FORGENT NETWORKS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2003

Commission file number 0-20008

FORGENT NETWORKS, INC.

A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696

108 WILD BASIN ROAD
AUSTIN, TEXAS 78746

(512) 437-2700

The registrant 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
has been subject to such filing requirements for the past 90 days. The
registrant is not an accelerated filer as defined in Rule 12b-2 of the Act.

At March 4, 2003 the registrant had outstanding 24,690,544 shares of its Common
Stock, $0.01 par value.

FORGENT NETWORKS, INC.

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

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

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FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
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The accompanying notes are an integral part
of these consolidated financial statements.

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FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
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The accompanying notes are an integral part
of these condensed consolidated financial statements.

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FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless
otherwise noted)
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NOTE 1 - GENERAL AND BASIS OF FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and accordingly, do not include all information and
footnotes required under accounting principals generally accepted in the United
States for complete financial statements. In the opinion of management, these
interim financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary for a fair presentation of the financial
position of Forgent Networks, Inc. ("Forgent") as of January 31, 2003 and July
31, 2002 and the results of operations for the three and six months ended
January 31, 2003 and January 31, 2002, and the cash flows for the six months
ended January 31, 2003 and January 31, 2002. The results for interim periods are
not necessarily indicative of results for a full fiscal year.

NOTE 2 - DISCONTINUED OPERATIONS

On January 6, 2003, Forgent signed a definitive agreement to sell the
operations and substantially all of the assets of its videoconferencing hardware
services business, based in King of Prussia, Pennsylvania, to an affiliate of
Gores Technology Group ("Gores"), a privately held international acquisition and
management firm, in order to focus solely on growing its software and
professional services and its intellectual property licensing businesses. The
acquisition agreement calls for consideration of $10.0 million in cash and the
assumption of approximately $8.0 million in liabilities, subject to adjustments.
Approximately 84% of the liabilities to be assumed represents deferred revenue
and the remaining 16% represents certain identified accounts payable and capital
lease obligations. The assets sold include accounts receivable, inventory, fixed
assets, and certain prepaid assets. The transaction is subject to certain
regulatory filings, approval by the Company's shareholders, and other customary
conditions. Forgent and Gores will also execute co-marketing and reseller
agreements, allowing both companies to provide software, software-related
services and hardware services to their customers and prospects.

The divestiture is a strategic move that is designed to enable Forgent
to focus on growing its software and professional services and its intellectual
property licensing businesses, increasing its cash balances, improving its gross
margins and reducing its operating expenses. Customers of Forgent's
videoconferencing hardware services business should also benefit from the
divestiture by having a service provider focused on services as its primary
business. Management anticipates finalizing the sale by May 2003. Management
anticipates that Gores will retain the approximately 70 employees, currently
employed by Forgent's videoconferencing hardware services business. Once the
sale of the videoconferencing hardware services business unit is finalized,
Forgent will employ approximately 90 employees.

In April 2002, Forgent sold inventory and certain other assets related
to its integration business to SPL Integrated Solutions ("SPL"), a leading
nationwide integrator that designs and installs large-display videoconferencing
systems and fully integrated multimedia systems for corporations, educational
institutions and government agencies. SPL currently provides all of the
integration services for Forgent and Forgent became the exclusive service
provider for SPL, thus allowing each company to strengthen and to significantly
expand its individual core services while complementing each others' product
offerings. As a result of the sale of its integration business, Forgent received
$150 in cash and a $282 note receivable from SPL. SPL absorbed 15 members of
Forgent's Professional Services Integration team and re-located to Forgent's
facility in King of Prussia, Pennsylvania, where the combined team of engineers
and technicians manage and execute the delivery of audio-video system
integration and

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FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless
otherwise noted)
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support. The assets related to the integration business were sold for
approximately their net book value and thus an immaterial amount of gain was
recorded during the third quarter of fiscal 2002. The sale allowed Forgent to
focus its strengths and resources on growing its software business while still
providing multimedia systems to its customers through SPL. As of January 31,
2003, the balance on the note receivable from SPL was $94.

