VTEL CORP - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

FOR THE FISCAL YEAR ENDED JULY 31, 2001

Commission file number 0-20008

VTEL CORPORATION

A Delaware Corporation IRS Employer ID No. 74-2415696

108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700

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

None

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

Common Stock

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

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

The aggregate market value of 20,970,317 shares of the registrant's Common Stock
held by nonaffiliates on October 10, 2001 was approximately $48,441,432. For
purposes of this computation all officers, directors and 5% beneficial owners of
the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors and beneficial owners are, in
fact, affiliates of the registrant.

At October 10, 2001 there were 24,776,975 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the 2001 Annual Meeting are incorporated by reference into Part
III.

GENERAL

VTEL Corporation, doing business as Forgent Corporation, ("Forgent,"
"Company," we or our) was founded in 1985 and has been a developer and early
pioneer of the videoconferencing equipment industry with the innovation of
utilizing an open PC architecture for videoconferencing endpoints. Integration
of the functionality and applications of a personal computer with
videoconferencing hardware provided a videoconference platform that included the
ability to use a broad range of PC applications, as well as simultaneous access
to the Internet. The Company has manufactured and installed more than 30,000
videoconferencing endpoints worldwide and provides service for more than 9,000
of these endpoints, as well as other endpoints, currently under maintenance
agreements.

In August 2000, the Company, then known as VTEL, announced its plans to
shift its strategy by enacting a new business charter and creating two business
units, Products and Solutions, to focus on distinctive core competencies. Our
Products unit is focused on building and selling videoconferencing endpoints
while our Solutions unit is focused on providing services and software for all
available enterprise systems. The Company's vast experience in the industry
indicated that videoconferencing would not reach the broad-based market appeal
necessary for overall growth of the Company's business through the production of
videoconferencing endpoints alone. This situation is further demonstrated by the
decline in the average selling price of videoconferencing endpoints over the
past several years while the videoconferencing industry as a whole has remained
relatively flat in terms of revenue growth during the same periods.

Management has decided to focus our efforts on our Solutions business
and to exit our Products business. Therefore, we announced in May 2001 that the
Company intended to sell its Products business unit and rename the remaining
Solutions business unit as Forgent Corporation, subject to the execution and
consummation of a sale agreement and shareholder approval. The Company executed
the sale agreement in early October 2001 and is intending to submit the sale of
the Products business to our shareholders at our 2001 annual meeting. To
facilitate the change, special attention is being paid to improving the
interoperability of all the components in a broadband video network, to
expanding the Company's current interoperability labs to create a center of
excellence for standards testing and integration and to developing and
introducing enterprise videoconferencing software that provides a high level of
manageability, reliability and ease-of-use for existing and new enterprise
systems. We believe we must provide network software and services that will
support the vast amount of visual communication applications that are becoming
possible with increased bandwidth. Furthermore, the development and expansion of
our consulting and services competencies will ultimately transform the majority
of our revenue base to a software and solutions centric provider. We feel that
refocusing our efforts will provide the greatest opportunity for long-term
success for Forgent and its shareholders. Our new name reflects our desire to
forge a new vision and direction for the industry as well as a new business
model that is designed to provide potential increased growth in shareholder
value.

INDUSTRY BACKGROUND

Videoconferencing first became available on a commercial basis in the
early 1980's. A wide range of uses quickly emerged ranging from business and
professional meetings, education and training classes, to technical and medical
consultations. Customers typically make use of this innovative technology to
reduce operating costs, improve customer service, reduce cycle times, and
improve intra- or inter-company communications. The industry has primarily
evolved around the production of the various compression/decompression (or
Codec) devices as each manufacturer has developed its own proprietary software
that compresses and decompresses signal for transmission of video, audio and
data signals between two or more locations over a network connection. VTEL
products, in particular, have been characterized by the innovation of placing
the Codec within a standard PC using an open architecture as opposed to
operating the Codec on a proprietary operating system. By incorporating a PC
into the videoconferencing endpoint, VTEL products allow for the inclusion of
software applications such as PowerPoint(TM) presentations, spreadsheets and the
ability to use whiteboard annotations during a videoconference as well as other
applications.

Over the years, few companies manufactured videoconferencing endpoints,
which fall into two distinct categories: (1) the room or group videoconferencing
products tailored for targeted markets with specific application needs and (2)
the set-top products for the individuals who require strictly video and audio
communications during a call. During this same time, the proliferation of the
broadband network has augmented the appeal of

1

videoconferencing, thereby increasing the demand for the set-top or appliance
type products. While the unit volumes of these products have increased
dramatically, the average selling price of set-top products is significantly
less than that of a room system. The result is that the total revenue of the
videoconferencing endpoint market has remained relatively flat despite the
increased unit volume. Although usage of videoconferencing systems is on the
rise, limitations still exist with respect to managing these types of networks.
The need for enterprise software and services that assist users in managing
their videoconferencing systems, ensuring reliability of the video network and
applications, as well as ease of use, is the primary reason the industry has not
enjoyed the growth of other hardware industries such as the PC.

We believe that while the demand in the industry will continue to be
directed toward set-top videoconferencing, technological developments will
reduce the endpoint to a software application with minimal additional hardware
attached to the PC. We also believe that our experience in providing solutions
and software for specific customer needs makes Forgent uniquely positioned to
address these limitations. The key to our future in this evolving industry will
be based on our ability to develop software and offer services and solutions
that can be successfully delivered to the end users as visual communications
become easier to use and the associated networks more manageable and more
reliable.

CORPORATE STRATEGY

As VTEL we were known as a leader in the design, manufacture and sale
of videoconferencing hardware and software with thousands of satisfied customers
around the world. As the industry has evolved into one with increased price
competition for endpoint products, the Company has shifted its focus from
manufacturing videoconferencing endpoints to providing the tools to visually
enable Internet Protocol ("IP") and ISDN networks. Forgent's corporate strategy
includes managing this transition in its business model with a view towards
generating profitable results from operations as quickly as possible. This
process, which began in August 2000, has included the restructuring and
refocusing of our core operations, the divestiture of all non-core operations,
the development of strategic relationships with network providers and vendors of
visual communication software and the creation of a visual management software
platform. Although such a strategy involves certain risks, we believe our years
of expertise, customer relationships and existing software and hardware product
offerings can be leveraged for future financial success.

Internet Protocol networks that connect large businesses and
organizations continue to expand and the steady growth of fiber optic or
"broadband" cable lines to serve these networks, create a new environment for
visual communications - video over IP. Thus, our new business model involves
continued execution of the following strategies:

o developing industry-wide interoperability tools to ensure that all
video network hardware and software are compatible regardless of
manufacturer;

o designing back-office, enterprise software products to establish the
standard for video over IP and ISDN;

o integrating entire video networks using existing IP and ISDN enterprise
networks and our software;

o serving as an industry consultant and expert on video over IP and ISDN;

o managing video networks;

o providing multi-vendor services and support;

o fulfilling multi-vendor endpoint and network product requirements,
including integrated systems.

In addition, the current economic downturn and world and US political
situation caused by the events of September 11, 2001 have increased attention on
the videoconferencing industry as a means for corporations to reduce travel
expenses, to alleviate safety concerns and to still receive the benefit from
face-to-face communication. Early industry figures show the volume of video over
today's networks have increased 70% since the September 11th tragedy. The world
situation has changed fundamental business processes and has provided an
intensified urgency and need for Forgent to prove its services expertise by
progressing our Video Network Platform ("Forgent VNP") software from beta
version to production-level software in the 2002 fiscal year. Forgent VNP is
designed to allow system administrators to manage complex heterogeneous video
networks from remote locations. Through strong industry partnerships, successful
feedback from our beta-testing, and other marketing strategies, Forgent VNP is
gaining widespread attention and if successfully adopted, we believe it can be
the catalyst for moving video from an infant industry into a mission critical
application. We believe the face of modern business

2

communication has changed forever and human interaction over video will supplant
the need many for face-to-face business transactions.

We anticipate revenue to originate from the sale of product elements
such as software, systems and network integration, network consulting services
and endpoint and network maintenance, as well as equipment sales. As Forgent we
will generate additional revenue through value added services and our enterprise
software while selling the hardware of many companies.

PROFESSIONAL SERVICES AND SOFTWARE

A key strategy in our business plan to become a services and software
provider for visually enabling broadband networks lies in our existing expertise
as a provider of video systems integration and maintenance services. Since the
announcement of the Company's new charter, we have determined the greatest
growth and profit opportunities in the videoconferencing industry lie in
improving industry wide multi-vendor platform interoperability and in the
integration and management of video conferencing networks, all of which are core
competencies of the Forgent team. Therefore, we announced in May 2001 that the
Company intended to sell its Products business unit and rename the remaining
Solutions business unit as Forgent Corporation, subject to the execution and
consummation of a sale agreement and shareholder approval. The Company executed
the sale agreement in early October 2001 and is intending to submit the sale of
the Products business to our shareholders at our 2001 annual meeting. If the
transaction is consummated as anticipated, we will exit from the Products
business and focus on building and growing our Solutions business. As the
Forgent Corporation, we will increase our focus on providing advanced video
services for enterprise communications, enterprise software that improves video
network management and reliability and interoperability standards throughout the
industry. We will leverage our service and software expertise in the deployment
and management of videoconferencing endpoints by continuing to actively market
our ability to integrate, install and service a wide offering of third-party
products, including the products of companies that were traditional competitors
when our focus was hardware.

Our service group currently supports more than 9,000 endpoint systems
around the world under maintenance agreements. These endpoints include current
VTEL products, legacy products, network products for which the Company acted as
a reseller and a growing base of our traditional competitors' products. We will
continue to actively pursue additional support and maintenance contracts for all
hardware products as well as other products that emerge in the broadband visual
communications industry. Through service and maintenance offerings, we will
augment our experience and knowledge of the multiple endpoints available within
the industry, thus positioning Forgent as the industry expert in visual
communication solutions. As such, we are expanding our service offering to
include all of the following: network consulting, interoperability testing,
total call management, 24x7 hotline support, emergency on-site support, resident
engineering services, video integrations services, and training.

The service group has also developed a worldwide reputation as a visual
communications solutions provider. We have successfully integrated systems into
boardrooms and auditoriums for our corporate customers as well as classrooms in
primary schools, colleges and universities by providing solutions for customers
requiring multiple voice activated cameras, custom user-interface and other
customized requirements. The experience gained by addressing these needs further
positions Forgent as the focal point and leader in visually enabling existing
and emerging network infrastructures.

In addition to software that provides manageability, reliability and
ease-of-use, the videoconferencing industry has needed a "hardware agnostic"
source for interoperability testing. Forgent is meeting this need through the
creation of an industry exclusive interoperability lab that allows for
real-world testing of video networking technology regardless of brand. In our
labs, we can test any major technology brands to ensure they that work, and more
importantly, that they work together. Our labs can test everything from personal
and group communications products to peripheral components and network
technology, which guarantee our customers receive the full value of their video
network investments.

During the fiscal year ended July 31, 2001, Forgent designed Video
Network Platform ("Forgent VNP"), an enterprise-class server software to manage
today's complex heterogeneous video networks. For the first time, enterprises
have a tool they can use to proactively measure and improve their end-to-end
video quality of service.

