling
    stockholders...........     $               $            $              $
</TABLE>

   We and our officers and directors and some of the other stockholders have
agreed that we and they will not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or, file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any additional shares of common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make the offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 90 days after the date of this prospectus.


                                       62
<PAGE>

   We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

   Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as a lead or co-manager on
numerous public offerings of equity securities.Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us under the underwriting agreement entered into in connection with this
offering.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.

  . Over-allotment involves syndicate sales in excess of the offering size,
    which creates a syndicate short position.

  . Stabilizing transactions permit bids to purchase the underlying security
    so long as the stabilizing bids do not exceed a specified maximum.

  . Syndicate covering transactions involve purchases of the common stock in
    the open market after the distribution has been completed in order to
    cover syndicate short positions.

  . Penalty bids permit the representatives to reclaim a selling concession
    from a stabilizing or syndicate member when the common stock originally
    sold by the syndicate member are purchased in a stabilizing or syndicate
    covering transaction to cover syndicate short positions.

  . In "passive" market making, market makers in the common stock who are
    underwriters may, subject to certain limitations, make bids for or
    purchases of the common stock until the time, if any, at which a
    stabilizing bid is made.

   These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and
the dealer from whom the purchase confirmation is received that:

  . the purchaser is entitled under applicable provincial securities laws to
    purchase the common stock without the benefit of a prospectus qualified
    under the securities laws,

  . where required by law, that the purchaser is purchasing as principal and
    not as agent and

  . the purchaser has reviewed the text above under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario Securities law. As a result, Ontario purchasers must rely on

                                       63
<PAGE>

other remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts names
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult their own legal and tax
advisors and with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                 LEGAL MATTERS

   The validity of the issuance of the common stock offered hereby will be
passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain
attorneys of Cooley Godward LLP own an aggregate of 6,225 shares of our common
stock. The legal matters in connection with the offering will be passed upon
for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1997 and 1998 and as of September 30,
1999 and the period from July 2, 1996 (inception) to December 31, 1996, for the
years ended December 31, 1997 and 1998, and the nine months ended September 30,
1999, as set forth in their report, included in this prospectus and
registration statement. Our consolidated financial statements are included in
this prospectus and registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

   A registration statement on Form S-1, including amendments thereto, relating
to the common stock offered by this prospectus has been filed by us with the
Securities and Exchange Commission. This prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to us and the common stock offered by this
prospectus, reference is made to the registration statement, exhibits and
schedules. A copy of the registration statement may be inspected by anyone
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington,
D.C. 20549, and copies of all or any part thereof maybe obtained from the
Securities and Exchange Commission upon payment of certain fees prescribed by
the Securities and Exchange Commission. The Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information filed electronically with the Securities and
Exchange Commission. The address of the site is http://www.sec.gov.

                                       64
<PAGE>

                              CLARENT CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors..........................  F-2

Consolidated Balance Sheets................................................  F-3

Consolidated Statements of Operations......................................  F-4

Consolidated Statements of Stockholders' Equity............................  F-5

Consolidated Statements of Cash Flows......................................  F-8

Notes to Consolidated Financial Statements................................. F-10
</TABLE>

                                      F-1
<PAGE>

               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, 1997 and 1998 and September 30, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from July 2, 1996 (inception) to December 31, 1996, for
the years ended December 31, 1997 and 1998, and for the nine months ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Clarent Corporation at December 31, 1997 and 1998 and September 30, 1999,
and the results of its operations and its cash flows for the period from July
2, 1996 (inception) to December 31, 1996, for the years ended December 31, 1997
and 1998, and for the nine months ended September 30, 1999, in conformity with
generally accepted accounting principles.

                                          Ernst & Young LLP

Palo Alto, California
October 22, 1999

                                      F-2
<PAGE>

                              CLARENT CORPORATION

                          CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                 December 31,
                                                ----------------  September 30,
                                                 1997     1998        1999
                                                -------  -------  -------------
<S>                                             <C>      <C>      <C>
ASSETS
Current assets:
  Cash and cash equivalents.................... $   474  $11,903    $ 33,870
  Short-term investments.......................      --       --      23,705
  Accounts receivable, net of allowance for
   doubtful accounts of $38, $807, and $1,859
   at December 31, 1997, December 31, 1998, and
   September 30, 1999, respectively............     777    6,943      15,194
  Inventories..................................     889    3,620       5,468
  Prepaid expenses and other current assets....     125      478       1,664
                                                -------  -------    --------
    Total current assets.......................   2,265   22,944      79,901
Property and equipment, net....................     543    2,233       7,507
Investments....................................      --       --       2,996
Other assets...................................      10       --         425
                                                -------  -------    --------
                                                $ 2,818  $25,177    $ 90,829
                                                =======  =======    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................. $   506  $ 2,905    $  4,662
  Line of credit...............................      --    2,500       4,128
  Settlement expense accrual...................     570       --          --
  Deferred revenue.............................     155    4,414       9,411
  Other accrued liabilities....................     253    1,594       5,267
  Long-term debt, current portion..............      --       --          91
                                                -------  -------    --------
    Total current liabilities..................   1,484   11,413      23,559
Long-term debt.................................      --       --          91
Commitments and contingencies
Stockholders' equity:
  Preferred Stock, $0.001 par value:
    Authorized shares--5,000,000 at September
     30, 1999 and none outstanding.............                           --
  Convertible preferred stock, $0.001 par
   value, issuable in series (aggregate
   liquidation preference of $21,119):
    Authorized shares--8,000,000 at December
     31, 1997 and 1998 and none at September
     30, 1999
    Issued and outstanding shares--4,220,000 in
     1997, 6,864,241 in 1998, and none at
     September 30, 1999........................   3,685   21,024          --
  Common stock, $0.001 par value:
    Authorized shares--50,000,000 at December
     31, 1997 and 1998 and September 30, 1999..
    Issued and outstanding shares--5,401,000 in
     1997, 7,129,076 in 1998 and 27,620,159 at
     September 30, 1999........................      27    2,746     110,476
  Deferred compensation........................      --   (1,771)     (7,818)
  Notes receivable from stockholders...........      (9)      --          --
  Accumulated other comprehensive loss.........     (34)     (68)        (47)
  Accumulated deficit..........................  (2,335)  (8,167)    (35,432)
                                                -------  -------    --------
    Total stockholders' equity.................   1,334   13,764      67,179
                                                -------  -------    --------
                                                $ 2,818  $25,177    $ 90,829
                                                =======  =======    ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                              CLARENT CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                          Period from
                          July 2, 1996
                          (inception)     Year ended       Nine Months Ended
                               to        December 31,        September 30,
                          December 31, -----------------  --------------------
                              1996       1997     1998       1998       1999
                          ------------ --------  -------  ----------- --------
                                                          (unaudited)
<S>                       <C>          <C>       <C>      <C>         <C>
Net revenue..............    $  --     $  3,359  $14,647    $ 8,748   $ 29,245
Cost of revenue..........       --        1,189    6,653      3,645     12,862
                             -----     --------  -------    -------   --------
  Gross profit...........       --        2,170    7,994      5,103     16,383
Operating expenses:
 Research and
  development............      136        1,044    3,356      2,081      6,023
 Sales and marketing.....       --        2,046    7,099      4,705     16,166
 General and
  administrative.........      140          639    2,484      1,500      4,402
 Amortization of
  compensation...........       --           --      879        421     17,543
 Settlement expense......       --          570       --         --         --
                             -----     --------  -------    -------   --------
  Total operating
   expenses..............      276        4,299   13,818      8,707     44,134
                             -----     --------  -------    -------   --------
Loss from operations.....     (276)      (2,129)  (5,824)    (3,604)   (27,751)
Other income (expense):
 Interest and other
  income.................       --           70      204        121        795
 Interest expense........       --           --     (172)      (170)      (226)
                             -----     --------  -------    -------   --------
  Total other income
   (expense).............       --           70       32        (49)       569
                             -----     --------  -------    -------   --------
Loss before income
 taxes...................     (276)      (2,059)  (5,792)    (3,653)   (27,182)
Provision for income
 taxes...................       --           --      (40)         3        (83)
                             -----     --------  -------    -------   --------
Net loss.................    $(276)    $(2,059)  $(5,832)   $(3,650)  $(27,265)
                             =====     ========  =======    =======   ========
Historical basic and
 diluted net loss per
 share...................      N/A     $  (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                             =====     ========  =======    =======   ========
Shares used to compute
 historical basic and
 diluted net loss per
 share...................       --          962    3,544      3,099     12,543
                             =====     ========  =======    =======   ========
Pro forma basic and
 diluted net loss per
 share...................                        $ (0.42)   $ (0.28)  $  (1.24)
                                                 =======    =======   ========
Shares used to compute
 pro forma basic and
 diluted net loss per
 share...................                         14,048     12,877     21,951
                                                 =======    =======   ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                              CLARENT CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                    Convertible                                       Notes                    Accumulated
                  Preferred Stock    Common Stock                   Receivable                    Other
                  ---------------- ------------------   Deferred       from     Comprehensive Comprehensive Accumulated
                   Shares   Amount   Shares    Amount Compensation Stockholders     Loss          Loss        Deficit
                  --------- ------ ----------  ------ ------------ ------------ ------------- ------------- -----------
<S>               <C>       <C>    <C>         <C>    <C>          <C>          <C>           <C>           <C>
Issuance of
restricted
common stock to
founders in
exchange for
cash,
technology, debt
forgiveness, and
stockholder
receivables.....         -- $   --  7,400,000   $37       $--          $(11)       $    --         $--        $   --
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $8.....  1,000,000    492         --    --        --            --             --          --            --
Net loss........         --     --         --    --        --            --             --          --          (276)
                  --------- ------ ----------   ---       ---          ----        -------         ---        ------
Balances as of
December 31,
1996............  1,000,000    492  7,400,000    37        --           (11)            --          --          (276)
Issuance of
Series B
convertible
preferred stock,
net of issuance
costs of $27....  3,220,000  3,193         --    --        --            --             --          --            --
Exercise of
common stock
options.........         --     --      1,000    --        --            --             --          --            --
Repurchase of
common stock....         --     -- (2,000,000)  (10)       --             2             --          --            --
Comprehensive
income:
Net loss........         --     --         --    --        --            --         (2,059)         --        (2,059)
Foreign currency
translation
adjustment......         --     --         --    --        --            --            (34)        (34)           --
                                                                                   -------
Comprehensive
loss............         --     --         --    --        --            --        $(2,093)         --            --
                  --------- ------ ----------   ---       ---          ----        =======         ---        ------
Balances as of
December 31,
1997............  4,220,000  3,685  5,401,000    27        --            (9)            --         (34)       (2,335)
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs of $159...  2,278,650 14,834         --    --        --            --             --          --            --
Issuance of
Series C
preferred stock
for settlement
expense.........     45,592    300         --    --        --            --             --          --            --
Conversion of
Series C bridge
notes and
related accrued
interest of $56
to Series C
preferred stock,
net of issuance
costs of $129...    319,999  1,977         --    --        --            --             --          --            --
<CAPTION>
                      Total
                  Stockholders'
                     Equity
                  -------------
<S>               <C>
Issuance of
restricted
common stock to
founders in
exchange for
cash,
technology, debt
forgiveness, and
stockholder
receivables.....     $   26
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $8.....        492
Net loss........       (276)
                  -------------
Balances as of
December 31,
1996............        242
Issuance of
Series B
convertible
preferred stock,
net of issuance
costs of $27....      3,193
Exercise of
common stock
options.........         --
Repurchase of
common stock....         (8)
Comprehensive
income:
Net loss........     (2,059)
Foreign currency
translation
adjustment......        (34)
Comprehensive
loss............         --
                  -------------
Balances as of
December 31,
1997............      1,334
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs of $159...     14,834
Issuance of
Series C
preferred stock
for settlement
expense.........        300
Conversion of
Series C bridge
notes and
related accrued
interest of $56
to Series C
preferred stock,
net of issuance
costs of $129...      1,977
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                              CLARENT CORPORATION

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                    Convertible                                       Notes                    Accumulated
                  Preferred Stock    Common Stock                   Receivable                    Other
                  ---------------- -----------------    Deferred       from     Comprehensive Comprehensive Accumulated
                   Shares   Amount  Shares    Amount  Compensation Stockholders     Loss          Loss        Deficit
                  --------- ------ ---------  ------  ------------ ------------ ------------- ------------- -----------
<S>               <C>       <C>    <C>        <C>     <C>          <C>          <C>           <C>           <C>
Issuance of
warrants in
conjunction with
Series C bridge
financing.......         -- $  228        --  $   --    $    --        $--         $    --         $--        $   --
Exercise of
common stock
options.........         --     -- 1,064,748      36         --         --              --          --            --
Exercise of
common stock
warrants........         --     --   768,328      38         --         --              --          --            --
Repurchase of
common stock....         --     --  (105,000)     (5)        --         --              --          --            --
Forgiveness of
stockholder
notes
receivable......         --     --        --      --         --          9              --          --            --
Deferred
compensation
related to grant
of stock
options.........         --     --        --   2,293     (2,293)        --              --          --            --
Compensation
related to
issuance of
warrants for
services........         --     --        --     357         --         --              --          --            --
Amortization of
deferred
compensation....         --     --        --      --        522         --              --          --            --
Comprehensive
loss:
Net loss........         --     --        --      --         --         --          (5,832)         --        (5,832)
Foreign currency
translation
adjustment......         --     --        --      --         --         --             (34)        (34)           --
                                                                                   -------
Comprehensive
loss............         --     --        --      --         --         --         $(5,866)         --            --
                  --------- ------ ---------  ------    -------        ---         =======         ---        ------
Balances as of
December 31,
1998............  6,864,241 21,024 7,129,076   2,746     (1,771)        --                         (68)       (8,167)
Exercise of
common stock
options.........         --     -- 1,052,397      83         --         --              --          --            --
Issuance of
common stock for
cash, net of
issuance costs
of $6,346.......         --     -- 4,600,000  62,651         --         --              --          --            --
Deferred
compensation
related to grant
of stock
options.........         --     --        --  11,318    (11,318)        --              --          --            --
Compensation
related to
issuance of
warrants for
services........         --     --        --  12,272         --         --              --          --            --
Amortization of
deferred
compensation....         --     --        --      --      5,271         --              --          --            --
<CAPTION>
                      Total
                  Stockholders'
                     Equity
                  -------------
<S>               <C>
Issuance of
warrants in
conjunction with
Series C bridge
financing.......     $  228
Exercise of
common stock
options.........         36
Exercise of
common stock
warrants........         38
Repurchase of
common stock....         (5)
Forgiveness of
stockholder
notes
receivable......          9
Deferred
compensation
related to grant
of stock
options.........         --
Compensation
related to
issuance of
warrants for
services........        357
Amortization of
deferred
compensation....        522
Comprehensive
loss:
Net loss........     (5,832)
Foreign currency
translation
adjustment......        (34)
Comprehensive
loss............         --
                  -------------
Balances as of
December 31,
1998............     13,764
Exercise of
common stock
options.........         83
Issuance of
common stock for
cash, net of
issuance costs
of $6,346.......     62,651
Deferred
compensation
related to grant
of stock
options.........         --
Compensation
related to
issuance of
warrants for
services........     12,272
Amortization of
deferred
compensation....      5,271
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                              CLARENT CORPORATION

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                     Convertible                                           Notes                    Accumulated
                   Preferred Stock        Common Stock                   Receivable                    Other
                  -------------------  -------------------   Deferred       from     Comprehensive Comprehensive Accumulated
                    Shares    Amount     Shares    Amount  Compensation Stockholders     Loss          Loss        Deficit
                  ----------  -------  ---------- -------- ------------ ------------ ------------- ------------- -----------
<S>               <C>         <C>      <C>        <C>      <C>          <C>          <C>           <C>           <C>
Exercise of
common stock
warrants.........         --  $    --     991,672 $     50   $    --        $--        $     --        $ --       $     --
Exercise of
Series C
preferred
warrants.........     59,266      332          --       --        --         --              --          --             --
Conversion of
preferred stock
into common
stock............ (6,923,507) (21,356) 13,847,014   21,356        --         --              --          --             --
Comprehensive
loss:
 Net loss........         --       --          --       --        --         --         (27,265)         --        (27,265)
 Foreign currency
 translation
 adjustment......         --       --          --       --        --         --              48          48             --
Unrealized loss
on securities....         --       --          --       --        --         --             (27)        (27)            --
                                                                                       --------
Comprehensive
loss.............         --       --          --       --        --         --        $(27,244)         --             --
                  ----------  -------  ---------- --------   -------        ---        ========        ----       --------
Balances as of
September 30,
1999.............         --  $    --  27,620,159 $110,476   $(7,818)       $--                        $(47)      $(35,432)
                  ==========  =======  ========== ========   =======        ===                        ====       ========
<CAPTION>
                      Total
                  Stockholders'
                     Equity
                  -------------
<S>               <C>
Exercise of
common stock
warrants.........    $    50
Exercise of
Series C
preferred
warrants.........        332
Conversion of
preferred stock
into common
stock............         --
Comprehensive
loss:
 Net loss........    (27,265)
 Foreign currency
 translation
 adjustment......         48
Unrealized loss
on securities....        (27)
Comprehensive
loss.............         --
                  -------------
Balances as of
September 30,
1999.............    $67,179
                  =============
</TABLE>

                            See accompanying notes.

                                      F-7
<PAGE>

                              CLARENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                           Period from
                           July 2, 1996    Year ended       Nine Months Ended
                          (inception) to  December 31,        September 30,
                           December 31,  ----------------  --------------------
                               1996       1997     1998       1998       1999
                          -------------- -------  -------  ----------- --------
                                                           (unaudited)
<S>                       <C>            <C>      <C>      <C>         <C>
Operating activities
Net loss................      $(276)     $(2,059) $(5,832)   $(3,650)  $(27,265)
Adjustments to reconcile
 net loss to net cash
 used in operating
 activities:
 Depreciation...........          9           82      516        229      1,609
 Amortization of
  compensation..........         --           --      879        421     17,543
 Interest expense from
  warrant issued in
  conjunction with
  Series C bridge
  notes.................         --           --       99         99         --
 Preferred stock issued
  for interest payable..         --           --       56         56         --
 Forgiveness of
  stockholder notes
  receivable............         --           --        9          9         --
 Changes in operating
  assets and
  liabilities:
  Accounts receivable...         --         (777)  (6,166)    (4,455)    (8,251)
  Inventories...........         --         (889)  (2,731)    (1,738)    (1,848)
  Prepaid expenses and
   other current
   assets...............         (1)        (124)    (353)      (281)    (1,186)
  Other assets..........        (10)           1       10          8       (425)
  Accounts payable and
   accrued liabilities..          2        1,324    3,440        726      5,430
  Deferred revenue......         --          155    4,259      4,323      4,997
                              -----      -------  -------    -------   --------
Net cash used in
 operating activities...       (276)      (2,287)  (5,814)    (4,253)    (9,396)
Investing activities
Purchase of long-term
 investments............         --           --       --         --     (3,000)
Purchases of short-term
 investments............         --           --       --         --    (23,728)
Purchases of property
 and equipment..........        (95)        (555)  (2,207)    (1,425)    (6,902)
                              -----      -------  -------    -------   --------
Net cash used in
 investing activities...        (95)        (555)  (2,207)    (1,425)   (33,630)
Financing activities
Proceeds from line of
 credit.................         --           --    2,500         --      1,628
Proceeds from issuance
 of long-term debt......         --           --       --         --        182
Proceeds from Series C
 bridge notes...........         --           --    2,600      2,600         --
Principal payment on
 Series C bridge notes..         --           --     (550)      (550)        --
Net proceeds from
 issuance of common
 stock..................         37           (8)      69         62     62,784
Net proceeds from
 issuance of preferred
 stock..................        492        3,193   14,834      9,875        332
Issuance of stockholder
 notes receivable.......        (11)          --       --         --         --
                              -----      -------  -------    -------   --------
Net cash provided by
 financing activities...        518        3,185   19,453     11,987     64,926
                              -----      -------  -------    -------   --------
Effect of exchange rate
 changes on cash and
 cash equivalents.......         --          (16)      (3)       (11)        67
                              -----      -------  -------    -------   --------
Net increase in cash and
 cash equivalents               147          327   11,429      6,298     21,967
Cash and cash
 equivalents at
 beginning of period....        --           147      474        474     11,903
                              -----      -------  -------    -------   --------
Cash and cash
 equivalents at end of
 period ................      $ 147      $   474  $11,903    $ 6,772   $ 33,870
                              =====      =======  =======    =======   ========
</TABLE>

                            See accompanying notes.

                                      F-8
<PAGE>

                              CLARENT CORPORATION

               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (in thousands)

<TABLE>
<CAPTION>
                                Period from
                                July 2, 1996   Year ended    Nine Months Ended
                               (inception) to December 31,     September 30,
                                December 31,  ------------- -------------------
                                    1996      1997   1998      1998      1999
                               -------------- ------------- ----------- -------
                                                            (unaudited)
<S>                            <C>            <C>   <C>     <C>         <C>
Supplemental disclosure of
 cash flow information
Cash paid for interest........      $--       $ --  $    28   $   15    $   225
                                    ===       ====  =======   ======    =======
Supplemental disclosure of
 noncash financing activities
Issuance of common stock for
 technology...................      $37       $ --  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Issuance of common stock for
 note receivable..............      $11       $ --  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Repurchase of common stock in
 exchange for forgiveness of
 note receivable..............      $--       $  2  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Conversion of bridge notes to
 Series C preferred stock,
 less unamortized cost of
 related preferred stock
 warrant......................      $--       $ --  $ 1,921   $1,921    $    --
                                    ===       ====  =======   ======    =======
Issuance of preferred stock
 for settlement expense.......      $--       $ --  $   300   $  300    $    --
                                    ===       ====  =======   ======    =======
Conversion of preferred stock
 to common stock..............      $--       $ --  $    --   $   --    $21,356
                                    ===       ====  =======   ======    =======
</TABLE>


                            See accompanying notes.

                                      F-9
<PAGE>

                              CLARENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (Information for the nine months ended September 30, 1998 is unaudited)

1. The Company and Summary of Significant Accounting Policies

 The Company

   Clarent Corporation (Clarent or the Company) was incorporated in the state
of California on July 2, 1996. In July 1999, the Company was reincorporated in
the state of Delaware. The Company is a provider of Internet protocol based
technology and systems for the delivery and administration of telecommunication
services over public and private networks.

 Basis of Presentation

   The consolidated financial statements include the accounts of Clarent and
its subsidiaries. The Company has export sales from the United States and has
marketing and liason operations in Taiwan, Japan, China, South Korea, Belgium,
Germany, Australia, France, Spain, Canada, Brazil, Greece, and the United
Kingdom. All significant intercompany transactions and balances 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 and when no
significant contractual obligations or acceptance terms, if any, remain
outstanding and collection of the resulting receivable is deemed probable.
Shipment of evaluation products are not recognized as revenue until acceptance
by the customer. Revenue from services is recognized when the services are
performed. Amounts billed or received in advance of satisfying revenue
recognition criteria are classified as deferred revenue in the accompanying
balance sheets.

 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 trade
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. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. Reserves are
maintained for potential credit losses and such losses to date have been within
management's expectations. The Company provided $0, $38, $803, $320 and $1,053
for doubtful accounts for the period from July 2, 1996 (inception) to December
31, 1996, the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, respectively.

   A limited number of customers have historically accounted for a substantial
portion of the Company's revenue. Two customers accounted for 44% and 35% of
the Company's revenue for the year ended December 31, 1997. Two customers
accounted for 36% and 12% of net revenue for the year ended December 31, 1998.
Three customers accounted for 35%, 17% and 10%, respectively, of net revenue
for the nine months ended September 30, 1998. Two customers accounted for 16%
and 15% of net revenue for the nine months ended September 30, 1999.

   Sales of the Company's products and contracts for its technology will vary
as a result of fluctuations in market demand for such products and technology.
Further, the markets in which the Company competes are characterized by rapid
technological change and increasing competition.

                                      F-10
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


 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.

 Inventories

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

<TABLE>
<CAPTION>
                                                        December
                                                           31,
                                                       ----------- September 30,
                                                       1997  1998      1999
                                                       ---- ------ -------------
                                                            (in thousands)
   <S>                                                 <C>  <C>    <C>
   Raw materials...................................... $392 $2,529    $3,735
   Finished goods.....................................  497  1,091     1,733
                                                       ---- ------    ------
                                                       $889 $3,620    $5,468
                                                       ==== ======    ======
</TABLE>

 Property and Equipment

   The Company records computer equipment, production and engineering
equipment, and furniture at cost and calculates depreciation using the
straight-line method over the estimated useful lives of the assets, generally
eighteen months to five years.

 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. Costs incurred by the Company
between the establishment of technological feasibility and the point at which
the product is ready for general release have been insignificant. Accordingly,
the Company has charged all such costs to research and development expenses in
the accompanying statements of operations.

 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" (FAS 123).


                                      F-11
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

 Advertising Expenses

   The Company expenses advertising costs in the period in which they are
incurred. Advertising expenses for 1996, 1997, 1998, and the nine months ended
September 30, 1998 and 1999 were approximately $0, $319,000, $706,000,
$503,000, and $1,669,000, respectively.

 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.

 Comprehensive Income (Loss)

   Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components, requiring foreign currency translation adjustments, and
unrealized gains and losses on short and long-term investments which currently
are reported in stockholders' equity, to be included in other comprehensive
income/loss. Prior year financial statements have been reclassified to conform
to the requirements of Statement 130. At December 31, 1997 and 1998, the
Company's accumulated other comprehensive loss consisted entirely of cumulative
translation adjustments. At September 30, 1999, accumulated other comprehensive
loss included cumulative translation adjustment losses of $20,000 and
unrealized losses on investments of $27,000.

 Unaudited Interim Financial Information

   The interim financial information for the nine months ended September 30,
1998 is unaudited but, in the opinion of management, includes all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position and results of
operations for the interim periods.

 Recent Accounting Pronouncements

   In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize certain
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The Company adopted SOP 98-1 effective January 1, 1999. Adoption of SOP 98-1
did not have a material effect on the Company's consolidated financial position
or results of operations.

   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 (VSOE) exists
for undelivered elements but does not exist for delivered elements of a
software arrangement. The Company will be required to comply with the
provisions of SOP 98-9 for transactions entered into beginning January 1, 2000.


                                      F-12
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

2. Financial Instruments

   Estimated fair values of financial instruments are based on quoted market
prices. The following is a summary of available-for-sale securities (in
thousands) at September 30, 1999. At December 31, 1997 and 1998, the fair
value of securities approximated cost, and the unrealized gains or losses were
not material.

<TABLE>
<CAPTION>
                                                  September 30, 1999
                                        ---------------------------------------
                                                    Gross      Gross
                                        Amortized Unrealized Unrealized  Fair
                                          Cost      Gains      Losses    Value
                                        --------- ---------- ---------- -------
                                                    (in thousands)
<S>                                     <C>       <C>        <C>        <C>
Money market fund......................  $ 2,911     $--        $ --    $ 2,911
Commercial paper.......................   27,667      --         (23)    27,644
Government securities..................    3,000      --          (4)     2,996
Market auction preferred...............   20,030      --          --     20,030
                                         -------     ---        ----    -------
                                         $53,608     $--        $(27)   $53,581
                                         =======     ===        ====    =======
Classified as:
  Cash equivalents.....................  $26,880     $--        $ --    $26,880
  Short-term investments...............   23,728      --         (23)    23,705
  Investments..........................    3,000      --          (4)     2,996
                                         -------     ---        ----    -------
                                         $53,608     $--        $(27)   $53,581
                                         =======     ===        ====    =======
</TABLE>

   The contractual maturities of Clarent's long-term investments 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 nine months ended
September 30, 1999 (none for 1996, 1997 or 1998).

3. Related Party Transactions

   In June 1997, the Company entered into an agreement for advisory services
with WK Technology Fund, a Taiwanese corporation, one of whose principals is a
member of the Company's board of directors. The advisory services 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. On the 6-
month anniversary of the warrant effective date, 175,000 of the warrants
vested with the remaining warrants scheduled to vest ratably over the
subsequent 42 months or immediately 30 days prior to the closing of the
Company's public offering. The warrant had a life of five years. 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
$0 (amount was $3,000), $357,000 and $12,272,000 for the years ended December
31, 1997 and 1998 and the nine months ended September 30, 1999. These amounts
are included in amortization of compensation in the consolidated statement of
operations. The Board of Directors terminated the advisory services
arrangement in June 1999 and elected to have the unvested portion of the
warrants 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.

                                     F-13
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


   Also in June 1997, the Company entered into another agreement for certain
services with WK Technology Fund. These services were to assist the Company in
identifying, evaluating, and recommending an outside director for the Company.
Under the terms of this agreement, 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.

   In December 1998, the Company issued a warrant to purchase up to 101,000
shares of the Company's Series C preferred stock to both WK Technology Fund and
another Series C investor. These warrants are only exercisable upon the early
conversion of Series C preferred stock into common stock by certain other
Series C preferred stock investors. Upon such an event, one warrant for 101,000
shares will become exercisable and the other warrant for 101,000 shares will be
canceled. The warrants had an exercise price of $6.58 per share, and a
contractual life of five years. As of December 31, 1998, no value was ascribed
to these warrants as they were only exercisable based on future events which
were not deemed probable. These warrants expired unexercised upon the closing
of the Company's Initial Public Offering in July 1999.

4. Property and Equipment

   Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                     December
                                                        31,
                                                    ------------  September 30,
                                                    1997   1998       1999
                                                    ----  ------  -------------
                                                         (in thousands)
<S>                                                 <C>   <C>     <C>
Computer hardware and software..................... $473  $1,415     $3,599
Production and engineering equipment...............   16     984      3,268
Office equipment, furniture, and fixtures..........   92     220        979
Leasehold improvements.............................   53     221      1,877
                                                    ----  ------     ------
                                                     634   2,840      9,723
Less accumulated depreciation and amortization.....  (91)   (607)    (2,216)
                                                    ----  ------     ------
                                                    $543  $2,233     $7,507
                                                    ====  ======     ======
</TABLE>

5. Short-Term Borrowings

   In February 1998, the Company obtained $2,600,000 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 have a contractual life of 10
years. As of the date of this 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

                                      F-14
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

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.

   In May 1998, the Company established a $5,000,000 line of credit with a
financial institution. The interest rate on this credit facility was variable
and was equal to one-half of one percentage point above the prime rate (8.5%
and 8.75% in total at December 31, 1998 and September 30, 1999, respectively).
Under the terms of this arrangement, the Company is to pay an additional, pro-
rated fee of 0.4% of all advances drawn in excess of $3,000,000. In addition,
borrowings under this arrangement are limited to the Company's eligible
receivable base. The terms of the line-of-credit agreement establish certain
affirmative and negative covenants, under which the Company must maintain
certain financial ratios and corporate reporting practices, respectively. The
Company failed to meet certain financial ratios required to be maintained under
the line of credit agreement as of December 31, 1998. The financial institution
waived these events of default. On February 16, 1999, the financial institution
increased the line of credit, to $7,000,000 and revised the ratios. In June
1999, the financial institution revised the line of credit to include eligible
inventory and further revise ratios, in consideration for 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. At September 30, 1999, the Company was in
compliance with the financial ratio covenants. Borrowings under the line of
credit are secured by substantially all assets of the Company. At December 31,
1998 and September 30, 1999, $2,500,000 and $4,128,000 were outstanding under
this line of credit. The line of credit agreement expires February 16, 2000.

6. Long-Term Debt

   In February 1999, the Company entered into a $3,000,000 equipment term loan
facility. The loan bears interest at the bank's prime rate plus .75%. Under the
terms of the agreement, the Company grants a security interest in certain
assets of the Company and must maintain financial covenants (see Note 5) with
which the Company was in compliance as of September 30, 1999. Borrowings and
interest are repayable in installments over 24-27 months. As of September 30,
1999, there was $182,000 outstanding against the term loan facility.

   Maturities under this agreement are as follows:

<TABLE>
<CAPTION>
                                                                      As of
                                                                  September 30,
                                                                       1999
                                                                  --------------
                                                                  (In thousands)
   <S>                                                            <C>
   1999 (three months)...........................................      $ 23
   2000..........................................................        91
   2001..........................................................        68
                                                                       ----
                                                                       $182
                                                                       ====
</TABLE>

7. Settlement Expense

   In November 1997, Wherever Computer Technology Co., Ltd. ("Wherever") filed
a complaint against the Company seeking to enforce a distributorship agreement
between Wherever and the Company or, in the alternative, for damages claimed in
connection with the breach of the distributorship agreement. On February 13,
1998, the Company's board of directors approved a settlement agreement with
Wherever. Under the terms of the agreement, the Company made an initial cash
payment to Wherever of $50,000, a cash

                                      F-15
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

payment to Wherever of $200,000 in September 1998 and granted Wherever a 5%
increase in the existing discount Wherever receives applicable to a specific
quantity of purchases of the Company's products. In addition, under the terms
of the settlement agreement, the Company issued 45,592 shares of Series C
preferred stock to Wherever at $6.58 per share on August 12, 1998.

8. Income Taxes

   The provision for income taxes of approximately $83,000 for the nine months
ended September 30, 1999 consists entirely of current foreign income taxes
provided on the profits attributable to the Company's foreign operations. Due
to operating losses and the Company's inability to recognize an income tax
benefit from these losses, there is no provision for income taxes for 1997 or
1996.

   Pretax income (loss) from foreign operations was approximately ($6,000),
$81,000, and $214,000 for 1997, 1998, and the nine months ended September 30,
1999, respectively.