After receiving approval from the Company's shareholders during its
2001 annual meeting, Forgent finalized the sale of its Products business unit,
including the VTEL name, on January 23, 2002 in order to devote its energies and
resources to the development of Forgent's software business. The sale of the
operations and substantially all of the assets used in the Products business
unit was made to VTEL Products Corporation ("VTEL"), a privately held company
created by the former Vice-President of Manufacturing of the Products business
unit and two other senior management members of the Products business unit. As a
result, the Company received cash of $500, a 90-day subordinated promissory
note, bearing interest at an annual rate of five percent, for $967, a 5-year
subordinated promissory note, bearing interest at an annual rate of five
percent, for $5,000 and 1,045 shares of common stock, par value $0.01 per share,
representing 19.9% of the new company's fully diluted equity. Additionally,
Forgent and VTEL entered into a general license agreement, in which VTEL was
granted certain non-exclusive rights in and to certain patents, software,
proprietary know-how, and information of the Company that was used in the daily
operations of the Products business unit. The group of management who purchased
the products division (now referred to as VTEL) put up $500 of their own money
at the closing. In addition, VTEL also received a $750 line of credit from a
bank, which was not guaranteed by Forgent. The facilities lease was signed over
to VTEL, which was accepted by the landlord with no further obligations by
Forgent. Furthermore, Forgent did not remain contingently liable for performance
on existing contracts or future contracts entered into by the newly formed
entity. The Company does not have any continuing involvement in the go-forward
operations of VTEL. It does not have veto power or any means to exercise
influence over the operations of that company. The Company has made no
guarantees with respect to any business matters as they relate to VTEL nor are
there any situations whereby the Company would be required to reassume any
obligations of VTEL.Due to uncertainties regarding VTEL's future business,
Forgent fully reserved its equity interest in VTEL.

VTEL did not remit payment on its first subordinated promissory note
due in April 2002, as stipulated in the sales agreement, and management is
currently renegotiating the terms of the note. As a result of this default and
due to the uncertainty in collecting the two outstanding notes from VTEL, the
Company recorded a $5,967 charge for the reserve of both notes from VTEL during
the third fiscal quarter of 2002. However, management is continuing its efforts
on collecting these outstanding notes receivables despite the low probability of
collection due to VTEL's current financial condition. During the quarter ended
October 31, 2002, management agreed with VTEL's management to offset Forgent's
accounts payable to VTEL with its accounts receivable and notes receivable from
VTEL. The net $499 Forgent liability was offset with the note in default, thus
relieving $499 of the reserve on the notes receivable. No cash was exchanged
with this transaction.

As a result of the sales of the products, integration, and
videoconferencing hardware services businesses, the Company has presented these
businesses as discontinued operations on the accompanying consolidated financial
statements. For the three and six months ended January 31, 2003, the Company
recorded a $660 and $2,162 gain for its discontinued operations, respectively.
For the three and six months ended January 31, 2002, the Company recorded a
$3,454 and $5,003 loss for its discontinued operations, respectively.

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FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless
otherwise noted)
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NOTE 3 - ACQUISITIONS

As approved by each company's board of directors, Forgent acquired
certain assets and liabilities of Global Scheduling Solutions, Inc., a global
provider of enterprise conference room scheduling and resource management
solutions, on June, 4, 2002. Forgent agreed to pay Global Scheduling Solutions,
Inc. a combination of $3,750 in cash, $250 held in escrow for representations
and warrants, and $700 tied to certain future contingent "earn-out" payments and
the assumption of certain liabilities. The $700 liability was dependent upon the
purchased assets generating a certain level of net revenue between April 2002
and September 2002. The acquisition was accounted for as a purchase of assets.
Accordingly, the purchase price was allocated to tangible and identifiable
intangible assets acquired based on their estimated fair values at the date of
acquisition. Approximately $5,229 was recorded as goodwill, which represents the
excess of total cost over tangible and intangible assets acquired. Forgent
continues to market Global Scheduling Solutions, Inc.'s acquired flagship
product, Global Scheduling System, an industry leading web-based application
that combines the management of large-scale meeting environments and all
necessary resources and services while reducing the cost and time associated
with such management. As a result of the acquisition, Forgent became a leading
vendor that provides complete one-stop video network scheduling, launching,
monitoring and management solution.

During the three months ended January 31, 2003, management settled the
contingent liability and paid Global Scheduling Solutions, Inc. $375. As part of
the settlement, the $250 held in escrow was relieved. Therefore, the related
goodwill was adjusted for the remaining contingent liability of $325 and the
$250 escrow. Additionally, the related goodwill was adjusted for $45 as a result
of finalizing the valuation of the assets acquired and liabilities assumed. As
of January 31, 2003, the Company no longer had any liabilities owed to Global
Scheduling Solutions, Inc.