3

Forgent VNP gives enterprises control over video networks by applying the power
of traditional network management tools to video, thus making video usage as
reliable as telephone and computer usage. Operating across traditional ISDN
networks (H.320) as well as IP networks (H.323), Forgent VNP is the first vendor
neutral management software that can manage any brand name endpoints, gateways,
gatekeepers, bridges, MCUs, as well as traditional network attached devices such
as desktops, servers, printers, IP phones, etc. With features including
comprehensive real-time displays, detailed location and status of video
infrastructure, an event notification system that provides real-time alerts,
powerful diagnostic tools that identify and help isolate video network problems,
scheduling, reporting, and automated call launching, Forgent VNP finds,
monitors, and identifies video related devices on the network so they can be
managed through business rules. Forgent VNP is compatible and interoperable with
existing enterprise management frameworks, including Hewlett-Packard's
OpenView(R). Network Node Manager, and is designed to accommodate additional
endpoints as well as future network protocols, thus protecting a customer's
current video investments while smoothing the transition to next-generation
technologies. Beta testing for Forgent VNP started in September 2001 with global
companies in a variety of industries such as finance/banking, oil and gas,
pharmaceutical, government, education and diverse multi-nationals. After several
weeks of testing, the video, telecommunications, and IT groups of these
companies are all providing positive feedback on the software and its
capabilities. The testing will be extended to international customers later this
year through Forgent's strategic partnership with Mobile Video Communication AG,
the largest German supplier of video, audio, and data conferencing solutions, as
well as to other customers. System testing will continue with enhancements being
made to the software based on customer feedback. Currently, potential customers
are approaching Forgent and requesting proposals for the hardware and software
installations for Forgent VNP, although they have not participated in the beta
program. Forgent VNP is planned and on target to go into production by the end
of the calendar year 2001.

INTERNET STRATEGY

During the year ended July 31, 2000, the Company established two
entities within its combined organizational structure to leverage its expertise
in visual communications and to pursue business strategies over the Internet.
OnScreen24(TM) developed and marketed visual communication tools for the
Internet and ArticuLearn(TM) was an e-learning portal provider for commercial
and educational businesses that delivered learning content in a Web environment.
During fiscal year 2001, management determined that these strategies were not
consistent with the Company's shifted focus on video network software and
services. Therefore, the Company ceased further investment in these non-core
operations. OnScreen24's operations were folded back into the core operations as
of January 31, 2001, and ArticuLearn's operations were terminated as of June 30,
2001.

DISTRIBUTION STRATEGY

Forgent primarily delivers its capabilities directly to the end-user
customers. These services will generally involve larger customers that already
have sophisticated visual communication networks in place, but require more
sophisticated involvement to support the sale, installation, operation and
maintenance of the network. As we intend to offer a broader range of visual
communication products, we also expect to develop a broader range of customers,
especially as broadband networks become available and affordable to small
businesses. VNP will be marketed with a direct sales force, separate from the
sales force from our services organization. By building alliances with strategic
partners, we plan to leverage their existing channels to directly reach our
customers.

COMPETITION

While there are several manufacturers of videoconferencing endpoints,
very few companies are dedicated to developing a business by providing services
and software around video communications over Local Area Networks ("LANs"), Wide
Area Networks ("WANs"), and Metropolitan Area Networks ("MANs"). Although big
network providers sell videoconferencing equipment along with the network they
are installing, they do not usually provide post-installation services such as
product services and training. Furthermore, today's network management tools do
not provide carriers with in depth information about video devices (endpoints,
gateways, gatekeepers, Multicontrol Units ("MCUs"), bridges, etc. In addition,
these networks are typically proprietary in nature and are not open to other
hardware or software vendors, limiting the customers in their usability.
Similarly, videoconferencing manufacturers may offer a small amount of
proprietary device level software to be used on their

4

products but do not usually provide a complete view of the entire network
infrastructure showing all the network touch points. Other potential competition
comes from a few start-up companies that are attempting to develop software that
supports video over broadband networks. However, these companies are typically
working with proprietary software and do not have the level of industry
experience that Forgent brings to the market.

The traditional network management systems vendors like Hewlett
Packard, Sun Microsystems, and others have traditionally focused on managing
devices and are moving to manage system level applications. At the same time,
enterprise systems management vendors like IBM Tivoli, BMC Patrol, and Computer
Associates Unicenter, who have traditionally focused on managing system level
applications, are migrating to cover device level management as well. However,
both groups, while interested in covering the widest breadth of device types, do
not have the same depth of understanding of video as Forgent and today have no
mechanism to discover, to monitor, to diagnose, or to report on video
application or device level issues. Forgent is pursuing the addition of several
new partnerships to expand the utilization of video, thereby making it a
business critical application. Therefore, Forgent's goal is to ensure dependable
video communications by combining professional services with network management
tools to deliver ease of use, reliability, and manageability for video
communications through interoperability standards.

While we believe that by embarking on this business strategy that we
are focusing on a niche that is being ignored by the industry, there can be no
assurances that this strategy will be successful. Furthermore, if this strategy
is successful it is likely that other companies will attempt to duplicate this
business model. We do believe that, like the PC industry, which saw exceptional
growth after the introduction of network management software, the combination of
software and services provided by Forgent could have a similar affect on the
videoconferencing industry.

MARKETING

Forgent has developed a comprehensive marketing/communications plan
designed to establish credibility and trust, as well as brand recognition, for
the Company as well as its software and services. This program integrates media
relations, industry analyst relations, investor relations and other corporate
communications activities to ensure a consistent and accurate flow of
information to and from our key stakeholders and target audiences. Early efforts
have been focused on developing clear and concise methods of communicating with
shareholders, customers, prospects, trade and technical media and influencers,
and the business media. Forgent's corporate Web site will play an important role
in providing audiences with the most up-to-date and accurate information
available on our people, services, software, success, trends and issues the
Company faces.

PATENTS AND TRADEMARKS

The United States Patent and Trademark Office has issued the Company
more than 35 patents covering a broad range of interest including, but not
limited to, videoconferencing, data compression, and video mail. The Company
currently has in excess of 38 patent applications in similar fields of interest
that are filed but not yet issued by the U.S. Patent and Trademark Office. Seven
of these patent applications, related to the new technology of video end-point
management, were filed in the fourth quarter of fiscal 2001 and we are on track
to complete filing on ten more patent applications by the end of the first
quarter in fiscal 2002. We intend to file more patents to protect our
intellectual property and anticipate an average of five filed patents to be
issued per quarter to Forgent by the U.S. Patent and Trademark Office, starting
in the near future. There can be no assurance that the pending patents will be
issued or that issued patents can be defended successfully. With the successful
sale of the products division, Forgent will own the rights to all patents.

The Company's Strategic Patent Program, headed by the leadership of
Chief Intellectual Property Officer, Gordon Matthews, stimulates the creation of
the Company's intellectual property. Mr. Matthews, a board member since 1994 as
well as a named inventor on more than 35 U.S. and foreign patents, directs the
program to manage the Company's portfolio of patents, to lead an internal patent
committee representing all functions in the Company, to empower all employees to
develop intellectual property, and to reward those employees who generate the
ideas. In addition to the Strategic Patent Program, Forgent is also initiating
an active program for licensing its intellectual property.

5

The Company has been issued two trademarks and two service marks by the
U. S. Patent and Trademark Office covering the "VTEL" mark and our logo as well
as trademarks and service marks issued by certain foreign countries and
entities. Applications for other trademarks, including the "Forgent" mark are
currently pending both in the United States and abroad.

EMPLOYEES

With the announcement of the New Charter on August 23, 2000, we also
announced the restructuring of our organization, which involved the termination
of approximately 200 employees or 34% of our workforce. As we further defined
our business strategy during fiscal 2001, we identified certain elements that
did not contribute our core competencies and therefore restructured our Company
in August 2001, which involved the termination of approximately 65 employees or
17% of our workforce.

As a result of the August 2001 restructuring, we employed 312 employees
as follows:

Once the sale of the Products business unit is completed, Forgent will
employ approximately 200 employees. Despite the workforce reductions, we believe
that we retained the appropriate employees to fully implement our business
strategy and that our current employee relations are good. None of our employees
are represented by a labor union.

Forgent's development, management of its growth and other activities
depend on the efforts of key management and technical employees. Competition for
such personnel is intense. We use incentives, including competitive compensation
and stock option plans, to attract and retain well-qualified employees and
generally do not have employment agreements with key management personnel or
technical employees. Our future success is dependent upon our ability to
effectively attract, retain, train, motivate and manage our employees. However,
there can be no assurance that we will continue to attract and retain personnel
with the requisite capabilities and experience. The loss of one or more of our
key management or technical personnel could have a material and adverse effect
on our business and operating results.

EXECUTIVE OFFICERS

Our executive officers are as follows:

RICHARD N. SNYDER, age 56, joined the Company's Board of Directors in
December of 1997 and became Chairman of the Board in March 2000. In June 2001
Mr. Snyder was named the Company's Chief Executive Officer. Mr. Snyder has over
twenty-five years of senior management experience including Group General
Manager at Hewlett-Packard, Senior Vice President and General Manager at Dell
Computer, and Senior Vice President of Worldwide Sales, Marketing, Service and
Support for Compaq Computer. Mr. Snyder received a Masters in Business
Administration from Saint Mary's College and a Bachelor of Science from Southern
Illinois University.

JAY C. PETERSON, age 44, joined the Company in September 1995 as
manager of Corporate Planning and has served as Chief Financial Officer and Vice
President of Finance since May 2000. Prior to joining the Company, Mr. Peterson
performed as Assistant Controller with the Dell Direct Channel that generated $1
billion in annual sales at Dell Computer Corporation and held various financial
positions during his 11 years with IBM Corporation. Mr. Peterson holds a Masters
in Business Administration and a Bachelor of Arts in Economics from the
University of Wisconsin.

6

KENNETH A. KALINOSKI, age 40, joined the Company in February 2001 as
Vice-President - Development and also currently serves as Chief Technology
Officer, responsible for all aspects of technology for the company. Mr.
Kalinoski's 18-year career has focused on client/server and communications
technology. Most recently, he was the founder and Vice-President of Development
at Netpliance and was responsible for delivering the first information appliance
to the consumer marketplace. Mr. Kalinoski held multiple management positions,
including director of AIX Development, at IBM Corporation, where he was
responsible for several multimedia and network management programs. Mr.
Kalinoski received a Masters in Computer Engineering from State University of
New York, a Bachelor of Science from Wilkes University and currently holds five
patents.

DENNIS M. EGAN, age 48, joined the Company in November 1995 as Vice
President - Service. From January 1993 to November 1995, Mr. Egan served as
Senior Vice President of Peirce-Phelps, Inc. From June 1985 to January 1993, Mr.
Egan was Vice President and General Manager of the Integrated Communications
Systems Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years
serving in various sales and management positions with Peirce-Phelps. Mr. Egan
holds a Master in Business Administration from Widener University and a Bachelor
of Science from Villanova University.

BOB R. SWEM, age 64, joined the Company in September 1992 as Vice
President - Manufacturing. From June 1981 to July 1992, Mr. Swem held various
positions with the Austin Division of Tandem Computers, Inc., ranging from
Manager of Manufacturing to Director of Operations.

ITEM 2. PROPERTIES

Forgent's headquarters, product development, and sales and marketing
facility leases approximately 139,000 square feet in Austin, Texas under a lease
which expires in March 2013. During fiscal 1999, we reduced the workforce of the
Company and as a result were able to sublet approximately 15,000 square feet
during the later part of fiscal 1999 and the first quarter of fiscal 2000. In
fiscal 2001, we subleased an additional 26,000 square feet in order to
consolidate space and take advantage of a favorable real estate market in the
Austin area. Forgent's Professional Services group occupies a facility of
approximately 41,000 square feet in the Philadelphia, Pennsylvania vicinity
which is leased through June 2006. We believe that the facilities in Texas and
Pennsylvania are adequate to meet our current requirements, and that suitable
additional space will be available, as needed, to accommodate further physical
expansion of corporate and development operations and for additional sales and
marketing offices.