   The difference between the provision for income taxes and the amount
computed by applying the Federal statutory income tax rate (34% for 1996, 1997,
1998 and 35% for 1999) to income before taxes is explained below:

<TABLE>
<CAPTION>
                                Period from
                                July 2, 1996
                                (inception)   Year ended
                                     to      December 31,    Nine months ended
                                December 31, --------------    September 30,
                                    1996     1997    1998          1999
                                ------------ -----  -------  -----------------
                                               (in thousands)
   <S>                          <C>          <C>    <C>      <C>
   Tax (benefit) at Federal
    statutory rate.............     $(94)    $(700) $(1,969)      $(9,472)
   Loss for which no tax
    benefit is currently
    recognizable...............       94       700    1,969         9,472
   Foreign tax.................       --        --       40            83
                                    ----     -----  -------       -------
   Total provision.............     $ --     $  --  $    40       $    83
                                    ====     =====  =======       =======
</TABLE>

   Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                 December 31,    September 30,
                                                 --------------  -------------
                                                 1997    1998        1999
                                                 -----  -------  -------------
                                                       (in thousands)
   <S>                                           <C>    <C>      <C>
   Deferred tax assets:
     Net operating loss carryforwards........... $ 524  $   798    $  3,280
     Tax credit carryforwards...................    --      200         500
     Deferred revenue...........................    --    1,061       2,144
     Deferred compensation......................    --      352       2,136
     Accounts receivable reserve................    15      435       1,665
     Accruals and reserves not currently
      deductible................................   361      305       1,671
                                                 -----  -------    --------
   Total deferred tax assets....................   900    3,151      11,396
   Valuation allowance..........................  (900)  (3,151)    (11,396)
                                                 -----  -------    --------
   Net deferred tax assets...................... $  --  $    --    $     --
                                                 =====  =======    ========
</TABLE>

   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

                                      F-16
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

includes the Company's historical operating performance and the reported
cumulative net losses in all prior years, the Company has provided a full
valuation allowance against its net deferred tax assets.

   The valuation allowance increased by $2,251,000 and $8,245,000 during the
year ended December 31, 1998 and the nine months ended September 30, 1999.

   As of September 30, 1999, the Company had federal and state net operating
loss carryforwards of approximately $8,560,000 and $4,680,000, respectively. As
of September 30, 1999, the Company also had research and development tax credit
carryforwards of approximately $300,000 each for federal and state purposes.
The net operating loss and tax credit carryforwards will expire at various
dates beginning in 2004 through 2019, if not utilized.

   Utilization of the pre-1998 net operating loss and tax credit carryforwards
is subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
Future ownership changes may also subject the post 1997 net operating loss and
tax credit carryforwards to an annual limitation on utilization.

9. Employee Benefit Plan

   The Company has a pretax savings plan that qualifies under Section 401(k) of
the Internal Revenue Code. Under the plan, 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 plan. For the period from July
2, 1996 (inception) to December 31, 1996, and for the years ended December 31,
1997 and 1998, and the nine months ended September 30, 1999, the Company made
no matching contributions and incurred immaterial expenses related to the plan.

10. Commitments and Contingencies

   The Company leases its principal office under noncancelable operating lease
agreements that expire in 2003 and 2004. As of September 30, 1999, minimum
lease payments under all noncancelable lease agreements with initial terms in
excess of one year were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Operating
   Year ended December 31,                                              Leases
   -----------------------                                             ---------
   <S>                                                                 <C>
   1999 (three months)................................................  $   713
   2000...............................................................    2,275
   2001...............................................................    2,292
   2002...............................................................    2,288
   2003...............................................................    2,329
   Thereafter.........................................................    1,141
                                                                        -------
   Total minimum lease payments.......................................  $11,038
                                                                        =======
</TABLE>

   Rent expense was approximately $24,000 for the period from July 2, 1996
(inception) to December 31, 1996, $81,000 and $492,000 for the years ended
December 31, 1997 and 1998, respectively, and $261,000 and $1,197,000 for the
nine months ended September 30, 1998 and 1999, respectively. At September 30,
1999, the Company's aggregate future minimum rentals to be received under
noncancelable subleases is approximately $269,000.

                                      F-17
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


   From time to time, the Company may be subject to claims which arise in the
normal course of business. Although the amount of any liability with respect to
such litigation cannot be determined, in the opinion of management, the
ultimate disposition of these claims will not have a material adverse effect on
the Company's financial position, cash flows or results of operations. However,
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.

11. Stockholders' Equity

 Convertible Preferred Stock

   Prior to the initial public offering in July 1999, the Company had
authorized 8,000,000 shares of preferred stock. All issued and outstanding
shares of preferred stock were converted into 13,847,014 shares of common stock
upon the closing of the public offering.

   Convertible Preferred Stock was as follows:

<TABLE>
<CAPTION>
                                                  Shares Issued
                                                 and Outstanding
                                               --------------------
                                                  December 31,
                                    Authorized ------------------- September 30,
   Series                             Shares     1997      1998        1999
   ------                           ---------- --------- --------- -------------
   <S>                              <C>        <C>       <C>       <C>
   A............................... 1,000,000  1,000,000 1,000,000       --
   B............................... 3,220,000  3,220,000 3,220,000       --
   C............................... 2,750,000         -- 2,644,241       --
   Undesignated.................... 1,030,000         --        --       --
                                    ---------  --------- ---------      ---
   Total preferred stock........... 8,000,000  4,220,000 6,864,241       --
                                    =========  ========= =========      ===
</TABLE>

 Preferred Stock

   The Company's Certificate of Incorporation was amended to authorize
5,000,000 shares of preferred stock upon reincorporation in Delaware in July
1999.

 Common Stock

   In July 1996, 7,400,000 shares of common stock were issued to the Company's
three founders, one of whom subsequently left the Company, at $0.005 per share
in exchange for cash, software architecture technology ($10,000), debts owed by
the Company ($15,914) to the founders and stockholder notes receivable
($11,086). The notes accrued interest at a rate of 7% per year and were due and
payable on July 15, 2005, with interest payable annually. The outstanding
shares were subject to certain transfer restrictions through June 1999. These
shares are subject to repurchase at the issuance price upon the occurrence of
certain events, including termination of employment. The Company's right of
repurchase expires ratably over four years. In June 1997, 2,000,000 shares
issued to a founder who left the Company were repurchased. At December 31, 1998
and September 30, 1999, 5,400,000 shares issued to the two remaining founders
remain outstanding and 1,996,876 shares and 956,250 shares, respectively remain
subject to repurchase. The two remaining founders each hold 2,700,000 shares
which have the same material terms.

   In April 1999, the Company's Board of Directors approved a two-for-one split
of the Company's common stock. The stock split became effective with the
approval of the Amended and Restated Certificate of Incorporation by the state
of Delaware in connection with the Company's reincorporation. In addition, each

                                      F-18
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

share of the Company's preferred stock was convertible into two shares of
common stock. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted retroactively.

   In July 1999, the Company completed an initial public offering of 4.6
million shares, including 600,000 over-allotment shares at $15.00 per share.
Net proceeds from the offering were $62.7 million. Upon the closing of the
initial public offering, 6,923,507 shares of the Company's convertible
preferred stock were automatically converted into 13,847,014 shares of common
stock.

 Stock Option Plans

   During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Option
Plan"). Under the 1996 Option Plan, an aggregate of up to 7,200,000 shares of
the Company's common stock may be granted to directors, employees, and certain
consultants. During 1998, the board of directors approved the increase of
options available under the 1996 Option Plan by 3,303,000 shares. In July 1999,
the Company adopted the 1999 Amended and Restated Equity Incentive Plan
("Employee Option Plan"). The Employee Option Plan increases the authorized
shares under the Company's existing stock option plan from 10,503,000 to
11,358,170. Under the Employee Option Plan, options to purchase common stock
may be granted at no less than 85% of the fair value on the date of the grant
(110% of fair value in certain instances), as determined by the board of
directors. Options generally vest and become exercisable as to 25% of the
shares one year from the date of grant and the balance in monthly increments
over the subsequent three years of service. Options have a maximum term of 10
years. Certain stock options ("Performance Options") issued under the Employee
Option Plan vest over a time period determined by the board of directors;
however, the vesting could be accelerated based on achievement of certain
performance criteria. As of December 31, 1998, the board of directors has
granted Performance Options to purchase 492,000 shares of common stock to
certain employees at an exercise price equal to the fair market value on the
date of grant. For the nine months ended September 30, 1999, the Company
granted performance options to purchase 262,000 shares of common stock. 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 ratably over a 48 month term.

   In July 1999, the Company adopted the 1999 Nonemployee Directors' Equity
Incentive Plan ("Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to the Company's nonemployee
directors who are not any of the Company's affiliates' employees or consultants
("Nonemployee Director"). The Directors' Plan is administered by the Board, and
may be delegated to a committee.

   The aggregate number of shares of common stock that may be issued under the
Directors' Plan is 300,000 shares. Under the terms of the Directors' Plan, as
of the initial public offering, each Nonemployee Director, and each person who
is thereafter elected or appointed for the first time to be a Nonemployee
Director automatically shall, upon the date of his or her initial election or
appointment to be a Nonemployee Director by the Board or stockholders, be
granted an option to purchase 5,000 shares of common stock. In addition,
commencing with the third regular meeting subsequent to the date of each
Nonemployee Directors' initial grant under the Directors' Plan, each person who
is then serving as a Nonemployee Director automatically shall be granted an
option to purchase 2,000 shares of common stock. The exercise price of the
options granted under the Directors' Plan will be equal to the fair market
value of the common stock on the date of grant. Options granted under the
Directors' Plan vest and become exercisable immediately. There have been no
grants under the Directors' Plan through September 30, 1999.

 Employee Stock Purchase Plan

   In July 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("Purchase Plan") covering the aggregate of 600,000 shares of common stock.
Under the Purchase Plan, the Board of Directors or a

                                      F-19
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

committee may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan.
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. There have been no shares
issued 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.

   A summary of activity under the Employee Option Plan is as follows:

<TABLE>
<CAPTION>
                                         Options Outstanding
                            Shares    --------------------------   Weighted-
                          Available   Number of       Price         Average
                          for Grant     Shares      Per Share    Exercise Price
                          ----------  ----------  -------------- --------------
<S>                       <C>         <C>         <C>            <C>
  Authorized............   7,200,000          --  $           --    $    --
  Granted...............    (380,000)    380,000  $        0.025    $ 0.025
                          ----------  ----------
Balance at December 31,
 1996...................   6,820,000     380,000  $        0.025    $ 0.025
  Granted...............  (5,040,000)  5,040,000  $  0.025-$0.05    $ 0.032
  Exercised.............          --      (1,000) $         0.25    $  0.25
  Canceled..............     400,000    (400,000) $  0.025-$0.05    $ 0.038
                          ----------  ----------
Balance at December 31,
 1997...................   2,180,000   5,019,000  $  0.025-$0.05    $ 0.029
  Authorized............   3,303,000          --  $           --    $    --
  Granted...............  (3,030,896)  3,030,896  $   0.05-$1.00    $  0.62
  Exercised.............          --  (1,064,748) $  0.025-$1.00    $ 0.035
  Canceled..............     511,500    (511,500) $   0.05-$0.35    $  0.13
                          ----------  ----------
Balance at December 31,
 1998...................   2,963,604   6,473,648  $  0.025-$1.00    $ 0.305
  Authorized............     855,170          --  $           --    $    --
  Granted...............  (2,577,250)  2,577,250  $ 1.50-$50.938    $10.987
  Exercised.............          --  (1,052,397) $ 0.025-$15.00    $ 0.079
  Canceled..............      64,226     (64,226) $  0.05-$15.00    $ 7.416
                          ----------  ----------
Balance at September 30,
 1999...................   1,305,750   7,934,275  $0.025-$50.938    $ 3.746
                          ==========  ==========
</TABLE>

                                      F-20
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


   The following table summarizes information concerning options outstanding
and exercisable at September 30, 1999:

<TABLE>
<CAPTION>
                                   Options Outstanding            Options Exercisable
                          ------------------------------------- ------------------------
                                                    Weighted-
                                                     Average
                                      Weighted-     Remaining               Weighted-
                          Number of    Average     Contractual  Number of    Average
Range of Exercise Prices   Shares   Exercise Price     Life      Shares   Exercise Price
------------------------  --------- -------------- ------------ --------- --------------
                                                    (in years)
<S>                       <C>       <C>            <C>          <C>       <C>
$0.025-$0.05............  3,086,715    $ 0.041         7.87       794,268     $0.041
$0.35-$1.00.............  2,339,910    $ 0.765         8.97       374,597     $0.620
$1.50-$5.00.............  1,477,300    $ 2.734         9.38        14,375     $ 1.50
$15.00-$50.938..........  1,030,350    $23.072         9.81         3,550     $15.00
                          ---------                             ---------
$0.025-$50.938..........  7,934,275    $ 3.746         8.73     1,186,790     $0.286
                          =========                             =========
</TABLE>

 Deferred Compensation

   The Company has recorded deferred compensation charges of approximately
$2,293,000 for the year ended December 31, 1998 and $11,318,000 for the nine
months ended September 30, 1999, for the difference between the exercise price
and the deemed fair value of certain stock options granted by the Company.
These amounts are being amortized as charges to operations, using the graded
method, over the vesting periods of the individual stock options, generally
four years. Under the graded method, approximately 59%, 25%, 12% and 4%,
respectively, of each option's compensation expense is recognized in each of
the four years following the date of grant.

 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:

<TABLE>
<CAPTION>
                                               December 31,      September 30,
                                               ---------------   --------------
                                                1996     1997     1998    1999
                                               ------   ------   ------  ------
   <S>                                         <C>      <C>      <C>     <C>
   Expected dividend yield....................      0%       0%       0%      0%
   Risk-free interest rate....................    6.0%     6.0%    5.40%   5.74%
   Expected life of option in years...........    4.0      4.0     4.21     4.0
   Volatility.................................      0%       0%       0%     60%
</TABLE>

                                      F-21
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


   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:

<TABLE>
<CAPTION>
                                        Years ended             Nine months
                                       December 31,         ended September 30,
                                   -----------------------  -------------------
                                   1996    1997     1998           1999
                                   -----  -------  -------  -------------------
                                   (in thousands, except per share amounts)
   <S>                             <C>    <C>      <C>      <C>
   Net loss as reported..........  $(276) $(2,059) $(5,832)      $(27,265)
   Pro forma net loss............   (276) $(2,064) $(5,869)      $(28,184)
   Net loss per share as
    reported, basic and diluted..    N/A  $ (2.14) $ (1.65)      $  (2.17)
   Pro forma net loss per share..    N/A  $ (2.15) $ (1.66)      $  (2.25)
</TABLE>

   The weighted average fair value of options granted to employees during the
years ended December 31, 1996, 1997 and 1998, were approximately $0.005, $0.005
and $0.125, respectively, and $5.7034 during the nine months ended September
30, 1999.

   For purposes of pro forma disclosures, the minimum value of the stock grants
and stock options is deemed amortized over the grant vesting period. Because
FAS 123 is applicable only to options granted since inception its pro forma
effect will not be fully reflected until 2001.

 Shares Reserved for Future Issuance

   Common stock reserved for future issuance is as follows:

<TABLE>
<CAPTION>
                                                     December 31, September 30,
                                                         1998         1999
                                                     ------------ -------------
  <S>                                                <C>          <C>
  Employee stock option plan........................   9,437,252    9,240,025
  Directors' option plan............................          --      300,000
  Employee stock purchase plan......................          --      600,000
  Warrants..........................................   1,312,204        3,000
  Conversion of outstanding preferred stock.........  13,728,482           --
                                                      ----------   ----------
    Total common stock reserved for future
     issuance.......................................  24,477,938   10,143,025
                                                      ==========   ==========
</TABLE>

                                      F-22
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


11. Segments of an Enterprise and Related Information

   The Company operates in one industry segment. The Company designs, develops
and sells Internet Protocol ("IP") telephony systems. The Chief Executive
Officer has been identified as the Chief Operating Decision Maker ("CODM")
because he has final authority over resource allocation decisions and
performance assessment. The CODM does not receive discrete financial
information about individual components.

   Net revenue for non-U.S. locations is substantially the result of export
sales from the U.S. Net revenue by geographic region based on customer location
was as follows:

<TABLE>
<CAPTION>
                                                                   Nine months
                                                     Year ended       ended
                                                    December 31,  September 30,
                                                   -------------- --------------
                                                    1997   1998    1998   1999
                                                   ------ ------- ------ -------
                                                          (in thousands)
   <S>                                             <C>    <C>     <C>    <C>
   Net revenue:
     United States................................ $  213 $ 7,544 $4,775 $14,166
     Other Americas...............................      2      99      4     169
     Europe.......................................     58     740     90   3,947
     Asia.........................................  3,086   6,264  3,879  10,963
                                                   ------ ------- ------ -------
       Total...................................... $3,359 $14,647 $8,748 $29,245
                                                   ====== ======= ====== =======
</TABLE>

12. 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.

                                      F-23
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

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

<TABLE>
<CAPTION>
                            Period from
                            July 2, 1996                       Nine months
                           (inception) to    Year ended      ended September
                            December 31,    December 31,           30,
                           -------------- -----------------  -----------------
                                1996        1997     1998     1998      1999
                           -------------- --------  -------  -------  --------
                               (in thousands, except per share amounts)
<S>                        <C>            <C>       <C>      <C>      <C>
Net loss (numerator).....     $  (276)    $(2,059)  $(5,832) $(3,650) $(27,265)
                              =======     ========  =======  =======  ========
Shares used in computing
 historical basic and
 diluted net loss per
 share (denominator):
Weighted average common
 shares outstanding......       7,400        6,400    6,248    5,959    14,005
Less shares subject to
 repurchase..............      (7,400)      (5,438)  (2,704)  (2,860)   (1,462)
                              -------     --------  -------  -------  --------
Denominator for
 historical basic and
 diluted net loss per
 share...................         --           962    3,544    3,099    12,543
                              =======     ========  =======  =======  ========
Conversion of preferred
 stock (pro forma).......                            10,504    9,778     9,408
                                                    -------  -------  --------
Denominator for pro forma
 basic and diluted net
 loss per share..........                            14,048   12,877    21,951
                                                    =======  =======  ========
Historical basic and
 diluted net loss per
 share...................         N/A     $  (2.14) $ (1.65) $ (1.18) $  (2.17)
                              =======     ========  =======  =======  ========
Pro forma basic and
 diluted net loss per
 share...................                           $ (0.42) $ (0.28) $  (1.24)
                                                    =======  =======  ========
</TABLE>

   Clarent 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 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 was 9,780,000 for the period from July 2, 1996 (inception) to
December 31, 1996, 19,297,000 and 24,158,334 for the years ended December 31,
1997 and 1998, respectively, and 22,128,593 and 9,396,775 for the nine months
ended September 30, 1998 and 1999, respectively.

13. Quarterly Financial Information (Unaudited)

   Summarized quarterly financial information for 1998 and the nine months
ended September 30, 1999 is as follows:

<TABLE>
<CAPTION>
                                        Fiscal Year 1998 Quarter Ended
                                   -------------------------------------------
                                   March 31  June 30  September 30 December 31
                                   --------  -------  ------------ -----------
                                     (in thousands, except per share data)
   <S>                             <C>       <C>      <C>          <C>
   Net revenue.................... $ 2,396   $ 3,083    $ 3,269      $ 5,899
   Gross margin ..................   1,616     1,687      1,800        2,891
   Loss from operations...........    (284)   (1,202)    (2,118)      (2,220)
   Net loss.......................    (324)   (1,302)    (2,024)      (2,182)
   Basic and diluted net loss per
    share......................... $ (0.14)  $ (0.46)   $ (0.50)     $ (1.65)
</TABLE>

<TABLE>
<CAPTION>
                                                 Fiscal Year 1999 Quarter Ended
                                                 -------------------------------
                                                 March 31 June 30   September 30
                                                 -------- --------  ------------
                                                   (in thousands, except per
                                                          share data)
   <S>                                           <C>      <C>       <C>
   Net revenue..................................  $6,714  $  9,304    $13,227
   Gross margin.................................   3,433     5,158      7,792
   Loss from operations.........................  (5,495)  (17,390)    (4,866)
   Net loss.....................................  (5,479)  (17,564)    (4,222)
   Basic and diluted net loss per share.........  $(1.00) $  (2.73)   $ (0.17)
</TABLE>


                                      F-24
<PAGE>

                              CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)


14. SUBSEQUENT EVENT (UNAUDITED)

   On October 25, 1999 the Company issued 43,487 shares of Common Stock to
three private investors in connection with the acquisition of all outstanding
stock of Global Media Concept, N.V. This business combination will be accounted
for using the purchase method.

                                      F-25
<PAGE>





                          [CLARENT LOGO APPEARS HERE]


<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the distribution of the common stock being registered. All amounts are
estimated, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Filing Fee:

<TABLE>
     <S>                                                               <C>
     SEC Registration Fee............................................. $ 95,910
     NASD Filing Fee..................................................   35,000
     Nasdaq National Market Filing Fee................................   17,500
     Blue Sky Fees and Expenses.......................................      175
     Accounting Fees..................................................  150,000
     Legal Fees and Expenses..........................................  250,000
     Transfer Agent and Registrar Fees................................    5,000
     Printing and Engraving...........................................   50,000
     Miscellaneous....................................................   21,415
                                                                       --------
       Total.......................................................... $625,000
                                                                       ========
</TABLE>

ITEM 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit the indemnification under
some circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933, as amended. Article VI of
the registrant's amended and restated certificate of incorporation provides for
indemnification of its directors to the maximum extent permitted by the
Delaware General Corporation Law and Section 43 of Article XI of the
registrant's bylaws provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the registrant intends to enter into
indemnification agreements with each director and some officers containing
provisions which are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the company, among other things, to
indemnify its directors against some liabilities that may arise by reason of
their status or service as directors, other than liabilities arising from
willful misconduct of culpable nature, to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' insurance if available on reasonable terms. Reference
is also made to Section 7 of the Underwriting Agreement contained in Exhibit
1.1 hereto, indemnifying officers and directors of the company against some
liabilities.

ITEM 15. Recent Sales of Unregistered Securities

Item 15. Recent Sales of Unregistered Securities

   a) Since July 2, 1996, the registrant has issued and sold, without payment
or any selling commissions to any person, the following registered securities:

     (1) Prior to completion of the initial public offering, the registrant
  effected a two-for-one stock split of its outstanding common stock in which
  every one outstanding share of common stock was split into two shares of
  common stock.

     (2) Since July 2, 1996, the registrant issued 3,400,000 shares of common
  stock (net of repurchases) to three employees, consultants and non-employee
  directors at a weighted average purchase price of $0.005 per share.

                                      II-1
<PAGE>

     (3) Since October 11, 1996 and through September 30, 1999, the
  registrant has granted stock options to purchase 10,809,646 shares of
  common stock (net of cancellations) to a total of 230 employees,
  consultants and non-employee directors at a weighted average exercise price
  of $3.70 per share pursuant to the registrant's stock plans.

     (4) On December 15, 1996, the registrant issued and sold shares of
  Series A preferred stock convertible into an aggregate of 2,000,000 shares
  of common stock to a total of five private investors for an aggregate
  purchase price of $500,000. All of the Series A preferred stock converted
  into common stock upon completion of the initial public offering.

     (5) From March 25, 1997 to June 10, 1997, the registrant issued and sold
  shares of Series B preferred stock convertible to an aggregate of 6,440,000
  shares of common stock to a total of 24 private investors for an aggregate
  purchase price of $3,220,000. All of the Series B preferred stock converted
  into common stock upon completion of the initial public offering.

     (6) As of March 31, 1999, 2,118,145 shares of common stock had been
  issued upon exercise of options and 7,934,275 shares of common stock were
  issuable upon exercise of outstanding options under the registrant's 1999
  amended and restated equity incentive plan.

     (7) On February 24, 1998, the registrant issued and sold warrants to
  purchase an aggregate of 59,266 shares of Series C preferred stock to eight
  private investors for an aggregate exercise price of $331,297. All of the
  warrants described above were exercised prior to the initial public
  offering.

     (8) On April 2, 1998, the registrant issued warrants to purchase an
  aggregate of 1,760,000 shares of common stock to WK Technology Fund for an
  aggregate exercise price of $88,000. All of the warrants described above
  were exercised prior to the initial public offering.

     (9) From June 11, 1998 to December 7, 1998, the registrant issued and
  sold shares of Series C preferred stock convertible into an aggregate of
  5,288,482 shares of common stock to 15 private investors for an aggregate
  purchase price of $17,399,106. All of the Series C preferred stock
  converted into common stock upon completion of the initial public offering.

     (10)  On June 22, 1999, the registrant issued a warrant to purchase an
  aggregate of 3,000 shares of common stock to Silicon Valley Bank for an
  aggregate exercise price of $45,000.

     (11) On October 25, 1999, the registrant issued 43,487 shares of common
  stock to three private investors in connection with the acquisition of all
  outstanding stock of Global Media Concept, N.V.

   The issuance described in Item 15(a)(1) was or will be exempt from
registration under Section 2(3) of the Securities Act of 1933, as amended (the
"Securities Act") on the basis that such transaction did not involve a "sale"
of securities.

   The sales and issuances of securities in the transactions described in
paragraphs (2), (3) and (6) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, as
transactions by an issuer not involving any public offering, in that the
purchasers in each case represented their intention to acquire the securities
for investment only and not with a view to the distribution thereof, received
either adequate information about the registrant or had access, through
employment or other relationship, to such information, and the securities were
offered and sold, either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation as provided by Rule
701. Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities.

   The sales and issuances of securities in transactions described in
paragraphs (4), (5) and (7) through (11) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2), Regulation D
or Regulation S promulgated thereunder as transactions by an issuer not
involving any public offering. The purchasers in each case represented their
intention to acquire the securities for investment only

                                      II-2
<PAGE>

and not with a view to the distribution thereof. Appropriate legends are
affixed to the stock certificates issued in such transactions. Similar legends
were imposed in connection with any subsequent sales of any such securities.
All recipients received either adequate information about the registrant or had
access, through employment or other relationships, to such information.

   There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).

ITEM 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
 <C>     <S>
  1.1    Form of Underwriting Agreement

  3.1+   Certificate of Incorporation of the Registrant

  3.2+   Form of Amended and Restated Certificate of Incorporation to be filed
         upon the closing of the offering made pursuant to this Registration
         Statement

  3.3+   Bylaws of the Registrant

  4.1+   Specimen Common Stock Certificate

  4.2+   Amended and Restated Investor Rights Agreement, dated June 11, 1998
         (as amended December 7, 1998 and April 8, 1999)

  4.3+   Founder Stock Purchase Agreement, dated July 2, 1996

  5.1    Opinion of Cooley Godward LLP

 10.1+   Form of Indemnity Agreement between the Registrant and its directors
         and officers.

 10.2+   1999 Amended and Restated Equity Incentive Plan and Form of Stock
         Option Grant Notice and Agreement

 10.3+   1999 Non-Employee Directors' Stock Option Plan and Form of
         Nonstatutory Stock Option

 10.4+   1999 Employee Stock Purchase Plan and Offering Document

 10.5+   Employment Agreement, dated August 1, 1998, by and between the
         Registrant and Richard J. Heaps

 10.6+   Employment Agreement, dated June 9, 1997, by and between the
         Registrant and Mark E. McIlvane (as amended June 9, 1998)

 10.7**+ OEM Purchase Agreement, dated effective as of December 1, 1998, by and
         between the Registrant and AudioCodes, Ltd.

 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.

 10.9+   Loan and Security Agreement, dated May 28, 1998, between Silicon
         Valley Bank and the Registrant (as modified on February 16, 1999)

 10.10+  Lease Agreement, dated August 12, 1998, by and between the Registrant
         and Seaport Centre Associates, LLC

 10.11+  Sublease, dated May 27, 1998, by and between the Registrant and
         Unwired Planet, Inc.

 10.12+  Customer Agreement, dated June 25, 1998, by and between the Registrant
         and Technet International

 10.13+  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

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Cooley Godward LLP (included in Exhibit 5.1)

</TABLE>

                                      II-3
<PAGE>

<TABLE>
 <C>    <S>
  24.1+ Power of Attorney

  27.1+ Financial Data Schedule

  99.1+ Consent of Frost & Sullivan, dated June 23, 1999

  99.2+ Consent of iLocus, dated June 23, 1999

</TABLE>

--------
 + Previously filed
** Portions have been omitted pursuant to an application for confidential
   treatment

   (b) Financial Statement Schedules

                 Schedule II--Valuation and Qualifying Accounts

Allowance For Doubtful Accounts:

<TABLE>
<CAPTION>
                                             Additions-
                                 Balances at Charged to             Balances at
                                  Beginning  Costs and  Deductions-   End of
                                  of Period   Expenses  Write-Offs    Period
                                 ----------- ---------- ----------- -----------
<S>                              <C>         <C>        <C>         <C>
Period from July 2, 1996
 (inception) through
 December 31, 1996..............   $  --       $  --      $  --       $  --
                                   ======      ======     ======      ======
Year ended December 31, 1997....   $  --       $   38     $  --       $   38
                                   ======      ======     ======      ======
Year ended December 31, 1998....   $   38      $  803     $  (34)     $  807
                                   ======      ======     ======      ======
Nine months ended September 30,
 1999...........................   $  807      $1,053     $   (1)     $1,859
                                   ======      ======     ======      ======
</TABLE>

   Schedules other than those listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.

ITEM 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Act, the
  information omitted from the form of prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Act shall be deemed to be a part of this Registration
  Statement as of the time it was declared effective.

     (2) For purposes of determining any liability under the Act, each post-
  effective amendment that contains a form of prospectus shall be deemed to
  be a new registration statement relating to the securities offered therein,
  and the offering of such securities at that time shall be deemed to be the
  initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement 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 November 1, 1999.

                                          CLARENT CORPORATION

                                                /s/ Jerry Shaw-Yau Chang
                                          By: _________________________________
                                                    Jerry Shaw-Yau Chang
                                                  Chief Executive Officer,
                                                   President and Director

                               POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jerry Shaw-Yau Chang and Richard J. Heaps, and each of
them, his or her attorneys-in-fact, each with the power of substitution, for
him or her in any and all capacities, in any and all capacities, to sign any
and all amendments to this Registration Statement (including post-effective
amendments), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority todo and perform each and every act and thing
requisite and necessary to be done in and about the premises,as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact, or his their substitutes, may
lawfully do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.

   Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
     /s/ Jerry Shaw-Yau Chang          Chief Executive Officer,    November 1, 1999
______________________________________  President and Director
         Jerry Shaw-Yau Chang           (Principal Executive
                                        Officer)

         /s/ Richard J. Heaps          Chief Operating Officer     November 1, 1999
______________________________________  and Chief Financial
           Richard J. Heaps             Officer (Principal
                                        Financial and Accounting
                                        Officer)

         /s/ Michael F. Vargo          Senior Vice President,      November 1, 1999
______________________________________  Chief Technology Officer
           Michael F. Vargo             and Director

           /s/ Wen Chang Ko            Director                    November 1, 1999
______________________________________
             Wen Chang Ko

        /s/ Syaru Shirley Lin          Director                    November 1, 1999
______________________________________
          Syaru Shirley Lin

         /s/ William R. Pape           Director                    November 1, 1999
______________________________________
           William R. Pape

</TABLE>


                                      II-5
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  1.1    Form of Underwriting Agreement

  3.1+   Certificate of Incorporation of the Registrant

  3.2+   Form of Amended and Restated Certificate of Incorporation to be filed
         upon the closing of the offering made pursuant to this Registration
         Statement

  3.3+   Bylaws of the Registrant

  4.1+   Specimen Common Stock Certificate

  4.2+   Amended and Restated Investor Rights Agreement, dated June 11, 1998
         (as amended December 7, 1998 and April 8, 1999)

  4.3+   Founder Stock Purchase Agreement, dated July 2, 1996

  5.1    Opinion of Cooley Godward LLP

 10.1+   Form of Indemnity Agreement between the Registrant and its directors
         and officers.

 10.2+   1999 Amended and Restated Equity Incentive Plan and Form of Stock
         Option Grant Notice and Agreement

 10.3+   1999 Non-Employee Directors' Stock Option Plan and Form of
         Nonstatutory Stock Option

 10.4+   1999 Employee Stock Purchase Plan and Offering Document

 10.5+   Employment Agreement, dated August 1, 1998, by and between the
         Registrant and Richard J. Heaps

 10.6+   Employment Agreement, dated June 9, 1997, by and between the
         Registrant and Mark E. McIlvane (as amended June 9, 1998)

 10.7**+ OEM Purchase Agreement, dated effective as of December 1, 1998, by and
         between the Registrant and AudioCodes, Ltd.

 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.

 10.9+   Loan and Security Agreement, dated May 28, 1998, between Silicon
         Valley Bank and the Registrant (as modified on February 16, 1999)

 10.10+  Lease Agreement, dated August 12, 1998, by and between the Registrant
         and Seaport Centre Associates, LLC

 10.11+  Sublease, dated May 27, 1998, by and between the Registrant and
         Unwired Planet, Inc.

 10.12+  Customer Agreement, dated June 25, 1998, by and between the Registrant
         and Technet International

 10.13+  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

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Cooley Godward LLP (included in Exhibit 5.1)

 24.1+   Power of Attorney

 27.1+   Financial Data Schedule

 99.1+   Consent of Frost & Sullivan, dated June 23, 1999

 99.2+   Consent of iLocus, dated June 23, 1999
</TABLE>
--------
 + Previously filed
** Portions have been omitted pursuant to an application for confidential
   treatment
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 373407}]
{"company-data": {"conformed-name": "CLARENT CORP/CA", "cik": "0001068292", "assigned-sic": "7372", "irs-number": "770433687", "state-of-incorporation": "CA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-90111", "film-number": "99738995"}, "business-address": {"street1": "700 CHESAPEAKE DRIVE", "street2": "650-306-7511", "city": "REDWOOD CITY", "state": "CA", "zip": "94063", "phone": "6503067511"}, "mail-address": {"street1": "700 CHESAPEAKE DRIVE", "city": "REDWOOD CITY", "state": "CA", "zip": "94063"}}
As filed with the Securities and Exchange Commission on November 1, 1999
                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                                ----------------
                              CLARENT CORPORATION
             (Exact name of registrant as specified in its charter)
                                ----------------
Delaware                           7372                          77-0433687
 (State or other jurisdiction of    (Primary Standard Industrial           (I.R.S. Employer
  incorporation or organization)     Classification Code Number)          Identification No.)
----------------
                              700 Chesapeake Drive
                         Redwood City, California 94063
                                 (650) 306-7511
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                                ----------------
                              Jerry Shaw-Yau Chang
                            Chief Executive Officer
                              Clarent Corporation
                              700 Chesapeake Drive
                         Redwood City, California 94063
                                 (650) 306-7511
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                ----------------

                                   Copies to:
       Patrick A. Pohlen, Esq.                 Donna M. Petkanics, Esq.
          COOLEY GODWARD LLP               WILSON SONSINI GOODRICH & ROSATI
        Five Palo Alto Square                  Professional Corporation
         3000 El Camino Real                      650 Page Mill Road
       Palo Alto, CA 94306-2155                Palo Alto, CA 94304-1050
            (650) 843-5000                          (650) 493-9300
                                ----------------

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
                                ----------------

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

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

                        CALCULATION OF REGISTRATION FEE

-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Proposed
                                           Proposed       Maximum
 Title of Each Class of                    Maximum       Aggregate      Amount of
    Securities to be      Amount To Be  Offering Price    Offering     Registration
       Registered        Registered(1)   Per Share(2)     Price(2)        Fee(2)
-----------------------------------------------------------------------------------
Common Stock, par value
 $0.001................    4,600,000        $75.00      $345,000,000     $95,910
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
(1) Includes 600,000 shares that may be purchased by the underwriters to cover
    over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
    registration fee in accordance with rule 457(c) under the Securities Act of
    1933, based on the average high and low trading price for the Common Stock
    on October 25, 1999.
                               ----------------
   The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting offers to buy these   +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                 SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1999

                                4,000,000 Shares

                       [LOGO OF CLARENT(TM) CORPORATION]

                                  Common Stock

                                   --------

  We are selling 2,837,500 shares of common stock and the selling stockholders
are selling 1,162,500 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.

  The underwriters have an option to purchase a maximum of 600,000 additional
shares, of which 512,500 shares are from us and 87,500 shares are from some of
the selling stockholders, to cover over-allotments of shares.

  Our common stock is listed on the Nasdaq National Market under the symbol
"CLRN." On November 1, 1999, the last reported sale price for the common stock
on the Nasdaq National Market was $92.50 per share.

  Investing in the common stock involves risks. See "Risk Factors" on page 8.
Underwriting             Proceeds to
                                             Price to  Discounts and  Proceeds    Selling
                                              Public    Commissions  to Clarent Stockholders
                                            ---------  ------------- ---------- ------------
Per Share..................................    $            $           $           $
Total......................................   $            $           $           $
Delivery of the shares of common stock will be made on or about     , 1999,
against payment in immediately available funds.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

           Robertson Stephens

                       Thomas Weisel Partners LLC

                                                      U.S. Bancorp Piper Jaffray

                      This prospectus is dated     , 1999.
------------

                               TABLE OF CONTENTS
Page
                                      ----
Prospectus Summary...................   4
Risk Factors.........................   8
Use of Proceeds......................  18
Dividend Policy......................  18
Price Range of Common Stock..........  18
Capitalization.......................  19
Dilution.............................  20
Selected Consolidated Financial
 Data................................  21
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations.......................  22
Business.............................  34
Page
                                       ----
Management...........................   47
Certain Transactions.................   56
Principal and Selling Stockholders...   57
Description of Capital Stock.........   59
Shares Eligible for Future Sale......   61
Underwriting.........................   62
Notice to Canadian Residents.........   63
Legal Matters........................   64
Experts..............................   64
Where You Can Find More Information..   64
Index to Consolidated Financial
 Statements..........................  F-1
------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.

   "Clarent" is a registered trademark and the Clarent logo and the Clarent
Command Center are trademarks of Clarent Corporation in the United States and
other jurisdictions. All other trademarks or service marks appearing in this
prospectus are trademarks or service marks of the respective companies that
use them.

                                       3
PROSPECTUS SUMMARY

   This summary highlights selected information contained elsewhere in this
prospectus and does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the Consolidated Financial Statements
and the related Notes before making an investment decision.

                              Clarent Corporation

   We are a leading provider of Internet protocol or IP telephony systems. IP
telephony systems permit the simultaneous transmission of voice, fax and data
over the Internet and similar communications networks. Using our technology to
simultaneously transmit voice, fax and data, our customers are able to more
efficiently and cost-effectively use the available capacity of their networks.
Our existing customers are service providers, including traditional, local,
international and wholesale long distance telephone companies, as well as new
telecommunications service providers. In addition, we have recently begun
selling to enterprises. The IP telephony market is relatively new. Less than 1%
of all voice calls worldwide are currently transmitted using IP telephony.
According to Frost & Sullivan, between 1997 and 2002, the number of call
minutes, including voice, fax and data, transmitted using IP telephony is
expected to have a compound annual growth rate of 325%.

   IP telephony technology and the technology used by traditional telephone
services differ fundamentally in the way the information travels from point to
point through their networks. Using IP telephony, a dedicated connection, or
circuit, between the callers is not required. Instead, the caller's voice is
divided into numerous small packages of information called packets. These
packets are sent over the network intermixed with other packets of data, such
as fax, email or Internet content, to be reassembled at the destination of the
call. In contrast, traditional telephone technology requires that a circuit
between the callers be established and maintained during the length of the
call, and voice, fax and data cannot be transmitted simultaneously over this
circuit.

   Using our IP telephony product, the Clarent system, service providers and
enterprises that manage their own telephony services can deliver a level of
voice quality that is indistinguishable from the voice quality over the
traditional telephone system. In addition, the Clarent system enables the
simultaneous transmission of voice, fax and data. The Clarent system features a
modular architecture that permits our customers to add new product and service
features without extensive product cost or development time. Based on publicly
available data provided by large telecommunications service providers, we
believe our modular architecture enables the provision of new and existing
communications services at a lower cost than the provision of communications
services by traditional telephone companies.

   The Clarent system consists of three distinct components:

  . the Clarent Gateway, an integrated hardware and software product that
    includes network server software that is based on industry standards;

  . the Clarent Command Center, a proprietary client/server software package;
    and

  . a relational database, which is supplied by a third party.

   The Clarent Gateway converts voice, fax and data into packets that can be
transmitted over an IP network, then converts them back into a form recognized
by the traditional telephone system. The Clarent Command Center is the software
that processes the data stored in the third-party relational database. The
Clarent Command Center supports all network management and administration
functions, including the routing and pricing of calls, authentication of
callers and billing, as well as network diagnostic and maintenance functions.

                                       4
Our products enable service providers and enterprises to deliver IP
telephony services to end user customers who can continue to use their existing
telephones. Since our products are integrated by telephone companies and other
service providers into systems that take calls from the traditional telephone
system and send these calls over the Internet and similar communications
networks before returning these calls to the traditional telephone system, the
use of IP telephony is transparent to end user customers.

   Our strategic objective is to be the leading provider of comprehensive IP
telephony solutions to telecommunications service providers worldwide.

   Key elements of our strategy include:

  . provide the core technology enabling the delivery of a broad range of IP
    telephony services;

  . increase our penetration of the service provider market;

  . target key growth markets worldwide;

  . promote strategic relationships between our customers;

  . extend our technology leadership position; and

  . deliver added value through customer support and services.

   We began commercial shipment of the Clarent system in March 1997. As of
September 30, 1999, we had shipped the Clarent system to approximately 160
telecommunications service providers in 55 countries worldwide. The Clarent
system has been installed in some of the world's leading service provider
networks, including those of AT&T Corporation, China Telecom, Chunghwa Telecom
(Taiwan), Ji Tong Communications Co., Ltd. (the People's Republic of China),
KDD (Japan), Korea Telecom (South Korea), Pacific Gateway Exchange (United
States), Singapore Telecom, Star Telecom (United States), Telstra (Australia)
and Telia Telecom (Sweden). In 1998, sales to these customers represented
approximately 48% of our $14.6 million in revenue. As of September 30, 1999, we
had an accumulated deficit of $35.4 million.

   We were originally incorporated under the name NetiPhone, Incorporated in
California in July 1996. We changed our name to Clarent Corporation in May
1997, and we reincorporated in Delaware in June 1999. Our headquarters are
located at 700 Chesapeake Drive, Redwood City, California 94063, and our
telephone number is (650) 306-7511. The address of our web site is
"www.clarent.com." Information contained on our web site should not be
considered a part of this prospectus.

                                       5
The Offering
Common stock offered by Clarent...  2,837,500 shares
Common stock offered by the
 selling stockholders.............  1,162,500 shares
Common stock to be outstanding
 after this offering.............. 30,457,659 shares(1)
Use of proceeds................... We intend to use the estimated proceeds for
                                   working capital and general corporate
                                   purposes, including increased research and
                                   development, sales and marketing and
                                   general and administrative expenditures. We
                                   may also use a portion of the proceeds for
                                   acquisitions of products and technologies
                                   or for strategic alliances. We will not
                                   receive any proceeds from the shares sold
                                   by the selling stockholders.
Nasdaq National Market symbol..... CLRN
--------
(1) The number of shares of common stock to be outstanding after this offering
    is based on the number of shares outstanding as of September 30, 1999, and
    does not include the following:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.

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

   Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.

                                       6
Summary Consolidated Financial Data
                    (in thousands, except per share amounts)
Year ended       Nine months ended
                               Period from         December 31,        September 30,
                         July 2, 1996 (inception) ----------------  --------------------
                           to December 31, 1996    1997     1998       1998       1999
                         ------------------------ -------  -------  ----------- --------
                                                                    (unaudited)
Consolidated Statement
 of Operations Data:
 Net revenue............         $    --          $ 3,359  $14,647    $ 8,748   $ 29,245
 Cost of revenue........              --            1,189    6,653      3,645     12,862
                                 -------          -------  -------    -------   --------
 Gross profit...........              --            2,170    7,994      5,103     16,383
 Operating expenses:
  Research and
   development..........             136            1,044    3,356      2,081      6,023
  Sales and marketing...              --            2,046    7,099      4,705     16,166
  General and
   administrative.......             140              639    2,484      1,500      4,402
  Amortization of
   compensation.........              --               --      879        421     17,543
  Settlement expense....              --              570       --         --         --
                                 -------          -------  -------    -------   --------
   Total operating
    expenses............             276            4,299   13,818      8,707     44,134
                                 -------          -------  -------    -------   --------
 Loss from operations...            (276)          (2,129)  (5,824)    (3,604)   (27,751)
 Other income (expense),
  net...................              --               70       32        (49)       569
                                 -------          -------  -------    -------   --------
 Loss before income
  taxes.................            (276)          (2,059)  (5,792)    (3,653)   (27,182)
 Provision for income
  taxes.................              --               --      (40)         3        (83)
                                 -------          -------  -------    -------   --------
 Net loss...............         $  (276)         $(2,059) $(5,832)   $(3,650)  $(27,265)
                                 =======          =======  =======    =======   ========
 Historical basic and
  diluted net loss per
  share(1)..............             N/A          $ (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                                 =======          =======  =======    =======   ========
 Shares used to compute
  historical basic and
  diluted net loss per
  share(1)..............              --              962    3,544      3,099     12,543
                                 =======          =======  =======    =======   ========
 Pro forma basic and
  diluted net loss per
  share(1)..............                                   $ (0.42)   $ (0.28)  $  (1.24)
                                                           =======    =======   ========
 Shares used to compute
  pro forma basic and
  diluted net loss per
  share(1)..............                                    14,048     12,877     21,951
                                                           =======    =======   ========
September 30, 1999
                                                          ----------------------
                                                          Actual  As Adjusted(2)
                                                          ------- --------------
Consolidated Balance Sheet Data:
 Cash, cash equivalents and short-term investments....... $57,575    $308,275
 Working capital.........................................  56,342     307,042
 Total assets............................................  90,829     341,529
 Long term portion of debt...............................      91          91
 Total stockholders' equity..............................  67,179     317,879
--------
(1) See Note 12 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of shares used in computing
    per share data.
(2) Adjusted to reflect the sale of 2,837,500 shares of common stock by Clarent
    in this offering, at an assumed offering price of $92.50 per share and the
    application of the estimated net proceeds after deducting the underwriting
    discounts and commissions and our estimated offering expenses.

                                       7
RISK FACTORS

   You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. The risks and
uncertainties described below are not the only ones that we face. Additional
risks and uncertainties not presently known to us or that we currently believe
are immaterial also may impair our business operations. If any of the following
risks occurs, our business, operating results and financial condition could be
seriously harmed. In addition, the trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.

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

   We are an early-stage company in the emerging IP telephony market. We were
founded in July 1996 and have not generated significant revenue to date.
Because of our limited operating history, we have limited insight into trends
that may emerge in our market and affect our business. The revenue and income
potential of the IP telephony market, and our business in particular, are
unproven. As a result of our limited operating history, we have limited
financial data that you can use to evaluate our business. You must consider our
prospects in light of the risks, expenses and challenges we might encounter
because we are at an early stage of development in a new and rapidly evolving
market.

Unless we generate significant revenue growth, our increasing expenses and
negative cash flow will significantly harm our financial position.

  As of September 30, 1999, we had an accumulated deficit of $35.4 million. We
expect to incur operating losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur negative operating cash flow in
the future. We expect to continue to increase capital expenditures and our
research and development, sales and marketing and general and administrative
expenses. We will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive operating cash flow, we may not be able to sustain
or increase profitability or positive operating cash flow on a quarterly or
annual basis.

   We have experienced operating losses in each quarterly and annual period
since inception. The following table shows our operating losses for the periods
indicated:
Period                                                         Operating Loss
   ------                                                         --------------
July 2, 1996 (inception) to December 31, 1996.................  $  (276,000)
   Year ended December 31, 1997..................................   (2,129,000)
   Year ended December 31, 1998..................................   (5,824,000)
   Nine months ended September 30, 1999..........................  (27,751,000)
Our operating results are volatile, and an unanticipated decline in revenue may
disproportionately affect our net income or loss in a quarter.

   Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. As a result, our future
operating results are difficult to predict. Further, we incur expenses in
significant part on our expectations of our future revenue. As a result, we
expect our expense levels to be relatively fixed in the short run. Therefore,
an unanticipated decline in revenue for a particular quarter may
disproportionately affect our net income (loss) in that quarter.

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

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

   We have experienced significant erosion in the average selling prices of our
products due to a number of factors, including competitive pricing pressures,
rapid technological change and sales discounts. We anticipate

                                       8
that the average selling prices of our products will decrease and fluctuate in
the future in response to the same factors. Therefore, to maintain or increase
our gross margin, we must develop and introduce new products and product
enhancements on a timely basis. We must also continually reduce our costs of
production. As our average selling prices decline, we must increase our unit
sales volume to maintain or increase our revenue. To date, the erosion in the
average selling prices has not had a material affect on our business. However,
we cannot be certain that the erosion in the average selling prices will not
affect our business in the future. If our average selling prices decline more
rapidly than our costs of production, our gross margin will decline, which
could seriously harm our business, financial condition and results of
operations.

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

   We compete in a new, rapidly evolving and highly competitive and fragmented
market. We expect competition to intensify in the future. We cannot assure you
that we will be able to compete effectively. We believe that the main
competitive factors in our market are product quality, features, cost and
customer relationships. Our current principal competitors include 3Com
Corporation, Cisco Systems, Inc., Lucent Technologies Inc., Nortel Networks
Corporation and VocalTec Communications, Ltd. Many of our large competitors
have stronger relationships with service providers than we do. In addition,
they may be able to compete more effectively because they will be able to add
IP telephony features to their existing equipment or bundle these features as
part of a broader solution. According to one industry source, our market share
in the IP telephony equipment market, as measured by ports shipped, fell from
16.7% in 1998 to 4.0% in the first half of 1999. We also expect that other
companies may enter our market with better products and technologies.

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

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

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

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

   Our future success depends, in large part, on our ability to attract and
retain highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, sales personnel
and marketing personnel, may seriously harm our business, financial condition
and results of operations. We will need to expand our sales operations and
marketing operations in order to increase market awareness of our products and
generate increased revenue. New sales personnel and marketing personnel will
require training and take time to achieve full productivity. In addition, the
design and installation of IP telephony solutions can be complex. Accordingly,
we need highly trained professional services and customer support personnel. We
currently have a small professional services and customer support organization
and will need to increase our staff to support new customers and the expanding
needs of existing customers. Competition for personnel is intense, especially
in the San Francisco Bay Area where we maintain our headquarters. We cannot be
certain that we will

                                       9
successfully attract and retain additional qualified personnel. In addition,
our key person life insurance policy, covering some of our key employees, may
be insufficient to cover the costs associated with the loss of one of these
employees.

Our failure to manage our rapid growth effectively could negatively affect our
results of operations.

   Since we began commercial shipment of our products in March 1997, we have
experienced a period of rapid growth and expansion that is significantly
straining all of our resources. From September 30, 1998 to September 30, 1999,
the number of our employees increased from approximately 70 to 230. We expect
our anticipated growth and expansion to continue to place strain on our
management, operational and financial resources. Our inability to manage growth
effectively could seriously harm our business, financial condition and results
of operations. We may not be able to install adequate control systems in an
efficient and timely manner, and our current or planned operational systems,
procedures and controls may not be adequate to support our future operations.
Delays in the implementation of new systems or operational disruptions when we
transition to new systems would impair our ability to accurately forecast sales
demand, manage our product inventory and record and report financial and
management information on a timely and accurate basis.

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

   The IP telephony market is relatively new and evolving rapidly. Less than 1%
of all voice calls worldwide are currently transmitted over IP-based data
networks. Our ability to increase revenue in the future depends on some of both
existing and future circuit-switched telephone network calls moving to IP-based
data networks. The use of IP telephony for voice calls might be hindered by
the:

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

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

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

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

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

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

   At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including IP telephony. We are unable to
predict the impact, if any, that future legislation, legal decisions or
regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services,

                                       10
which could restrict our business or increase our cost of doing business. The
increasing growth of the IP telephony market and popularity of IP telephony
products and services heighten the risk that governments will seek to regulate
IP telephony and the Internet. In addition, large, established
telecommunications companies may devote substantial lobbying efforts to
influence the regulation of the IP telephony market, which may be contrary to
our interests.

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

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

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

   We have historically derived the majority of our revenue from a small number
of customers, particularly various entities within AT&T. In 1998 entities
affiliated with AT&T Corporation accounted for 36% of our net revenue and
Technet International accounted for 12% of our net revenue. For the nine months
ended September 30, 1999, entities affiliated with AT&T Corporation accounted
for 16% of our net revenue and entities affiliated with Ji Tong Communications
accounted for 15% of our net revenue. None of our customers is obligated to
purchase additional products or services. Accordingly, we cannot be certain
that present or future customers will not terminate their purchasing
arrangements with us or significantly reduce or delay their orders. Any
termination, change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations.

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

   We believe that our future success is dependent upon our ability to expand
our direct sales force and establish successful relationships with a variety of
international distribution partners. To date, we have entered into agreements
with only a small number of distribution partners that accounted for
approximately 18% of net revenue for 1998 and 17% of net revenue for the nine
months ended September 30, 1999. These distribution agreements typically may be
terminated without cause upon 90 days notice. We cannot be certain that we will
be able to reach agreement with additional distribution partners on a timely
basis or at all, or that these distribution partners will devote adequate
resources to marketing, selling and supporting our products. We must
successfully manage our distributor relationships. In 1997 we settled a dispute
with one of our distributors at a cost to us of $570,000, plus future specified
discounts. We cannot guarantee that we will successfully manage our distributor
relationships in the future. Our inability to generate revenue from
distribution partners may harm our business, financial condition and results of
operations.

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

   International sales represented approximately 94% of net revenue in 1997,
48% in 1998 and 52% for the nine months ended September 30, 1999. Our
international operations are subject to a variety of risks associated

                                       11
with conducting business internationally any of which could seriously harm our
business, financial condition and results of operations. These risks include:

  . greater difficulty in accounts receivable collections;

  . import or export licensing and product certification requirements;

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

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

  . fluctuations in currency exchange rates;

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

  . unexpected changes in regulatory requirements;

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

  . difficulties and costs of staffing and managing foreign operations;

  . political instability;

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

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

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

   We currently have offices in Belgium, France, Germany, Japan, the People's
Republic of China, South Korea, Spain, Taiwan, the United Kingdom and the
United States. We intend to expand the scope of our international operations,
which will require us to enhance our communications infrastructure and may
include the establishment of overseas assembly operations. If we are unable to
expand our international operations effectively and quickly, we may be unable
to successfully market, sell, deliver and support our products internationally.

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

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

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

  . the particular telecommunications market that the customer serves; and

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

Before we receive orders, our customers typically test and evaluate our
products for a period of months or, in some cases, over a year.

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

                                       12
Delays in customer orders could have a negative impact on our results of
operations for any given quarter.

   We have historically received a significant portion of our product orders
near the end of a quarter. Accordingly, a delay in an anticipated receipt or
delivery of a given order past the end of a particular quarter may negatively
impact our results of operations for that quarter. These delays may become more
likely given that we expect that the average size of our customer orders may
increase. As a result, a delay in the recognition of revenue, even from just
one customer, may have a significant negative impact on our results of
operations for a given period. Any delay in sales of our products could result
in a significant decrease in cash flow, which, in turn, could severely affect
our ability to make payments as they come due and could cause our operating
results to vary significantly from quarter to quarter.

Our dependence on independent manufacturers may result in product delivery
delays.

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

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

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

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

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

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

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

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

   Due to our international operations, we incur expenses in a number of
currencies. We do not currently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. Therefore, fluctuations in

                                       13
the value of foreign currencies could have a negative impact on the
profitability of our global operations, which would seriously harm our
business, financial condition and results of operations. All of our sales,
including international sales are currently denominated in U.S. dollars.
However, we do not expect that future international sales will continue to be
denominated in U.S. dollars. Fluctuations in the value of the U.S. dollar and
foreign currencies may make our products more expensive than local product
offerings.

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

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

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

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

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

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

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

   We believe there is a risk that third parties have filed, or will file
applications for, or have received or will receive, patents or obtain
additional intellectual property rights relating to materials or processes that
we use or

                                       14
propose to use. As a result, from time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual property rights
to technologies that are important to us. In addition, third parties may assert
claims or initiate litigation against us or our manufacturers, suppliers or
customers with respect to existing or future products, trademarks or other
proprietary rights. Any claims against us or customers that we indemnify
against intellectual property claims, with or without merit, may be time-
consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology. If a
claim is successful, we may be required to obtain a license or royalty
agreement under the intellectual property rights of those parties claiming the
infringement. If we are unable to obtain the license, we may be unable to
market our products. Limitations on our ability to market our products and
delays and costs associated with monetary damages and redesigns in compliance
with an adverse judgment or settlement could harm our business, financial
condition and results of operations.

Our failure and the failure of our key suppliers and customers to be Year 2000
compliant may negatively impact our business and results of operations.

   The Year 2000 computer issue creates a significant risk for us in at least
four areas:

  . potential warranty or other claims arising from our products for failure
    to be Year 2000 compliant;

  . systems we use to run our business may fail or produce inaccurate
    results;

  . systems used by our suppliers may fail or produce inaccurate results,
    causing operational difficulties for us; and

  . potential customers may reduce spending on IP telephony products as a
    result of significant information systems spending on Year 2000
    remediation or to limit additional changes to their networks during the
    current year.

   If any of these risks materialize, it may seriously harm our business,
financial condition and results of operations.

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

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

Our existing stockholders have voting control over Clarent.

   On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 47.50% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which may have the effect of delaying or preventing a third party
from acquiring control over us.

New investors in our common stock will experience immediate and substantial
dilution.

   The offering price is substantially higher than the book value per share of
our common stock. Assuming an offering price of $92.50 per share, investors
purchasing common stock in this offering will, therefore, incur immediate
dilution of $82.06 in net tangible book value per share of common stock.
Investors will incur additional dilution upon the exercise of outstanding stock
options and warrants.

                                       15
Our stock price is highly volatile.

   The trading price of our common stock has fluctuated significantly since our
initial public offering in July 1999. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, announcements of strategic partnerships or new customers by
us or our competitors, changes in financial estimates by securities analysts
and other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of our common
stock.

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

   In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Our
acquisition activity may involve us in disputes from time to time. Litigation
that may arise from these disputes may lead to volatility in our stock price
and/or may result in our being the target of securities class action
litigation. Securities litigation may result in substantial costs and divert
management's attention and resources, which may seriously harm our business,
financial condition and results of operations.

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

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

  . authorizing the board of directors to issue additional preferred stock;

  . prohibiting cumulative voting in the election of directors;

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

  . prohibiting stockholder action by written consent; and

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

   We are also subject certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.

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

   If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market during a short period of time, our stock price may decline
significantly. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. After completion of this offering, we will have outstanding
30,457,659 shares of common stock. All of the shares sold in this offering and
our initial public offering, unless held by our affiliates, will be freely
tradeable. All of the remaining shares are subject to lock-up arrangements
between the stockholders and us or the underwriters. Of these shares, 6,258,075
will be eligible for sale in the public market on December 29, 1999, of which
1,716,680 will be eligible for sale subject to volume limitations and manner of
sale restrictions under federal securities laws. 14,321,044 shares will be
eligible for sale in the public market 90 days following the date of this
prospectus subject to volume

                                       16
limitations and manner of sale restrictions under federal securities laws. The
remaining shares will be available for sale at various times upon the
expiration of applicable holding periods. In addition, we filed a registration
statement on Form S-8 with the Securities and Exchange Commission covering the
10,112,151 shares reserved for issuance under our 1999 amended and restated
equity incentive plan, 1999 non-employee directors' stock option plan and our
1999 employee stock purchase plan. Approximately 1,373,103 of these shares will
be subject to immediately exercisable options (based on options outstanding on
September 30, 1999) 90 days following the date of this prospectus and will be
eligible for sale in the public market 90 days following the date of this
prospectus. Sales of a large number of these shares could have an adverse
effect on the market price for our common stock.

We do not intend to pay dividends.

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth. In addition,
pursuant to our bank credit facility, we cannot pay dividends without our
bank's consent, with limited exceptions. Therefore, we do not expect to pay any
dividends in the foreseeable future.

Special note regarding forward-looking statements.

   Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These statements involve known and
unknown risks and uncertainties, such as our plans, objectives, expectations
and intentions, and other factors that may cause our, or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These
factors are listed under "Risk Factors" and elsewhere in this prospectus.

   In some cases, you can identify forward-looking statements by terminology
such as "expects," "anticipates," "intends," "may," "should," "plans,"
"believes," "seeks," "estimates" or the negative of such terms or other
comparable terminology.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. You
should not place undue reliance on these forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results.

                                       17
USE OF PROCEEDS

   We will not receive any proceeds from the shares sold by the selling
stockholders in this offering. We expect to receive net proceeds of
approximately $250,700,000 from the sale of 2,837,500 shares of common stock,
and an additional $45,400,000 from the sale of 512,500 shares if the
underwriters' over-allotment option is exercised in full, at an assumed
offering price of $92.50 per share.

   We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
research and development expenditures, sales and marketing expenditures, and
general and administrative expenditures.

   The amounts and timing of these expenditures will vary depending on a number
of factors, including the amount of cash generated by our operations,
competitive and technological developments and the rate of growth, if any, of
our business. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies, to lease additional
facilities, or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so at this time.

   The amounts that we actually expend for working capital and other general
corporate purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds in short-term, interest bearing, investment-grade
securities. We cannot predict whether the proceeds will be invested to yield a
favorable return.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. In addition, under our bank credit facility, we cannot
pay dividends without our bank's consent, with limited exceptions. Therefore,
we currently do not anticipate paying any cash dividends in the foreseeable
future.

                          PRICE RANGE OF COMMON STOCK

   Our common stock is traded on the Nasdaq National Market under the symbol
"CLRN." Public trading of the common stock commenced on July 1, 1999. The
following table shows, for the periods indicated, the high and low per share
prices of common stock, as reported by the Nasdaq National Market.
Quarter Ended                            High    Low
                         -------------                           ------- ------
September 30, 1999.............................................. $ 51.50 $19.88
December 31, 1999 (Through October 29, 1999).................... $100.38 $49.50
On October 29, 1999, the last reported sale price of the common stock on the
Nasdaq National Market was $94.875 per share. As of September 30, 1999, there
were approximately 165 stockholders of record of the common stock.

                                       18
CAPITALIZATION

   The following table sets forth our capitalization as of September 30, 1999:

  . on an actual basis; and

  . as adjusted to give effect to the sale of 2,837,500 shares of common
    stock being sold by us in this offering and to give effect to the receipt
    of the estimated net proceeds from the sale of the shares at an assumed
    offering price of $92.50 per share and the application of the net
    proceeds from the sale.

   Please read the following information in conjunction with the more detailed
Consolidated Financial Statements and Notes of Clarent and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.
September 30, 1999
                                                          ---------------------
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                             (in thousands)
Long term portion of debt................................ $     91   $     91
Stockholders' equity:
  Preferred stock: $0.001 par value, 5,000,000 shares
   authorized; no shares issued and outstanding, actual
   and as adjusted.......................................
  Common stock: $0.001 par value, 50,000,000 shares
   authorized; 27,620,159 issued and outstanding, actual;
   30,457,659 shares issued and outstanding, as
   adjusted..............................................  110,476    361,176
  Deferred compensation..................................   (7,818)    (7,818)
  Accumulated other comprehensive loss(1)................      (47)       (47)
  Accumulated deficit....................................  (35,432)   (35,432)
                                                          --------   --------
    Total stockholders' equity...........................   67,179    317,879
                                                          --------   --------
    Total capitalization................................. $ 67,270   $317,970
                                                          ========   ========
--------
(1) See Note 1 to the Consolidated Financial Statements for an explanation of
    accumulated other comprehensive loss.

   This table excludes the following shares as of September 30, 1999:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.

                                       19
DILUTION

   Our net tangible book value as of September 30, 1999 was $67,179,000, or
approximately $2.43 per share. Net tangible book value per share represents the
amount of our total assets less total liabilities, divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering. After
giving effect to the sale of the 2,837,500 shares of common stock being sold by
us in this offering at an assumed offering price of $92.50 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value at
September 30, 1999 would have been $317,879,000, or approximately $10.44 per
share. This represents an immediate increase in pro forma net tangible book
value of $8.01 per share to existing stockholders and an immediate dilution in
net tangible book value of $82.06 per share to new investors of common stock in
this offering. The following table illustrates this dilution on a per share
basis:
Assumed offering price per share..............................       $92.50
     Pro forma net tangible book value per share as of September
      30, 1999................................................... $2.43
     Increase in net tangible book value per share attributable
      to new investors...........................................  8.01
                                                                  -----
   Pro forma net tangible book value per share after offering....        10.44
                                                                        ------
   Dilution in net tangible book value per share to new
    investors....................................................       $82.06
                                                                        ======
The following table sets forth, on a pro forma basis as of September 30,
1999, the difference between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing holders of common stock and by the new investors, before deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, at an assumed offering price of $92.50 per share.
Shares Purchased  Total Consideration   Average
                               ------------------ --------------------   Price
                                 Number   Percent    Amount    Percent per Share
                               ---------- ------- ------------ ------- ---------
Existing stockholders...... 27,620,159   90.7% $ 93,555,000   26.3%  $ 3.39
   New investors..............  2,837,500    9.3   262,468,750   73.7   $92.50
                               ----------  -----  ------------  -----
     Total.................... 30,457,659  100.0% $356,023,750  100.0%
                               ==========  =====  ============  =====
This table excludes the following shares as of September 30, 1999:

  . 7,934,275 shares subject to options outstanding as of September 30, 1999,
    at a weighted average exercise price of $3.75 per share;

  . 1,305,750 shares reserved for future issuance under our 1999 amended and
    restated equity incentive plan; and the number of shares reserved for
    issuance under this plan can increase on January 31 of each year through
    the year 2004 by an amount equal to 2 1/2% of the number of outstanding
    shares on the last trading day of each preceding calendar year;

  . 600,000 shares reserved for issuance under our 1999 employee stock
    purchase plan;

  . 300,000 shares reserved for issuance under our 1999 non-employee
    directors' stock option plan; and

  . 3,000 shares issuable upon the exercise of an outstanding warrant at an
    exercise price of $15.00 per share.

                                       20
SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated balance sheet data as of December 31,
1996 has been derived from consolidated financial statements not included in
this prospectus, which were audited by Ernst & Young LLP, independent auditors.
The selected consolidated statement of operations data for the period from July
2, 1996 (inception) to December 31, 1996, each of the two years in the period
ended December 31, 1998 and the nine months period ended September 30, 1999,
and the related consolidated balance sheet data as of December 31, 1997 and
1998, and September 30, 1999, are derived from the consolidated financial
statements of the company which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this prospectus. The data
should be read in conjunction with the consolidated financial statements. The
selected statement of operations data for the nine months ended September 30,
1998 has been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated financial statements
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, that management considers necessary for a fair
statement of the results for those periods. The operating results for the nine
months ended September 30, 1999 are not necessarily indicative of results that
may be expected for the year ending December 31, 1999 or any other interim
period or future fiscal year.
Period from      Year ended       Nine months ended
                           July 2, 1996     December 31,        September 30,
                          (inception) to   ----------------  --------------------
                         December 31, 1996  1997     1998       1998       1999
                         ----------------- -------  -------  ----------- --------
                                                             (unaudited)
                                (in thousands, except per share amounts)
Consolidated Statement
 of Operations Data:
Net revenue.............       $  --       $ 3,359  $14,647    $ 8,748   $ 29,245
Cost of revenue.........          --         1,189    6,653      3,645     12,862
                               -----       -------  -------    -------   --------
Gross profit............          --         2,170    7,994      5,103     16,383
Operating expenses:
  Research and
   development..........         136         1,044    3,356      2,081      6,023
  Sales and marketing...          --         2,046    7,099      4,705     16,166
  General and
   administrative.......         140           639    2,484      1,500      4,402
  Amortization of
   compensation.........          --            --      879        421     17,543
  Settlement expense....          --           570       --         --         --
                               -----       -------  -------    -------   --------
    Total operating
     expenses...........         276         4,299   13,818      8,707     44,134
                               -----       -------  -------    -------   --------
Loss from operations....        (276)       (2,129)  (5,824)    (3,604)   (27,751)
Other income (expense),
 net....................          --            70       32        (49)       569
                               -----       -------  -------    -------   --------
Loss before income
 taxes..................        (276)       (2,059)  (5,792)    (3,653)   (27,182)
Provision for income
 taxes..................          --            --      (40)         3        (83)
                               -----       -------  -------    -------   --------
Net loss................       $(276)      $(2,059) $(5,832)   $(3,650)  $(27,265)
                               =====       =======  =======    =======   ========
Historical basic and
 diluted net loss
 per share(1)...........         N/A       $ (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                               =====       =======  =======    =======   ========
Shares used to compute
 historical basic and
 diluted net loss per
 share(1)...............          --           962    3,544      3,099     12,543
                               =====       =======  =======    =======   ========
Pro forma basic and
 diluted net loss per
 share(1)...............                            $ (0.42)   $ (0.28)  $  (1.24)
                                                    =======    =======   ========
Shares used to compute
 pro forma basic and
 diluted net loss
 per share(1)...........                             14,048     12,877     21,951
                                                    =======    =======   ========
December 31,
                                               ------------------- September 30,
                                               1996  1997   1998       1999
                                               ---- ------ ------- -------------
                                                        (in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $147 $  474 $11,903    $33,870
Working capital...............................  146    781  11,531     56,342
Total assets..................................  244  2,818  25,177     90,829
Long term portion of debt.....................   --     --      --         91
Total stockholders' equity....................  242  1,334  13,764     67,179
--------
(1) See Note 12 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of shares used in computing
    per share data.