The Company also occupies approximately 60,000 square feet of a
facility that is situated in a light industrial area in Austin, Texas where our
manufacturing, training and spare parts depot are located. As part of the sale
agreement of the Products unit, Forgent will assign this lease to the new
company, VTEL Product, who will assume all obligations under the existing lease.

Forgent leased 52,500 square feet in Sunnyvale, California under a
lease that expired in April 2008. This property housed some of our research and
development group as well as our OnScreen24 operations. During fiscal 2001,
Forgent reached an agreement with the landlord and sold its equity interest in
the real estate lease. Forgent is no longer liable for the remaining lease
payments.

ITEM 3. LEGAL PROCEEDINGS

The Company is the defendant or plaintiff in various actions that arose
in the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial condition or results of operations.

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

None

7

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

Since April 7, 1992, VTEL's Common Stock has been traded in the
NASDAQ-National Market System under the symbol "VTEL". Starting June 1, 2001,
the Company's Common Stock has been traded under the symbol "FORG." The
following table sets forth the range of high and low intra-day prices for each
fiscal quarter of 2000 and 2001:

The Company has not paid cash dividends on its Common Stock and
presently intends to continue a policy of retaining earnings for reinvestment in
its business.

On October 15, 2001, Forgent's common stock closed at $2.88 on the
NASDAQ. At that date there were approximately 17,791 stockholders of record of
the common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth consolidated financial data for Forgent
as of the dates and for the periods indicated. All such data reflects the merger
with Compression Labs, Inc. ("CLI") on May 23, 1997, which was accounted for as
a pooling of interests. The restatement of the consolidated financial
information combines the financial information of Forgent and CLI giving
retroactive effect to the merger as if the two companies had operated as a
single company for fiscal year 1997 presented, although the two companies
operated independently prior to the merger.

The selected consolidated balance sheet data as of July 31, 2000 and
2001 and the selected consolidated operations data for the years ended July 31,
1999, 2000, and 2001 have been derived from the audited consolidated financial
statements of Forgent included elsewhere in this Report. The selected
consolidated balance sheet data as of July 31, 1997, 1998 and 1999 and the
selected consolidated operations data for the year ended July 31, 1997 and 1998
have been derived from the audited consolidated financial statements of Forgent
not included in this Report.

The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" the consolidated financial statements of Forgent and the notes to
those statements included elsewhere in this Report. The information set forth
below is not necessarily indicative of the results of future operations.

8

(a) Net loss for the year ended July 31, 1997 includes merger and
other expenses totaling $29.4 million related to the merger
between VTEL and CLI.

(b) Net income for the year ended July 31, 1998 includes the
reversal of $1.5 million of merger and other expenses and a
gain from a non-recurring real estate transaction of $1.3
million.

(c) Net loss for the year ended July 31, 1999 includes expense for
restructuring totaling $3.1 million.

(d) Net income for the year ended July 31, 2000 includes a
non-recurring gain of $44.5 million and an expense for the
write-down of impaired assets of $14.1 million.

(e) Net loss for the year ended July 31, 2001 includes an expense
of $4.0 million for the impairment of certain assets and
transaction expenses in anticipation of a segment sale and
expenses for restructuring totaling $1.7 million.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY

RESULT OF OPERATIONS

The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items in Forgent's
consolidated statement of operations:

9

FOR THE YEARS ENDED JULY 31, 1999, 2000, AND 2001.

Revenues

Consolidated revenue was $46.1 million in fiscal 1999, $45.2 million in
fiscal 2000, and $38.2 million in fiscal 2001. The decline was $0.9 million from
1999 to 2000 and $7.1 million from 2000 to 2001. This is a decrease of 1.9% for
2000 and 15.6% for 2001. Consolidated revenue represents the combined revenues
of Forgent's, formerly VTEL Solution's, business, which provides network
consulting, installation, training, and maintenance services as well as custom
videoconferencing integration solutions, and multi-vendor products. Consolidated
revenues do not include any revenues from our discontinued Products business,
which engages in the manufacture and sale of endpoint systems (see Note 17, in
the accompanying financial statements).

Service revenue was $29.7 million in fiscal 1999, $27.2 million in
fiscal 2000, and $25.4 million in fiscal 2001. The decline was $2.5 million from
1999 to 2000 and $1.8 million from 2000 to 2001. This is a decrease of 8.4% for
2000 and 6.8% for 2001. Service represents 64.4%, 60.2%, and 66.5% of total
revenues for the years ended July 31, 1999, 2000 and 2001, respectively. Despite
significant declining product revenues from our discontinued operations, revenue
streams from network consulting, installation, training and maintenance
contracts have been relatively stable, which reflects our customers' confidence
in the quality of our service performance. Customers' confidence is confirmed
further by the renewal of their maintenance contracts. During the last two
quarters of fiscal 2001 we achieved significant increases in our service
bookings, which will lead to future service revenues. As Forgent demonstrates
its expertise in providing visual communications solutions using a wider array
of visual communications products, we believe our service bookings will continue
to increase through customers' renewals and new contracts.

Revenue from integration solutions and other was $16.4 million, $18.0
million, and $12.8 million in fiscal 1999, 2000, and 2001, respectively. The
increase was $1.6 million from 1999 to 2000 and the decrease was $5.2 million
from 2000 to 2001. This is an increase of 9.9% for 2000 and a decrease of 28.9%
for 2001. Integration solutions and other represent 35.6%, 39.8% and 33.5% of
total revenues for the years ended July 31, 1999, 2000, and 2001, respectively.
Although we experienced an increase in integration and other revenues in fiscal
2000, integration and other revenues were down in fiscal 2001 primarily due to a
change in business strategy. In previous fiscal years, VTEL derived
approximately half of its integration revenue from sales through its channels.
Under the new charter as announced in August 2000, VTEL Solutions sold
integrated solutions directly to the marketplace while VTEL Products continued
selling existing integrated systems, also referred to as pre-designed systems,
via the channels. The cycle time for selling new integrated solutions was
significantly longer than selling existing integrated systems and the direct
sales did not replace the channel sales as quickly as anticipated, which led to
the decline in integrated revenues in fiscal 2001. As "Forgent," the Company
will return to its channel partners, leading with visual communications services
instead of videoconferencing products. These services will include integrated
solutions and focus on all available visual communications products, not only
VTEL products. Forgent will be channel-focused with select direct sales targeted
in certain geographic marketplaces that do not have any dominant channels.
Additionally, during the year ended July 31, 2001, Forgent created the
Multi-Vendor Partners Program(TM) ("MVP"), which allows the Company to market
and distribute a variety of third-party manufactured equipment to optimize
connectivity in a variety of network environments. The Company recognized $1.5
million in product revenue that was generated from MVP during fiscal 2001.

Gross margin

Consolidated gross margins were $16.9 million in fiscal 1999, $12.9
million in fiscal 2000, and $8.3 million in fiscal 2001. The decline was $4.0
million from 1999 to 2000 and $4.6 million from 2000 to 2001. This is a decrease
of 23.5% for 2000 and 35.7% for 2001. Consolidated gross margin percentages were
37% for fiscal 1999, 29% for fiscal 2000, and 22% for fiscal 2001.

The Company's margins are primarily generated from service revenues.
Since the costs associated with our service and maintenance business is
relatively fixed, the gross margins are directly affected by the level of
revenue generated from new and renewed service contracts. As Forgent, we offer
our service capabilities to a broader range of third-party visual communications
products, which is resulting in increased service bookings. Therefore, we
anticipate that as our service revenues grow, our margins will strengthen.
However, there can be no assurance our sales levels will increase. Additionally,
we have successfully restructured our business in August 2001 (see Note 18, in
the accompanying financial statements) in order to minimize these relatively
fixed costs, which cost reductions were designed to improve our margins.

10

As well as being subject to relatively fixed costs, gross margins from
integration revenues are also subject to product mix shifts based on the types
of integration solutions we produce. During fiscal 2001 margins from integrated
revenues decreased primarily due to the decrease in the overall integration
revenues in addition to reduced pre-designed systems sales and increased sales
of customized systems at lower margins. The decline in integration margins
during fiscal 2000 was attributable to a higher percentage of larger custom
integration projects that generated higher revenues yet lower gross margins.

Despite declining gross margins, Forgent has resized its infrastructure
in fiscal 2002 to more closely match projected revenue levels. Additionally, the
integration business acts as a conduit to deliver service maintenance contracts
on the visual communications solutions we deliver. Since service revenues do not
carry the associated cost of sales that product sales do, and since we have
restructured our business, we believe a predominately service-based business
model has the potential to provide greater overall profitability.

Selling, general and administrative

Selling, general and administrative expenses were $18.3 million in
fiscal 1999, $19.2 million in fiscal 2000, and $19.7 million in fiscal 2001. The
increase was $0.9 million from 1999 to 2000 and $0.5 million from 2000 to 2001.
This is an increase of 4.8% for 2000 and 2.5% for 2001. Selling, general and
administrative expenses were 39.7%, 42.4% and 51.5% of revenues for the years
ended July 31, 1999, 2000, and 2001, respectively.

Although total selling, general and administrative ("SG&A") expenses
have remained relatively flat during the past three fiscal years, SG&A expenses
related to Forgent's operations have actually decreased each year. The SG&A
expenses incurred by the Internet subsidiaries, which were folded back into the
core operations during fiscal 2001, were $2.0 million and $2.8 million for the
fiscal years ended July 31, 2000 and 2001, respectively. Without the effect of
the Internet ventures, total SG&A expenses decreased $1.1 million, or 5.9%, from
1999 to 2000 and $0.4 million, or 2.1%, from 2000 to 2001. SG&A as a percentage
of revenues increased each year although total SG&A expenses remained relatively
constant against a declining level of revenues.

During our years of significant revenue growth, our sales and marketing
infrastructure was designed to support a growing business. Although we took
measures to reduce costs during fiscal 1999 (see "Restructuring Activities"), we
had projected that our revenue levels would increase and therefore continued
certain strategies in anticipation of further growth. In efforts to find
efficiencies and to significantly reduce our administrative costs as a percent
of expected revenues, we reexamined our overall staffing needs and restructured
our operations in August 2001. We will record a one-time charge of approximately
$0.8 million in the first quarter of fiscal 2002 for the restructuring.
Additionally, we are replacing our Enterprise Reporting Platform ("ERP"), which
includes the Company's accounting system. The combination of the restructuring
and the replacement of the ERP will further reduce our annual administrative
expenses by approximately $7.8 million. This savings will be offset by
approximately $1.6 million as we expense the remaining value of the current
accounting system over a short expected life. As we move into fiscal 2002, any
expense not directly supporting the generation of revenues for Forgent remains
under close scrutiny in order to prevent any unnecessary costs. Despite the cost
reducing measures that we are undertaking, there can be no assurance that we
will be able reduce costs enough to become profitable.

Research and development

Research and development expenses were $0.0 million in fiscal 1999,
$8.5 million in fiscal 2000, and $7.4 million in fiscal 2001. The increase was
$8.5 million from 1999 to 2000 and the decrease was $1.0 million from 2000 to
2001. This is an increase of 100.0% for 2000 and a decrease of 12.0% for 2001.
Research and development expenses were 0.0%, 18.7%, and 19.5% of revenues for
the years ended July 31, 1999, 2000, and 2001 respectively.