                                       21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

   We are a leading provider of IP telephony systems. We were incorporated in
July 1996 and commenced sales of our products in March 1997. Prior to March
1997, we had no sales and our operations consisted primarily of various start-
up activities, such as research and development, recruiting personnel and
raising capital. We first recognized revenue from product sales in March 1997.
We generated net revenue of $3.4 million in 1997, $14.6 million in 1998 and
$29.2 million in the nine months ended September 30, 1999. We incurred net
losses of $276,000 in 1996, $2.1 million in 1997, $5.8 million in 1998 and
$27.3 million in the nine months ended September 30, 1999. As of September 30,
1999, we had an accumulated deficit of $35.4 million.

   We generate revenue from sales of our integrated hardware and software
products and from maintenance and support of those products. Revenue derived
from product sales, largely sales of our Clarent Gateway products measured in
the number of ports, constituted 99% of net revenue in 1997, 94% of net revenue
in 1998 and 92% of net revenue in the nine months ended September 30, 1999. A
port is the connection between the traditional telephone system and the IP
telephony system. Each port handles a single call and can have the capacity to
handle 8,000 to 10,000 call minutes per month. Telecommunications service
providers bill their customers based on the minutes transmitted through their
IP telephony systems. Although service revenue does not currently constitute a
material portion of our revenue, we believe service revenue will become an
increasing portion of our revenue. Product revenue is generally recognized upon
shipment. Service revenue includes revenue from implementation and integration
services, system management services, warranty coverage and customer support.
Revenue from implementation and system integration services is recognized as
the services are performed, while revenue from system management services,
warranty coverage and customer support is recognized ratably over the period of
the contract.

   We sell our products primarily through our direct sales force and, to a
lesser extent, through distribution channels. We have sales and support offices
in Belgium, France, Germany, Japan, the People's Republic of China, South
Korea, Spain, Taiwan, the United Kingdom and the United States. We intend to
increase sales through distribution channels. In 1998, we expanded the breadth
of our support services by establishing a professional services group to
provide product installation and customization, technical support, customer
training and product maintenance.

   Net revenue from international sales totaled $3.1 million or approximately
94% of net revenue in 1997, $7.1 million or approximately 48% of net revenue in
1998 and $15.1 million or approximately 52% of net revenue in the nine months
ended September 30, 1999. We expect that over time we may derive a majority of
our revenue from foreign-based service providers, subjecting our revenue stream
to risks from economic uncertainties, currency fluctuations, political
instability and uncertain cultural and regulatory environments.

   Cost of revenue consists of component and material costs, direct labor
costs, warranty costs, royalties, overhead related to manufacturing our
products and customer support costs, as well as materials, travel and labor
costs related to personnel engaged in our service operations. Our gross margin
is affected by changes in the average selling price of our products and the
proportion of our net revenue derived from the sale of software and services.
Software sales, which typically carry higher gross margin than hardware sales,
currently make up only a fraction of our net revenue. However, we expect that
the proportion of software sales will increase in the future. Service sales,
which typically carry a lower gross margin than product sales, currently make
up a small proportion of our net revenue. We expect the proportion of service
revenue to increase in the future. The net impact that the increased proportion
of sales of both software and services will have on our total gross margin
cannot be determined at this time. Furthermore, we expect to derive an
increasing proportion of our net revenue from the sale of our products through
distribution channels. Revenue derived from indirect sales typically carries a
lower gross margin than direct sales. As a result, we expect the increased
proportion of net revenue derived from indirect sales to have a negative impact
on our total gross margin in the future.

                                       22
Research and development expenses consist primarily of compensation and
related costs for research and development personnel and expenses for testing
facilities and equipment. We also make separate investments in engineering
personnel and equipment to assure timely response to problems and correction of
stability issues in our products. We expect to continue to make substantial
investments in research and development and anticipate that research expenses
will continue to increase in absolute dollars.

   Sales and marketing expenses consist primarily of compensation and related
costs for sales personnel, marketing personnel, sales commissions, marketing
programs, public relations, promotional materials, travel expenses and trade
show exhibit expenses. We expect to incur substantial expenditures related to
sales and marketing activities, the recruitment of additional sales and
marketing personnel and the expansion of our domestic and international
distribution channels.

   General and administrative expenses consist primarily of salaries and
related expenses, finance, accounting and human resources expenses,
professional fees, bad debt expenses and other general corporate expenses. We
expect general and administrative expenses to increase in absolute dollars as
we add personnel and incur additional costs related to the anticipated growth
of our business and operation as a public company, and increase our exposure to
bad debt expenses arising from obligations to us from our customers,
particularly new entrants.

   We expect each of these operating expense categories, research and
development, sales and marketing and general and administrative, to increase in
absolute dollars. However, the percentage of net revenue that each of these
categories represents will vary depending on the rate of our revenue growth and
investments that may be required to support the development of new products and
our penetration of new markets.

   We have a limited operating history and face a number of risks encountered
by early stage companies. These risks include, among others:

  . the market acceptance of IP telephony solutions;

  . our ability to anticipate and respond to changing market conditions,
    including competition;

  . our ability to retain key customers; and

  . our dependence upon key personnel.

   Also, we had stability issues when we released Version 3.0 of the Clarent
Gateway. These issues have been resolved. To date, product defects have not had
a material impact on our results of operations. We cannot be certain that
product defects will not occur in the future. Management has significantly
increased product development resources and quality assurance test processes to
address stability issues.

   In addition, although our revenue has grown in recent quarters, we cannot be
certain that our revenue will continue to grow or that we will achieve or
maintain profitability in the future. We expect to continue to experience
significant growth in research and development, sales and marketing and general
and administrative expenses as we attempt to expand our business and maintain
or improve our market position. We cannot accurately predict the future growth
rate, if any, or the ultimate size of our market. In addition, our ability to
increase revenue and achieve or maintain profitability depends on a number of
factors outside our control, including the extent to which:

  . our products are able to gain market acceptance;

  . our competitors develop competing products; and

  . our distributors and other marketing partners dedicate resources to
    selling our products.

   Furthermore, we have experienced significant erosion of average selling
prices due to a number of factors, including competitive pricing pressures,
rapid technological change and increases in sales discounts. We anticipate that
the average selling prices of our products will decrease in the future in
response to the same factors. Therefore, to maintain or increase our gross
margin, we must develop and introduce new products and

                                       23
product enhancements to stabilize our existing products, on a timely basis and
continually reduce our product costs. Our failure to do so will cause our
revenue to grow more slowly and our gross margin to decline, which will
seriously harm our business, financial condition and results of operations.

   Because of continuing and substantial capital expenditures and increasing
research and development, sales and marketing and general and administrative
expenses, we will need to generate significant revenue growth to achieve
profitability and positive operating cash flow. Even if we do achieve
profitability and positive cash flow, we may not be able to sustain or increase
profitability or positive operating cash flow on a quarterly or annual basis.

Results of Operations

   Prior to the first quarter of 1997, our operations were limited and
consisted primarily of start-up activities. Expenses of $276,000 for 1996 were
comprised of payroll and related costs for research and development and general
and administrative personnel. Accordingly, we believe that year-to-year
comparisons of 1996 against 1997, and 1997 against 1998, are not meaningful.

   The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue.
Year ended
                                              December       Nine months ended
                                                 31,           September 30,
                                             -------------   -----------------
                                             1997    1998       1998     1999
                                             -----   -----   ----------- -----
                                                             (unaudited)
As a Percentage of Net Revenue:
   Net revenue.............................. 100.0%  100.0%     100.0%   100.0%
   Cost of revenue..........................  35.4    45.4       41.7     44.0
                                             -----   -----      -----    -----
   Gross margin.............................  64.6    54.6       58.3     56.0
   Operating expenses:
     Research and development...............  31.1    22.9       23.8     20.6
     Sales and marketing....................  60.9    48.4       53.8     55.3
     General and administrative.............  19.0    17.0       17.1     15.0
     Amortization of compensation...........    --     6.0        4.8     60.0
     Settlement expense.....................  17.0      --         --       --
                                             -----   -----      -----    -----
       Total operating expenses............. 128.0    94.3       99.5    150.9
                                             -----   -----      -----    -----
   Loss from operations..................... (63.4)  (39.7)     (41.2)   (94.9)
   Other income (expense), net..............   2.1     0.2       (0.6)     2.0
                                             -----   -----      -----    -----
   Loss before income taxes................. (61.3)  (39.5)     (41.8)   (92.9)
   Provision for income taxes...............    --    (0.3)       0.1     (0.3)
                                             -----   -----      -----    -----
   Net loss................................. (61.3)% (39.8)%    (41.7)%  (93.2)%
                                             =====   =====      =====    =====
Comparison of Nine Months Ended September 30, 1998 and 1999

 Net Revenue

   Net revenue consists of sales of both our integrated hardware and software
products, as well as revenue generated from the maintenance and support of
those products. Net revenue increased from $8.7 million in the nine months
ended September 30, 1998 to $29.2 million in the nine months ended September
30, 1999. The increase in net revenue was largely due to a 408% increase in
port volume of our Clarent Gateway products sold partially offset by a decrease
of approximately 45% in our average per port selling prices for those products.
Entities affiliated with AT&T Corporation accounted for 35% of net revenue,
Technet International accounted for 17% of net revenue and International
Services Inc. accounted for 10% of net revenue in the nine months ended
September 30, 1998. Entities affiliated with AT&T Corporation accounted for 16%
of net revenue and entities affiliated with Ji Tong Communications accounted
for 15% of net revenue in the nine months ended September 30, 1999.

                                       24
Cost of Revenue

   Cost of revenue increased from $3.6 million in the nine months ended
September 30, 1998 to $12.9 million in the nine months ended September 30,
1999. Gross margin decreased from 58% in the nine months ended September 30,
1998 to 56% in the nine months ended September 30, 1999. The decline was a
result of decreases in the average selling prices of our products, offset to a
slight degree by a decrease in the material cost of our products.

   The mix of products we sell will significantly impact our gross margin. 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. However, we expect increased sales
of our software products both in absolute dollars and as a percentage of net
revenue to positively impact our gross margin. The future net impact on our
gross margin from the increased proportion of sales of both software and
services cannot be determined at this time.

 Research and Development Expenses

   Research and development expenses increased from $2.1 million in the nine
months ended September 30, 1998 to $6.0 million in the nine months ended
September 30, 1999. Research and development expenses consist of payroll and
related expenses for research and development personnel, costs related to
systems infrastructure and third-party consultants. The absolute dollar
increases in research and development expenses from period to period were
attributable to increases in the number of research and development personnel.
Research and development expenses decreased as a percentage of net revenue from
24% in the nine months ended September 30, 1998 to 21% in the nine months ended
September 30, 1999.

 Sales and Marketing Expenses

   Sales and marketing expenses increased from $4.7 million in the nine months
ended September 30, 1998 to $16.2 million in the nine months ended September
30, 1999. Sales and marketing expenses consist primarily of payroll and related
expenses for personnel engaged in sales and marketing, as well as public
relations and marketing communications expenditures. The absolute dollar
increase in sales and marketing expenses from period to period was primarily
attributable to a $6.3 million or a 339% increase 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. The
growth rate of sales and marketing expenses exceeded the growth rate of net
revenue for the period because we were adding sales and marketing personnel and
spending on promotional activities in anticipation of increased future sales.

 General and Administrative Expenses

   General and administrative expenses increased from $1.5 million in the nine
months ended September 30, 1998 to $4.4 million in the nine months ended
September 30, 1999. General and administrative expenses consist primarily of
payroll and related costs for general corporate functions, including finance,
accounting, business development, human resources, facilities and
administration, as well as legal fees and fees for professional services. The
increases in general and administrative expenses from period to period were due
to increases in general and administrative personnel expenses, and related
occupancy costs, and to a lesser degree an increase in the charge for the
allowance for doubtful accounts. General and administrative expenses decreased
as a percentage of net revenue from 17% in the nine months ended September 30,
1998 to 15% in the nine months ended September 30, 1999.

 Amortization of Compensation

   Amortization of compensation expense for the nine months ended September 30,
1999 was $17.5 million. Amortization of compensation expense includes $5.3
million from stock compensation charges resulting from

                                       25
the granting of stock options at prices below the deemed fair value of our
common stock. We expect to amortize additional deferred compensation of $1.8
million in the fourth quarter of 1999, $3.8 million in 2000, $1.7 million in
2001 and $537,000 in 2002.

  Amortization of compensation for the nine months ended September 30, 1999
also includes $12.3 million associated with the granting of a warrant for
advisory services to an investor. We terminated the advisory services
arrangement in June 1999 which caused the unvested portion of the warrant to
become fully vested.

 Fiscal Years Ended December 31, 1997 and 1998

 Net Revenue

   We began generating net revenue in the first quarter of 1997. Net revenue
increased from $3.4 million in 1997 to $14.6 million in 1998. The increase in
net revenue was due to a 667% increase in port volume of our Clarent Gateway
products sold partially offset by a decrease of approximately 52% in our
average per port selling prices for those products. A limited number of
customers have historically accounted for a substantial portion of our net
revenue. Entities affiliated with AT&T Corporation accounted for 46% and
Wherever Computer Technology Company Limited accounted for 35% of net revenue
in 1997. Entities affiliated with AT&T Corporation accounted for 36% and
Technet International accounted for 12% of net revenue in 1998.

 Cost of Revenue

   Cost of revenue increased from $1.2 million in 1997 to $6.7 million in 1998.
Gross margin declined from 65% in 1997 to 55% in 1998. The decline was a result
of decreases in average selling prices in our products, offset to a slight
degree by a decrease in the material cost of our products.

 Research and Development Expenses

   Research and development expenses increased from $1.0 million in 1997 to
$3.4 million in 1998. The absolute dollar increases in research and development
expenses from period to period were attributable to increases in the number of
research and development personnel. Research and development expenses decreased
as a percentage of net revenue from 31% in 1997 to 23% in 1998 because the
growth rate of net revenue exceeded the growth rate of research and development
expenses for the period.

 Sales and Marketing Expenses

   Sales and marketing expenses increased from $2.0 million in 1997 to $7.1
million in 1998. The absolute dollar increases in sales and marketing expenses
from period to period were primarily attributable to a $3.4 million or 67%
increase in personnel and related expenses required to implement our sales and
marketing strategy and, to a lesser extent, increased public relations,
advertising and other promotional expenses. Sales and marketing expenses
decreased as a percentage of net revenue from 61% in 1997 to 49% in 1998
primarily due to increased productivity of our sales personnel and increased
net revenue in such periods.

 General and Administrative Expenses

   General and administrative expenses increased from $639,000 in 1997 to $2.5
million in 1998. The absolute dollar increases in general and administrative
expenses from period to period were due to a $198,000 or 11% increase in
general and administrative personnel expenses, a $371,000 or 20% increase in
professional services fees, a $733,000 or 39% increase in the charge for the
allowance for doubtful accounts and, to a lesser extent, increased facility
expenses to support the growth of our operations.

 Amortization of Compensation

   In connection with some stock option grants in 1998, $2.3 million in
deferred compensation has been recorded. Amortization of compensation expense
reflects the amortization of stock compensation charges

                                       26
resulting from the granting of stock options at prices below the deemed fair
value of our common stock. These amounts are being amortized using the
accelerated method over the vesting period of the stock options. Of the total
deferred compensation, approximated $522,000 was amortized in 1998.

   Amortization of compensation also includes compensation charges associated
with the granting of a warrant for advisory services to an investor.
Amortization of compensation related to the warrant totaled $357,000 for the
year ended December 31, 1998.

 Settlement Expense

   Settlement expense totaled $570,000 in 1997 and consisted of our legal
expenses and the settlement expense that we paid in connection with a dispute
with one of our distributors. Under the terms of the settlement agreement, we
made cash payments to the distributor of $250,000 and granted the distributor a
5% increase in its existing discount rate for a specific quantity of its
purchases from us in 1998. In addition, under the terms of the settlement
agreement, we issued 45,592 shares of Series C preferred stock to the
distributor at a value of $6.58 per share in August 1998.

 Income Taxes

   In 1997 we incurred net losses for federal and state income tax purposes and
did not recognize any income tax provision or benefit during such period. In
1998 we recorded a provision for income taxes of $40,000 related to current
foreign income tax provided on the profits attributable to our foreign
operations. As of December 31, 1998, we had $2.0 million of federal and $1.4
million of state net operating loss carryforwards to offset future taxable
income. 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 our deferred revenue, which
totaled $4.4 million as of December 31, 1998.

   We cannot assure you that we will realize the benefit of the net operating
loss carryforwards and have therefore set up a full valuation allowance against
these deferred tax assets. The federal and state net operating loss
carryforwards will expire at various dates beginning in fiscal year 2004
through 2018, if we do not use them. Due to the "change of ownership"
provisions of the Internal Revenue Code, the availability of our pre 1998 net
operating loss and tax credit carryforwards are subject to an annual limitation
against taxable income in future periods. Post 1997 net operating loss and tax
credit carryforwards could also be subject to a substantial annual limitation
if future ownership changes should occur. It is likely that the shares to be
issued in this offering will create this type of change.

                                       27
Quarterly Results of Operations

   The following tables present some consolidated statements of operations data
for our seven most recent quarters ended September 30, 1999, in dollars and as
a percentage of net revenue. In management's opinion, this unaudited
information has been prepared on the same basis as the audited annual
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. You should read this
information in conjunction with the consolidated financial statements,
including the related notes, included elsewhere in this prospectus. The results
of operations for any quarter are not necessarily indicative of results that we
might achieve for any subsequent periods.
Quarter Ended
                          --------------------------------------------------------------------------
                          Mar. 31,  June 30,   Sept. 30,  Dec. 31,   Mar. 31,   June 30,   Sept. 30,
                            1998      1998       1998       1998       1999       1999       1999
                          --------  --------   ---------  --------   --------   --------   ---------
                                         (in thousands, except percentages)
Consolidated Statement
 of Operations Data:
Net revenue.............   $2,396   $ 3,083     $ 3,269   $ 5,899    $ 6,714    $  9,304    $13,227
Cost of revenue.........      780     1,396       1,469     3,008      3,281       4,146      5,435
                           ------   -------     -------   -------    -------    --------    -------
Gross profit............    1,616     1,687       1,800     2,891      3,433       5,158      7,792
Operating expenses:
  Research and
   development..........      540       698         843     1,275      1,566       1,991      2,466
  Sales and marketing...    1,182     1,553       1,970     2,394      4,025       5,623      6,518
  General and
   administrative.......      176       554         770       984      1,357       1,272      1,773
  Amortization of
   compensation.........        2        84         335       458      1,980      13,662      1,901
                           ------   -------     -------   -------    -------    --------    -------
   Total operating
    expenses............    1,900     2,889       3,918     5,111      8,928      22,548     12,658
                           ------   -------     -------   -------    -------    --------    -------
Loss from operations....     (284)   (1,202)     (2,118)   (2,220)    (5,495)    (17,390)    (4,866)
Other income (expense),
 net....................      (40)     (101)         92        81         16        (163)       716
                           ------   -------     -------   -------    -------    --------    -------
Loss before income
 taxes..................     (324)   (1,303)     (2,026)   (2,139)    (5,479)    (17,553)    (4,150)
Provision for income
 taxes..................       --         1           2       (43)        --         (11)       (72)
                           ------   -------     -------   -------    -------    --------    -------
Net loss................   $ (324)  $(1,302)    $(2,024)  $(2,182)   $(5,479)   $(17,564)   $(4,222)
                           ======   =======     =======   =======    =======    ========    =======
As a Percentage of Net
 Revenue:
Net revenue.............      100%      100%        100%      100%       100%        100%       100%
Cost of revenue.........       33        45          45        51         49          45         41
                           ------   -------     -------   -------    -------    --------    -------
Gross margin............       67        55          55        49         51          55         59
Operating expenses:
  Research and
   development..........       23        23          26        22         23          21         19
  Sales and marketing...       49        50          60        40         60          60         49
  General and
   administrative.......        7        18          24        17         20          14         13
  Amortization of
   compensation.........       --         3          10         8         30         147         14
                           ------   -------     -------   -------    -------    --------    -------
   Total operating
    expenses............       79        94         120        87        133         242         95
                           ------   -------     -------   -------    -------    --------    -------
Loss from operations....      (12)      (39)        (65)      (38)       (82)       (187)       (36)
Other income (expense),
 net....................       (2)       (3)          3         2         --          (2)         5
                           ------   -------     -------   -------    -------    --------    -------
Loss before income
 taxes..................      (14)      (42)        (62)      (36)       (82)       (189)       (31)
Provision for income
 taxes..................       --        --          --        (1)        --          --         (1)
                           ------   -------     -------   -------    -------    --------    -------
Net loss................      (14)%     (42)%       (62)%     (37)%      (82)%      (189)%      (32)%
                           ======   =======     =======   =======    =======    ========    =======
Our operating expenses, excluding amortization of compensation, have
increased significantly in absolute dollars, but not as a percentage of net
revenue, in each quarter since inception as we have transitioned from the
development stage to the commercialization of our products and services and
expansion of our business. We expect to incur an increase in operating expenses
in the future as we attempt to expand our business. To the extent that these
expenses are not accompanied by an increase in net revenue, our business,
results of operations and financial condition could be adversely affected.

                                       28
In the quarters subsequent to March 31, 1998, we experienced a significant
decrease in average selling prices which decreased our gross margin percentage
through the quarter ended December 31, 1998. Gross margin percentage for the
quarters ended June 30 and September 30, 1999 increased primarily due to lower
product costs.

   We expect our operating results to fluctuate significantly in the future as
a result of a variety of factors, many of which are outside our control.
Consequently, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful, and as a result, you should not rely
on them as an indication of future performance.

Liquidity and Capital Resources

   Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which totaled $18.9 million in aggregate
net proceeds through September 30, 1998. We have also financed our operations
through lines of credit, of which $2.5 million was outstanding as of September
30, 1998 and $4.1 million is outstanding as of September 30, 1999.

   Net cash used in operating activities was $276,000 in 1996, $2.3 million in
1997, $5.8 million in 1998, $4.3 million for the nine months ended September
30, 1998 and $9.4 million for the nine months ended September 30, 1999. For
1997, cash used in operating activities was attributable primarily to a net
loss of $2.1 million, an increase in trade accounts receivable of $777,000 and
an increase in inventory of $889,000 due to anticipated growth in expected
product revenues, offset in part by increases in accounts payable and accrued
liabilities of $1.3 million. For 1997 the increase in accounts receivable was
entirely related to our increase in sales. For 1998, cash used in operating
activities was attributable primarily to a net loss of approximately $5.8
million, and increases in trade accounts receivable of $6.2 million and
inventory of $2.7 million. For 1998, 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. There was no deferred
revenue recognized on sales to these customers, as collectibility was probable
under the software revenue recognition rules.

   In addition, we deferred recognition of revenue on some sales where
collectibility was not probable because of the fact that in some sales
arrangements, payment terms are for periods that are longer than our normal
terms. Because we have not established a payment history with some of these
customers, we concluded that the fees in these arrangements were not "fixed and
determinable" as defined by the software revenue recognition rules. For these
arrangements, we perform normal credit checks but concluded that revenue should
be deferred until such time as payments become due or probable. The amount of
deferred revenue as a result of not meeting the fixed and determinable criteria
totaled $1.4 million at December 31, 1998 and $4.3 million at September 30,
1999. No provision for doubtful accounts has been established for these
deferred revenue arrangements. The cash used in operating activities was offset
in part by depreciation of approximately $516,000, amortization of compensation
of $879,000 and increases in accounts payable and accrued liabilities of
approximately $3.4 million and an increase in deferred revenue of approximately
$4.3 million for the year ended December 31, 1998.

   Net cash used in operating activities for the nine months ended September
30, 1998 was attributable primarily to a net loss of approximately $3.7 million
and increases in trade accounts receivable of $4.5 million and inventory of
$1.7 million partially offset by depreciation of $229,000, increases in
accounts payable and accrued liabilities of $726,000 and increases in deferred
revenue of $4.3 million. Net cash used in operating activities for the nine
months ended September 30, 1999 was attributable primarily to a net loss of
approximately $27.3 million and increases in trade accounts receivable of $8.3
million and inventory of $1.8 million partially offset by depreciation of $1.6
million, amortization of compensation of $17.5 million, increases in accounts
payable and accrued liabilities of $5.4 million and increases in deferred
revenue of

                                       29
$5.0 million. The increase in inventory for the nine months ended September 30,
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 the nine months ended September 30, 1999 is primarily the result
of increased sales which occurred during the last month of the quarter. In
addition we increased our allowance for doubtful accounts to address the
increase in our accounts receivable balance.

   Net cash used in investing activities was approximately $95,000 in 1996,
$555,000 in 1997, $2.2 million in 1998, $1.4 million for the nine months ended
September 30, 1998 and $33.6 million for the nine months ended September 30,
1999. For the nine months ended September 30, 1999, $26.7 million of cash used
in investing activities was for the purchase of short and long term securities.
For each of these periods, the remaining cash used in investing activities was
also attributable to purchases of property and equipment.

   Net cash provided by financing activities was $518,000 in 1996, $3.2 million
in 1997, $19.5 million in 1998, $12.0 million for the nine months ended
September 30, 1998 and $64.9 million for the nine months ended September 30,
1999. For 1996 and 1997, cash provided by financing activities was attributable
principally to proceeds from the issuance of preferred stock. 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. For the nine months ended September 30, 1998, cash provided by financing
activities was attributable primarily to $9.9 million of proceeds from the
issuance of preferred stock and $2.6 million in proceeds from the issuance of
bridge notes, offset by $550,000 in repayment of bridge notes. For the nine
months ended September 30, 1999, cash provided by financing activities was
attributable primarily to $1.6 million in proceeds from our line of credit and
equipment term loan facility, $332,000 of proceeds from the issuance of
preferred stock and $62.8 million of proceeds from the issuance of common stock
principally through our initial public offering.

   As of September 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate a substantial increase in capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We also may establish additional
operations as we expand globally.

   From July 2, 1996 through December 31, 1998, we issued warrants to purchase
160,266 shares of Series C preferred stock at prices ranging from $5.59 to
$6.58 per share and 1,760,000 shares of common stock at a price of $0.05 per
share. All of these warrants for shares of common stock and Series C preferred
stock have been exercised as of September 30, 1999. In June 1999, we granted a
warrant to purchase 3,000 shares of common stock, which remains outstanding.
See Notes 3 and 5 of Notes to Consolidated Financial Statements.

   In February 1998, we obtained $2.6 million in bridge financing in the form
of promissory notes from several investors and other parties. In June 1998,
approximately $2.1 million of the promissory notes were converted to Series C
preferred stock and the remainder was repaid.

   In May 1998, we established a $5.0 million line of credit with a financial
institution. The effective interest rate on this credit facility is equal to
one-half of one percentage point above the prime rate. Borrowings under this
agreement are limited to our eligible receivable base. The terms of the line of
credit agreement establish affirmative and negative covenants, under which we
must maintain certain financial ratios and reporting practices. We failed to
comply with financial covenants related to the liquidity, tangible net worth
and the maximum permitted loss required under the agreement as of December 31,
1998. The financial institution waived these events of default. On February 16,
1999, the financial institution increased the line of credit to $7.0 million,
extended an additional $3.0 million equipment term loan facility, and revised
these financial ratios.

                                       30
As of September 30, 1999, $4.1 million was outstanding under this line of
credit and $182,000 was outstanding under the equipment term loan facility. At
September 30, 1999, we had $2.9 million unused under our line of credit and
$2.8 million unused under our equipment term loan facility.

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

Year 2000 Compliance

   Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish between 20th and 21st century dates. This may result in software
failures or the creation of erroneous results.

   We have conducted a Year 2000 readiness review for the prior and current
versions of our products. The review includes assessment, implementation,
including remediation, modifications, where necessary, of current product
versions, validation testing and contingency planning. We continue to respond
to customer questions about prior versions of our products on a case-by-case
basis.

   We have largely completed all phases of this plan for the prior and current
versions of our products. As a result, all current versions of our products are
"Year 2000 compliant," as defined below, when configured and used in accordance
with the related documentation, and provided that the underlying operating
system of the computer on which our products run and any other software used
with or in the computer on which our products run, prior versions of our
products are also Year 2000 compliant. We are also supplying our customers who
use prior versions of our products with software updates for the third party
supplied software components of our products to make those versions Year 2000
compliant. We have tested our products on all platforms and all versions of
operating systems that we currently support.

   We define "Year 2000 compliant" as the ability to:

  . correctly handle date information needed for the December 31, 1999 to
    January 1, 2000 date change;

  . function according to the product documentation provided for this date
    change, without changes in operation resulting from the advent of a new
    century, assuming correct configuration;

  . where appropriate, respond to two-digit date input in a way that resolves
    the ambiguity as to century in a disclosed, defined and predetermined
    manner;

  . if the date elements in interfaces and data storage specify the century,
    store and provide output of date information in ways that are unambiguous
    as to century; and

  . recognize the Year 2000 as a leap year.

   We have tested software obtained from third parties that is incorporated
into our products, and we have received assurances from our primary vendors
that licensed software is Year 2000 compliant. We re-verified the assurances
from primary vendors during October 1999.

                                       31
Our internal systems include both our information technology, or IT, and
non-IT systems. We have made an assessment of our material internal IT systems,
including both our own software products and third-party software and hardware
technology. We completed our initial inventory/assessments of our non-IT
systems as of September 30, 1999. We have completed the inventory/assessment of
licensed software included in our products and have confirmed that the licensed
software that we incorporate in our products is Year 2000 compliant. We have
not initiated an assessment of our non-material internal IT systems. This
confirmation has been achieved through a combination of internal testing,
vendors' Year 2000 Readiness Disclosures, and an ongoing certification program
addressing all of our suppliers and vendors.

   Despite testing by us and by current and potential clients, and assurances
from developers of products incorporated into our products, our products, IT
systems, and non-IT systems may contain undetected errors or defects associated
with Year 2000 date functions. Known or unknown errors or defects in our
products or IT and non-IT systems could result in delay or loss of revenue,
diversion of development resources, damage to our reputation, or increased
service and warranty costs, any of which could materially adversely affect our
business, operating results or financial condition. Some industry analysts have
predicted significant litigation regarding Year 2000 compliance issues, and we
are aware of such lawsuits against other software vendors. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.

   Our total costs incurred through September 30, 1999, are approximately
$500,000. We expect that we could incur additional costs with respect to our
Year 2000 compliance efforts. In addition, we may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal IT and non-IT systems.

   We do not currently have any information concerning the Year 2000 compliance
status of our customers. If our current or future customers fail to achieve
Year 2000 compliance or if they divert technology expenditures to address Year
2000 compliance problems, our business could suffer.

   We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. We may incur additional costs
related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for our products,
product engineering and customer satisfaction. In addition, we may experience
material problems and costs with Year 2000 compliance that could adversely
affect our business, results of operations, and financial condition.

   We have developed a contingency plan to address situations that may result
if we are unable to achieve Year 2000 readiness of our critical operations. We
are also subject to external forces that might generally affect industry and
commerce, such as utility or transportation company Year 2000 compliance
failures and related service interruptions.

Recent Accounting Pronouncements

   In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9. "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", or 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 will be required to comply
with the provisions of SOP 98-9 for transactions entered into beginning January
1, 2000. The adoption of SOP 98-9 is not expected to have a material impact on
our consolidated financial statements.

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 denominated in U.S. dollars and therefore
are not subject to

                                       32
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 September 30, 1999, we have
not experienced any significant negative impact on our operations as a result
of fluctuations in foreign currency exchange rates.

   We have an investment portfolio of fixed income securities, including those
classified as cash equivalents of $53.6 million at September 30, 1999. These
securities are subject to interest rate fluctuations and will decrease in
market value if interest rates increase.

   We also have financial market risk on the interest rate associated with our
short term debt. At September 30, 1999, our financial market risk related to
this debt was immaterial.

                                       33
BUSINESS

Overview

   We are a leading provider of Internet protocol or IP telephony systems. IP
telephony systems permit the simultaneous transmission of voice, fax and data
over the Internet and similar communications networks. Using our technology to
simultaneously transmit voice, fax and data, our customers are able to more
efficiently and cost-effectively use the available capacity of their networks.
Existing customers include traditional, local, international and wholesale long
distance telephone companies, as well as new telecommunications service
providers. Traditional telecommunications service providers are companies that
have previously served as the monopoly or incumbent provider in their region.
New telecommunications service providers are companies that have started to
offer telecommunications services in the last three to five years in countries
that have deregulated their telecommunications markets. In addition, we have
recently begun selling to enterprises, in particular, large corporations with
multiple locations and high long distance calling costs. Using our products,
enterprises should be able to reduce their telecommunications services costs
compared to the costs they previously incurred for similar services using the
traditional telephone system. The IP telephony market is relatively new. Less
than 1% of all voice calls worldwide is currently transmitted using IP
telephony systems primarily over the Internet. According to Frost & Sullivan,
between 1997 and 2002, the number of call minutes, including voice, fax and
data, transmitted using IP telephony systems is expected to have a compound
annual growth rate of 325%.