During the year ended July 31, 2000, Forgent created two subsidiaries
focused on the development and delivery of visual communication products and
services over the Internet. In January of 2000, we announced the formation of
OnScreen24 which was comprised primarily of Forgent research and development
engineers who developed visual communication delivery products for use over the
Internet, including products such as video mail as well as the further
development of our web streaming product line, Turbocast(TM), which utilizes the
technology acquired in our acquisition of Vosaic during fiscal 1999. In March of
2000, we announced the formation of ArticuLearn, which created and managed
custom e-learning portals that enable organizations to create, deliver and
manage their learning content directly online. In addition, ArticuLearn offered
various professional services to assist

11

organizations in the production of their web-based learning content. During the
years ended July 31, 2000 and July 31, 2001, the Company's two Internet
subsidiaries incurred $8.5 million and $5.1 million in research and development
expenses, respectively. Due to the weakening environment for start-up businesses
and related tightening of the venture capital marketplace, the Company absorbed
its OnScreen24 operations back into the operations of its core business and
terminated ArticuLearn during fiscal 2001.

Without the effects of the Internet ventures, the Company incurred $2.3
million in research and development expenses during fiscal 2001 and no research
and development expenses during fiscal 2000 or fiscal 1999. These expenses,
which represent 6.1% of revenue in fiscal 2001, are related to the development
of a network management software and are net of $0.6 million capitalized in
fiscal 2001. Software development costs are capitalized after a product is
determined to be technologically feasible and is in the process of being
developed for market. At the time the product is released, the capitalized
software is amortized over the estimated economic life of the related projects.
The research and development costs capitalized during fiscal 2001 relates to
efforts on designing Forgent's Video Network Platform ("Forgent VNP"), an
enterprise-class server software that allows enterprises control over video
networks. Efforts on Forgent VNP will continue to be capitalized until the end
of this calendar year when the product is scheduled to be released to the
market.

Our ability to successfully develop software solutions to visually
enable broadband networks will be a significant factor in Forgent's success. As
we develop our research and development strategy, we anticipate additional costs
associated with the recruiting and retention of engineering professionals adept
at broadband technologies. We will attempt to maintain research and development
expenses at reasonable levels in terms of percentage of revenue. However, we
believe our ultimate future success is based primarily on our commitment to the
new business strategy and the success of Forgent VNP.

Write-down of Impaired Assets

During fiscal year 2001 management implemented a strategy to divest all
non-core operations to focus the business strategy to management software and
services. Therefore, the Company folded its OnScreen24 subsidiary's operations
back into the core business. OnScreen24 primarily operated from our property in
Sunnyvale, California. During the third fiscal quarter the Company sold its
equity interest in the real estate lease for $500,000 and recorded a related
$1.1 million impairment for the leasehold improvements at the Sunnyvale
facility. The $1.1 milllion impairment in fiscal 2001 was all related to
continuing operations.

As a result of the New Charter announced in August 2000, we reviewed
certain long-lived assets including property, plant and equipment, goodwill and
other intangibles and capitalized software, to evaluate the recoverability of
these assets pursuant to Statement of Financial Accounting Standard ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The evaluation indicated that the future undiscounted
cash flows related to certain long-lived assets were below the carrying value of
the assets associated with their future operations. Further, the closure of
certain foreign offices and the termination of the software capitalization
projects resulted in the identification of only minimal future cash flows.
During the fourth quarter of fiscal 2000, we adjusted the long-lived assets
associated with our manufacturing operations and the long-lived assets related
to the foreign operations and capitalized software. We calculated the fair value
for the long-lived assets based on anticipated future cash flows discounted at a
rate commensurate with the risk involved, which resulted in a non-cash
impairment charge of $14.1 million. This impairment loss was recorded on the
consolidated statement of operations as follows:

The remaining useful lives of certain assets were shortened and thus,
depreciation and amortization for these assets were slightly higher in
subsequent fiscal years.

12

Amortization of Intangibles

Amortization expenses were $1.3 million in fiscal 1999, $1.4 million in
fiscal 2000, and $1.4 million in fiscal 2001. The expenses relate to the
amortization of goodwill resulting from certain acquisitions. In March 1999, the
Company acquired substantially all of the assets of Vosaic LLP, an Internet
video software and technology company, which included technology presently being
incorporated into Forgent's VNP product. In November 1995, the Company acquired
certain assets and a specified work force of the Integrated Communications
Systems Group ("ICS") of Peirce-Phelps, Inc., which has developed into the
Forgent services business. The Company acquired certain assets of the
videoconferencing division of one of its German resellers in July 1998. The
goodwill related to the German acquisition was fully amortized during fiscal
2001.

Effective August 1, 2001, the Company chose early adoption of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangibles Assets," which recognizes that since goodwill and certain intangible
assets may have indefinite useful lives, these assets are no longer required to
be amortized but are to be evaluated at least annually for impairment. The
Company anticipates an annual expense reduction of $1.3 million from adoption of
SFAS No. 142.

Restructuring Activities

In November 1998, management adopted a restructuring plan that was
intended to match the size and complexity of the organization with our planned
business approach and recorded a charge of $0.9 million in fiscal 1999. The plan
included the involuntary reduction of employees from all departments and was
effective immediately for most employees upon announcement. We also made the
decision to reduce our operating costs by exiting other activities and reducing
related overhead costs. All of the termination benefits were paid and closure
costs were incurred by October 31, 1999.

Non-Recurring Events

On March 3, 2000 the Company settled a lawsuit pending in the 126th
Judicial District Court in Travis County, Texas in which VTEL had previously
initiated against five former employees who left VTEL in September 1996 to form
Via Video Communications, Inc. ("Via Video"). Via Video was subsequently
acquired by Polycom, Inc. Pursuant to the settlement agreement, the former
employees of VTEL paid $2.5 million in cash and delivered to VTEL 300,800 shares
of common stock of Polycom, Inc. in settlement of the claims asserted by VTEL.
These shares were sold during fiscal 2000 for $33.7 million, net of settlement
costs. The parties agreed to dismiss all claims and counterclaims and third
party claims in the lawsuit, ending the litigation. Separately, VTEL voluntarily
dismissed Polycom, Inc. and Via Video from the case without consideration.

On March 3, 2000, the Company granted non-exclusive licenses to
Polycom, Inc. ("Polycom") to use three of its patented technologies, and Polycom
paid a one time fee of $8.3 million to VTEL as a fully paid up royalty in
exchange for such license. In turn and without any payments by VTEL, Polycom
also has granted VTEL a non-exclusive sublicense to its rights under its license
agreement with Brown University pertaining to its single camera tracking
technology. Through this technology exchange, the parties have access to
specified distinctive technologies of the other for use in their product
offerings.

Interest income and expense

Interest income was $0.8 million in fiscal 1999, $1.2 million in fiscal
2000, and $1.2 million in fiscal 2001. The increase was $0.4 million from 1999
to 2000 and $0.04 million from 2000 to 2001. This is an increase of 50% for 2000
and 0% for 2001. Interest income was 1.7%, 2.6%, and 3.2% of revenues for the
years ended July 31, 1999, 2000, and 2001.

Changes in interest income are based on interest rates earned on
invested cash and cash balances available for investment. The slight increase in
interest income during fiscal 2001 is due primarily to a higher average cash
balance held for investment in fiscal 2001 than in fiscal 2000. The increase in
interest income during fiscal 2000 is the result of an increase in the cash
balance due to income from non-recurring events.

13

Income taxes

As of July 31, 2001, Forgent had federal net operating loss
carryforwards of $139.6 million, research and development credit carryforwards
of $5.8 million, and alternative minimum tax credit carryforwards of $0.3
million. The net operating loss and credit carryforwards will expire in varying
amounts from 2002 through 2021, if not utilized. Minimum tax credit
carryforwards do not expire and carry forward indefinitely. Net operating losses
related to our foreign subsidiaries of $5.3 million are available to offset
future foreign taxable income. However, significant permanent limitations may
apply to the use of these losses based upon laws of the foreign tax
jurisdictions.

As a result of various acquisitions completed in prior years,
utilization of our net operating losses and credit carryforwards may be subject
to a substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization. Also, due to the
uncertainty surrounding the timing of realizing the benefits of its favorable
tax attributes in future tax returns, we have placed a valuation allowance
against our net deferred tax asset. Accordingly, no deferred tax benefits have
been recorded for the tax years ended July 31, 1999, 2000, and 2001. The
valuation allowance increased by $11.2 million during the year ended July 31,
2001.

Loss from discontinued operations, net of income taxes

In May 2001, the Company adopted a formal plan to sell the operations
and certain assets of its VTEL Products business unit, including the VTEL name.
Accordingly, the Products business has been accounted for and presented as
discontinued operations in the consolidated financial statements. Loss from
discontinued operations was $12.1 million in fiscal 1999, $17.8 million in
fiscal 2000, and $16.9 million in fiscal 2001. Loss from discontinued operations
was 26.2%, 39.4% and 44.3% of revenues for the years ended July 31, 1999, 2000,
and 2001, respectively. In October 2001, Forgent signed a definitive agreement
to sell the Products business unit to a management team led by one of the
Company's executive officers, Bob Swem (see Note 18, in the accompanying
financial statements).

Loss on disposal, net of income taxes

In preparation of the sale of the Products business unit, Forgent
recorded a $1.1 million loss on disposal as of July 31, 2001. The loss is
primarily related to legal and consulting fees associated with the sale.

Net income (loss)

Net loss was $15.6 million in fiscal 1999; net income was $2.3 million
in fiscal 2000; and net loss was $32.5 million in fiscal 2001. The increase was
$17.9 million from 1999 to 2000 and the decrease was $34.8 million. Net (loss)
income was (33.8%), 5.1%, and (85.3%) of revenues for the years ended July 31,
1999, 2000, and 2001, respectively.

During the fiscal 2001 we have taken steps to eliminate both
unprofitable and non-strategic investments and have established a new business
strategy to grow the visual communication solutions business. These steps
include terminating our Internet ventures, which incurred $16.4 million and $9.5
million in net losses for the years ended July 31, 2000 and 2001, respectively.
Additionally, we have resized our infrastructure to more closely match our
projected revenue and we signed a definitive purchase agreement to sell our
Products business unit, subject to shareholders' approval in the second fiscal
quarter of 2002. Therefore, in fiscal 2002 as cost reduction efforts are
realized and sales from Forgent VNP are achieved, the Company is poised for
future profitability. Leveraging off the strengths of our existing services,
integration and development teams to offer visual communication solutions for
the emerging broadband marketplace, we believe we are focused on the strategy to
return to profitability. However, there is no assurance that our new business
strategy will be successful or profitable.

14

Other factors affecting results of operations

Forgent's future results of operations and financial condition could be
impacted by many factors, but our ability to implement our new strategy is
critical to our future success. Factors that could affect our success are other
competitors entering the same market, technical problems in delivering video
solutions over broadband networks, and slow adoption to videoconferencing over
broadband networks. Due to these factors and others noted elsewhere in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, our past earnings and stock price have been, and future earnings and
stock price potentially may be, subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors are cautioned in using
historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price of
Forgent's Common Stock in any given period. Also, we participate in a highly
dynamic industry that often contributes to the volatility of Forgent's Common
Stock price.

Liquidity and capital resources

Cash provided by operating activities was $2.3 million in fiscal 1999;
cash provided by operating activities was $52.1 million in fiscal 2000; and cash
used in operating activities was $4.9 million in fiscal 2001. The increase was
$49.8 million from 1999 to 2000 and the decrease was $57.0 million from 2000 to
2001. At July 31, 2001, we had working capital of $13.8 million, including $22.0
million in cash, cash equivalents and short-term investments. Changes in cash
from operating activities are primarily the result of the net losses or income
generated and changes in working capital, primarily increases and decreases in
accounts receivable, accounts payable, and deferred revenues. The OnScreen24 and
ArticuLearn operations required significant funding from the Company. The
liquidation of both these subsidiaries, as well as the completion of the
Company's restructuring efforts, will improve the cash requirements from
operations. The Company eliminated its cash burn during the fourth quarter of
fiscal 2001 and management believes the Company is in the position to generate
cash from operations in fiscal 2002. Included in net income for fiscal 2000 was
the favorable settlement of litigation in which the Company received $44.5
million in cash and securities (see "Non-recurring events").

Cash provided by investing activities was $0.5 million in fiscal 1999;
cash used in investing activities was $32.3 million in fiscal 2000; and cash
provided by investing activities was $21.9 million in fiscal 2001. During the
year ended July 31, 2001, the Company owned common stock shares of Accord
Networks ("Accord"), a networking equipment manufacturer, which were converted
to Polycom, Inc. ("Polycom") common stock shares as a result of Polycom's
acquisition of Accord. The cash provided by investing activities in fiscal 2001
was primarily due to the proceeds received from the sale of the Polycom and
Accord shares and other short-term investments. During fiscal 2000, the cash
used in investing activities was primarily from the investment of cash received
from the settlement of litigation (see "Non-recurring events"). Investments were
also made in additional property and equipment and capitalized research and
development. During fiscal 1999, the cash used in investing activities was spent
primarily to complete the acquisition of property and equipment and to
capitalize the costs associated with the research and development of our visual
communication software. These expenditures were partially offset by the net sale
and maturity of short-term investments.

Cash provided by financing activities was $8.0 million in fiscal 1999;
cash used in financing activities was $11.0 million in fiscal 2000; and cash
used in financing activities was $0.6 million in fiscal 2001. Cash used in
financing activities during fiscal 2001 primarily relates to the Company
settling its remaining notes payable. As of July 31, 2001, the Company did not
have any outstanding debt. Cash used in financing activities for the year ended
July 31, 2000 relates to the repayment of cash borrowed under the line of credit
and payment on notes payable. Cash provided by financing activities for the year
ended July 31, 1999 relates to borrowings under our line of credit and was
offset by the purchase of treasury stock and payments on notes payable.

During fiscal 1999 we initiated a stock repurchase program and
repurchased 526,000 shares of the Company's Common Stock for $2.3 million. The
repurchased shares were used to fulfill requirements for the Company's stock
including stock option exercises or stock issuances under business combination
transactions. In April 2001 we announced a stock repurchase program to purchase
up to two million shares of the Company's stock. During fiscal 2001 the Company
repurchased 87,400 shares for $0.1 million, including fees. We anticipate
repurchasing additional shares during fiscal 2002, depending on the Company's
cash position, market conditions and other factors.

Forgent's principal sources of liquidity at July 31, 2001 consist of
$22.0 million of cash, cash equivalents

15

and short-term investments, and the ability to generate cash from operations.
The $22.0 million includes $1.7 million in stock of Polycom, a networking
equipment manufacturer. We have recorded the related unrealized gain of $1.5
million as part of other comprehensive income and included the asset as part of
short-term investments on our Consolidated Balance Sheet at July 31, 2001. The
76,625 shares of Polycom were sold during the first quarter of fiscal 2002 under
a cash flow hedge and resulted in a cash inflow of $1.8 million. Our capital
budget for fiscal 2001 was $3.0 million, which was not fully utilized as we
reduced capital expenditures. Our capital budget for fiscal 2002 is $2.0
million, which will be used principally to invest in development tools, sales
and marketing demonstration equipment, and on going operational requirements.

In March 2000, we repaid the outstanding balance on our line of credit
with a banking syndicate. At July 31, 2001, we did not have a line of credit in
place. Based on the Company's strong cash position, management does not
anticipate acquiring any additional lines of credit in the near future.

Legal Matters

Forgent is the defendant or plaintiff in various actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangibles Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Since the standard
recognizes goodwill and certain intangible assets may have indefinite useful
lives, these assets are no longer required to be amortized but are evaluated at
least annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their useful lives, but without constraint of an
arbitrary ceiling. Effective August 1, 2001, the Company chose early adoption of
SFAS No. 142 and anticipates an annual expense reduction of $1.3 million.

On August 31, 2000 the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities on the Consolidated Balance
Sheet with changes in fair value recorded in the Consolidated Statement of
Operations.

The accounting for changes in fair value of a derivative depends upon
whether it has been designated in a hedging relationship and, further, on the
type of hedging relationship pursuant to SFAS No. 133. Changes in the fair value
of derivatives not designated in a hedging relationship are recognized each
period in earnings. Hedging relationships are established pursuant to the
Company's risk management policies, and are initially and regularly evaluated to
determine whether they are expected to be, and have been, highly effective
hedges. If a derivative ceases to be a highly effective hedge, hedge accounting
is discontinued prospectively, and future changes in the fair value of the
derivative is recognized in earnings each period. For derivatives designated as
hedges of the variability of cash flows related to a recognized asset or
liability (cash flow hedges), the effective portion of the change in fair value
of the derivatives is reported in other comprehensive income and reclassified
into earnings in the period in which the hedged items affect earnings. Gains or
losses deferred in accumulated other comprehensive income associated with
terminated derivatives remain in accumulated other comprehensive income until
the hedged items affect earnings. Forecasted transactions designated as the
hedged items in cash flow hedges are regularly evaluated to assess that they
continue to be probable of occurring, and if the forecasted transactions are no
longer probable of occurring, any gain or loss deferred in accumulated other
comprehensive income is recognized in earnings currently.

During fiscal 2001 the Company utilized forward currency exchange
contracts to reduce the exposure to fluctuations in foreign currency exchange
rates related to the European Euro and the Australian Dollar. The changes in
these contracts are reflected in the Consolidated Statement of Operations. The
Company also utilized derivatives designated as cash flow hedges to ensure a
minimum level of cashflows as related to its investment in the Polycom stock.
The amount of ineffectiveness with respect to these cash flow hedges was not
material. These hedges were recorded at fair value on the Consolidated

16

Balance Sheet, under the caption short-term investments and will result in a
$1.7 million reclass from other comprehensive income to earnings in first
quarter fiscal 2002.

In December 1999, the SEC staff issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101, as amended by SAB 101A and SAB 101B,
outlines the basic criteria that must be met to recognize revenue and presents
guidance for disclosures related to revenue recognition policies. Forgent
adopted SAB 101 during the fourth quarter of fiscal 2001. The adoption of SAB
101 did not have a material impact on our revenue recognition policies.

In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", which further clarifies APB
Opinion No. 25, "Accounting for Stock Issued to Employees". This Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation did
not have a material effect on our results of operations or financial position.

Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results

Certain portions of this report contain forward-looking statements that
reflect the Company's current expectations regarding future results of
operations, economic performance, financial condition and achievements. Whenever
possible, Forgent attempted to identify these forward-looking statements with
the words "believes," "estimates," "plans," "expects," "anticipates" and other
similar expressions. These statements reflect management's current plans and
expectations that rely on a number of assumptions and estimates that are subject
to risks and uncertainties including, but not limited to our ability to execute
the business strategy as outlined above, rapid changes in technology, unexpected
changes in customer order patterns or order mix, the intensity of competition,
economic conditions, the cost and availability of certain key components,
pricing pressures, interest rates fluctuations, changes in the capital markets,
litigation involving intellectual property, changes in tax and other laws and
governmental rules applicable to Forgent's business and other risks indicated in
Forgent's filings with the Securities and Exchange Commission. These risks and
uncertainties are beyond the Company's control, and in many cases, management
cannot predict all of the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We identify our principal market risks as interest rate risk related to
short-term investments and the market value of our Polycom investment (see
Liquidity and capital resources). Interest rate exposure with regard to our
investments is minor due to the short-term nature of our investments. We
previously invested in Accord Networks ("Accord") an Israeli-based manufacturer
of networking equipment. In June of 2000, Accord filed an initial public
offering on the NASDAQ stock exchange in which VTEL was apportioned 1.3 million
shares. In February 2001, Accord was acquired by Polycom and VTEL's investment
in Accord converted to 399,000 shares of Polycom. The company sold 246,000
shares and then entered into a cash flow hedge to ensure a minimum level of cash
flow from the 153,000 remaining shares. These hedges settled in July and October
2001, resulting in net cash flows of $1.8 and $1.8 million, respectively.

Foreign Exchange Risk

Our objective in managing our exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, we historically utilized forward contracts to hedge our foreign
currency exposure on firm commitments. The principal currencies hedged during
fiscal years 1999, 2000 and 2001 were the Euro and Australian dollar. The amount
of unrealized gain or (loss) related to these contracts was ($18,000), $38,000
and $0 for fiscal years 1999, 2000 and 2001, respectively. As of July 31, 2001
the Company held no foreign currency contracts.

17

INDEX TO FINANCIAL STATEMENTS

Reports of Independent Auditors and Accountants 20

Financial Statements:

Consolidated Balance Sheets as of July 31, 2000 and 2001 22

Consolidated Statements of Operations for the years ended
July 31, 1999, 2000 and 2001 23

Consolidated Statements of Changes in Stockholders' Equity for the
years ended July 31, 1999, 2000 and 2001 24

Consolidated Statements of Cash Flows the years ended July 31, 1999, 2000 and 2001 25

Notes to Consolidated Financial Statements 26

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts 48

Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise included

19

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of VTEL Corporation

We have audited the accompanying consolidated balance sheets of VTEL
Corporation as of July 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
years then ended. Our audits also included the financial statement schedule as
of and for the fiscal years ended July 31, 2001 and 2000 listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of VTEL
Corporation at July 31, 2001 and 2000, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule as of and for the fiscal years
ended July 31, 2001 and 2000, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Ernst & Young LLP

Austin, Texas
September 18, 2001

20

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of VTEL Corporation

In our opinion, the consolidated statements of operations, changes in
stockholders' equity and of cash flows for the year ended July 31, 1999 (listed
in the accompanying index) present fairly, in all material respects, the results
of operations and cash flows of VTEL Corporation and its subsidiaries for the
year ended July 31, 1999, in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. We have not
audited the consolidated financial statements of VTEL Corporation for any period
subsequent to July 31, 1999.

PricewaterhouseCoopers LLP

Austin, Texas
September 24, 1999

VTEL CORPORATION

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)

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

The accompanying notes are an integral part
of these consolidated financial statements

22

VTEL CORPORATION

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

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

The accompanying notes are an integral part
of these consolidated financial statements

23

VTEL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)

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

The accompanying notes are an integral part
of these consolidated financial statements.

24

VTEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

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

The accompanying notes are an integral part
of these consolidated financial statements

25

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

1. THE COMPANY

VTEL Corporation, doing business as Forgent Corporation (Forgent, the
Company, we or our), visually enables broadband networks through our existing
expertise by providing top-rate services to the visual communications industry,
regardless of brand, and by developing neutral network management software for
rich media networks. Forgent's services and software are designed to improve
industry wide multi-vendor platform interoperability as well as improve video
network management and reliability standards throughout the industry.