   Using our IP telephony product, the Clarent system, service providers and
enterprises that manage their own telephony services can deliver a level of
voice quality that is indistinguishable from the voice quality over the
traditional telephone system. In addition, the Clarent system enables the
simultaneous transmission of voice, fax and data. The Clarent system features a
modular architecture that permits our customers to add new product and service
features without extensive product cost or development time. Based on publicly
available data provided by large telecommunications service providers, we
believe our modular architecture enables the provision of new and existing
communications services at a lower cost than the provision of communications
services by traditional telephone companies.

   The Clarent system consists of three distinct components:

  . the Clarent Gateway, an integrated hardware and software product that
    includes network server software that is based on industry standards;

  . the Clarent Command Center, a proprietary client/server software package;
    and

  . a relational database, which is supplied by a third party.

   Our products enable our customers to deliver IP telephony services to end
user customers who can continue to use their existing telephones. Since our
products are integrated by telephone companies and other service providers into
systems that take calls from the traditional telephone system and send these
calls over the Internet and other Internet protocol networks before returning
these calls to the traditional telephone system, the use of IP telephony is
transparent to end user customers. Our products can be accessed from cellular
as well as traditional telephones. As a result, end users do not have to
purchase additional telephone equipment to make IP telephony calls. Currently,
IP telephony is not commonly offered incorporating satellite transmissions or
using cable lines.

   We began commercial shipment of the Clarent system in March 1997. As of
September 30, 1999, we had shipped the Clarent system to approximately 160
telecommunications service providers in 55 countries worldwide. The Clarent
system has been installed in some of the world's leading service provider
networks, including those of AT&T Corporation, China Telecom, Chunghwa Telecom
(Taiwan), Ji Tong Communications Co., Ltd. (the People's Republic of China),
KDD (Japan), Korea Telecom (South Korea), Pacific Gateway Exchange (United
States), Singapore Telecom, Star Telecom (United States), Telstra (Australia)
and Telia Telecom (Sweden).

                                       34
Industry Background

   The telecommunications industry has historically followed a path of
development based on the belief that voice and data require separate
technologies and network resources. Traditional telephone systems were, and are
still, built around an architecture that requires a dedicated connection, or
circuit, in order for a call to be completed. This technology requires the
circuit to remain dedicated between calling parties for the entire duration of
a call. Most data today is transmitted over Internet protocol-based networks.
These networks are more efficient because they do not require a dedicated
circuit for the entire path of the call. In a network using Internet protocol,
the voice, fax or data is divided into packets that are simultaneously sent to
a final destination where they are reassembled back to their original form. In
this type of network, multiple types of information including voice, fax and
different forms of data can travel through the network at the same time. The
improvements in the technologies used in data networks have led to an increase
in use of this type of network to transmit both voice and data. The IP
telephony market emerged from these technological advances. Recent developments
in IP telephony technology have significantly bridged the voice quality gap
between the traditional telephone system, which is commonly referred to as a
circuit-switched system, and IP telephony systems. The differences between a
circuit-switched call and an IP telephony call is illustrated in the diagram
below.

 [Graphic depicting the differences between a circuit-switched and IP telephony
                                     call]
   [A phone call transmits signals that direct a series of switches to open a
dedicated circuit to second phone. The dedicated circuit carries the electronic
 signals through the line. The phones transists the signals back into speech.]
    [Unlike the traditional circuit switched phone call, which travels on a
    dedicated circuit, the electronic signals go to a Clarent Gateway, which
 converts them into small packets of digital information. The packets may take
 different routes to their destination. After traveling through the IP network,
   the packets are converted back into electronic signals by another Clarent
                  Gateway and put back on the phone network.]

   Today a voice call placed over an IP telephony network can sound virtually
indistinguishable from the same call made over the traditional telephone
system. What distinguishes IP telephony technology, however, is that it allows
service providers to simultaneously send voice, fax and data transmissions over
their networks and enables them to quickly add and use additional features and
services without the need for costly network upgrades. In contrast, changes to
the traditional telephone system are costly and difficult. For example, based
on estimates from the International Engineering Consortium, we believe the
recent integration of such basic

                                       35
services as caller ID and call return services into the traditional telephone
system took over a decade to accomplish and hundreds of millions of dollars to
implement in the United States alone. In addition, new end user devices, such
as cable modems, digital subscriber line (DSL) modems and wireless phones that
can also be Internet access devices offer cost and feature benefits to
consumers. IP telephony technology allows phone calls to be made through these
devices.

   The added flexibility and cost-effectiveness of IP telephony networks are
particularly important in an increasingly deregulated and competitive market
environment. Deregulation acts as a catalyst for the rapid deployment of these
services by allowing new service providers to quickly enter formerly regulated
markets and by forcing existing service providers to rapidly respond to the
challenge of competition. According to a 1998 Frost & Sullivan report, the
total number of worldwide voice minutes running over Internet protocol-based
data networks is expected to grow from 6.3 million in 1997 to 8.8 billion in
2002, representing a compound annual growth rate of 325% for the period.
Accordingly, spending on IP telephony equipment is projected to grow from $47.3
million in 1997 to $3.2 billion in 2002, representing a compound annual growth
rate of 132%.

   We believe a significant market opportunity now exists for the makers of IP
telephony systems. We believe that none of our competitors to date has
developed a comprehensive solution that incorporates the functionality that
service providers require to provide end-to-end service. Some vendors have
developed products that embed the instructions on where to route the IP
telephony call in the same equipment that provides the IP telephony technology.
This approach limits service providers' flexibility to make modifications to
their networks because any modification must be made at several different
points throughout the network.

   Some IP telephony vendors may offer IP telephony products that allow calls
to be made from traditional telephones. We believe that these vendors may not
have an architecture that also supports calls transmitted through cable modems
or calls using other new end user devices.

   In addition, some IP telephony vendors now allow enterprises to use IP
telephony for calls that are made from one company location to another.
However, if that enterprise's end users want to call a non-company location,
those calls must get routed over the traditional phone system.

   Many vendors only provide limited billing and network management data. This
data is gathered and formatted in a simplistic fashion, limiting the ability of
service providers to manage sophisticated networks or to bill using any pricing
structure they desire. Also, these simplistic billing systems make it difficult
to connect service providers' networks to the networks of other service
providers.

   Some router, switch and IP telephony companies have formed partnerships with
billing and network management technology providers in order to provide even
the most basic operational support solution to service providers. A router is a
device that routes packets over the Internet or other Internet protocol
networks. A switch is a device that takes multiple incoming calls and places
these calls onto fewer lines. This partnering necessitates integration, which
can be technologically difficult, time consuming and expensive.

   Many IP telephony vendors require dedicated ports for voice, fax or data. A
port is the connection between the traditional telephone system and the IP
telephony system. Each port handles a single call. Systems that use dedicated
ports are inefficient and more costly because more ports are needed to handle
the different types of transmissions anticipated. In addition, many vendors do
not have the technical capability to integrate these ports with the traditional
telephone system so that the ports can correctly interpret busy signals, dial
tones and disconnects. This means that service providers cannot accurately bill
for the call. Furthermore, the inability to integrate well with the traditional
telephone system makes it more difficult for end-users to gain the benefits of
this technology because they have to dial separate phone numbers or use multi-
step dialing processes.

   In order to compete effectively in the emerging market for IP telephony
services, service providers need a solution that provides the following
attributes. The solution must be cost-effective and combine a high level of
functionality with a flexible architecture designed to support growth, new
features and the ability to make calls

                                       36
using new end user devices. This solution must enable service providers and
enterprises to deliver clear and robust voice quality that can be merged
efficiently with fax and data IP telephony services. The solution must also
possess comprehensive back-office features to allow service providers to
operate and manage a viable communications business. We also believe that
enterprises need a solution that enables their end users to take advantage of
the benefits of IP telephony for voice calls, fax and data transmissions made
both within and outside of their organization. Some service providers and their
customers, as well as enterprises and their end users, will use these features
to support connections with other networks, while others will use these
features to connect to an intermediary, like an IP telephony clearinghouse, to
facilitate the exchange of IP telephony calls. These clearinghouses enable
service providers to exchange calls between multiple destinations worldwide
without having to enter into individual agreements with other service providers
in each geographic region. A clearinghouse also performs the associated
accounting and settlement services for its members. The solution must allow
service providers and enterprises to centrally make changes to their network as
this technology continues to evolve. The solution must also be able to
incorporate feature enhancements because there will be many and varied new
feature requests as this technology continues to evolve. The solution must also
be transparent to end users and easy to use. Finally, we expect that customers
will prefer a solution that is technologically advanced enough to allow service
providers and enterprises to quickly adapt their entire IP telephony network to
emerging standards. We believe that although some of our competitors may offer
some of these attributes, with others offering a few other attributes, none of
our competitors offers all of the above attributes.

The Clarent Solution

   We have developed a comprehensive IP telephony solution that offers the
following key benefits:

   Traditional telephone system voice quality and simultaneous voice, fax and
data transmission. Calls over a Clarent network that sound indistinguishable
from a traditional telephone system call. In addition, the Clarent system
enables the simultaneous transmission of voice, fax and data traffic. These
features are enabled by using standard compression and echo cancellation
technologies and our proprietary packet technologies.

   Rapid, low-cost deployment and maintenance. The Clarent system provides a
comprehensive solution that can be rapidly put into use by service providers
with a modest initial capital investment. By centralizing management and
distributing functionality, the Clarent system allows service providers to
perform network administration in an economical manner.

   Transparent and secure interconnection with different networks. The Clarent
system is designed to support the seamless interconnection between other
networks that use Clarent's products and the traditional telephone system. This
includes bridging an enterprise's private IP telephony network with a
telecommunications service provider-based IP telephony network and IP telephony
global clearinghouses so the enterprise can take advantage of IP telephony for
calls made within or outside of its business. This includes interconnecting to
the traditional telecommunications service providers' networks, commonly known
as the SS7 network. These interconnections provide a level of security that
enables service providers to exchange large volumes of calls and billing data
with each other and with their business customers. This process requires that
only relevant transaction information is disclosed, either bilaterally or
through an intermediary, such as an IP telephony clearinghouse.

   Complementary processing of calls and centralized network management
functions. The Clarent system provides centralized processing of such network
functions as the authentication of callers, billing, routing and pricing of
calls and network diagnostics and maintenance. Because we provide both the call
processing and operational support functions in a network, we can effect
system-wide enhancements and new features quickly and efficiently.

   Adaptability to changing standards and technologies. The Clarent system is
comprised of distinct units that can be spread across a network. Compared to a
circuit-switched network, a network using a Clarent system may be modified
quickly to accommodate new features, support new protocols or handle new end-
user devices, such as cable modems and IP telephones, as they become widely-
used or available.

                                       37
Strategy

   Our objective is to be the leading provider of comprehensive IP telephony
solutions to service providers and enterprises worldwide. Key elements of our
strategy include the following:

   Provide the core technology enabling the delivery of a broad range of IP
telephony services. We have designed the Clarent system to provide service
providers and enterprises with a unified technology platform for the effective
and rapid delivery of a broad range of IP telephony services. This will enable
service providers and enterprises to offer their customers or end users a wide
array of value-added services, including virtual private networks and
worldwide roaming, using the Clarent system. An additional element of our
strategy is to increase the level of technological interoperability of our
products with those of other vendors to expand the breadth of opportunities
our products can address. An example of this strategy is to allow enterprises
to enable their end users to use IP telephony for voice calls, fax and data
transmissions made both within and outside their organization.

   Increase our penetration of service provider market. We plan to increase
the sales of our products by expanding our relationships with existing
customers and by capturing new customer relationships. We have shipped our
solutions to approximately 160 telecommunications service providers, including
several of the world's leading long distance carriers. We believe the demand
for our products will increase as new and existing customers increasingly
derive revenue from IP telephony-based services.

   Target key growth markets worldwide. We will continue to focus our sales,
marketing and customer service and support efforts on key growth markets for
IP telephony services. We currently maintain a global sales and customer
service and support presence, with offices in Belgium, France, Germany, Japan,
the People's Republic of China, South Korea, Spain, Taiwan, the United Kingdom
and the United States, focusing on both service provider and enterprise
customers. We believe that international markets represent particularly
attractive early markets for our products and services due to rapid
telecommunications deregulation and increasing demand for network capacity. We
will continue to add sales, marketing and customer service and support
resources in these regions and will respond to emerging opportunities in these
markets.

   Promote strategic relationships between our customers. We will continue to
promote the formation of bilateral alliances and clearinghouse arrangements
between our customers based on the Clarent system. For example, AT&T
Corporation, Pacific Gateway Exchange, Telia Telecom, ISPhone, Startec and
Rapid Link have established international IP telephony clearinghouses based on
the Clarent system. We expect other service providers in different geographic
regions to continue to establish bilateral relationships with other Clarent
customers or join additional clearinghouses. We believe these relationships
will lead to increased installations of our products in both existing and new
customers' networks.

   Extend our technology leadership position. We believe we have established a
technology leadership position in the market for IP telephony solutions, and
we intend to extend this position by leveraging our distinct architecture. Our
architecture is a component-based technology that segregates the call
processing and network management functions in the Clarent system. We believe
that our architecture differentiates the Clarent system from competing
vendors' systems by enabling service providers to implement and manage new
features and services across a network with a minimum level of service
disruption.

   Deliver added value through customer support and services. To drive the
rapid deployment of our solutions, we will continue to assist our customers in
the installation of our IP telephony systems and provide comprehensive ongoing
technical support, training and other services. We expect to continue to build
our internal professional services organization and explore additional
relationships with potential global services partners as a means of generating
additional revenue.

                                      38
Products and Technology

   The Clarent system incorporates internally-developed and third-party
technologies, including our proprietary packet handling technology. This
technology 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. As shown below, the Clarent system is comprised of
three distinct components:

  . the Clarent Gateway;

  . the Clarent Command Center; and

  . a third-party relational database.

   In order to implement the Clarent system, 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 telephone
gateway to a central office switch and the Internet, or other Internet Protocol
network, to allow the Clarent solution to work. The implementation for an
enterprise is the same, except an enterprise usually connects the gateway to a
private branch exchange, commonly known as PBX, instead of a central office
switch.

[Graphic depicting the architectural structure of our solution, the Clarent
System]

 Clarent Gateway

   The Clarent Gateway is an integrated hardware and software product that
converts voice, fax and data into packets that can be sent over Internet
protocol networks, then transmits these packets over the network. At the
destination, another Clarent Gateway converts these packets back into circuit-
switched voice, fax and data. The

                                       39
Clarent Gateway is connected on one side to the traditional telephone network,
or to a PBX, and on the other side to the Internet protocol network. Each
Clarent Gateway currently has the capacity to handle up to 120 simultaneous
voice calls, fax and data transmissions. Typically, a service provider or
enterprise will deploy a number of gateways sufficient to handle the projected
call volume and for system redundancy. The Clarent Gateway provides the
following functionality:

   Standard telephony interfaces. The Clarent Gateway supports many standard
telephony interfaces and signaling protocols. Available telephony interfaces
include both analog and digital. Supported signaling protocols include MFR1,
MFCR2, PRI-ISDN, Feature Group D 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. Clarent Gateways simultaneously handle
voice, fax and data transmissions through universal ports, eliminating the need
to dedicate ports to specific types of transmissions. A universal port can
handle any type of call that comes to it, either a voice, fax or data.
Conversely, a dedicated port can only handle a single type of call, either
voice or fax or data. Universal and dedicated ports each handle one call at a
time, but a universal port can handle any type of call. Universal ports are
more flexible and cost-efficient.

   Compliance with major telecommunications standards. Clarent 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.

   Low call latency. Clarent 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 Command Center

   The Clarent Command Center is a centralized client/server software package
that processes network management and back-office functions, including the
routing and pricing of calls, user management, gateway monitoring and billing.
A single Clarent Command Center can support more than one Clarent Gateway. The
Clarent Command Center does not have a dedicated connection to each Clarent
Gateway. Instead it communicates with Clarent Gateways over the Internet or an
Internet protocol network. By centralizing all network management and
back-office functions, networks that use 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:

   Dynamic routing of calls. Calls are directed to specified groups of
gateways. In the event that a specified group of gateways is unavailable for a
particular destination, the Clarent Command Center will automatically route the
call to the specified backup group of gateways for completion. Furthermore, if
there are no gateways for a particular destination, the Clarent Command Center
can always route the call through the circuit-switched network, so that call
completion can be guaranteed.

                                       40
Call pricing. The Clarent Command Center supports a wide range of pricing
options for service provider and enterprise customers. Service providers are
able to customize their pricing schemes to their business needs and offer
different rates for the same routes based on individual call or user
characteristics. Enterprise customers are able to charge calls back to
different internal departments. Examples of pricing options supported by the
Clarent Command Center include time-of-day rates and drop-off rates, which are
reduced rates after the first minute of a call. Rates can also be varied, based
on the identity of the caller, the calling number or the called number, such as
toll-free numbers.

 Relational Database

   The Clarent system also 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. The Clarent
system is currently compatible with specific databases, including current
releases from Oracle Corporation and Microsoft Corporation. As a result,
customers using the Clarent system can develop their own customized Web
interfaces, billing systems and advanced management tools. Examples of the data
stored in the relational database include:

   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 this capability to segment a network into
domains, or "subnetworks" within a larger network.

 Other Clarent Products and Services

   The following table provides a summary of additional Clarent products and
services:
Product or Service               Features
Clarent Connect                  Provides network interconnection; real-time
                                   account settlement; least-cost routing of
                                   calls; balancing of calls between partners;
                                   and connecting service providers and private
                                   networks of companies
-------------------------------------------------------------------------------
  Clarent Clearinghouse Products   Harvest, sort, group and archive billing
                                   data from individual gateways or networks of
                                   gateways
-------------------------------------------------------------------------------
  Clarent SS7/C7 Gateway Signaling Provides seamless connection between a
                                   service provider's network and a Clarent
                                   Gateway
-------------------------------------------------------------------------------
  Clarent Care                     Provides software upgrades and worldwide
                                   technical support to customers seven days a
                                   week, 24 hours a day
-------------------------------------------------------------------------------
  Clarent University               Provides basic and advanced training courses
                                   to users of Clarent technology
Products Under Development

   We are developing a new architecture called Clarent Open Network Environment
(Clarent ONE). We believe that this new architecture will provide the
foundation for Clarent products going forward. Clarent ONE is also being
designed to introduce a variety of open, standards-based products targeted to
allow consumers to use new end user devices to make IP telephony calls.

                                       41
We are currently designing a suite of products based on the Clarent ONE
architecture expected to be released in phases during the next 18 months. These
products include:

  . Clarent ClearView
  . Clarent Gatekeeper
  . Clarent Call Manager
  . Clarent Application Programming Interfaces (APIs)
  . Clarent high density gateway

   Clarent ClearView. Clarent ClearView is designed to provide network
management capabilities to customers and tools that allow customers to build
their own network management features.

   Clarent Gatekeeper. The Clarent Gatekeeper will be designed to allow Clarent
gateways to interoperate with other vendors' gateways.

   Clarent Call Manager. The Clarent Call Manager is an open, standards-based
product that will be designed to allow new end user devices to make calls
through IP telephony networks.

   Clarent Application Programming Interfaces (APIs). Clarent APIs will be
designed to allow software developers to build new end user applications to
work with our products.

   Clarent high density gateway. The Clarent high density gateway will be
designed to perform the same functions as the current Clarent Gateway, but will
be designed to allow 1,500 to 2,000 simultaneous calls in a gateway that
currently handles up to 120 simultaneous calls.

Customers

   We began commercial shipments of our products in March 1997 and, as of
September 30, 1999, had already shipped Clarent Systems to approximately 160
telecommunications service providers in 55 countries. We sell our products
directly and through distributors to service providers.

   The following table is a list of our top 15 customers by revenue for 1998:
AT&T Corporation           Hemisphere Communications Corporation Sprint Corporation
   AT&T GCSI Inc.             IT&E Overseas, Inc.                   Star Telecom
   AT&T Jens Corporation      Korea Telecom International           Technet International, Inc.
   Bitro Telecommunications,  Rapid Link Telecommunications         Telecomet International Inc.
    Inc.
   Dacom International Inc.   Singapore Telecommunications Ltd.     Telia Telecom
In 1998 sales to these customers represented approximately 70% of our
revenues. Entities affiliated with AT&T Corporation accounted for 36% of net
revenue and Technet International accounted for 12% of net revenue in 1998.
Entities affiliated with AT&T Corporation accounted for 16% of net revenue and
entities affiliated with Ji Tong Communications Co., Ltd. accounted for 15% of
net revenue in the first nine months of 1999.

Customer Case Studies

   The following case studies illustrate how certain of our customers have
deployed our products.

   Jens Corporation (a subsidiary of Japan Telecom as of September 1, 1999,
previously owned by AT&T Corporation). Jens Corporation offered its customers
IP telephony services using the Clarent system in September 1997. Its first
service offering, AT&T @Phone, is a prepaid and postpaid calling card service
that initially allowed consumers in Japan to call 57 other countries around the
world. By the fall of 1998, Jens Corporation had expanded this service to
provide voice and fax service to 224 countries. Using the Clarent system, Jens
Corporation has been able to provide international long distance telephone
services to customers in Japan, a market in which it had previously not been
able to provide service

                                       42
using circuit-switched technology. We believe that the success of AT&T @Phone
stems from its ability to offer a lower priced international long distance
alternative compared to existing circuit-switched services.

   Rapid Link Telecommunications. Rapid Link Telecommunications, an
international telecommunications service provider based in Atlanta, Georgia,
launched commercial long distance service using the Clarent system in the fall
of 1998. The initial service launched was a prepaid long distance calling card
service between Asia, Europe and the United States. Rapid Link
Telecommunications is expanding its IP telephony network by setting up
bilateral partnerships with major international telecom carriers offering IP
telephony services in their geographic regions. The first partnership was
signed with Korea Telecom International in November 1998, and the second
partnership was announced with Telecom Malaysia in September 1999.

   Telia Telecom. Telia Telecom, the leading telecommunications service
provider in Scandinavia and the incumbent telephone company in Sweden, began
commercial IP telephony trials in the summer of 1998 using the Clarent system.
After testing our products against those of seven other vendors, Telia Telecom
selected the Clarent system, based on its differentiating features. These
differentiating features included voice quality and the flexibility of the
Clarent Command Center. Telia launched its service in February 1999. At that
same time, Telia Telecom also launched Europe's first IP telephony
clearinghouse, using the Clarent system, for international IP telephony calls.
Since then, Telia Telecom has recruited approximately 15 service providers to
join the clearinghouse.

   Sybase, Inc. Sybase, Inc., a leading enterprise software company, is
currently using the Clarent system at selected sites worldwide. At these sites
the company's employees are using Sybase, Inc.'s existing PBX, which connects
to a Clarent Gateway, to make IP telephony calls within Sybase, Inc. When
calling outside Sybase, Inc.'s internal network, the company calls are routed
through the Clarent Gateways in the AT&T Global Clearinghouse's IP telephony
network. By implementing the Clarent system into its corporate network, Sybase,
Inc. anticipates realizing a significant reduction in its telecommunications
costs.

Sales, Marketing and Customer Service and Support

 Sales

   We currently have a global sales organization with sales and support offices
in Belgium, France, Germany, Japan, the People's Republic of China, South
Korea, Spain, Taiwan, the United Kingdom and the United States. Our sales force
sells our products to service providers and enterprises both directly and
through third-party distributors. Direct sales accounted for 82% of our net
revenue for the year ended December 31, 1998 and 83% for the nine months ended
September 30, 1999. In addition, we have 13 third party distributors in 10
countries. Our arrangements with these distributors provide discount levels,
target geographic sales regions and other material terms. In addition, we
believe that our value added reseller (VAR) relationship with Siemens will
expand our sales opportunities because of the size and geographic presence of
Siemens' sales force.

 Marketing

   Our marketing organization develops strategies and implements programs to
support the sale of our products. Our current marketing efforts include a
number of programs designed to increase industry visibility, including
press/analyst tours, trade shows and events, speaking engagements and ongoing
interaction with analysts and the media as well as targeted marketing programs.
In particular, we have established a partner marketing program to enhance
members' ability to develop applications and complementary technology to work
with our products and to encourage the growth of minutes exchange networks or
clearinghouses based on our technology. Additional programs include our
customer summit, which provides the opportunity for our customers to meet each
other and learn more about the Clarent system. We also undertake joint
marketing programs with our clearinghouse customers to help them build their
customer base.

 Customer Service and Support

   We believe that customer service and support are critical to maintaining
existing customer relationships and developing relationships with new
customers. Our professional services group performs the following functions:

  . pre-sales support;

                                       43
. product installation and customization;

  . technical support and consulting services;

  . customer training; and

  . product maintenance.

   In addition to our sales and support offices in North America, Asia and
Europe, we have established a support center in the United States that provides
support seven days a week, 24 hours a day. We also currently partner with
Equant Integration Services, Inc., a supplier of international network support
services, to provide global call center and technical support to our customers.

Competition

   We compete in a new, rapidly evolving and highly competitive and fragmented
market. 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 international service providers and to facilitate
relationships between those service providers to increase the geographic
coverage of their services.

   Our current principal competitors include large networking equipment
manufacturers, such as 3Com Corporation and Cisco Systems, Inc., large
telecommunications equipment manufacturers, such as Lucent Technologies Inc.
and Nortel Networks Corporation, and IP telephony technology companies, such as
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. According
to one industry source, our market share in the IP telephony equipment market,
as measured by ports shipped, fell from 16.7% in 1998 to 4.0% in the first half
of 1999. If any technology that is competing with ours is more reliable,
faster, 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 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 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
margins 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

                                       44
extensive product development input from our customers and monitor our
customers' needs and changes in the marketplace. We are currently 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, significant investments in
research and development. Our engineering, research and development
expenditures totaled approximately $136,000 in 1996, $1.0 million in 1997, $3.4
million in 1998 and $6.0 million for the nine months ended September 30, 1999.

   We perform our research and product development activities at our principal
offices in Redwood City, California. As of September 30, 1999, we had 53
employees in our research and development department. 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.

Manufacturing and Assembly

   Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control and packaging and
shipping. We assemble and test our products at our facilities in Redwood City,
California. Based on volume, geographic or customer requirements, we may begin
outsourcing some assembly and test functions. We have developed an assembly
process that enables us to configure our products to be adapted to different
customer specifications at the final assembly stage. This flexibility is
designed to reduce both our assembly cycle time and our need to maintain a
large inventory of finished goods. We believe that the efficiency of our
assembly process to date is largely due to our product architecture and our
commitment to assembly process design. However, this assembly process involves
some risks, including the potential absence of adequate capacity and reduced
control over delivery schedules, manufacturing yields, quality and costs.

   We test our products both during and after the assembly process using
internally-developed product assurance testing procedures. Although we
generally use standard components for our products and try to maintain
alternative sources of supply, some key components are purchased from sole or
single source suppliers for which alternative sources are not currently
available. We may experience supply problems in the future from any of our
suppliers, which could delay our ability to assemble and ship our products and
seriously harm our business, financial condition and results of operations.

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 do not have any United States patents issued for any of our
technology, although we do have four United States applications, one German
application and one Japanese application on file.

   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

                                       45
patents, when or if issued, or our other intellectual property rights. If we
fail to adequately protect our intellectual property, 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
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 substantial, including treble damages or the issuance of an injunction
against us requiring that we cease development and withdraw some products from
the marketplace. Limitations on our ability to market our products and delays
and costs associated with monetary damages and redesigns in compliance with an
adverse judgment or settlement could harm our business, financial condition and
results of operations.

Employees

   As of September 30, 1999, we had a total of approximately 230 employees, of
which approximately 53 were in research and development, 100 were in sales,
marketing and customer support and 77 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 this
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.

Facilities

   We occupy approximately 86,000 square feet of space in Redwood City,
California. The term of the lease for 14,000 square feet of this facility
expires in December 1999, 25,000 square feet expires in December 2003 and the
remaining 47,000 square feet expires in October 2004. In addition to our
principal office space in Redwood City, California, we also lease sales and
support offices in Illinois and internationally in Belgium, France, Germany,
Japan, the People's Republic of China, South Korea, Spain, Taiwan and the
United Kingdom. We believe that existing facilities are adequate for our needs
through calendar year 1999 and are currently in the process of locating
additional space to meet our expected requirements thereafter. If we require
additional space, we believe that we will be able to secure such space on
commercially reasonable terms without undue operational disruption.

Legal Proceedings

   We are not currently a party to any material legal proceedings.

                                       46
MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors and their ages as of September 30,
1999, are as follows:
Name                             Age                  Position
----                             ---                  --------
Jerry Shaw-Yau Chang............  40 Chief Executive Officer, President and
                                      Director

Richard J. Heaps................  47 Chief Operating Officer, Chief Financial
                                      Officer, General Counsel and Secretary

Michael F. Vargo................  39 Senior Vice President, Chief Technology
                                      Officer and Director

Mark E. McIlvane................  46 Senior Vice President, Worldwide Sales

Heidi H. Bersin.................  44 Senior Vice President, Corporate Marketing
                                      and Communications

Mong Hong (Mahan) Wu............  40 Senior Vice President and General Manager,
                                      Asia Pacific

Wen Chang Ko(1)(2)..............  50 Director

Syaru Shirley Lin(1)(2).........  31 Director

William R. Pape.................  49 Director
---------------------
(1) Member of the audit committee
(2) Member of the compensation committee

   Mr. Chang, one of our co-founders, has served as our President and Chief
Executive Officer and as a director since our inception in July 1996. From
March 1996 through June 1996, Mr. Chang worked as the system architect for
Relations Software, a developer of network and applications monitoring
software. From September 1994 through February 1996, Mr. Chang served as a
Senior Software Engineer at OnLive! Technologies, Inc., a developer of on-line
communications technology. Prior to September 1994, Mr. Chang spent seven years
at Centura Software Corporation, formerly Gupta Corporation, a supplier of
client/server application development and deployment technology, as a manager
and developer of Centura Software Corporation's client/server database
solution. Mr. Chang holds a B.S. degree in control engineering from National
Chiao-Tung University and an M.S. degree in computer science from Pennsylvania
State University. Mr. Chang's brother-in-law, Shoon Shen Tony Wang, serves as
our Controller of the Asia Pacific region.

   Mr. Heaps has served as our Chief Operating Officer, Chief Financial
Officer, General Counsel and Secretary since September 1998. From July 1997
through August 1998, Mr. Heaps worked as an independent consultant and headed a
private consulting firm and law practice serving Silicon Valley-based high-
technology companies. From October 1987 through July 1997, Mr. Heaps served in
various management positions at Centura, most recently serving as Senior Vice
President of Business Development and General Counsel. Mr. Heaps is a member of
the State Bar of California and a member of the board of directors of the
Children's Discovery Museum of San Jose. Mr. Heaps holds a B.A. degree in
economics and mathematics from Yale University and J.D. and M.B.A. degrees from
Stanford University.

   Mr. Vargo, one of our co-founders, has served as a Senior Vice President
since July 1999 and as our Chief Technology Officer and as a director since our
inception in July 1996. From April 1996 through June 1996, Mr. Vargo served as
a Senior Software Engineer at Oracle Corporation, a leading provider of
relational databases. From January 1995 through April 1996, Mr. Vargo served as
a Senior Software Engineer at OnLive! Technologies, Inc. From January 1992
through December 1994, Mr. Vargo served as a Senior Software Engineer at
Centigram Corporation, a voice messaging equipment manufacturer. Prior to
Centigram Corporation, Mr. Vargo spent seven years at Pacific Bell. Mr. Vargo
holds a B.S. degree in electrical engineering and an M.E. degree in electrical
engineering from California State Polytechnic University at Pomona.

                                       47
Mr. McIlvane has served as our Senior Vice President, Worldwide Sales since
July 1999, having previously served as our Vice President, Worldwide Sales
since July 1997. From January 1993 through June 1997, Mr. McIlvane served as
Vice President of Sales and Marketing for Comverse Technology, Inc., a
manufacturer of high-performance voice processing computers for network-based
telecommunications service providers. Prior to Comverse Technology, Inc., Mr.
McIlvane served in various senior positions at Applied Communications, Inc., a
wholly owned subsidiary of U.S. WEST, Inc. and Bell & Howell Corporation.
Mr. McIlvane holds a B.S. degree in business and economics from MacMurray
College.

   Ms. Bersin has served as our Senior Vice President, Corporate Marketing and
Communications since July 1999, having previously served as our Vice President,
Marketing since February 1997. From 1983 through January 1997, Ms. Bersin
served in various management positions at Pacific Bell and Pacific Bell
Information Services, including Director of Pacific Bell Information Services
from 1986 to 1997. Ms. Bersin holds a B.A. degree from Stanford University and
an M.B.A. degree from Yale University.

   Mr. Wu has served as our Senior Vice President and General Manager, Asia
Pacific since July 1999, having previously served as our Vice President and
General Manager of the Asia Pacific region since April 1997. From January 1996
through March 1997, Mr. Wu served as the Regional Sales Manager of Computer
Sales Operations for Hewlett-Packard Company, a measurement and computer
equipment manufacturer, in Asia, except Japan, and Australia after Hewlett-
Packard Company acquired Convex Computer Corporation, a supercomputer
manufacturer, where Mr. Wu served as General Manager of the Asia Pacific
region, except Japan, from January 1994 through December 1995. Mr. Wu holds a
B.S. degree in electrical engineering and an M.B.A. degree from National Chiao-
Tung University.