On August 23, 2000, the Company announced a new business charter that
is intended to shift its core business model from the manufacture of
videoconferencing endpoints to a provider of premier enterprise solutions and
services for visually enabling broadband networks. The Company's vast experience
in the industry indicated that videoconferencing would not reach the broad-based
market appeal necessary for overall growth through the production of
videoconferencing endpoints alone. We will leverage our service and software
expertise in the deployment and management of videoconferencing endpoints by
continuing to actively market our ability to integrate, install and service a
wide offering of third-party products, including the products of companies that
were traditional competitors when our focus was hardware.

Management has decided to focus our efforts on our Solutions business
and to exit our Products business. Therefore, we announced in May 2001 that the
Company intended to sell its Products business unit and rename the remaining
Solutions business unit as Forgent Corporation, subject to the execution and
consummation of a sale agreement and shareholder approval. The Company executed
the sale agreement in early October 2001 and is intending to submit the sale of
the Products business to our shareholders at our 2001 annual meeting. To
facilitate the change, special attention is being paid to improving the
interoperability of all the components in a broadband video network, to
expanding the Company's current interoperability labs to create a center of
excellence for standards testing and integration and to developing and
introducing enterprise videoconferencing software that provides a high level of
manageability, reliability and ease-of-use for existing and new enterprise
systems. We believe we must provide network software and services that will
support the vast amount of visual communication applications that are becoming
possible with increased bandwidth. Furthermore, the development and expansion of
our consulting and services competencies is focused upon ultimately transforming
the majority of our revenue base from endpoint products to a software and
solutions centric provider. We feel that refocusing our efforts will provide the
greatest opportunity for long-term success for Forgent and its shareholders.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and include
the accounts of Forgent's wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant estimates made by
management include the loss from discontinued operations, the provision for
doubtful accounts receivable, inventory write-downs for potentially excess or
obsolete inventory, warranty reserves, the valuation allowance for the gross
deferred tax asset, contingency reserves, lives of fixed assets, the
amortization period for intangible assets and the determination of the fair
value of its long-lived assets. Actual amounts could differ from the estimates
made. Management periodically evaluates estimates used in the preparation of the
financial statements for continued reasonableness. Appropriate adjustments, if
any, to the estimates used are made prospectively based upon such periodic
evaluation.

26

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

Revenue Recognition

Service and integration revenues are recognized at the time the
services are rendered and the Company has no significant further obligations to
the customer. Revenues for extended warranty contracts are recorded over the
contract period. Customer prepayments are deferred until services have been
rendered and there are no significant further obligations to the customer. In
general, the Company recognizes revenue when persuasive evidence of an
arrangement exists, service delivery has occurred, fee is fixed or determinable,
and collectibility is probable.

Warranty Costs

Forgent generally warrants against software defects for ninety days
from the date of installation. Additionally, the Company guarantees its products
against hardware defects for one year from the date of installation, but not to
exceed fifteen months from date of shipment. The Company provides currently for
the estimated costs which may be incurred in the future under the warranty
program.

Software Development Costs

Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Amortization of capitalized software begins upon initial product shipment.
Software development costs are amortized over the estimated life of the
related product (generally thirty months), using the straight-line method.

The Company capitalized internal software development costs of $3,064,
$3,945, and $617 for the years ended July 31, 1999, 2000, and 2001,
respectively. No amortization of such costs was recorded for the years ended
July 31, 1999, 2000, and 2001, respectively. In addition, during the year ended
July 31, 2000 management made the decision to discontinue further development
efforts and abandoned certain projects previously capitalized. The resulting
charge of $5,120 was included in the write-down of impaired assets during the
year ended July 31, 2000 (see Note 13).

Cash and Equivalents

Cash and equivalents include cash and investments in highly liquid
investments with an original maturity of three months or less when purchased.

Short-term Investments

Short-term investments are carried at market value. Short-term
investments consist of funds primarily invested in mortgage-backed securities
guaranteed by the U.S. government, government securities, commercial paper, and
equity securities, and all mature within one year of July 31, 2000 and 2001. The
carrying amounts of the Company's short-term investments at July 31, 2000 and
2001 are as follows:

27

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment portfolio. At July 31, 2000 and 2001, all investment
securities are classified as available-for-sale. The Company specifically
identifies its short-term investments and uses the cost of the investments as
the basis for recording unrealized gains and losses as part of other
comprehensive income on the Consolidated Balance Sheet and for recording
realized gains and losses as part of other income and expense on the
Consolidated Statements of Operations. Gross unrealized gains on
available-for-sale securities were $10.0 million and $1.5 million at July 31,
2000 and 2001, respectively. The Company realized $6.5 million in gains during
fiscal 2001, and had $1.9 million in unrealized losses as of July 31, 2001.

Inventories

Inventories are stated at the lower of cost (weighted average cost
which approximates the first-in, first-out method) or market. Cost includes the
acquisition of purchased components, parts and sub-assemblies, labor and
overhead.

Property and Equipment

Property and equipment is recorded at cost. Internal support equipment
is video teleconferencing equipment used internally for purposes such as sales
and marketing demonstrations, Company meetings, testing, troubleshooting
customer problems, and engineering, and is recorded at manufactured cost.
Depreciation and amortization are provided using the straight-line method over
the estimated economic lives of the assets, ranging from two to ten years, over
the lease term, or over the life of the improvement of the respective assets, as
applicable. Repair and maintenance costs are expensed as incurred. The Company
periodically reviews the estimated economic lives of property and equipment and
makes adjustments according to the latest information available.

Intangible Assets

Intangible assets include the goodwill that resulted from various
acquisitions by the Company (see Note 4). Amortization periods for the
intangible assets associated with these acquisitions range from 8 to 15 years.
Appropriate adjustments, if any, to the intangible assets will be based upon
such periodic evaluation. Accumulated amortization of intangibles was $3.8
million, $5.2 million and $6.2 million at July 31, 1999, 2000, and 2001,
respectively.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly,
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resultant gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense from the subsidiaries are translated using monthly average exchange
rates.

In order to manage the Company's exposure to foreign currency exchange
rate fluctuations related to the European Euro and the Australian Dollar,
management utilized forward currency exchange contracts. Since these forward
contracts were used to hedge foreign currency exposures, the net cash amounts
paid or received on the

28

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

contracts were accrued and recognized as an adjustment to currency translation
adjustments in the statement of operations. Management ceased utilizing forward
currency exchange contracts effective July 31, 2001.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.

Concentration of Credit Risk

The Company sells its services to various companies across several
industries, including third-party resellers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The Company requires advanced payments or secured transactions when deemed
necessary.

Fair Value of Financial Instruments

The fair value of the Company's foreign currency forward contracts at
July 31, 2000 were based on quoted market rates. The carrying amount of
short-term investments approximates fair value because of the short maturity and
nature of these instruments. The Company places its cash in investment quality
financial instruments and limits the amount invested in any one institution or
in any type of instrument. The Company has not experienced any significant
losses on its investments.

Long-lived Assets

The Company evaluates its long-lived assets and intangibles based on
guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of (see Note 13).

Employee Stock Plans

The Company determines the fair value of grants of stock, stock options
and other equity instruments issued to employees in accordance with SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to continue to apply the existing accounting rules contained in APB No.
25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no
effect on the Company's financial position or results of operations.

The Company records unearned compensation related to stock options that
are issued at exercise prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related stock options.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangibles Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Since the standard
recognizes goodwill and certain intangible assets may have indefinite useful
lives, these assets are no longer required to be amortized

29

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

but are evaluated at least annually for impairment. Intangible assets with
finite useful lives will continue to be amortized over their useful lives, but
without constraint of an arbitrary ceiling. Effective August 1, 2001, the
Company chose early adoption of SFAS No. 142 and anticipates an annual expense
reduction of $1.3 million.

On August 31, 2000 the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities on the Consolidated Balance
Sheet with changes in fair value recorded in the Consolidated Statement of
Operations.

The accounting for changes in fair value of a derivative depends upon
whether it has been designated in a hedging relationship and, further, on the
type of hedging relationship pursuant to SFAS No. 133. Changes in the fair value
of derivatives not designated in a hedging relationship are recognized each
period in earnings. Hedging relationships are established pursuant to the
Company's risk management policies, and are initially and regularly evaluated to
determine whether they are expected to be, and have been, highly effective
hedges. If a derivative ceases to be a highly effective hedge, hedge accounting
is discontinued prospectively, and future changes in the fair value of the
derivative is recognized in earnings each period. For derivatives designated as
hedges of the variability of cash flows related to a recognized asset or
liability (cash flow hedges), the effective portion of the change in fair value
of the derivatives is reported in other comprehensive income and reclassified
into earnings in the period in which the hedged items affect earnings. Gains or
losses deferred in accumulated other comprehensive income associated with
terminated derivatives remain in accumulated other comprehensive income until
the hedged items affect earnings. Forecasted transactions designated as the
hedged items in cash flow hedges are regularly evaluated to assess that they
continue to be probable of occurring, and if the forecasted transactions are no
longer probable of occurring, any gain or loss deferred in accumulated other
comprehensive income is recognized in earnings currently.

During fiscal 2001 the Company utilized forward currency exchange
contracts to reduce the exposure to fluctuations in foreign currency exchange
rates related to the European Euro and the Australian Dollar. The changes in
these contracts are reflected in the Consolidated Statement of Operations. The
Company also utilized derivatives designated as cash flow hedges to ensure a
minimum level of cashflows as related to its investment in the Polycom stock.
The amount of ineffectiveness with respect to these cash flow hedges was not
material. These hedges were recorded at fair value on the Consolidated Balance
Sheet, under the caption short-term investments and will result in a $1,674
reclass from other comprehensive income to earnings in first quarter fiscal
2002.

In December 1999, the SEC staff issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101, as amended by SAB 101A and SAB 101B,
outlines the basic criteria that must be met to recognize revenue and presents
guidance for disclosures related to revenue recognition policies. Forgent
adopted SAB 101 during the fourth quarter of fiscal 2001. The adoption of SAB
101 did not have a material impact on our revenue recognition policies.

In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", which further clarifies APB
Opinion No. 25, "Accounting for Stock Issued to Employees". This Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation did
not have a material effect on our results of operations or financial position.

3. NON-RECURRING EVENTS

On March 3, 2000 the Company settled a lawsuit pending in the 126th
Judicial District Court in Travis County, Texas, which VTEL had previously
initiated against five former employees who left VTEL in September 1996 to form
Via Video Communications, Inc. ("Via Video"). Via Video was subsequently
acquired by Polycom, Inc.

30

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

Pursuant to the settlement agreement, the former employees of VTEL paid
$2.5 million in cash and delivered to VTEL 301 shares of common stock of
Polycom, Inc. in settlement of the claims asserted by VTEL. These shares were
sold during fiscal 2000 for $33.7 million, net of settlement costs. The parties
agreed to dismiss all claims and counterclaims and third party claims in the
lawsuit, ending the litigation. Separately, VTEL voluntarily dismissed Polycom,
Inc. and Via Video from the case without consideration.

On March 3, 2000, the Company granted non-exclusive licenses to
Polycom, Inc. ("Polycom") to use three of its patented technologies, and Polycom
paid a one time fee of $8.3 million to VTEL as a fully paid up royalty in
exchange for such license. In turn and without any payments by VTEL, Polycom
also has granted VTEL a non-exclusive sublicense to its rights under its license
agreement with Brown University pertaining to its single camera tracking
technology. Through this technology exchange, the parties have access to
specified distinctive technologies of the other for use in their product
offerings.

4. ACQUISITIONS

On March 9, 1999, the Company acquired substantially all of the assets
of Vosaic LLC, an Internet video software and technology company for $3,200 in
cash, stock and warrants. The transaction was accounted for as a purchase of
assets. The acquisition involved the issuance of 1,149 shares (equivalent to
approximately 5% of the outstanding shares of the Company's stock as of March 9,
1999). The common shares were registered with the Securities Exchange Commission
on May 14, 1999. Of these shares, 200 were to be held in escrow and an
additional, 350 warrants were to remain unearned pending the completion of
certain obligations by Vosaic. During fiscal 2000, the Company and Vosaic
entered into a settlement agreement pursuant to which 90 of the escrowed shares
were released to Vosaic and 110 shares and all of the warrants were cancelled.

5. INVENTORIES

Inventories consist of the following:

Finished goods held for evaluation consist of completed digital visual
communication systems used for demonstration and evaluation purposes.

6. PROPERTY AND EQUIPMENT

Property and equipment and related depreciable lives are composed of
the following:

31

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

Capital leases of $1,140 and $575 for the years ended July 31, 2000 and
2001, respectively, are included in the "Leasehold improvements, lease term, or
life of the improvement" amounts above. The amortization of the capital leases
is recorded as depreciation expense on the Consolidated Statement of Operations.
Depreciation and amortization expense relating to property and equipment was
approximately $8,999, $4,060 and $5,354 for the years ended July 31, 1999, 2000
and 2001, respectively.

7. RESTRUCTURING ACTIVITIES

On August 23, 2000, the Company announced a new business charter and
the restructuring of its organization. The new business charter was intended to
execute a change in business strategy that leverages Forgent's services and
systems integration capabilities in order to become the industry leader in
providing visual communication solutions over broadband enterprise networks. The
restructuring involved the involuntary termination of approximately 200
employees globally, or 34% of the Company's workforce and the consolidation of
leased office space in its Austin, Texas headquarters, as well as in Sunnyvale,
California and other remote facilities. These workforce reductions and
consolidations of office space reduced costs and focused resources on efforts to
support the new business strategy. The Company completed all terminations by
January 31, 2001. During fiscal 2001, the Company recorded a restructuring
charge of $1,708, all of which is included in the loss from discontinued
operations.

8. NOTES PAYABLE

Notes payable at July 31, 2000 consist of the following:

During fiscal 2001, the Company paid its remaining notes payable and at July 31,
2001, the Company did not have any notes payable.

9. LINE OF CREDIT

In March 2000, the Company repaid the outstanding balance on its line
of credit with a banking syndicate. At July 31, 2001, the Company did not have a
line of credit in place and does not expect to obtain a new line of credit in
fiscal 2002.

10. STOCKHOLDERS' EQUITY

Share Repurchase Program

During fiscal 1999, the Company initiated a stock repurchase program
and repurchased 526 shares of its Common Stock for $2,265. The repurchased
shares have been used to fulfill requirements for stock option exercises or
stock issuances under business combination transactions.

32

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

--------------------------------------------------------------------------------
During fiscal 2001, the Company repurchased an additional 87 shares of its
Common Stock for $108. These purchased shares remained in treasury as of the
end of fiscal 2001.

Stock Subscriptions Receivable

During fiscal 1999, the Company loaned certain employees of the Company
amounts to either purchase shares of the Company's stock on the open market,
exercise options or participate in the employee stock purchase program.
Receivables with recourse totaling $150 related to the exercise of options and
the participation of the employee stock purchase program were classified as a
reduction of additional paid-in capital at July 31, 1999 and were repaid during
the year ended July 31, 2000.

Stock and Stock Option Plans

VTEL has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both
provide for the issuance of non-qualified and incentive stock options to
employees and consultants of the Company. Stock options are generally granted at
the fair market value at the time of grant, and the options generally vest
ratably over 48 months and are exercisable for a period of ten years beginning
with date of grant. Effective June 1999, the 1989 Plan expired whereby the
Company can no longer grant options under the Plan, however, options previously
granted remain outstanding. The 1992 Plan provides for the issuance of stock
options to nonemployee directors at the fair market value at the time of grant.
Such options vest ratably over 36 months and are exercisable for a period of ten
years beginning with the date of the grant.

The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans for grants to employees. Accordingly, no
compensation cost is recognized for its stock option plans unless options are
issued at exercise prices that are below the market price on the measurement
date. Had compensation cost for the Company's stock option plans been determined
based on the fair market value at the grant dates for awards under those plans
consistent with the method provided by SFAS No. 123, the Company's net income
(loss) per share would have been reflected by the following pro forma amounts
for the years ended July 31, 1999, 2000 and 2001:

The pro forma effect on net income (loss) for 2001, 2000 and 1999 is
not representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants issued prior to 1996.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants the years ended July 31, 1999, 2000 and 2001:

33

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

The following table summarizes activity under all Plans for the years
ended July 31, 1999, 2000 and 2001.

Generally, options are exercisable immediately upon grant. However,
stock issued upon exercise of a stock option is subject to repurchase by the
Company at the exercise price until the option vesting period has elapsed. At
July 31, 2001, options to purchase 1,775 shares were vested. At July 31, 2001,
no unvested options had been exercised.

Employee Stock Purchase Plan

On April 29, 1993, VTEL adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire VTEL stock under the
plan. The Employee Plan authorizes the issuance of up to 950 shares of VTEL's
Common Stock. The Employee Plan allows participants to purchase shares of the
Company's Common Stock at a price equal to the lesser of (a) 85% of the fair
market value of the Common Stock on the date of the grant of the option or (b)
85% of the fair market value of the Common Stock at the time of exercise. Common
Stock issued under the Employee Plan totaled 203 shares, 155 shares, and 103
shares respectively, for the years ended July 31, 1999, 2000 and 2001.

Restricted Stock Plan

On December 17, 1998, the Company adopted a restricted stock plan (the
"1998 Plan"). The 1998 Plan authorizes the issuance of up to 1,000 shares of
VTEL's Common Stock to be used to reward, incent and retain employees. Shares of
restricted stock issued under the 1998 Plan were 80 for the year ended July 31,
1999. No shares were issued under the 1998 Plan in fiscal 2000 or 2001.

34

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

11. DEFINED CONTRIBUTION PLAN

The Company sponsors a defined contribution 401(k) plan that is
available to substantially all employees. The plan may be amended or terminated
at any time by the Board of Directors. The Company, although not required to,
has provided matching contributions to the plan of $83 for the year ended July
31, 2001 and $176 for a portion of the year ended July 31, 2000. No matching
contributions were made in fiscal 1999. These contributions were recorded as
expense in the consolidated statement of operations.

12. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per common share for the years ended July 31, 1999, 2000 and
2001:

13. WRITE-DOWN OF IMPAIRED ASSETS

During fiscal year 2001 management implemented a strategy to divest all
non-core operations to focus on returning to profitability. Therefore, the
Company folded its OnScreen24 subsidiary's operations back into the core
business. OnScreen24 primarily operated from our property in Sunnyvale,
California. During the third fiscal quarter the Company sold its equity interest
in the real estate lease for $500 and recorded a related $1.1 million impairment
for the leasehold improvements at the Sunnyvale facility. The $1.1 million
impairment in fiscal 2001 was all related to continuing operations.

As a result of the New Charter announced in August 2000, we reviewed
certain long-lived assets including property, plant and equipment, goodwill and
other intangibles and capitalized software, to evaluate the recoverability of
these assets pursuant to Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The evaluation indicated that the future undiscounted
cash flows related to certain long-lived assets were below the carrying value of
the assets associated with their future operations. Further, the closure of
certain foreign offices and the termination of the software capitalization
projects resulted in the identification of only minimal future cash flows.
During the fourth quarter of fiscal 2000, we adjusted the long-lived assets
associated with our manufacturing operations and the long-lived assets related
to the foreign operations and capitalized software. We calculated the fair value
for the long-lived assets based on anticipated future cash flows discounted at a
rate commensurate with the risk involved, which resulted in a non-cash
impairment charge of $14.1 million. This impairment loss was recorded on the
consolidated statement of operations as follows:

35

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

The remaining useful lives of certain assets were shortened and thus,
depreciation and amortization for these assets will be higher in subsequent
fiscal years.

14. FEDERAL INCOME TAXES

The components of the provision (benefit) for income taxes attributable to
continuing operations are as follows for the years ended July 31, 1999, 2000 and
2001:

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes at July 31, 2000 and 2001 are as follows:

At July 31, 2001, the Company had federal net operating loss
carryforwards of $139,535, research and development credit carryforwards of
$5,802, and alternative minimum tax credit carryforwards of $286. The net
operating loss and credit carryforwards will expire in varying amounts from 2002
through 2021, if not utilized.

36

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

Minimum tax credit carryforwards do not expire and carry forward indefinitely.
Net operating losses related to the Company's foreign subsidiaries of $5,331 are
available to offset future foreign taxable income. However, significant
permanent limitations may apply to the use of these losses based upon laws of
the foreign tax jurisdictions.

As a result of various acquisitions performed by the Company in prior
years, utilization of the net operating losses and credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses before utilization. Also, due
to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its net deferred tax asset. Accordingly, no deferred
tax benefits have been recorded for the tax years ended July 31, 1999, 2000, and
2001. The valuation allowance increased by $11,180 during the year ended July
31, 2001.

The Company's provision (benefit) for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34% to income before income taxes for the years ended July 31, 1999,
2000 and 2001 primarily as a result of the following:

15. COMMITMENTS AND CONTINGENCIES

Lease Commitments

Forgent leases furniture and equipment, manufacturing facilities and
office space under non-cancelable leases that expire at various dates through
2013. Certain leases obligate Forgent to pay property taxes, maintenance and
insurance. Additionally, the Company also has several capital leases for
computer and office equipment.

Future minimum lease payments under all operating and capital leases as of July
31, 2001 were as follows:

The current portion of the capital lease obligations is included in
other accrued liabilities on the Consolidated Balance Sheet.

Included in the minimum lease payments are the lease payments for the
Company's manufacturing facility in Austin, Texas. As part of the sale agreement
of the Products unit, Forgent will assign this lease to the new

37

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

company, VTEL Product, who will assume all obligations under the existing lease.
This lease assignment will save the Company approximately $1,750 in future lease
payments.

Total rent expense under all operating leases for the years ended July
31, 1999, 2000 and 2001 was $6,858, $7,983, and $6,221, respectively. During the
years ended July 31, 2000, and 2001, the Company received $785, and $920,
respectively, in rent income under sub-leasing arrangements. No rental income
was received during the year ended July 31, 1999. These amounts offset against
rental expense in the consolidated statement of operations. At July 31, 2001,
future minimum lease payments receivable under non-cancelable sub-lease
arrangements totaled $1,384 for all future years.

Contingencies

The Company is the defendant or plaintiff in various actions that arose
in the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial condition, results of operation or cash flows.

16. SEGMENT INFORMATION

The Company manages its business primarily along the lines of three
reportable segments: Products, Solutions, and Internet Ventures. The Products
segment designs and manufactures multi-media visual communication products to
customers primarily through a network of resellers, and to a lesser extent
directly to end-users and was accounted for as discontinued operations for the
three fiscal years ending July 31, 1999, 2000, and 2001 (see Note 17). The
Solutions segment designs and installs custom integrated visual communication
systems primarily in meetings spaces of large corporations, and provides a wide
variety of support services to customers, including equipment from numerous
vendors. The Internet Ventures included OnScreen24(TM), which delivered and
marketed visual communication tools for the Internet and ArticuLearn(TM), an
e-learning portal provider for commercial and educational businesses that
deliver learning content in a Web environment. OnScreen24's operations were
folded back into the core businesses as of January 31, 2001 and ArticuLearn's
operations were terminated as of June 30, 2001. The accounting policies of the
segments are the same as those described in Note 2.