   Mr. Ko has served as a director since June 1997. Since 1990, Mr. Ko has
served as Chairman of the WK Technology Funds and also served as Chairman of
the Taipei Venture Capital Association from 1992 to 1995. From 1977 to 1990,
Mr. Ko served in various management positions at Hewlett-Packard Taiwan Ltd.,
most recently serving as Chairman and President from 1979 to 1990. From 1974 to
1977, Mr. Ko served in various positions at IBM in the United States, most
recently serving as Research and Development Project Manager from 1975 to 1977.
Mr. Ko holds a B.S. degree in electrical engineering from National Cheng Kung
University and an M.S. degree in system science from Michigan State University.

   Ms. Lin has served as a director since July 1998. Since 1993, Ms. Lin has
been employed by Goldman Sachs (Asia) Limited. She currently serves as an
executive director in the Principal Investment Area, which manages several
principal investment funds. From 1990 to 1993, Ms. Lin worked for Morgan
Stanley & Co. in New York and Hong Kong. Ms. Lin is also a non-executive
director of Hung Hing Printing Group Limited, a publicly listed company on the
Hong Kong Stock Exchange. Ms. Lin holds a B.A. degree from Harvard University.

   Mr. Pape has served as a director since October 1999. Since June 1998, Mr.
Pape has been involved in several startups. In 1982, Mr. Pape co-founded
Verifone and from 1982 to 1998 served in a variety of senior positions,
including Senior Vice President, Chief Information Officer, Vice President
Product Marketing and Vice President Software Development. Prior to co-founding
Verifone, Mr. Pape was a principal at Innovative Software Applications, and an
Assistant Professor of Decision Sciences at the University of Hawaii School of
Business. Mr. Pape holds an A.B. degree in psychology from Stanford University.
He holds two advanced degrees from the University of Hawaii, an M.A. in social
psychology and an M.A. in communications.

   Executive officers are appointed by the board of directors and serve until
their successors are qualified and appointed. There are no family relationships
among any of our directors or executive officers.

Board Composition

   The number of directors is currently set at five. In accordance with the
terms of our amended and restated certificate of incorporation, the terms of
the office of the board of directors are divided into three classes, with each
class holding office for staggered three year terms: Class I directors' terms
will expire at the annual meeting of stockholders to be held in 2000, Class II
directors' terms will expire at the annual meeting of

                                       48
stockholders to be held in 2001, and Class III directors' terms will expire at
the annual meeting of stockholders to be held in 2002. The Class I director is
Ms. Lin. The Class II directors are Mr. Ko and Mr. Vargo, and the Class III
directors are Mr. Chang and Mr. Pape.

   At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our amended and restated certificate of
incorporation provides that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control.
Although our directors may be removed for cause by the affirmative vote of the
holders of a majority of the common stock, our amended and restated certificate
of incorporation provides that holders of two-thirds of the common stock must
vote to approve the removal of directors without cause.

Board Committees

   The compensation committee consists of Mr. Ko and Ms. Lin. The compensation
committee:

  . reviews and approves the compensation and benefits for our executive
    officers and grants stock options under our equity incentive plans; and

  . makes recommendations to the board of directors regarding compensation
    matters.

   The audit committee consists of Mr. Ko and Ms. Lin. The audit committee:

  . makes recommendations to the board of directors regarding the selection
    of independent auditors;

  . reviews the results and scope of the audit and other professional
    services provided by our independent auditors;

  . reviews the independence of the independent auditors; and

  . reviews and evaluates our internal control functions.

Compensation Committee Interlocks and Insider Participation

   The members of our compensation committee are Mr. Ko and Ms. Lin. None of
the members of the compensation committee of the board of directors is
currently or has been, at any time since our formation, one of our officers or
employees.

   On February 24, 1998, we issued secured convertible subordinated promissory
notes with an aggregate principal amount of $2,600,000 and warrants to purchase
an aggregate of 59,266 shares of Series C preferred stock at an exercise price
of $5.59, in a private placement debt and equity financing with

  . WK Technology Fund and entities affiliated with WK Technology Fund,

  . Alice Wang, the spouse of Mr. Chang, one of our co-founders and chief
    executive officer,

  . Daniel Warmenhoven, one of our directors, who has since resigned from the
    board of directors, and

  . one unaffiliated investor.

These warrants were exercised prior to completion of our initial public
offering and all outstanding shares of preferred stock automatically converted
into shares of common stock upon the completion of our initial public offering.

   In connection with this financing we issued notes evidencing an aggregate
principal amount of $2,000,000 and warrants to purchase an aggregate of 45,590
shares of Series C preferred stock to entities affiliated with WK Technology
Fund. $2,050,000 of the promissory notes were converted into shares of Series C
preferred stock on June 11, 1998.

   On June 11, 1998 and December 7, 1998, we issued an aggregate of 2,644,241
shares of Series C preferred stock, at a per share price of $6.58, in a private
placement equity financing with entities affiliated with WK Technology Fund and
several unaffiliated investors. In connection with this financing we issued an
aggregate of 312,194 shares in connection with the conversion of promissory
notes by entities affiliated with

                                       49
WK Technology Fund. All outstanding shares of preferred stock automatically
converted into shares of common stock upon the completion of our initial public
offering. We also entered into a voting agreement with some of our stockholders
in connection with the sale of our Series C preferred stock. In connection with
the voting agreement, we issued warrants to purchase 101,000 shares of our
Series C preferred stock at an exercise price of $6.58 per share to each of:

  . WK Technology Fund III; and

  . The Goldman Sachs Group, L.P., the predecessor to The Goldman Sachs
    Group, Inc., and affiliated investment partnerships, which are affiliated
    with Goldman Sachs (Asia) Limited. Ms. Lin, one of our directors, is an
    executive director of Goldman Sachs (Asia) Limited.

These warrants expired upon the completion of our initial public offering.

Director Compensation

   Directors who are also executive officers do not receive any additional
compensation for serving as members of the board of directors or any committee
of the board of directors. Non-employee directors who join the board of
directors after our initial public offering are expected to receive an initial
option to purchase 5,000 shares of common stock and all non-employee directors
are expected to receive an option to purchase 2,000 shares of common stock
under our 1999 non-employee directors' stock option plan at each regular
meeting of the board of directors, beginning with the third meeting after our
initial public offering or after the initial grant of 5,000 shares.

Executive Compensation

   The following table sets forth information for the year ended December 31,
1998, regarding the compensation of our chief executive officer and each of our
four most highly-compensated executive officers whose salary and bonus for the
year ended December 31, 1998 were in excess of $100,000 on an annualized basis:

                           Summary Compensation Table
Long-Term
                                 Annual Compensation           Compensation Awards
                        ------------------------------------- ---------------------
Name and Principal                             Other Annual   Securities Underlying     All Other
Position                Salary($)(1) Bonus($) Compensation(2)      Options(#)       Compensation($)(3)
------------------      ------------ -------- --------------- --------------------- ------------------
Jerry Shaw-Yau Chang
 President and Chief
 Executive Officer.....   $110,000        --          --                  --                  --
Richard J. Heaps(4)
 Chief Operating
 Officer, Chief
 Financial Officer,
 General Counsel and
 Secretary.............     67,500   $ 6,160          --             400,000                  --
Michael F. Vargo
 Chief Technology
 Officer...............    131,875     7,500          --                  --                  --
Mark E. McIlvane
 Vice President,
 Worldwide Sales.......    202,717    20,000      $7,800             160,000              $2,000
Mong Hong (Mahan) Wu
 Vice President and
 General Manager, Asia
 Pacific...............    131,640    26,145          --                  --                  --
---------------------
(1) Mr. McIlvane's salary consists of a salary of $150,000 and sales
    commissions of $52,717.
(2) Consists of reimbursement of automobile expenses.
(3) Consists of life insurance premiums.
(4) Mr. Heaps started his employment with us in September 1998. Mr. Heaps would
    have earned a salary of $180,000 if he had been employed by us for the
    entire year.

                                       50
Option Grants in Last Fiscal Year

   The following table sets forth certain information relating to stock options
awarded to each of the named executive officers during the fiscal year ended
December 31, 1998. All such options were awarded under the 1999 amended and
restated equity incentive plan.
Potential Realizable
                                                                       Value at Assumed
                                                                    Annual Rates of Stock
                                                                    Price Appreciation for
                                     Individual Grants               Stock Option Term(2)
                         ------------------------------------------ ----------------------
                         Number of
                         Securities % of Total
                         Underlying  Options   Exercise
                          Options    Granted   Price Per Expiration
Name                      Granted   in 1998(1)   Share      Date        5%         10%
----                     ---------- ---------- --------- ---------- ---------- -----------
Jerry Shaw-Yau Chang....       --        --         --          --          --          --
Richard J. Heaps........  400,000      13.2%    $0.75     08/27/08  $9,473,368 $15,262,455
Michael F. Vargo........       --        --         --          --          --          --
Mark E. McIlvane........  160,000       5.3      0.329    07/20/08   3,856,707   6,172,342
Mong Hong (Mahan) Wu....       --        --         --          --          --          --
---------------------
(1) The total number of options granted to our employees in fiscal year 1998
    was 3,030,896.
(2) In order to comply with the rules of the Securities and Exchange
    Commission, we are including the gains or "option spreads" that would exist
    for the respective options we granted to the named executive officers. We
    calculate these gains based upon the initial public offering price of
    $15.00 per share appreciating at 5% and 10% compounded annually from the
    date of the option grant until the termination date of the option. These
    gains do not represent our estimate or projection of the future common
    stock price.

   Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option
                                     Values

   The following table sets forth the number and value of securities underlying
unexercised options held by the named executive officers at December 31, 1998:
Number of Securities
                                                  Underlying Unexercised     Value of Unexercised
                                                        Options at          In-the-Money Options at
                           Shares                    December 31, 1998       December 31, 1998(1)
                          Acquired      Value    ------------------------- -------------------------
Name                     on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- ----------- ----------- ------------- ----------- -------------
Jerry Shaw-Yau Chang....        --           --         --           --            --           --
Richard J. Heaps........        --           --         --      400,000            --   $5,700,000
Michael F. Vargo........        --           --         --           --            --           --
Mark E. McIlvane........        --           --    324,882      175,118    $4,846,790    2,589,820
Mong Hong (Mahan) Wu....   221,664   $3,319,418     11,668      326,668       174,728    4,891,853
---------------------
(1) The amount set forth represents the difference between the fair market
    value of the underlying common stock using the initial public offering
    price of $15.00 per share and the exercise price of the option, multiplied
    by the number of shares underlying the option.

Employment Agreements

   In June 1997, we entered into an employment agreement with Mark E. McIlvane,
Senior Vice President, Worldwide Sales. The agreement was amended on June 1,
1998. The amended agreement provides for an annual base salary of $150,000. Mr.
McIlvane is also eligible to receive sales commissions. The sales commissions
are based upon the sales plan that sets out the quota attainment standards and
the associated percentage of revenue to be paid as sales commissions. The sales
plan's objectives include attaining revenue

                                       51
that exceeds our business plan. Under the sales plan's provisions, commissions
are paid monthly based on product and service revenue. A higher commission
percentage can be earned if revenue exceeds quota targets. There is no limit to
the amount of commission that can be earned. The agreement also provides Mr.
McIlvane with incentive stock options to purchase an aggregate of 500,000
shares of common stock. Of those options, 40,000 shares vested immediately upon
the signing of the amendment to the employment agreement, 370,000 shares are
subject to time-based vesting over a four-year period and 90,000 shares are
subject to certain milestone-based vesting, but must vest by August 1, 2004.
The agreement provides that Mr. McIlvane is employed "at-will," and the
employment relationship may be terminated for any reason at any time, but if we
terminate Mr. McIlvane's employment without cause, we must pay Mr. McIlvane a
severance payment equal to 100% of his annual salary.

   In August 1998, we entered into an employment agreement with Richard J.
Heaps, Chief Operating Officer, Chief Financial Officer, General Counsel and
Secretary. The agreement provides for an annual base salary of $180,000. Mr.
Heaps is also eligible to receive a $40,000 annual performance bonus based on
quarterly goals and objectives agreed upon by him and the chief executive
officer. The amount of the bonus will be reviewed and reset in each subsequent
year. The agreement also provides Mr. Heaps with an incentive stock option to
purchase 400,000 shares of common stock, which is subject to time-based vesting
over a four-year period. In the event Mr. Heaps is terminated without cause or
constructively terminated within 18 months of any change of control, between
50% to 100% of the outstanding options then held by Mr. Heaps will accelerate
and vest, depending on how long Mr. Heaps had been employed with us prior to
termination. "Constructive termination" is defined in the agreement as a
voluntary termination of employment after his duties or benefits are materially
reduced. The agreement provides that Mr. Heaps is employed "at-will," and the
employment relationship may be terminated for any reason at any time, but if we
terminate Mr. Heaps' employment without cause or if Mr. Heaps voluntarily
terminates his employment after his duties or benefits are materially reduced,
we must pay Mr. Heaps a severance payment equal to up to 100% of his annual
salary, depending on the amount of time Mr. Heaps has been employed by us.

Stock Plans

   1999 Amended and Restated Equity Incentive Plan. Our 1999 amended and
restated equity incentive plan was adopted in October 1996, amended in May
1997, May 1998 and October 1998, and amended and restated by the board of
directors in April 1999. An aggregate of 11,358,170 shares of common stock
currently are authorized for issuance under the equity incentive plan. However,
on January 31 of 2000, 2001, 2002, 2003 and 2004, respectively, the aggregate
number of shares of common stock that are available for issuance under the
equity incentive plan will automatically be increased by that number of shares
of common stock equal to 2.5% of our outstanding shares of common stock on that
date or a lesser amount as determined by the board of directors for each year.

   The equity incentive plan provides for the grant of incentive stock options,
as defined under the amended Internal Revenue Code of 1986, to employees,
including officers and employee directors, and non-statutory stock options,
restricted stock purchase awards, stock bonuses and stock appreciation rights
to our and our affiliates' employees, including officers and employee
directors, directors and consultants. The equity incentive plan is administered
by the compensation committee of our board of directors which determines the
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.

   The terms of options granted under the equity incentive plan may not exceed
ten years. Our compensation committee determines the exercise price of options
granted under the equity incentive plan. However, the exercise price for an
incentive stock option and a non-statutory stock option cannot be less than
100% of the fair market value of the common stock on the date of the option
grant. Options granted under the equity incentive plan vest at the rate
specified in the option agreement. Generally, the right to exercise 25% of the
total number of shares granted vests 12 months after the date of option grant,
with the remainder vesting monthly over three years thereafter, such that an
option is fully vested on the fourth anniversary of the date of

                                       52
the option grant. Generally, the optionee may not transfer a stock option other
than by will or the laws of descent or distribution. However, an optionee may
designate a beneficiary who may exercise the option in the event of the
optionee's death or disability. Unless the terms of an optionee's option
agreement provide for an earlier termination, in the event of the optionee's
cessation of his or her relationship with us due to death or disability, the
optionee's beneficiary may exercise any vested options after the date of the
cessation for up to 18 months after death and 12 months after disability after
the date of such cessation. If the optionee's relationship with us ceases for
any reason other than the optionee's death or disability, the optionee may
exercise any vested options during a minimum of 30 days following such
cessation. Generally, the same terms and conditions that govern the vesting and
exercise of non-statutory options shall apply to stock appreciation rights, and
stock appreciation rights shall generally be subject to the same terms and
conditions applicable to the particular option grant to which these rights
pertain.

   No incentive stock option, may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of our
total combined voting power or that of any of our affiliates, unless the option
exercise price is at least 110% of the fair market value of the stock subject
to the option on the date of grant and the term of the option does not exceed
five years from the date of the grant. In addition, the aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year, under the equity incentive plan and all
of our other stock plans and those of our affiliates, may not exceed $100,000.
Pursuant to Section 162(m) of the Internal Revenue Code, no person may be
granted options under the equity incentive plan covering more than 720,000
shares of common stock in any calendar year.

   Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the equity incentive plan. Our compensation committee has the
authority to reprice outstanding options or to offer optionees the opportunity
to replace outstanding options with new options for the same or a different
number of shares. Both the original and new options will count toward the
Section 162(m) limitations set forth above. Shares subject to stock
appreciation rights exercised in accordance with the incentive plan will not be
available for subsequent issuance under the incentive plan.

   If there is any sale of all or substantially all of our assets, any merger
or any consolidation in which we are not the surviving corporation, or a like
transaction involving us, all outstanding awards under the equity incentive
plan either will be assumed or substituted for by any surviving entity. If the
surviving entity determines not to assume or substitute for such awards, the
vesting of stock awards held by persons still serving us or our affiliates will
be accelerated as to all of the shares and the awards will terminate if not
exercised prior to the sale of assets, merger or consolidation.

   As of September 30, 1999, 2,118,145 shares of common stock had been issued
upon the exercise of options granted under the equity incentive plan, options
to purchase 7,934,275 shares of common stock were outstanding and as of
September 30, 1999, 1,305,750 shares remained available for future grant. The
equity incentive plan will terminate on April 7, 2009, unless terminated by our
board of directors before then. As of September 30, 1999, 7,000 stock
appreciation rights had been granted and no stock bonus or restricted stock has
been granted under the equity incentive plan.

   1999 Non-Employee Directors' Stock Option Plan. In April 1999, our board of
directors adopted the 1999 non-employee directors' stock option plan to provide
for the automatic grant of options to purchase shares of common stock to our
non-employee directors who are not any of our affiliates' employees or
consultants. Our board of directors administers the directors' plan, but may
delegate the administration to a committee.

   The aggregate number of shares of common stock that may be issued under
options granted under the directors' plan is 300,000 shares. Under the terms of
the directors' plan each person who is elected or appointed for the first time
to be a non-employee director after our initial public offering automatically
shall, upon the date of his or her initial election or appointment to be a non-
employee director by our board of

                                       53
directors or stockholders, be granted an option to purchase 5,000 shares of
common stock. In addition, on the day of each regular meeting of the board of
directors, commencing with the third regular meeting subsequent to the date of
our initial public offering or the date of each non-employee directors' initial
grant under the director's plan, each person who is then serving as a non-
employee director automatically shall be granted an option to purchase 2,000
shares of common stock.

   The exercise price of the options granted under the directors' plan will be
equal to the fair market value of the common stock on the date of grant. No
option granted under the directors' plan may be exercised after the expiration
of ten years from the date it was granted. Options granted under the directors'
plan vest and become exercisable immediately. Options granted under the
directors' plan generally are non-transferable. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with us or any of our affiliates,
whether as one of our non-employee directors or subsequently as our affiliates'
employee, director or consultant, ceases for any reason, the vested option may
be exercised as provided in the option agreement, which is three months
generally, 12 months in the event of optionee's disability and 18 months in the
event of optionee's death.

   As of September 30, 1999, no options have been granted under the directors'
plan.

   1999 Employee Stock Purchase Plan. In April 1999, our board of directors
approved the 1999 employee stock purchase plan covering an aggregate of 600,000
shares of common stock. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. 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. The offering period for
any offering will be no more than 27 months.

   Under the purchase plan, employees are eligible to participate if they are
employed by us or one of our affiliates designated by our board of directors
and are employed at least 20 hours per week and at least five months per year.
Employees who participate in an offering will have the right to purchase up to
the number of shares of common stock purchasable with a percentage designated
by our board of directors, up to 10%, of an employee's earnings withheld
pursuant to the purchase plan and applied, on specified dates determined by the
board of directors, to the purchase of shares of common stock. 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. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with us.

   In the event of changes in control, our 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 will be applied to purchase stock immediately prior to the
change in control. The purchase plan will terminate at the board of directors'
discretion or when all of the shares reserved for issuance under the purchase
plan have been issued.

   As of September 30, 1999, no shares of common stock have been purchased
under the purchase plan, although rights to purchase have accrued since our
initial public offering. The first purchase date under the purchase plan is
November 15, 1999.

Description of 401(k) Plan

   401(k) Plan. We maintain the Clarent Corporation 401(k) Retirement Plan for
eligible employees. In order to be a participant in the 401(k) plan, an
employee must have attained age 18. A participant may contribute up to 25% of
his or her total annual compensation to the 401(k) plan, or up to a statutorily
prescribed annual limit, if less. The annual limit for 1999 is $10,000. Each
participant is fully vested in his or her deferred salary contributions.
Participant contributions are held and invested by the 401(k) plan's trustee.

                                       54
We may make discretionary contributions as a percentage of participant
contributions, subject to established limits. To date, we have not made any
contributions to the 401(k) plan on behalf of the participants. The 401(k) plan
is intended to qualify under Section 401 of the Internal Revenue Code, so that
contributions by us or our employees to the 401(k) plan, and income earned on
the 401(k) plan contributions, are not taxable to employees until withdrawn
from the 401(k) plan, and so that our contributions, if any, will be deductible
by us when made.

Limitation of Liability and Indemnification Matters

   Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of the fiduciary duties as a director except for
liability

  . for any breach of the director's duty of loyalty to us or to our
    stockholders,

  . for acts or omissions not in good faith or that involve intentional
    misconduct or a knowing violation of law,

  . for unlawful payments of dividends or unlawful stock repurchases or
    redemptions as provided in Section 174 of the Delaware General
    Corporation Law or

  . for any transaction from which the director derives an improper personal
    benefit.

   Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our officers, employees and other agents to the full
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence and gross negligence on the part of an indemnified
party. Our bylaws also require us to advance expenses incurred by directors and
executive officers in connection with the defense of any action or proceeding,
subject to several exceptions, arising out of the status or service as one of
our directors or executive officers upon an undertaking by that party to repay
these advances if it is ultimately determined that the party is not entitled to
indemnification. Furthermore, our bylaws authorize us to enter into
indemnification agreements with our directors, officers, employees and agents
and we intend to enter into these agreements. A copy of the form of the
indemnity agreement has been filed as an exhibit to the registration statement.
We also maintain directors' and officers' liability insurance.

   At present we are not aware of any pending material litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. Furthermore, we are not aware of
any material threatened litigation or proceeding that may result in a claim for
such indemnification.

   We are aware that the Securities and Exchange Commission considers
indemnification for liabilities arising under the Securities Act to be against
public policy. Even if our indemnification of our directors, officers and
controlling persons is permitted under indemnification agreements, it would be
unenforceable as a matter of public policy.

                                       55
CERTAIN TRANSACTIONS

   On March 25, 1997 and June 10, 1997, we sold an aggregate of 3,220,000
shares of Series B preferred stock at a per share price of $1.00, in a private
placement equity financing with several unaffiliated investors and one of our
directors, including:

  . an aggregate of 900,000 shares purchased by entities affiliated with WK
    Technology Fund, a principal stockholder, of which Mr. Ko, one of our
    directors, is Chairman; and

  . 900,000 shares purchased by Mr. Ko.

   These shares of preferred stock converted into shares of common stock upon
the completion of our initial public offering.

   On June 6, 1997, we entered into an employment agreement with Mr. McIlvane,
our Senior Vice President, Worldwide Sales.

   On June 3, 1997, we entered into an Advisory Services Agreement with WK
Technology Fund under which WK Technology Fund agreed that it would provide us
with business advisory services and finder services to identify, evaluate and
recommend outside director candidates. As compensation for these services, we
agreed to issue WK Technology Fund a warrant to purchase 1,400,000 shares of
common stock that vested monthly or immediately 30 days prior to the closing of
our initial public offering at an exercise price of $0.05 per share and a
warrant to purchase 360,000 shares of common stock that was exercisable on the
date of issuance at an exercise price of $0.05. On June 10, 1999 the board of
directors accelerated the vesting of the warrants and terminated the Advisory
Services Agreement. WK Technology Fund exercised these warrants prior to the
completion of our initial public offering.

   On August 1, 1998, we entered into an employment agreement with Mr. Heaps,
our Chief Operating Officer Chief Financial Officer, General Counsel and
Secretary.

   On December 7, 1998, we entered into an agreement with Intel Corporation
under which we agreed to collaborate on certain technical, public relations and
marketing activities. We agreed to allow Intel to purchase our products at the
same prices as the best price that we offer to any customer for similar
products and pursuant to similar terms and conditions at the time of Intel's
order. Intel can terminate the agreement at its convenience after September 30,
1999, without cause and both parties can terminate the agreement for cause upon
giving a 30-day notice and allowing for a 60-day cure period. Intel is one of
our principal stockholders.

   We intend to enter into indemnification agreements with our directors and
executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. We also intend to execute
such agreements with our future directors and executive officers.

   We believe that the foregoing transactions were in our best interest. As a
matter of policy the transactions were, and all future transactions between us
and any of our officers, directors or principal stockholders will be, approved
by a majority of the independent and disinterested members of the board of
directors, will be on terms no less favorable to us than could be obtained from
unaffiliated third parties and will be in connection with bona fide business
purposes.

                                       56
PRINCIPAL AND SELLING STOCKHOLDERS

   The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of our common stock offered by this prospectus:

  . each stockholder who is known by us to own beneficially more than 5% of
    our common stock;

  . each of our named executive officers;

  . each of our directors;

  . all of our directors and executive officers as a group; and

  . each selling stockholder.

   Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their shares of our common
stock, except to the extent authority is shared by spouses under applicable
law. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Applicable percentage ownership is based on
27,620,159 shares of common stock outstanding as of September 30, 1999,
together with options for that stockholder that are currently exercisable or
exercisable within 60 days of September 30, 1999. In computing the number and
percentage of shares beneficially owned by a person, shares of common stock
subject to options currently exercisable, or exercisable within 60 days of
September 30, 1999 are counted as outstanding, while these shares are not
counted as outstanding for computing the percentage ownership of any other
person. The percentage of shares outstanding after the offering is calculated
after giving effect to the issuance of 2,837,500 shares of common stock offered
by this prospectus, assuming no exercise of the underwriters' over-allotment
option. If the underwriters exercise the over-allotment option in full, the
executive officers will sell 87,500 shares of common stock.
Shares
                                                Beneficially Owned
                            Shares Issuable     Prior to Offering
                              pursuant to     (Including the Number                         Shares
                          Options Exercisable of Shares Shown in the                  Beneficially Owned
                            within 60 days        First Column)                         After Offering
                           of September 30,   -------------------------  Number of    ------------------
Name of Beneficial Owner         1999            Number      Percent   Shares Offered   Number   Percent
------------------------  ------------------- ------------- ------------------------- ---------- -------
WK Technology Funds(1)
 6F, No.15
 Section 2, Tiding
 Avenue
 Taipei 114, Taiwan.....              0           5,075,568     18.38%     500,000     4,575,568  15.02%
1998 Wang/Chang Family
 Revocable Trust(2)
 c/o Clarent Corporation
 700 Chesapeake Drive
 Redwood City,
 California 94063.......              0           2,668,558      9.66       15,000     2,653,558   8.71
1998 Vargo Family Trust
 c/o Clarent Corporation
 700 Chesapeake Drive
 Redwood City,
 California 94063.......              0           2,564,000      9.28       75,000     2,489,000   8.17
The Goldman Sachs Group,
 Inc.(3)
 85 Broad Street
 New York, New York
 10004 .................              0           2,127,658      7.70      400,000     1,727,658   5.67
Intel Corporation
 2200 Mission Boulevard
 Santa Clara, California
 95052 .................              0           1,519,756      5.50            0     1,519,756   4.99
Jerry Shaw-Yau
 Chang(4)...............              0           2,668,558      9.66       15,000     2,653,558   8.71
Richard J. Heaps........        135,000             135,400         *       45,000        90,400      *
Michael F. Vargo(5).....              0           2,564,000      9.28       75,000     2,489,000   8.17
Mark E. McIlvane........        369,934             370,803      1.32       37,500       332,934   1.08
Heidi H. Bersin(6)......        150,000             618,750      2.23       45,000       573,750   1.87
Mong Hong (Mahan) Wu....         46,666             561,666      2.03       45,000       516,666   1.69
Wen Chang Ko(7).........              0           6,875,568     24.89      500,000     6,375,568  20.93
Syaru Shirley Lin(8)....              0           2,127,658      7.70      400,000     1,727,658   5.67
William R. Pape.........          5,000               5,000         *            0         5,000      *
All officers and
 directors as a group
 (9 persons)(9).........                         15,927,034     56.23    1,162,500    14,764,534  47.50
--------
  * Represents beneficial ownership of less than one percent of the common
    stock.

                                       57
(1) Consists of 663,514 shares held by WK Global Fund Ltd., 1,004,670 shares
    held by WK Technology Fund, 926,134 shares held by WK Technology Fund II,
    1,097,336 shares held by WK Technology Fund III, 783,914 shares held by WK
    Technology Fund IV and 600,000 shares held by WK Technology Fund V. Mr. Ko
    is the chairman and a beneficial owner of each of the above entities and
    exercises sole voting and dispositive powers with respect to the shares
    held of record by the WK Technology Funds.
(2) Consists of 2,664,000 shares held by the 1998 Wang/Chang Family Revocable
    Trust and 4,558 shares held by Alice Wang, one of the trustees of the 1998
    Wang/Chang Family Revocable Trust.
(3) Consists of 1,519,756 shares held by The Goldman Sachs Group, Inc., 140,930
    shares held by Bridge Street Fund 1998, L.P. and 466,972 shares held by
    Stone Street Fund 1998, L.P. Bridge Street Fund 1998, L.P. and Stone Street
    Fund 1998, L.P. are affiliates of The Goldman Sachs Group, Inc. The Goldman
    Sachs Group, Inc. is the general partner or managing general partner of
    each of these investment partnerships. The Goldman Sachs Group, Inc.
    disclaims beneficial ownership of the shares owned by these investment
    partnerships to the extent attributable to partnership interests therein
    held by persons other than The Goldman Sachs Group, Inc. and its
    affiliates. Each of these investment partnerships shares voting and
    investment power with some of its respective affiliates.
(4) Consists of 2,664,000 shares held by the 1998 Wang/Chang Family Revocable
    Trust, of which Mr. Chang is a trustee, and 4,558 shares held by Alice
    Wang, Mr. Chang's spouse.
(5) Consists of 2,564,000 shares held by the 1998 Vargo Family Trust, of which
    Mr. Vargo is a trustee.
(6) Consists of 468,750 shares held by the Bersin Family Trust, of which Ms.
    Bersin is a trustee.
(7) Includes 5,075,568 shares held by the WK Technology Funds. Mr. Ko is the
    chairman of the WK Technology Funds. Mr. Ko disclaims beneficial ownership
    of these shares except to the extent of his proportional partnership
    interest therein.
(8) Consists of 2,127,658 shares held by The Goldman Sachs Group, Inc. and its
    affiliated entities. Ms. Lin is an executive director in the Principal
    Investment Area of Goldman Sachs (Asia) Limited. Ms. Lin disclaims
    beneficial ownership of these shares.
(9) Includes an aggregate of 5,075,568 shares held by the WK Technology Funds,
    2,664,000 shares held by the 1998 Wang/Chang Family Revocable Trust,
    2,564,000 shares held by the 1998 Vargo Family Trust, 468,750 shares held
    by the Bersin Family Trust, 2,127,658 shares held by The Goldman Sachs
    Group, Inc. and its affiliated entities and 4,558 shares held by Alice
    Wang.

                                       58
DESCRIPTION OF CAPITAL STOCK

   Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value.

Common Stock

   As of September 30, 1999, there were 27,620,159 shares of common stock
outstanding held of record by approximately 165 stockholders. There will be
30,457,659 shares of common stock outstanding after giving effect to the sale
of the shares of common stock offered by this prospectus. This number assumes
no exercise of the underwriters' over-allotment option.

   The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor. In the event
of our liquidation, dissolution or winding up, holders of the common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of common stock have no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully-paid and nonassessable.

Preferred Stock

   We are authorized to issue 5,000,000 shares of undesignated preferred stock.
Our board of directors has the authority to issue the undesignated preferred
stock in one or more series and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued series of undesignated preferred stock and to fix the
number of shares constituting any series and the designation of these series,
without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing any
change in control without further action by the stockholders and may adversely
affect the voting and other rights of holders of common stock, and the
likelihood that the holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control. At present, we have no plans to issue any shares of
preferred stock.

Registration Rights of Certain Holders

   The holders of 17,698,014 shares of common stock or their transferees are
entitled to some rights with respect to the registration of these shares under
the Securities Act. These rights are provided under the terms of an agreement
between us and the holders of registrable securities. Subject to some
limitations in this agreement, the holders of the registrable securities may
require, on two occasions at any time after one year from the effective date of
our initial public offering, that we use our best efforts to register the
registrable securities, except for the 5,228,000 shares held by the founders,
for public resale, provided that the proposed aggregate offering price exceeds
$10,000,000. If we register any of our common stock either for our own account
or for the account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in this offering. All fees, costs and expenses of such
registrations must be borne by us and all selling expenses, including
underwriting discounts, selling commissions and stock transfer taxes, relating
to registrable securities must be borne by the holders of the securities being
registered.

Delaware Law and Some Charter Provisions

   We are subject to the provisions of Section 203 of the Delaware Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested

                                       59
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, with some exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control without further action by the stockholders. In
addition, upon completion of this offering, some provisions of our charter
documents, including a provision eliminating the ability of stockholders to
take actions by written consent, may have the effect of delaying or preventing
changes in control or management, which could harm the market price of our
common stock. Our stock option and purchase plans generally provide for
assumption of such plans or substitution of an equivalent option of a successor
corporation or, alternatively, acceleration of vesting of shares issued
pursuant to stock grants, upon a change of control or similar event. The board
of directors has authority to issue up to 5,000,000 shares of preferred stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the common stock will be subject to,
and may be harmed by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in control. Furthermore, this
preferred stock may have other rights, including economic rights senior to the
common stock, and, as a result, the issuance of this preferred stock could harm
the market value of the common stock. We have no present plan to issue shares
of preferred stock.

Transfer Agent and Registrar

   Norwest Bank Minnesota, N.A. is the transfer agent and registrar for our
common stock.

                                       60
SHARES ELIGIBLE FOR FUTURE SALE

   Future sales of substantial amounts of common stock in the public market, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through an offering of equity securities.

   After this offering, we will have outstanding 30,457,659 shares of common
stock. Of these shares, the 4,000,000 shares to be sold in this offering or
4,600,000 shares if the underwriters' over-allotment option is exercised in
full, together with 4,600,000 shares sold in our initial public offering, will
be freely tradable in the public market without restriction under the
Securities Act, unless such shares are held by "affiliates" of Clarent, as that
term is defined in Rule 144 under the Securities Act.