The Company evaluates the performance as well as the financial results
of its segments. Included in the segment operating income (loss) is an
allocation of certain corporate operating expenses. The Company does not
identify assets or capital expenditures by reportable segments. Additionally,
the Chief Executive Officer and Chief Financial Officer do not evaluate the
business groups based on these criteria. The prior years' segment information
has been restated to present the Company's reportable segments as they are
currently defined under management's revised business strategy.

The table below presents segment information about revenue from
unaffiliated customers, gross margins, and operating income (loss) for each of
the three years ended July 31, 2001:

38

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

Revenue and long-lived assets related to operations in the United
States and foreign countries for the three fiscal years ended July 31, 2001 are
presented below. Revenues generated between foreign geographic locations have
historically been insignificant.

17. DISCONTINUED OPERATIONS

In May 2001, the Company announced its plan to sell its Products
business unit and rename the remaining Solutions business unit as Forgent
Corporation, subject to the execution and consummation of a sale agreement and
shareholder approval. The Company executed the sale agreement in early October
2001 and is intending to submit the sale of the Products business to our
shareholders at our 2001 annual meeting. Therefore, the Company has presented
the Products business unit as discontinued operations on the consolidated
financial statements. For the year ended July 31, 2001, the Company recorded an
estimated loss of $2.9 million for the net assets to be sold and a $1.1 million
loss, which is primarily related to legal and consulting fees associated with
the sale.

The operating results of the Products segment for the fiscal years
ended July 31, 1999, 2000, and 2001 were as follows:

The net assets from discontinued operations presented on the
Consolidated Balance Sheets were as follows:

18. SUBSEQUENT EVENTS

In August 2001, the Company restructured its organization, which
involved the termination of approximately 65 employees or 17% of our workforce.
The restructuring is the result of eliminating certain business elements that
did not contribute to our core competencies as well as efforts to increase
efficiencies and to significantly reduce our administrative costs. We will
record a one-time charge of approximately $0.8 million in the first quarter of
fiscal 2002 for the restructuring.

39

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

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

On October 2, 2001, Forgent announced that it had signed a definitive
agreement to sell the operations and certain assets of its VTEL Products
business unit, including the VTEL name, in order to devote its energies and
resources to the development of Forgent's services and software business. The
transaction is subject to certain regulatory filings, approval of the Company's
shareholders, and other customary conditions, including receipt by the buyer of
sufficient financing for the purchase. If the sale is completed, under the
agreement, the Company will receive cash of $0.5 million, a 90-day note for $2.0
million, a 5-year note for $5.0 million and a 19.9% equity interest in the new
company. VTEL Products will receive certain assets including inventory and
equipment. The sale is anticipated to be finalized by the end of the second
fiscal quarter in fiscal year 2002. Once the sale of the Products business unit
is finalized, Forgent will employ approximately 200 employees.

19. QUARTERLY INFORMATION (UNAUDITED)

The following tables contain selected unaudited consolidated statement
of operations and earnings per share data for each quarter of fiscal year 2000
and 2001.

40

20. RELATED PARTY TRANSACTIONS

In October 2000, the Company entered into an agreement with Strategic
Management, Inc. ("SMI") to assist the Company in developing a plan to establish
the Company's video conferencing business as an independent, self-sustaining
unit, and to assist the Company in assessing strategic alternatives for this
business unit as part of the Company's previously disclosed efforts to
restructure its business around its video network consulting services business.
Pursuant to this engagement, the Company agreed to pay SMI an hourly rate for
services rendered, up to a maximum of $60. In addition, the engagement provides
additional contingent compensation to SMI if there should be consummated a
transaction involving the Company's video conferencing business, including, if
the business unit is sold, a fee equal to 7% of the consideration received by
the Company, with a minimum fee upon a sale of $750, and if new investors invest
in the business, a fee equal to 7% of the cash proceeds received by the Company.
Gary Trimm, a director of the Company, is a principal and officer of SMI. The
engagement was approved by the disinterested directors of the Company. As of
July 31, 2001, the Company had accrued $840 and paid $69 related to this
contract.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Form 8-K dated April 6, 2000 reporting the resignation of
PricewaterhouseCoopers LLP as the Company's independent auditors is hereby
incorporated by reference.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the captions
"Election of Directors" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 2001.

ITEM 11. EXECUTIVE COMPENSATION

In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Executive Compensation" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" will be filed
with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or
before November 28, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption "Certain
Relationships and Transactions" will be filed with the Company's Definitive
Proxy Statement pursuant to the regulation 14A on or before November 28, 2001.

41

PART IV.

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

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.

(a)(2) The financial statement schedule filed as part of this Report at Item 8
is listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.

(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:

42

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 - Agreement and Plan of Merger and Reorganization dated as of
January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI
(incorporated by reference to the Exhibit 99.1 of VTEL's
Report on Form 8-K dated January 6, 1997).

3.1 - Fourth Amended Restated Certificate of Incorporation
(incorporated by reference the Exhibit 3.1 to the Company's
quarterly report form 10-Q for the period ended June 30,
1993).

3.2 - Amendment to Fourth Amended and Restated Certificate of
Incorporation, as filed on May 27, 1997 with the Secretary of
State of Delaware (incorporated by reference the Exhibit 3.1
to the Company's Annual Report on form 10-K for the period
ended July 31, 1997).

3.3 - Bylaws of the Company as adopted by the Board of Directors of
the Company effective as of June 11, 1989 (incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).

3.4 - Amendment to Bylaws of the Company as adopted by the Board of
Directors of the Company effective as of April 28, 1992
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March
31, 1992).

3.5 - Amendment to the Bylaws of the Company as adopted by the Board
of Directors of the Company effective as of July 10, 1996
(incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated July 10, 1996).

4.1 - Specimen Certificate for the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).

4.2 - Rights Agreement dated as of July 10, 1996 between VTEL
Corporation and First National Bank of Boston, which includes
the form of Certificate of Designations for Designating Series
A Preferred Stock, $.01 par value, the form of Rights
Certificate, and the Summary of Rights to Purchase Series A
Preferred Stock (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated July 10, 1996).

10.1 - License Agreement, dated as of November 7, 1990, between
Universite de Sherbrooke, as Licenser, and the Company, as
Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No.
33-45876, as amended).

43

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------

10.2 - VideoTelecom Corp. 1989 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).

10.3 - Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).

10.4 - Form of VideoTelecom Corp. Incentive Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).

10.5 - Distributor Agreement dated January 8, 1990, between US WEST
Communications Services, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).

10.6 - Purchase Agreement effective October 1, 1990, between GTE
Service Corporation and the Company, as amended July 1, 1991
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).

10.7 - Distribution Agreement, made and entered into November 1,
1991, by and between Microsoft Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).

10.8 - VideoTelecom Corp. 1992 Director Stock Option Plan
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).

10.9 - VideoTelecom Corp. Employee Stock Purchase Plan (incorporated
by reference to Exhibit 4.1 to the Company's Registration on
Form S-8, File No. 33-51822).

10.10 - Lease agreement, executed by Waterford HP, Ltd. on June 14,
1994, as Landlord, and the Company, as Tenant, together with
First Amendment of Lease Agreement between Waterford HP, Ltd.,
as Landlord, and the Company, as Tenant, dated November 2,
1994, Second Amendment of Lease Agreement between Waterford
HP, Ltd., as Landlord, and the Company, as Tenant, dated
February 1, 1995, and Net Profits Agreement, executed between
Waterford HP, Ltd. on June 14, 1994 and the Company
(incorporated by reference to Exhibit 10.17 to the Company's
1994 Annual Report on Form 10-K).

10.11 - Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim
Fund (1993) Ltd., the "Star Entities", Manakin Investments BV,
Messrs. Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval
(incorporated by reference to Exhibit 10.19 to the Company's
1995 Annual Report on Form 10-K. The schedules referred to in
the agreement have been omitted but will be furnished to the
Securities and Exchange Commission upon request).

44

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.12 - Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and
the 1992 Director Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1996 Definitive
Proxy Statement).

10.13 - The VTEL Corporation 1996 Stock Option Plan (the terms of
which are incorporated by reference to the Company's 1995
Definitive Proxy Statement).

10.14 - Amendment to the VTEL Corporation 1996 Stock Option Plan (the
terms of which are incorporated by reference to the Company's
Joint Proxy Statement filed on April 24, 1997).

10.15 - Compression Labs, Incorporated 1980 Stock Option Plan - the
ISO Plan (incorporated by reference to the Annual Report on
Form 10-K of Compression Labs, Inc. for the year ended
December 31, 1994).

10.16 - Revised forms of Incentive Stock Option and Early Exercise
Stock Purchase Agreement used in connection with the issuance
and exercise of options under the ISO Plan (incorporated by
reference to the Registration Statement on Form S-8 of
Compression Labs, Inc. filed on June 6, 1994).

10.17 - Consulting and separation agreement between Compression Labs,
Incorporated and John E. Tyson dated February 16, 1996
(incorporated by reference to the Annual Report on Form 10-K
of Compression Labs, Inc. for the year ended December 31,
1995).

10.18 - Lease Agreement, dated January 30, 1998, between 2800
Industrial, Inc., Lessor and VTEL Corporation, Lessee
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended April
30, 1998).

10.19 - First Amendment, dated March 11, 1998, to Lease Agreement
dated January 30, 1998, between 2800 Industrial, Inc., Lessor
and VTEL Corporation, Lessee (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the three months ended April 30, 1998).

10.20 - The VTEL Corporation 1998 Restricted Stock Plan (the terms of
which are incorporated by reference to the Company's 1998
Definitive Proxy Statement).

10.21 - Loan and Security Agreement, dated May 5, 1999, between
Silicon Valley Bank and Comerica Bank-Texas, as Creditors, and
the Company, as Borrower.

45

EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.22 - Change-in-Control Agreements with members of senior management
of the Company (incorporated by reference to exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year ended
July 31, 1998)

10.22(a) Stephen L. Von Rump

10.22(b) Rodney S. Bond

10.22(c) Dennis M. Egan

10.22(d) Vinay Goel

10.22(e) Steve F. Keilen

10.22(f) F.H. (Dick) Moeller

10.22(g) Ly-Huong T. Pham

10.22(h) Michael J. Steigerwald

10.22(i) Bob R. Swem

10.22(j) Judy A. Wallace

10.23 Change-in Control Agreements with members of senior management
of the Company (incorporated by reference to exhibit 10.1 to
the Company's Annual Report on Form 10-Q for the quarter ended
January 31, 2000)

10.23(a) Brian C. Sullivan,

10.23(b) Stephen Cox

10.23(c) Stephen Von Rump (amended)

21.1 - List of Subsidiaries

23.1 - Consent of Ernst & Young LLP.

23.2 - Consent of PricewaterhouseCoopers LLP.

27.1 - Financial Data Schedule (filed electronically only)

----------

(b) Reports on Form 8-K:

None have been filed during the quarter ended July 31, 2000

(c) See subitem 14(a)(3) above.

(d) See subitem 14(a)(2) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

VTEL Corporation

By /s/ Jay C. Peterson
-----------------------------------------
Jay C. Peterson
CHIEF FINANCIAL OFFICER

46

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

47

VTEL CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
--------------------------------------------------------------------------------

48

INDEX TO EXHIBITS