   The remaining 21,857,659 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold the restricted shares in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act, as summarized below.

   Pursuant to the "lock-up" agreements between our stockholders and either
Clarent or the underwriters, holders of 16,284,290 shares of the restricted
shares have agreed not to offer, sell, pledge or otherwise dispose of, directly
or indirectly, or announce their intention to do the same, any common stock of
Clarent or security convertible into, or exchangeable or exercisable for any
security of Clarent for a period of 90 days from the date of this offering.
However, if the holder of the restricted shares is an individual, he or she may
transfer any such securities either during his or her lifetime or on death by
will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively the holder of the securities and/or a
member of his or her immediate family. We also have entered into an agreement
with the underwriters that we will not offer, sell or otherwise dispose of
common stock for a period of 90 days from the date of this offering. On the
date of the expiration of the lock-up agreements, 14,321,044 of the restricted
shares will be eligible for immediate sale, subject to some volume, manner of
sale and other limitations under Rule 144. In addition, 6,258,075 shares that
are currently subject to lock-up agreements entered into in connection with our
initial public offering will become freely tradeable on December 29, 1999. The
remaining shares will be available for sale at various times upon the
expiration of applicable holding periods, of which 1,716,680 shares are subject
to volume, manner of sale and other restrictions under Rule 144.

   Following the expiration of the lock-up periods, some shares issued upon
exercise of options we granted prior to the date of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act. Additionally, 1,373,103 shares subject to vested options as of
the date 90 days after the completion of this offering will be available for
sale subject to compliance with Rule 701 and upon the expiration of the lock-up
periods. Rule 701 permits resales of such shares in reliance upon Rule 144
under the Securities Act but without compliance with the restrictions,
including the holding-period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of

  . 1% of the then-outstanding shares of common stock or

  . the average weekly trading volume of the common stock during the four
    calendar weeks preceding the filing of a Form 144 with respect to the
    sale.

   Sales under Rule 144 are also subject to some manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

                                       61
UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated      , 1999, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, BancBoston Robertson Stephens Inc., Thomas Weisel Partners LLC and
U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the following
respective numbers of shares of common stock:
Number of
        Underwriter                                                     Shares
        -----------                                                    ---------
Credit Suisse First Boston Corporation.............................
   BancBoston Robertson Stephens Inc..................................
   Thomas Weisel Partners LLC.........................................
   U.S. Bancorp Piper Jaffray Inc.....................................
                                                                       ---------
     Total............................................................ 4,000,000
                                                                       =========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.

   We and some of the selling stockholders who are our executive officers have
granted to the underwriters a 30-day option to purchase on a pro rata basis up
to 600,000 additional shares, of which 512,500 shares will be from us and
87,500 shares will be from our executive officers, at the public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $     per share. The
underwriters and selling group members may allow a discount of $     per share
on sales to other broker/dealers. After the public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay:
Per Share                       Total
                             ----------------------------- -----------------------------
                                Without          With         Without          With
                             Over-Allotment Over-Allotment Over-Allotment Over-Allotment
                             -------------- -------------- -------------- --------------
Underwriting discounts
    and commissions payable
    by us..................     $               $            $              $
   Expenses payable by us..     $               $            $              $
   Underwriting discounts
    and commissions payable
    by the selling
    stockholders...........     $               $            $              $
We and our officers and directors and some of the other stockholders have
agreed that we and they will not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or, file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any additional shares of common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make the offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 90 days after the date of this prospectus.

                                       62
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

   Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as a lead or co-manager on
numerous public offerings of equity securities.Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us under the underwriting agreement entered into in connection with this
offering.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.

  . Over-allotment involves syndicate sales in excess of the offering size,
    which creates a syndicate short position.

  . Stabilizing transactions permit bids to purchase the underlying security
    so long as the stabilizing bids do not exceed a specified maximum.

  . Syndicate covering transactions involve purchases of the common stock in
    the open market after the distribution has been completed in order to
    cover syndicate short positions.

  . Penalty bids permit the representatives to reclaim a selling concession
    from a stabilizing or syndicate member when the common stock originally
    sold by the syndicate member are purchased in a stabilizing or syndicate
    covering transaction to cover syndicate short positions.

  . In "passive" market making, market makers in the common stock who are
    underwriters may, subject to certain limitations, make bids for or
    purchases of the common stock until the time, if any, at which a
    stabilizing bid is made.

   These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and
the dealer from whom the purchase confirmation is received that:

  . the purchaser is entitled under applicable provincial securities laws to
    purchase the common stock without the benefit of a prospectus qualified
    under the securities laws,

  . where required by law, that the purchaser is purchasing as principal and
    not as agent and

  . the purchaser has reviewed the text above under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario Securities law. As a result, Ontario purchasers must rely on

                                       63
other remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts names
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult their own legal and tax
advisors and with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                 LEGAL MATTERS

   The validity of the issuance of the common stock offered hereby will be
passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain
attorneys of Cooley Godward LLP own an aggregate of 6,225 shares of our common
stock. The legal matters in connection with the offering will be passed upon
for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1997 and 1998 and as of September 30,
1999 and the period from July 2, 1996 (inception) to December 31, 1996, for the
years ended December 31, 1997 and 1998, and the nine months ended September 30,
1999, as set forth in their report, included in this prospectus and
registration statement. Our consolidated financial statements are included in
this prospectus and registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

   A registration statement on Form S-1, including amendments thereto, relating
to the common stock offered by this prospectus has been filed by us with the
Securities and Exchange Commission. This prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to us and the common stock offered by this
prospectus, reference is made to the registration statement, exhibits and
schedules. A copy of the registration statement may be inspected by anyone
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington,
D.C. 20549, and copies of all or any part thereof maybe obtained from the
Securities and Exchange Commission upon payment of certain fees prescribed by
the Securities and Exchange Commission. The Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information filed electronically with the Securities and
Exchange Commission. The address of the site is http://www.sec.gov.

                                       64
CLARENT CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors..........................  F-2

Consolidated Balance Sheets................................................  F-3

Consolidated Statements of Operations......................................  F-4

Consolidated Statements of Stockholders' Equity............................  F-5

Consolidated Statements of Cash Flows......................................  F-8

Notes to Consolidated Financial Statements................................. F-10
F-1
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, 1997 and 1998 and September 30, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from July 2, 1996 (inception) to December 31, 1996, for
the years ended December 31, 1997 and 1998, and for the nine months ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Clarent Corporation at December 31, 1997 and 1998 and September 30, 1999,
and the results of its operations and its cash flows for the period from July
2, 1996 (inception) to December 31, 1996, for the years ended December 31, 1997
and 1998, and for the nine months ended September 30, 1999, in conformity with
generally accepted accounting principles.

                                          Ernst & Young LLP

Palo Alto, California
October 22, 1999

                                      F-2
CLARENT CORPORATION

                          CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)
December 31,
                                                ----------------  September 30,
                                                 1997     1998        1999
                                                -------  -------  -------------
ASSETS
Current assets:
  Cash and cash equivalents.................... $   474  $11,903    $ 33,870
  Short-term investments.......................      --       --      23,705
  Accounts receivable, net of allowance for
   doubtful accounts of $38, $807, and $1,859
   at December 31, 1997, December 31, 1998, and
   September 30, 1999, respectively............     777    6,943      15,194
  Inventories..................................     889    3,620       5,468
  Prepaid expenses and other current assets....     125      478       1,664
                                                -------  -------    --------
    Total current assets.......................   2,265   22,944      79,901
Property and equipment, net....................     543    2,233       7,507
Investments....................................      --       --       2,996
Other assets...................................      10       --         425
                                                -------  -------    --------
                                                $ 2,818  $25,177    $ 90,829
                                                =======  =======    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................. $   506  $ 2,905    $  4,662
  Line of credit...............................      --    2,500       4,128
  Settlement expense accrual...................     570       --          --
  Deferred revenue.............................     155    4,414       9,411
  Other accrued liabilities....................     253    1,594       5,267
  Long-term debt, current portion..............      --       --          91
                                                -------  -------    --------
    Total current liabilities..................   1,484   11,413      23,559
Long-term debt.................................      --       --          91
Commitments and contingencies
Stockholders' equity:
  Preferred Stock, $0.001 par value:
    Authorized shares--5,000,000 at September
     30, 1999 and none outstanding.............                           --
  Convertible preferred stock, $0.001 par
   value, issuable in series (aggregate
   liquidation preference of $21,119):
    Authorized shares--8,000,000 at December
     31, 1997 and 1998 and none at September
     30, 1999
    Issued and outstanding shares--4,220,000 in
     1997, 6,864,241 in 1998, and none at
     September 30, 1999........................   3,685   21,024          --
  Common stock, $0.001 par value:
    Authorized shares--50,000,000 at December
     31, 1997 and 1998 and September 30, 1999..
    Issued and outstanding shares--5,401,000 in
     1997, 7,129,076 in 1998 and 27,620,159 at
     September 30, 1999........................      27    2,746     110,476
  Deferred compensation........................      --   (1,771)     (7,818)
  Notes receivable from stockholders...........      (9)      --          --
  Accumulated other comprehensive loss.........     (34)     (68)        (47)
  Accumulated deficit..........................  (2,335)  (8,167)    (35,432)
                                                -------  -------    --------
    Total stockholders' equity.................   1,334   13,764      67,179
                                                -------  -------    --------
                                                $ 2,818  $25,177    $ 90,829
                                                =======  =======    ========
See accompanying notes.

                                      F-3
CLARENT CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
Period from
                          July 2, 1996
                          (inception)     Year ended       Nine Months Ended
                               to        December 31,        September 30,
                          December 31, -----------------  --------------------
                              1996       1997     1998       1998       1999
                          ------------ --------  -------  ----------- --------
                                                          (unaudited)
Net revenue..............    $  --     $  3,359  $14,647    $ 8,748   $ 29,245
Cost of revenue..........       --        1,189    6,653      3,645     12,862
                             -----     --------  -------    -------   --------
  Gross profit...........       --        2,170    7,994      5,103     16,383
Operating expenses:
 Research and
  development............      136        1,044    3,356      2,081      6,023
 Sales and marketing.....       --        2,046    7,099      4,705     16,166
 General and
  administrative.........      140          639    2,484      1,500      4,402
 Amortization of
  compensation...........       --           --      879        421     17,543
 Settlement expense......       --          570       --         --         --
                             -----     --------  -------    -------   --------
  Total operating
   expenses..............      276        4,299   13,818      8,707     44,134
                             -----     --------  -------    -------   --------
Loss from operations.....     (276)      (2,129)  (5,824)    (3,604)   (27,751)
Other income (expense):
 Interest and other
  income.................       --           70      204        121        795
 Interest expense........       --           --     (172)      (170)      (226)
                             -----     --------  -------    -------   --------
  Total other income
   (expense).............       --           70       32        (49)       569
                             -----     --------  -------    -------   --------
Loss before income
 taxes...................     (276)      (2,059)  (5,792)    (3,653)   (27,182)
Provision for income
 taxes...................       --           --      (40)         3        (83)
                             -----     --------  -------    -------   --------
Net loss.................    $(276)    $(2,059)  $(5,832)   $(3,650)  $(27,265)
                             =====     ========  =======    =======   ========
Historical basic and
 diluted net loss per
 share...................      N/A     $  (2.14) $ (1.65)   $ (1.18)  $  (2.17)
                             =====     ========  =======    =======   ========
Shares used to compute
 historical basic and
 diluted net loss per
 share...................       --          962    3,544      3,099     12,543
                             =====     ========  =======    =======   ========
Pro forma basic and
 diluted net loss per
 share...................                        $ (0.42)   $ (0.28)  $  (1.24)
                                                 =======    =======   ========
Shares used to compute
 pro forma basic and
 diluted net loss per
 share...................                         14,048     12,877     21,951
                                                 =======    =======   ========
See accompanying notes.

                                      F-4
CLARENT CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (in thousands, except share amounts)
Convertible                                       Notes                    Accumulated
                  Preferred Stock    Common Stock                   Receivable                    Other
                  ---------------- ------------------   Deferred       from     Comprehensive Comprehensive Accumulated
                   Shares   Amount   Shares    Amount Compensation Stockholders     Loss          Loss        Deficit
                  --------- ------ ----------  ------ ------------ ------------ ------------- ------------- -----------
Issuance of
restricted
common stock to
founders in
exchange for
cash,
technology, debt
forgiveness, and
stockholder
receivables.....         -- $   --  7,400,000   $37       $--          $(11)       $    --         $--        $   --
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $8.....  1,000,000    492         --    --        --            --             --          --            --
Net loss........         --     --         --    --        --            --             --          --          (276)
                  --------- ------ ----------   ---       ---          ----        -------         ---        ------
Balances as of
December 31,
1996............  1,000,000    492  7,400,000    37        --           (11)            --          --          (276)
Issuance of
Series B
convertible
preferred stock,
net of issuance
costs of $27....  3,220,000  3,193         --    --        --            --             --          --            --
Exercise of
common stock
options.........         --     --      1,000    --        --            --             --          --            --
Repurchase of
common stock....         --     -- (2,000,000)  (10)       --             2             --          --            --
Comprehensive
income:
Net loss........         --     --         --    --        --            --         (2,059)         --        (2,059)
Foreign currency
translation
adjustment......         --     --         --    --        --            --            (34)        (34)           --
                                                                                   -------
Comprehensive
loss............         --     --         --    --        --            --        $(2,093)         --            --
                  --------- ------ ----------   ---       ---          ----        =======         ---        ------
Balances as of
December 31,
1997............  4,220,000  3,685  5,401,000    27        --            (9)            --         (34)       (2,335)
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs of $159...  2,278,650 14,834         --    --        --            --             --          --            --
Issuance of
Series C
preferred stock
for settlement
expense.........     45,592    300         --    --        --            --             --          --            --
Conversion of
Series C bridge
notes and
related accrued
interest of $56
to Series C
preferred stock,
net of issuance
costs of $129...    319,999  1,977         --    --        --            --             --          --            --
Total
                  Stockholders'
                     Equity
                  -------------
Issuance of
restricted
common stock to
founders in
exchange for
cash,
technology, debt
forgiveness, and
stockholder
receivables.....     $   26
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $8.....        492
Net loss........       (276)
                  -------------
Balances as of
December 31,
1996............        242
Issuance of
Series B
convertible
preferred stock,
net of issuance
costs of $27....      3,193
Exercise of
common stock
options.........         --
Repurchase of
common stock....         (8)
Comprehensive
income:
Net loss........     (2,059)
Foreign currency
translation
adjustment......        (34)
Comprehensive
loss............         --
                  -------------
Balances as of
December 31,
1997............      1,334
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs of $159...     14,834
Issuance of
Series C
preferred stock
for settlement
expense.........        300
Conversion of
Series C bridge
notes and
related accrued
interest of $56
to Series C
preferred stock,
net of issuance
costs of $129...      1,977
See accompanying notes.

                                      F-5
CLARENT CORPORATION

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
                     (in thousands, except share amounts)
Convertible                                       Notes                    Accumulated
                  Preferred Stock    Common Stock                   Receivable                    Other
                  ---------------- -----------------    Deferred       from     Comprehensive Comprehensive Accumulated
                   Shares   Amount  Shares    Amount  Compensation Stockholders     Loss          Loss        Deficit
                  --------- ------ ---------  ------  ------------ ------------ ------------- ------------- -----------
Issuance of
warrants in
conjunction with
Series C bridge
financing.......         -- $  228        --  $   --    $    --        $--         $    --         $--        $   --
Exercise of
common stock
options.........         --     -- 1,064,748      36         --         --              --          --            --
Exercise of
common stock
warrants........         --     --   768,328      38         --         --              --          --            --
Repurchase of
common stock....         --     --  (105,000)     (5)        --         --              --          --            --
Forgiveness of
stockholder
notes
receivable......         --     --        --      --         --          9              --          --            --
Deferred
compensation
related to grant
of stock
options.........         --     --        --   2,293     (2,293)        --              --          --            --
Compensation
related to
issuance of
warrants for
services........         --     --        --     357         --         --              --          --            --
Amortization of
deferred
compensation....         --     --        --      --        522         --              --          --            --
Comprehensive
loss:
Net loss........         --     --        --      --         --         --          (5,832)         --        (5,832)
Foreign currency
translation
adjustment......         --     --        --      --         --         --             (34)        (34)           --
                                                                                   -------
Comprehensive
loss............         --     --        --      --         --         --         $(5,866)         --            --
                  --------- ------ ---------  ------    -------        ---         =======         ---        ------
Balances as of
December 31,
1998............  6,864,241 21,024 7,129,076   2,746     (1,771)        --                         (68)       (8,167)
Exercise of
common stock
options.........         --     -- 1,052,397      83         --         --              --          --            --
Issuance of
common stock for
cash, net of
issuance costs
of $6,346.......         --     -- 4,600,000  62,651         --         --              --          --            --
Deferred
compensation
related to grant
of stock
options.........         --     --        --  11,318    (11,318)        --              --          --            --
Compensation
related to
issuance of
warrants for
services........         --     --        --  12,272         --         --              --          --            --
Amortization of
deferred
compensation....         --     --        --      --      5,271         --              --          --            --
Total
                  Stockholders'
                     Equity
                  -------------
Issuance of
warrants in
conjunction with
Series C bridge
financing.......     $  228
Exercise of
common stock
options.........         36
Exercise of
common stock
warrants........         38
Repurchase of
common stock....         (5)
Forgiveness of
stockholder
notes
receivable......          9
Deferred
compensation
related to grant
of stock
options.........         --
Compensation
related to
issuance of
warrants for
services........        357
Amortization of
deferred
compensation....        522
Comprehensive
loss:
Net loss........     (5,832)
Foreign currency
translation
adjustment......        (34)
Comprehensive
loss............         --
                  -------------
Balances as of
December 31,
1998............     13,764
Exercise of
common stock
options.........         83
Issuance of
common stock for
cash, net of
issuance costs
of $6,346.......     62,651
Deferred
compensation
related to grant
of stock
options.........         --
Compensation
related to
issuance of
warrants for
services........     12,272
Amortization of
deferred
compensation....      5,271
See accompanying notes.

                                      F-6
CLARENT CORPORATION

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
                     (in thousands, except share amounts)
Convertible                                           Notes                    Accumulated
                   Preferred Stock        Common Stock                   Receivable                    Other
                  -------------------  -------------------   Deferred       from     Comprehensive Comprehensive Accumulated
                    Shares    Amount     Shares    Amount  Compensation Stockholders     Loss          Loss        Deficit
                  ----------  -------  ---------- -------- ------------ ------------ ------------- ------------- -----------
Exercise of
common stock
warrants.........         --  $    --     991,672 $     50   $    --        $--        $     --        $ --       $     --
Exercise of
Series C
preferred
warrants.........     59,266      332          --       --        --         --              --          --             --
Conversion of
preferred stock
into common
stock............ (6,923,507) (21,356) 13,847,014   21,356        --         --              --          --             --
Comprehensive
loss:
 Net loss........         --       --          --       --        --         --         (27,265)         --        (27,265)
 Foreign currency
 translation
 adjustment......         --       --          --       --        --         --              48          48             --
Unrealized loss
on securities....         --       --          --       --        --         --             (27)        (27)            --
                                                                                       --------
Comprehensive
loss.............         --       --          --       --        --         --        $(27,244)         --             --
                  ----------  -------  ---------- --------   -------        ---        ========        ----       --------
Balances as of
September 30,
1999.............         --  $    --  27,620,159 $110,476   $(7,818)       $--                        $(47)      $(35,432)
                  ==========  =======  ========== ========   =======        ===                        ====       ========
Total
                  Stockholders'
                     Equity
                  -------------
Exercise of
common stock
warrants.........    $    50
Exercise of
Series C
preferred
warrants.........        332
Conversion of
preferred stock
into common
stock............         --
Comprehensive
loss:
 Net loss........    (27,265)
 Foreign currency
 translation
 adjustment......         48
Unrealized loss
on securities....        (27)
Comprehensive
loss.............         --
                  -------------
Balances as of
September 30,
1999.............    $67,179
                  =============
See accompanying notes.

                                      F-7
CLARENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
Period from
                           July 2, 1996    Year ended       Nine Months Ended
                          (inception) to  December 31,        September 30,
                           December 31,  ----------------  --------------------
                               1996       1997     1998       1998       1999
                          -------------- -------  -------  ----------- --------
                                                           (unaudited)
Operating activities
Net loss................      $(276)     $(2,059) $(5,832)   $(3,650)  $(27,265)
Adjustments to reconcile
 net loss to net cash
 used in operating
 activities:
 Depreciation...........          9           82      516        229      1,609
 Amortization of
  compensation..........         --           --      879        421     17,543
 Interest expense from
  warrant issued in
  conjunction with
  Series C bridge
  notes.................         --           --       99         99         --
 Preferred stock issued
  for interest payable..         --           --       56         56         --
 Forgiveness of
  stockholder notes
  receivable............         --           --        9          9         --
 Changes in operating
  assets and
  liabilities:
  Accounts receivable...         --         (777)  (6,166)    (4,455)    (8,251)
  Inventories...........         --         (889)  (2,731)    (1,738)    (1,848)
  Prepaid expenses and
   other current
   assets...............         (1)        (124)    (353)      (281)    (1,186)
  Other assets..........        (10)           1       10          8       (425)
  Accounts payable and
   accrued liabilities..          2        1,324    3,440        726      5,430
  Deferred revenue......         --          155    4,259      4,323      4,997
                              -----      -------  -------    -------   --------
Net cash used in
 operating activities...       (276)      (2,287)  (5,814)    (4,253)    (9,396)
Investing activities
Purchase of long-term
 investments............         --           --       --         --     (3,000)
Purchases of short-term
 investments............         --           --       --         --    (23,728)
Purchases of property
 and equipment..........        (95)        (555)  (2,207)    (1,425)    (6,902)
                              -----      -------  -------    -------   --------
Net cash used in
 investing activities...        (95)        (555)  (2,207)    (1,425)   (33,630)
Financing activities
Proceeds from line of
 credit.................         --           --    2,500         --      1,628
Proceeds from issuance
 of long-term debt......         --           --       --         --        182
Proceeds from Series C
 bridge notes...........         --           --    2,600      2,600         --
Principal payment on
 Series C bridge notes..         --           --     (550)      (550)        --
Net proceeds from
 issuance of common
 stock..................         37           (8)      69         62     62,784
Net proceeds from
 issuance of preferred
 stock..................        492        3,193   14,834      9,875        332
Issuance of stockholder
 notes receivable.......        (11)          --       --         --         --
                              -----      -------  -------    -------   --------
Net cash provided by
 financing activities...        518        3,185   19,453     11,987     64,926
                              -----      -------  -------    -------   --------
Effect of exchange rate
 changes on cash and
 cash equivalents.......         --          (16)      (3)       (11)        67
                              -----      -------  -------    -------   --------
Net increase in cash and
 cash equivalents               147          327   11,429      6,298     21,967
Cash and cash
 equivalents at
 beginning of period....        --           147      474        474     11,903
                              -----      -------  -------    -------   --------
Cash and cash
 equivalents at end of
 period ................      $ 147      $   474  $11,903    $ 6,772   $ 33,870
                              =====      =======  =======    =======   ========
See accompanying notes.

                                      F-8
CLARENT CORPORATION

               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (in thousands)
Period from
                                July 2, 1996   Year ended    Nine Months Ended
                               (inception) to December 31,     September 30,
                                December 31,  ------------- -------------------
                                    1996      1997   1998      1998      1999
                               -------------- ------------- ----------- -------
                                                            (unaudited)
Supplemental disclosure of
 cash flow information
Cash paid for interest........      $--       $ --  $    28   $   15    $   225
                                    ===       ====  =======   ======    =======
Supplemental disclosure of
 noncash financing activities
Issuance of common stock for
 technology...................      $37       $ --  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Issuance of common stock for
 note receivable..............      $11       $ --  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Repurchase of common stock in
 exchange for forgiveness of
 note receivable..............      $--       $  2  $    --   $   --    $    --
                                    ===       ====  =======   ======    =======
Conversion of bridge notes to
 Series C preferred stock,
 less unamortized cost of
 related preferred stock
 warrant......................      $--       $ --  $ 1,921   $1,921    $    --
                                    ===       ====  =======   ======    =======
Issuance of preferred stock
 for settlement expense.......      $--       $ --  $   300   $  300    $    --
                                    ===       ====  =======   ======    =======
Conversion of preferred stock
 to common stock..............      $--       $ --  $    --   $   --    $21,356
                                    ===       ====  =======   ======    =======
See accompanying notes.

                                      F-9
CLARENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (Information for the nine months ended September 30, 1998 is unaudited)

1. The Company and Summary of Significant Accounting Policies

 The Company

   Clarent Corporation (Clarent or the Company) was incorporated in the state
of California on July 2, 1996. In July 1999, the Company was reincorporated in
the state of Delaware. The Company is a provider of Internet protocol based
technology and systems for the delivery and administration of telecommunication
services over public and private networks.

 Basis of Presentation

   The consolidated financial statements include the accounts of Clarent and
its subsidiaries. The Company has export sales from the United States and has
marketing and liason operations in Taiwan, Japan, China, South Korea, Belgium,
Germany, Australia, France, Spain, Canada, Brazil, Greece, and the United
Kingdom. All significant intercompany transactions and balances 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 and when no
significant contractual obligations or acceptance terms, if any, remain
outstanding and collection of the resulting receivable is deemed probable.
Shipment of evaluation products are not recognized as revenue until acceptance
by the customer. Revenue from services is recognized when the services are
performed. Amounts billed or received in advance of satisfying revenue
recognition criteria are classified as deferred revenue in the accompanying
balance sheets.

 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 trade
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. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. Reserves are
maintained for potential credit losses and such losses to date have been within
management's expectations. The Company provided $0, $38, $803, $320 and $1,053
for doubtful accounts for the period from July 2, 1996 (inception) to December
31, 1996, the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, respectively.

   A limited number of customers have historically accounted for a substantial
portion of the Company's revenue. Two customers accounted for 44% and 35% of
the Company's revenue for the year ended December 31, 1997. Two customers
accounted for 36% and 12% of net revenue for the year ended December 31, 1998.
Three customers accounted for 35%, 17% and 10%, respectively, of net revenue
for the nine months ended September 30, 1998. Two customers accounted for 16%
and 15% of net revenue for the nine months ended September 30, 1999.

   Sales of the Company's products and contracts for its technology will vary
as a result of fluctuations in market demand for such products and technology.
Further, the markets in which the Company competes are characterized by rapid
technological change and increasing competition.

                                      F-10
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

 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.

 Inventories

   Inventories are stated at the lower of cost or market on a first-in, first-
out basis. Inventories consist of the following:
December
                                                           31,
                                                       ----------- September 30,
                                                       1997  1998      1999
                                                       ---- ------ -------------
                                                            (in thousands)
Raw materials...................................... $392 $2,529    $3,735
   Finished goods.....................................  497  1,091     1,733
                                                       ---- ------    ------
                                                       $889 $3,620    $5,468
                                                       ==== ======    ======
Property and Equipment

   The Company records computer equipment, production and engineering
equipment, and furniture at cost and calculates depreciation using the
straight-line method over the estimated useful lives of the assets, generally
eighteen months to five years.

 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. Costs incurred by the Company
between the establishment of technological feasibility and the point at which
the product is ready for general release have been insignificant. Accordingly,
the Company has charged all such costs to research and development expenses in
the accompanying statements of operations.

 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" (FAS 123).

                                      F-11
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

 Advertising Expenses

   The Company expenses advertising costs in the period in which they are
incurred. Advertising expenses for 1996, 1997, 1998, and the nine months ended
September 30, 1998 and 1999 were approximately $0, $319,000, $706,000,
$503,000, and $1,669,000, respectively.

 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.

 Comprehensive Income (Loss)

   Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components, requiring foreign currency translation adjustments, and
unrealized gains and losses on short and long-term investments which currently
are reported in stockholders' equity, to be included in other comprehensive
income/loss. Prior year financial statements have been reclassified to conform
to the requirements of Statement 130. At December 31, 1997 and 1998, the
Company's accumulated other comprehensive loss consisted entirely of cumulative
translation adjustments. At September 30, 1999, accumulated other comprehensive
loss included cumulative translation adjustment losses of $20,000 and
unrealized losses on investments of $27,000.

 Unaudited Interim Financial Information

   The interim financial information for the nine months ended September 30,
1998 is unaudited but, in the opinion of management, includes all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position and results of
operations for the interim periods.

 Recent Accounting Pronouncements

   In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize certain
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The Company adopted SOP 98-1 effective January 1, 1999. Adoption of SOP 98-1
did not have a material effect on the Company's consolidated financial position
or results of operations.

   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 (VSOE) exists
for undelivered elements but does not exist for delivered elements of a
software arrangement. The Company will be required to comply with the
provisions of SOP 98-9 for transactions entered into beginning January 1, 2000.

                                      F-12
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

2. Financial Instruments

   Estimated fair values of financial instruments are based on quoted market
prices. The following is a summary of available-for-sale securities (in
thousands) at September 30, 1999. At December 31, 1997 and 1998, the fair
value of securities approximated cost, and the unrealized gains or losses were
not material.
September 30, 1999
                                        ---------------------------------------
                                                    Gross      Gross
                                        Amortized Unrealized Unrealized  Fair
                                          Cost      Gains      Losses    Value
                                        --------- ---------- ---------- -------
                                                    (in thousands)
Money market fund......................  $ 2,911     $--        $ --    $ 2,911
Commercial paper.......................   27,667      --         (23)    27,644
Government securities..................    3,000      --          (4)     2,996
Market auction preferred...............   20,030      --          --     20,030
                                         -------     ---        ----    -------
                                         $53,608     $--        $(27)   $53,581
                                         =======     ===        ====    =======
Classified as:
  Cash equivalents.....................  $26,880     $--        $ --    $26,880
  Short-term investments...............   23,728      --         (23)    23,705
  Investments..........................    3,000      --          (4)     2,996
                                         -------     ---        ----    -------
                                         $53,608     $--        $(27)   $53,581
                                         =======     ===        ====    =======
The contractual maturities of Clarent's long-term investments 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 nine months ended
September 30, 1999 (none for 1996, 1997 or 1998).

3. Related Party Transactions

   In June 1997, the Company entered into an agreement for advisory services
with WK Technology Fund, a Taiwanese corporation, one of whose principals is a
member of the Company's board of directors. The advisory services 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. On the 6-
month anniversary of the warrant effective date, 175,000 of the warrants
vested with the remaining warrants scheduled to vest ratably over the
subsequent 42 months or immediately 30 days prior to the closing of the
Company's public offering. The warrant had a life of five years. 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
$0 (amount was $3,000), $357,000 and $12,272,000 for the years ended December
31, 1997 and 1998 and the nine months ended September 30, 1999. These amounts
are included in amortization of compensation in the consolidated statement of
operations. The Board of Directors terminated the advisory services
arrangement in June 1999 and elected to have the unvested portion of the
warrants 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.

                                     F-13
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

   Also in June 1997, the Company entered into another agreement for certain
services with WK Technology Fund. These services were to assist the Company in
identifying, evaluating, and recommending an outside director for the Company.
Under the terms of this agreement, 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.

   In December 1998, the Company issued a warrant to purchase up to 101,000
shares of the Company's Series C preferred stock to both WK Technology Fund and
another Series C investor. These warrants are only exercisable upon the early
conversion of Series C preferred stock into common stock by certain other
Series C preferred stock investors. Upon such an event, one warrant for 101,000
shares will become exercisable and the other warrant for 101,000 shares will be
canceled. The warrants had an exercise price of $6.58 per share, and a
contractual life of five years. As of December 31, 1998, no value was ascribed
to these warrants as they were only exercisable based on future events which
were not deemed probable. These warrants expired unexercised upon the closing
of the Company's Initial Public Offering in July 1999.

4. Property and Equipment

   Property and equipment consist of the following:
December
                                                        31,
                                                    ------------  September 30,
                                                    1997   1998       1999
                                                    ----  ------  -------------
                                                         (in thousands)
Computer hardware and software..................... $473  $1,415     $3,599
Production and engineering equipment...............   16     984      3,268
Office equipment, furniture, and fixtures..........   92     220        979
Leasehold improvements.............................   53     221      1,877
                                                    ----  ------     ------
                                                     634   2,840      9,723
Less accumulated depreciation and amortization.....  (91)   (607)    (2,216)
                                                    ----  ------     ------
                                                    $543  $2,233     $7,507
                                                    ====  ======     ======
5. Short-Term Borrowings

   In February 1998, the Company obtained $2,600,000 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 have a contractual life of 10
years. As of the date of this 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

                                      F-14
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

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.

   In May 1998, the Company established a $5,000,000 line of credit with a
financial institution. The interest rate on this credit facility was variable
and was equal to one-half of one percentage point above the prime rate (8.5%
and 8.75% in total at December 31, 1998 and September 30, 1999, respectively).
Under the terms of this arrangement, the Company is to pay an additional, pro-
rated fee of 0.4% of all advances drawn in excess of $3,000,000. In addition,
borrowings under this arrangement are limited to the Company's eligible
receivable base. The terms of the line-of-credit agreement establish certain
affirmative and negative covenants, under which the Company must maintain
certain financial ratios and corporate reporting practices, respectively. The
Company failed to meet certain financial ratios required to be maintained under
the line of credit agreement as of December 31, 1998. The financial institution
waived these events of default. On February 16, 1999, the financial institution
increased the line of credit, to $7,000,000 and revised the ratios. In June
1999, the financial institution revised the line of credit to include eligible
inventory and further revise ratios, in consideration for 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. At September 30, 1999, the Company was in
compliance with the financial ratio covenants. Borrowings under the line of
credit are secured by substantially all assets of the Company. At December 31,
1998 and September 30, 1999, $2,500,000 and $4,128,000 were outstanding under
this line of credit. The line of credit agreement expires February 16, 2000.

6. Long-Term Debt

   In February 1999, the Company entered into a $3,000,000 equipment term loan
facility. The loan bears interest at the bank's prime rate plus .75%. Under the
terms of the agreement, the Company grants a security interest in certain
assets of the Company and must maintain financial covenants (see Note 5) with
which the Company was in compliance as of September 30, 1999. Borrowings and
interest are repayable in installments over 24-27 months. As of September 30,
1999, there was $182,000 outstanding against the term loan facility.

   Maturities under this agreement are as follows:
As of
                                                                  September 30,
                                                                       1999
                                                                  --------------
                                                                  (In thousands)
1999 (three months)...........................................      $ 23
   2000..........................................................        91
   2001..........................................................        68
                                                                       ----
                                                                       $182
                                                                       ====
7. Settlement Expense

   In November 1997, Wherever Computer Technology Co., Ltd. ("Wherever") filed
a complaint against the Company seeking to enforce a distributorship agreement
between Wherever and the Company or, in the alternative, for damages claimed in
connection with the breach of the distributorship agreement. On February 13,
1998, the Company's board of directors approved a settlement agreement with
Wherever. Under the terms of the agreement, the Company made an initial cash
payment to Wherever of $50,000, a cash

                                      F-15
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

payment to Wherever of $200,000 in September 1998 and granted Wherever a 5%
increase in the existing discount Wherever receives applicable to a specific
quantity of purchases of the Company's products. In addition, under the terms
of the settlement agreement, the Company issued 45,592 shares of Series C
preferred stock to Wherever at $6.58 per share on August 12, 1998.

8. Income Taxes

   The provision for income taxes of approximately $83,000 for the nine months
ended September 30, 1999 consists entirely of current foreign income taxes
provided on the profits attributable to the Company's foreign operations. Due
to operating losses and the Company's inability to recognize an income tax
benefit from these losses, there is no provision for income taxes for 1997 or
1996.

   Pretax income (loss) from foreign operations was approximately ($6,000),
$81,000, and $214,000 for 1997, 1998, and the nine months ended September 30,
1999, respectively.

   The difference between the provision for income taxes and the amount
computed by applying the Federal statutory income tax rate (34% for 1996, 1997,
1998 and 35% for 1999) to income before taxes is explained below:
Period from
                                July 2, 1996
                                (inception)   Year ended
                                     to      December 31,    Nine months ended
                                December 31, --------------    September 30,
                                    1996     1997    1998          1999
                                ------------ -----  -------  -----------------
                                               (in thousands)
Tax (benefit) at Federal
    statutory rate.............     $(94)    $(700) $(1,969)      $(9,472)
   Loss for which no tax
    benefit is currently
    recognizable...............       94       700    1,969         9,472
   Foreign tax.................       --        --       40            83
                                    ----     -----  -------       -------
   Total provision.............     $ --     $  --  $    40       $    83
                                    ====     =====  =======       =======
Significant components of the Company's deferred tax assets are as follows:
December 31,    September 30,
                                                 --------------  -------------
                                                 1997    1998        1999
                                                 -----  -------  -------------
                                                       (in thousands)
Deferred tax assets:
     Net operating loss carryforwards........... $ 524  $   798    $  3,280
     Tax credit carryforwards...................    --      200         500
     Deferred revenue...........................    --    1,061       2,144
     Deferred compensation......................    --      352       2,136
     Accounts receivable reserve................    15      435       1,665
     Accruals and reserves not currently
      deductible................................   361      305       1,671
                                                 -----  -------    --------
   Total deferred tax assets....................   900    3,151      11,396
   Valuation allowance..........................  (900)  (3,151)    (11,396)
                                                 -----  -------    --------
   Net deferred tax assets...................... $  --  $    --    $     --
                                                 =====  =======    ========
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

                                      F-16
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

includes the Company's historical operating performance and the reported
cumulative net losses in all prior years, the Company has provided a full
valuation allowance against its net deferred tax assets.

   The valuation allowance increased by $2,251,000 and $8,245,000 during the
year ended December 31, 1998 and the nine months ended September 30, 1999.

   As of September 30, 1999, the Company had federal and state net operating
loss carryforwards of approximately $8,560,000 and $4,680,000, respectively. As
of September 30, 1999, the Company also had research and development tax credit
carryforwards of approximately $300,000 each for federal and state purposes.
The net operating loss and tax credit carryforwards will expire at various
dates beginning in 2004 through 2019, if not utilized.

   Utilization of the pre-1998 net operating loss and tax credit carryforwards
is subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
Future ownership changes may also subject the post 1997 net operating loss and
tax credit carryforwards to an annual limitation on utilization.

9. Employee Benefit Plan

   The Company has a pretax savings plan that qualifies under Section 401(k) of
the Internal Revenue Code. Under the plan, 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 plan. For the period from July
2, 1996 (inception) to December 31, 1996, and for the years ended December 31,
1997 and 1998, and the nine months ended September 30, 1999, the Company made
no matching contributions and incurred immaterial expenses related to the plan.

10. Commitments and Contingencies

   The Company leases its principal office under noncancelable operating lease
agreements that expire in 2003 and 2004. As of September 30, 1999, minimum
lease payments under all noncancelable lease agreements with initial terms in
excess of one year were as follows (in thousands):
Operating
   Year ended December 31,                                              Leases
   -----------------------                                             ---------
1999 (three months)................................................  $   713
   2000...............................................................    2,275
   2001...............................................................    2,292
   2002...............................................................    2,288
   2003...............................................................    2,329
   Thereafter.........................................................    1,141
                                                                        -------
   Total minimum lease payments.......................................  $11,038
                                                                        =======
Rent expense was approximately $24,000 for the period from July 2, 1996
(inception) to December 31, 1996, $81,000 and $492,000 for the years ended
December 31, 1997 and 1998, respectively, and $261,000 and $1,197,000 for the
nine months ended September 30, 1998 and 1999, respectively. At September 30,
1999, the Company's aggregate future minimum rentals to be received under
noncancelable subleases is approximately $269,000.

                                      F-17
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

   From time to time, the Company may be subject to claims which arise in the
normal course of business. Although the amount of any liability with respect to
such litigation cannot be determined, in the opinion of management, the
ultimate disposition of these claims will not have a material adverse effect on
the Company's financial position, cash flows or results of operations. However,
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.

11. Stockholders' Equity

 Convertible Preferred Stock

   Prior to the initial public offering in July 1999, the Company had
authorized 8,000,000 shares of preferred stock. All issued and outstanding
shares of preferred stock were converted into 13,847,014 shares of common stock
upon the closing of the public offering.

   Convertible Preferred Stock was as follows:
Shares Issued
                                                 and Outstanding
                                               --------------------
                                                  December 31,
                                    Authorized ------------------- September 30,
   Series                             Shares     1997      1998        1999
   ------                           ---------- --------- --------- -------------
A............................... 1,000,000  1,000,000 1,000,000       --
   B............................... 3,220,000  3,220,000 3,220,000       --
   C............................... 2,750,000         -- 2,644,241       --
   Undesignated.................... 1,030,000         --        --       --
                                    ---------  --------- ---------      ---
   Total preferred stock........... 8,000,000  4,220,000 6,864,241       --
                                    =========  ========= =========      ===
Preferred Stock

   The Company's Certificate of Incorporation was amended to authorize
5,000,000 shares of preferred stock upon reincorporation in Delaware in July
1999.

 Common Stock

   In July 1996, 7,400,000 shares of common stock were issued to the Company's
three founders, one of whom subsequently left the Company, at $0.005 per share
in exchange for cash, software architecture technology ($10,000), debts owed by
the Company ($15,914) to the founders and stockholder notes receivable
($11,086). The notes accrued interest at a rate of 7% per year and were due and
payable on July 15, 2005, with interest payable annually. The outstanding
shares were subject to certain transfer restrictions through June 1999. These
shares are subject to repurchase at the issuance price upon the occurrence of
certain events, including termination of employment. The Company's right of
repurchase expires ratably over four years. In June 1997, 2,000,000 shares
issued to a founder who left the Company were repurchased. At December 31, 1998
and September 30, 1999, 5,400,000 shares issued to the two remaining founders
remain outstanding and 1,996,876 shares and 956,250 shares, respectively remain
subject to repurchase. The two remaining founders each hold 2,700,000 shares
which have the same material terms.

   In April 1999, the Company's Board of Directors approved a two-for-one split
of the Company's common stock. The stock split became effective with the
approval of the Amended and Restated Certificate of Incorporation by the state
of Delaware in connection with the Company's reincorporation. In addition, each

                                      F-18
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

share of the Company's preferred stock was convertible into two shares of
common stock. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted retroactively.

   In July 1999, the Company completed an initial public offering of 4.6
million shares, including 600,000 over-allotment shares at $15.00 per share.
Net proceeds from the offering were $62.7 million. Upon the closing of the
initial public offering, 6,923,507 shares of the Company's convertible
preferred stock were automatically converted into 13,847,014 shares of common
stock.

 Stock Option Plans

   During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Option
Plan"). Under the 1996 Option Plan, an aggregate of up to 7,200,000 shares of
the Company's common stock may be granted to directors, employees, and certain
consultants. During 1998, the board of directors approved the increase of
options available under the 1996 Option Plan by 3,303,000 shares. In July 1999,
the Company adopted the 1999 Amended and Restated Equity Incentive Plan
("Employee Option Plan"). The Employee Option Plan increases the authorized
shares under the Company's existing stock option plan from 10,503,000 to
11,358,170. Under the Employee Option Plan, options to purchase common stock
may be granted at no less than 85% of the fair value on the date of the grant
(110% of fair value in certain instances), as determined by the board of
directors. Options generally vest and become exercisable as to 25% of the
shares one year from the date of grant and the balance in monthly increments
over the subsequent three years of service. Options have a maximum term of 10
years. Certain stock options ("Performance Options") issued under the Employee
Option Plan vest over a time period determined by the board of directors;
however, the vesting could be accelerated based on achievement of certain
performance criteria. As of December 31, 1998, the board of directors has
granted Performance Options to purchase 492,000 shares of common stock to
certain employees at an exercise price equal to the fair market value on the
date of grant. For the nine months ended September 30, 1999, the Company
granted performance options to purchase 262,000 shares of common stock. 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 ratably over a 48 month term.

   In July 1999, the Company adopted the 1999 Nonemployee Directors' Equity
Incentive Plan ("Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to the Company's nonemployee
directors who are not any of the Company's affiliates' employees or consultants
("Nonemployee Director"). The Directors' Plan is administered by the Board, and
may be delegated to a committee.

   The aggregate number of shares of common stock that may be issued under the
Directors' Plan is 300,000 shares. Under the terms of the Directors' Plan, as
of the initial public offering, each Nonemployee Director, and each person who
is thereafter elected or appointed for the first time to be a Nonemployee
Director automatically shall, upon the date of his or her initial election or
appointment to be a Nonemployee Director by the Board or stockholders, be
granted an option to purchase 5,000 shares of common stock. In addition,
commencing with the third regular meeting subsequent to the date of each
Nonemployee Directors' initial grant under the Directors' Plan, each person who
is then serving as a Nonemployee Director automatically shall be granted an
option to purchase 2,000 shares of common stock. The exercise price of the
options granted under the Directors' Plan will be equal to the fair market
value of the common stock on the date of grant. Options granted under the
Directors' Plan vest and become exercisable immediately. There have been no
grants under the Directors' Plan through September 30, 1999.

 Employee Stock Purchase Plan

   In July 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("Purchase Plan") covering the aggregate of 600,000 shares of common stock.
Under the Purchase Plan, the Board of Directors or a

                                      F-19
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

committee may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan.
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. There have been no shares
issued 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.

   A summary of activity under the Employee Option Plan is as follows:
Options Outstanding
                            Shares    --------------------------   Weighted-
                          Available   Number of       Price         Average
                          for Grant     Shares      Per Share    Exercise Price
                          ----------  ----------  -------------- --------------
Authorized............   7,200,000          --  $           --    $    --
  Granted...............    (380,000)    380,000  $        0.025    $ 0.025
                          ----------  ----------
Balance at December 31,
 1996...................   6,820,000     380,000  $        0.025    $ 0.025
  Granted...............  (5,040,000)  5,040,000  $  0.025-$0.05    $ 0.032
  Exercised.............          --      (1,000) $         0.25    $  0.25
  Canceled..............     400,000    (400,000) $  0.025-$0.05    $ 0.038
                          ----------  ----------
Balance at December 31,
 1997...................   2,180,000   5,019,000  $  0.025-$0.05    $ 0.029
  Authorized............   3,303,000          --  $           --    $    --
  Granted...............  (3,030,896)  3,030,896  $   0.05-$1.00    $  0.62
  Exercised.............          --  (1,064,748) $  0.025-$1.00    $ 0.035
  Canceled..............     511,500    (511,500) $   0.05-$0.35    $  0.13
                          ----------  ----------
Balance at December 31,
 1998...................   2,963,604   6,473,648  $  0.025-$1.00    $ 0.305
  Authorized............     855,170          --  $           --    $    --
  Granted...............  (2,577,250)  2,577,250  $ 1.50-$50.938    $10.987
  Exercised.............          --  (1,052,397) $ 0.025-$15.00    $ 0.079
  Canceled..............      64,226     (64,226) $  0.05-$15.00    $ 7.416
                          ----------  ----------
Balance at September 30,
 1999...................   1,305,750   7,934,275  $0.025-$50.938    $ 3.746
                          ==========  ==========
F-20
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

   The following table summarizes information concerning options outstanding
and exercisable at September 30, 1999:
Options Outstanding            Options Exercisable
                          ------------------------------------- ------------------------
                                                    Weighted-
                                                     Average
                                      Weighted-     Remaining               Weighted-
                          Number of    Average     Contractual  Number of    Average
Range of Exercise Prices   Shares   Exercise Price     Life      Shares   Exercise Price
------------------------  --------- -------------- ------------ --------- --------------
                                                    (in years)
$0.025-$0.05............  3,086,715    $ 0.041         7.87       794,268     $0.041
$0.35-$1.00.............  2,339,910    $ 0.765         8.97       374,597     $0.620
$1.50-$5.00.............  1,477,300    $ 2.734         9.38        14,375     $ 1.50
$15.00-$50.938..........  1,030,350    $23.072         9.81         3,550     $15.00
                          ---------                             ---------
$0.025-$50.938..........  7,934,275    $ 3.746         8.73     1,186,790     $0.286
                          =========                             =========
Deferred Compensation

   The Company has recorded deferred compensation charges of approximately
$2,293,000 for the year ended December 31, 1998 and $11,318,000 for the nine
months ended September 30, 1999, for the difference between the exercise price
and the deemed fair value of certain stock options granted by the Company.
These amounts are being amortized as charges to operations, using the graded
method, over the vesting periods of the individual stock options, generally
four years. Under the graded method, approximately 59%, 25%, 12% and 4%,
respectively, of each option's compensation expense is recognized in each of
the four years following the date of grant.

 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,      September 30,
                                               ---------------   --------------
                                                1996     1997     1998    1999
                                               ------   ------   ------  ------
Expected dividend yield....................      0%       0%       0%      0%
   Risk-free interest rate....................    6.0%     6.0%    5.40%   5.74%
   Expected life of option in years...........    4.0      4.0     4.21     4.0
   Volatility.................................      0%       0%       0%     60%
F-21
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

   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:
Years ended             Nine months
                                       December 31,         ended September 30,
                                   -----------------------  -------------------
                                   1996    1997     1998           1999
                                   -----  -------  -------  -------------------
                                   (in thousands, except per share amounts)
Net loss as reported..........  $(276) $(2,059) $(5,832)      $(27,265)
   Pro forma net loss............   (276) $(2,064) $(5,869)      $(28,184)
   Net loss per share as
    reported, basic and diluted..    N/A  $ (2.14) $ (1.65)      $  (2.17)
   Pro forma net loss per share..    N/A  $ (2.15) $ (1.66)      $  (2.25)
The weighted average fair value of options granted to employees during the
years ended December 31, 1996, 1997 and 1998, were approximately $0.005, $0.005
and $0.125, respectively, and $5.7034 during the nine months ended September
30, 1999.

   For purposes of pro forma disclosures, the minimum value of the stock grants
and stock options is deemed amortized over the grant vesting period. Because
FAS 123 is applicable only to options granted since inception its pro forma
effect will not be fully reflected until 2001.

 Shares Reserved for Future Issuance

   Common stock reserved for future issuance is as follows:
December 31, September 30,
                                                         1998         1999
                                                     ------------ -------------
Employee stock option plan........................   9,437,252    9,240,025
  Directors' option plan............................          --      300,000
  Employee stock purchase plan......................          --      600,000
  Warrants..........................................   1,312,204        3,000
  Conversion of outstanding preferred stock.........  13,728,482           --
                                                      ----------   ----------
    Total common stock reserved for future
     issuance.......................................  24,477,938   10,143,025
                                                      ==========   ==========
F-22
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

11. Segments of an Enterprise and Related Information

   The Company operates in one industry segment. The Company designs, develops
and sells Internet Protocol ("IP") telephony systems. The Chief Executive
Officer has been identified as the Chief Operating Decision Maker ("CODM")
because he has final authority over resource allocation decisions and
performance assessment. The CODM does not receive discrete financial
information about individual components.

   Net revenue for non-U.S. locations is substantially the result of export
sales from the U.S. Net revenue by geographic region based on customer location
was as follows:
Nine months
                                                     Year ended       ended
                                                    December 31,  September 30,
                                                   -------------- --------------
                                                    1997   1998    1998   1999
                                                   ------ ------- ------ -------
                                                          (in thousands)
Net revenue:
     United States................................ $  213 $ 7,544 $4,775 $14,166
     Other Americas...............................      2      99      4     169
     Europe.......................................     58     740     90   3,947
     Asia.........................................  3,086   6,264  3,879  10,963
                                                   ------ ------- ------ -------
       Total...................................... $3,359 $14,647 $8,748 $29,245
                                                   ====== ======= ====== =======
12. 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.

                                      F-23
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

   The following table sets forth the computation of basic and diluted earnings
per share:
Period from
                            July 2, 1996                       Nine months
                           (inception) to    Year ended      ended September
                            December 31,    December 31,           30,
                           -------------- -----------------  -----------------
                                1996        1997     1998     1998      1999
                           -------------- --------  -------  -------  --------
                               (in thousands, except per share amounts)
Net loss (numerator).....     $  (276)    $(2,059)  $(5,832) $(3,650) $(27,265)
                              =======     ========  =======  =======  ========
Shares used in computing
 historical basic and
 diluted net loss per
 share (denominator):
Weighted average common
 shares outstanding......       7,400        6,400    6,248    5,959    14,005
Less shares subject to
 repurchase..............      (7,400)      (5,438)  (2,704)  (2,860)   (1,462)
                              -------     --------  -------  -------  --------
Denominator for
 historical basic and
 diluted net loss per
 share...................         --           962    3,544    3,099    12,543
                              =======     ========  =======  =======  ========
Conversion of preferred
 stock (pro forma).......                            10,504    9,778     9,408
                                                    -------  -------  --------
Denominator for pro forma
 basic and diluted net
 loss per share..........                            14,048   12,877    21,951
                                                    =======  =======  ========
Historical basic and
 diluted net loss per
 share...................         N/A     $  (2.14) $ (1.65) $ (1.18) $  (2.17)
                              =======     ========  =======  =======  ========
Pro forma basic and
 diluted net loss per
 share...................                           $ (0.42) $ (0.28) $  (1.24)
                                                    =======  =======  ========
Clarent 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 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 was 9,780,000 for the period from July 2, 1996 (inception) to
December 31, 1996, 19,297,000 and 24,158,334 for the years ended December 31,
1997 and 1998, respectively, and 22,128,593 and 9,396,775 for the nine months
ended September 30, 1998 and 1999, respectively.

13. Quarterly Financial Information (Unaudited)

   Summarized quarterly financial information for 1998 and the nine months
ended September 30, 1999 is as follows:
Fiscal Year 1998 Quarter Ended
                                   -------------------------------------------
                                   March 31  June 30  September 30 December 31
                                   --------  -------  ------------ -----------
                                     (in thousands, except per share data)
Net revenue.................... $ 2,396   $ 3,083    $ 3,269      $ 5,899
   Gross margin ..................   1,616     1,687      1,800        2,891
   Loss from operations...........    (284)   (1,202)    (2,118)      (2,220)
   Net loss.......................    (324)   (1,302)    (2,024)      (2,182)
   Basic and diluted net loss per
    share......................... $ (0.14)  $ (0.46)   $ (0.50)     $ (1.65)
Fiscal Year 1999 Quarter Ended
                                                 -------------------------------
                                                 March 31 June 30   September 30
                                                 -------- --------  ------------
                                                   (in thousands, except per
                                                          share data)
Net revenue..................................  $6,714  $  9,304    $13,227
   Gross margin.................................   3,433     5,158      7,792
   Loss from operations.........................  (5,495)  (17,390)    (4,866)
   Net loss.....................................  (5,479)  (17,564)    (4,222)
   Basic and diluted net loss per share.........  $(1.00) $  (2.73)   $ (0.17)
F-24
CLARENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    (Information for the nine months ended September 30, 1998 is unaudited)

14. SUBSEQUENT EVENT (UNAUDITED)

   On October 25, 1999 the Company issued 43,487 shares of Common Stock to
three private investors in connection with the acquisition of all outstanding
stock of Global Media Concept, N.V. This business combination will be accounted
for using the purchase method.

                                      F-25
[CLARENT LOGO APPEARS HERE]
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the distribution of the common stock being registered. All amounts are
estimated, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Filing Fee:
SEC Registration Fee............................................. $ 95,910
     NASD Filing Fee..................................................   35,000
     Nasdaq National Market Filing Fee................................   17,500
     Blue Sky Fees and Expenses.......................................      175
     Accounting Fees..................................................  150,000
     Legal Fees and Expenses..........................................  250,000
     Transfer Agent and Registrar Fees................................    5,000
     Printing and Engraving...........................................   50,000
     Miscellaneous....................................................   21,415
                                                                       --------
       Total.......................................................... $625,000
                                                                       ========
ITEM 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit the indemnification under
some circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933, as amended. Article VI of
the registrant's amended and restated certificate of incorporation provides for
indemnification of its directors to the maximum extent permitted by the
Delaware General Corporation Law and Section 43 of Article XI of the
registrant's bylaws provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the registrant intends to enter into
indemnification agreements with each director and some officers containing
provisions which are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the company, among other things, to
indemnify its directors against some liabilities that may arise by reason of
their status or service as directors, other than liabilities arising from
willful misconduct of culpable nature, to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' insurance if available on reasonable terms. Reference
is also made to Section 7 of the Underwriting Agreement contained in Exhibit
1.1 hereto, indemnifying officers and directors of the company against some
liabilities.

ITEM 15. Recent Sales of Unregistered Securities

Item 15. Recent Sales of Unregistered Securities

   a) Since July 2, 1996, the registrant has issued and sold, without payment
or any selling commissions to any person, the following registered securities:

     (1) Prior to completion of the initial public offering, the registrant
  effected a two-for-one stock split of its outstanding common stock in which
  every one outstanding share of common stock was split into two shares of
  common stock.

     (2) Since July 2, 1996, the registrant issued 3,400,000 shares of common
  stock (net of repurchases) to three employees, consultants and non-employee
  directors at a weighted average purchase price of $0.005 per share.

                                      II-1
(3) Since October 11, 1996 and through September 30, 1999, the
  registrant has granted stock options to purchase 10,809,646 shares of
  common stock (net of cancellations) to a total of 230 employees,
  consultants and non-employee directors at a weighted average exercise price
  of $3.70 per share pursuant to the registrant's stock plans.

     (4) On December 15, 1996, the registrant issued and sold shares of
  Series A preferred stock convertible into an aggregate of 2,000,000 shares
  of common stock to a total of five private investors for an aggregate
  purchase price of $500,000. All of the Series A preferred stock converted
  into common stock upon completion of the initial public offering.

     (5) From March 25, 1997 to June 10, 1997, the registrant issued and sold
  shares of Series B preferred stock convertible to an aggregate of 6,440,000
  shares of common stock to a total of 24 private investors for an aggregate
  purchase price of $3,220,000. All of the Series B preferred stock converted
  into common stock upon completion of the initial public offering.

     (6) As of March 31, 1999, 2,118,145 shares of common stock had been
  issued upon exercise of options and 7,934,275 shares of common stock were
  issuable upon exercise of outstanding options under the registrant's 1999
  amended and restated equity incentive plan.

     (7) On February 24, 1998, the registrant issued and sold warrants to
  purchase an aggregate of 59,266 shares of Series C preferred stock to eight
  private investors for an aggregate exercise price of $331,297. All of the
  warrants described above were exercised prior to the initial public
  offering.

     (8) On April 2, 1998, the registrant issued warrants to purchase an
  aggregate of 1,760,000 shares of common stock to WK Technology Fund for an
  aggregate exercise price of $88,000. All of the warrants described above
  were exercised prior to the initial public offering.

     (9) From June 11, 1998 to December 7, 1998, the registrant issued and
  sold shares of Series C preferred stock convertible into an aggregate of
  5,288,482 shares of common stock to 15 private investors for an aggregate
  purchase price of $17,399,106. All of the Series C preferred stock
  converted into common stock upon completion of the initial public offering.

     (10)  On June 22, 1999, the registrant issued a warrant to purchase an
  aggregate of 3,000 shares of common stock to Silicon Valley Bank for an
  aggregate exercise price of $45,000.

     (11) On October 25, 1999, the registrant issued 43,487 shares of common
  stock to three private investors in connection with the acquisition of all
  outstanding stock of Global Media Concept, N.V.

   The issuance described in Item 15(a)(1) was or will be exempt from
registration under Section 2(3) of the Securities Act of 1933, as amended (the
"Securities Act") on the basis that such transaction did not involve a "sale"
of securities.

   The sales and issuances of securities in the transactions described in
paragraphs (2), (3) and (6) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, as
transactions by an issuer not involving any public offering, in that the
purchasers in each case represented their intention to acquire the securities
for investment only and not with a view to the distribution thereof, received
either adequate information about the registrant or had access, through
employment or other relationship, to such information, and the securities were
offered and sold, either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation as provided by Rule
701. Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities.

   The sales and issuances of securities in transactions described in
paragraphs (4), (5) and (7) through (11) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2), Regulation D
or Regulation S promulgated thereunder as transactions by an issuer not
involving any public offering. The purchasers in each case represented their
intention to acquire the securities for investment only

                                      II-2
and not with a view to the distribution thereof. Appropriate legends are
affixed to the stock certificates issued in such transactions. Similar legends
were imposed in connection with any subsequent sales of any such securities.
All recipients received either adequate information about the registrant or had
access, through employment or other relationships, to such information.

   There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).

ITEM 16. Exhibits and Financial Statement Schedules

   (a) Exhibits
1.1    Form of Underwriting Agreement

  3.1+   Certificate of Incorporation of the Registrant

  3.2+   Form of Amended and Restated Certificate of Incorporation to be filed
         upon the closing of the offering made pursuant to this Registration
         Statement

  3.3+   Bylaws of the Registrant

  4.1+   Specimen Common Stock Certificate

  4.2+   Amended and Restated Investor Rights Agreement, dated June 11, 1998
         (as amended December 7, 1998 and April 8, 1999)

  4.3+   Founder Stock Purchase Agreement, dated July 2, 1996

  5.1    Opinion of Cooley Godward LLP

 10.1+   Form of Indemnity Agreement between the Registrant and its directors
         and officers.

 10.2+   1999 Amended and Restated Equity Incentive Plan and Form of Stock
         Option Grant Notice and Agreement

 10.3+   1999 Non-Employee Directors' Stock Option Plan and Form of
         Nonstatutory Stock Option

 10.4+   1999 Employee Stock Purchase Plan and Offering Document

 10.5+   Employment Agreement, dated August 1, 1998, by and between the
         Registrant and Richard J. Heaps

 10.6+   Employment Agreement, dated June 9, 1997, by and between the
         Registrant and Mark E. McIlvane (as amended June 9, 1998)

 10.7**+ OEM Purchase Agreement, dated effective as of December 1, 1998, by and
         between the Registrant and AudioCodes, Ltd.

 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.

 10.9+   Loan and Security Agreement, dated May 28, 1998, between Silicon
         Valley Bank and the Registrant (as modified on February 16, 1999)

 10.10+  Lease Agreement, dated August 12, 1998, by and between the Registrant
         and Seaport Centre Associates, LLC

 10.11+  Sublease, dated May 27, 1998, by and between the Registrant and
         Unwired Planet, Inc.

 10.12+  Customer Agreement, dated June 25, 1998, by and between the Registrant
         and Technet International

 10.13+  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

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Cooley Godward LLP (included in Exhibit 5.1)
II-3
24.1+ Power of Attorney

  27.1+ Financial Data Schedule

  99.1+ Consent of Frost & Sullivan, dated June 23, 1999

  99.2+ Consent of iLocus, dated June 23, 1999
--------
 + Previously filed
** Portions have been omitted pursuant to an application for confidential
   treatment

   (b) Financial Statement Schedules

                 Schedule II--Valuation and Qualifying Accounts

Allowance For Doubtful Accounts:
Additions-
                                 Balances at Charged to             Balances at
                                  Beginning  Costs and  Deductions-   End of
                                  of Period   Expenses  Write-Offs    Period
                                 ----------- ---------- ----------- -----------
Period from July 2, 1996
 (inception) through
 December 31, 1996..............   $  --       $  --      $  --       $  --
                                   ======      ======     ======      ======
Year ended December 31, 1997....   $  --       $   38     $  --       $   38
                                   ======      ======     ======      ======
Year ended December 31, 1998....   $   38      $  803     $  (34)     $  807
                                   ======      ======     ======      ======
Nine months ended September 30,
 1999...........................   $  807      $1,053     $   (1)     $1,859
                                   ======      ======     ======      ======
Schedules other than those listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.

ITEM 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Act, the
  information omitted from the form of prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Act shall be deemed to be a part of this Registration
  Statement as of the time it was declared effective.

     (2) For purposes of determining any liability under the Act, each post-
  effective amendment that contains a form of prospectus shall be deemed to
  be a new registration statement relating to the securities offered therein,
  and the offering of such securities at that time shall be deemed to be the
  initial bona fide offering thereof.

                                      II-4
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement 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 November 1, 1999.

                                          CLARENT CORPORATION

                                                /s/ Jerry Shaw-Yau Chang
                                          By: _________________________________
                                                    Jerry Shaw-Yau Chang
                                                  Chief Executive Officer,
                                                   President and Director

                               POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jerry Shaw-Yau Chang and Richard J. Heaps, and each of
them, his or her attorneys-in-fact, each with the power of substitution, for
him or her in any and all capacities, in any and all capacities, to sign any
and all amendments to this Registration Statement (including post-effective
amendments), and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority todo and perform each and every act and thing
requisite and necessary to be done in and about the premises,as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact, or his their substitutes, may
lawfully do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.

   Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Jerry Shaw-Yau Chang          Chief Executive Officer,    November 1, 1999
______________________________________  President and Director
         Jerry Shaw-Yau Chang           (Principal Executive
                                        Officer)

         /s/ Richard J. Heaps          Chief Operating Officer     November 1, 1999
______________________________________  and Chief Financial
           Richard J. Heaps             Officer (Principal
                                        Financial and Accounting
                                        Officer)

         /s/ Michael F. Vargo          Senior Vice President,      November 1, 1999
______________________________________  Chief Technology Officer
           Michael F. Vargo             and Director

           /s/ Wen Chang Ko            Director                    November 1, 1999
______________________________________
             Wen Chang Ko

        /s/ Syaru Shirley Lin          Director                    November 1, 1999
______________________________________
          Syaru Shirley Lin

         /s/ William R. Pape           Director                    November 1, 1999
______________________________________
           William R. Pape
II-5
INDEX TO EXHIBITS
Exhibit
   No.                                 Description
 -------                               -----------
1.1    Form of Underwriting Agreement

  3.1+   Certificate of Incorporation of the Registrant

  3.2+   Form of Amended and Restated Certificate of Incorporation to be filed
         upon the closing of the offering made pursuant to this Registration
         Statement

  3.3+   Bylaws of the Registrant

  4.1+   Specimen Common Stock Certificate

  4.2+   Amended and Restated Investor Rights Agreement, dated June 11, 1998
         (as amended December 7, 1998 and April 8, 1999)

  4.3+   Founder Stock Purchase Agreement, dated July 2, 1996

  5.1    Opinion of Cooley Godward LLP

 10.1+   Form of Indemnity Agreement between the Registrant and its directors
         and officers.

 10.2+   1999 Amended and Restated Equity Incentive Plan and Form of Stock
         Option Grant Notice and Agreement

 10.3+   1999 Non-Employee Directors' Stock Option Plan and Form of
         Nonstatutory Stock Option

 10.4+   1999 Employee Stock Purchase Plan and Offering Document

 10.5+   Employment Agreement, dated August 1, 1998, by and between the
         Registrant and Richard J. Heaps

 10.6+   Employment Agreement, dated June 9, 1997, by and between the
         Registrant and Mark E. McIlvane (as amended June 9, 1998)

 10.7**+ OEM Purchase Agreement, dated effective as of December 1, 1998, by and
         between the Registrant and AudioCodes, Ltd.

 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.

 10.9+   Loan and Security Agreement, dated May 28, 1998, between Silicon
         Valley Bank and the Registrant (as modified on February 16, 1999)

 10.10+  Lease Agreement, dated August 12, 1998, by and between the Registrant
         and Seaport Centre Associates, LLC

 10.11+  Sublease, dated May 27, 1998, by and between the Registrant and
         Unwired Planet, Inc.

 10.12+  Customer Agreement, dated June 25, 1998, by and between the Registrant
         and Technet International

 10.13+  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

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 23.2    Consent of Cooley Godward LLP (included in Exhibit 5.1)

 24.1+   Power of Attorney

 27.1+   Financial Data Schedule

 99.1+   Consent of Frost & Sullivan, dated June 23, 1999

 99.2+   Consent of iLocus, dated June 23, 1999
--------
 + Previously filed
** Portions have been omitted pursuant to an application for confidential
   treatment