NOTE 4 - COMPREHENSIVE INCOME (LOSS)

In accordance with the disclosure requirements of SFAS No. 130,
"Reporting Comprehensive Income", the Company's other comprehensive income
(loss) is comprised of net income (loss), foreign currency translation
adjustments and unrealized gains and losses on short-term investments held as
available-for-sale securities. Comprehensive income for the three and six months
ended January 31, 2003 was $1,303 and $2,458, respectively, and comprehensive
loss for the three and six months ended January 31, 2002 was $8,242 and $12,559,
respectively.

NOTE 5 - RESTRUCTURING ACTIVITIES

In August 2001, the Company restructured its organization, which
involved the termination of 65 employees, or 17% of the workforce, who were
assisted with outplacement support and severance. The reduction affected 16
employees in Austin, Texas, 30 employees in King of Prussia, Pennsylvania, and
19 employees in remote and international locations. The restructuring was the
result of eliminating certain business elements that did not contribute to
Forgent's software and professional services and intellectual property licensing
businesses as well as efforts to increase efficiencies and to significantly
reduce administrative costs. All of the employees were terminated and the
Company recorded a one-time charge of $818 in the first quarter of fiscal 2002
for the restructuring and is disclosed as part of discontinued operations on the
Consolidated Statement of Operations. All of the involuntary termination
benefits were paid in fiscal 2002.

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FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless
otherwise noted)
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NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On August 31, 2000 the Company adopted Statement of Financial
Accounting Standards ("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.

The Company utilized derivatives designated as cash flow hedges to
ensure a minimum level of cash flows as related to its investment in the Polycom
stock. The amount of ineffectiveness with respect to these cash flow hedges was
not material. During the three months ended October 31, 2001, the remaining 77
shares of Polycom were sold under a cash flow hedge and $1.7 million was
reclassed from other comprehensive income to earnings.

NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses accounting for
restructuring costs and supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that the
liability associated with exit or disposal activities be recognized when the
liability is incurred. As a contrast under EITF 94-3, a liability for an exit
cost is recognized when a Company commits to an exit plan. SFAS No. 146 also
establishes that a liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing and amount of recognizing
restructuring costs. The Company will adopt the provisions of this statement for
any restructuring activities initiated after December 31, 2002. No such
activities were initiated during the three months ended January 31, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-

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FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless
otherwise noted)
- --------------------------------------------------------------------------------

Lived Assets and for Long-Lived Assets to be Disposed Of," as well as the
accounting and reporting provisions relating to the disposal of a segment of a
business as required by Accounting Principles Board No. 30. Effective August 1,
2002, the Company adopted SFAS No. 144, which did not have a significant impact
on its financial statements.

NOTE 8 - SEGMENT INFORMATION

As a result of the Company's current business strategy, the Company
operates in two distinct segments: software and professional services, and
intellectual property licensing. Forgent's software and professional services
business provides customers with video network management and scheduling
software applications as well as software customization, installation, and
training, network consulting, hardware devices, and other comprehensive related
services. Forgent's intellectual property licensing business is currently
focused on generating license revenues relating to the Company's data
compression technology embodied in U.S. Patent No. 4,698,672 and its foreign
counterparts.

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 prior year's segment
information has been restated to present the Company's reportable segments as
they are currently defined. 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 table below presents segment information about revenue from
unaffiliated customers, gross margins, and operating income (loss) for the three
and six months ended January 31, 2003 and 2002:

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

The following review of Forgent's financial position as of January 31,
2003 and July 31, 2002 and for the three and six months ended January 31, 2003
and 2002 should be read in conjunction with the Company's 2002 Annual Report on
Form 10-K and 2002 Amended Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on October 29, 2002 and November 27, 2002,
respectively.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage
of total revenues represented by certain items in Forgent's Consolidated
Statements of Operations:

THREE AND SIX MONTHS ENDED JANUARY 31, 2003 AND 2002

REVENUES. Revenues for the three months ended January 31, 2003 were
$8.3 million, an increase of $7.9 million, or 2,110%, from the $0.4 million
reported for the three months ended January 31, 2002. Revenues for the six
months ended January 31, 2003 were $15.7 million, an increase of $15.2 million,
or 3,338%, from the $0.5 million reported for the six months ended January 31,
2002. Consolidated revenues represent the combined revenues including sale of
Forgent's software products, software customization, installation, and training,
network consulting, hardware devices, and other comprehensive professional
services as well as royalties received from licensing the Company's intellectual
property. Consolidated revenues do not include any revenues from Forgent's
discontinued products business, which manufactured and sold endpoint systems,
the Company's discontinued integration business, which provided customized
videoconferencing solutions, or the Company's discontinued videoconferencing
hardware services business, which provided hardware maintenance service and
other technical services.

Software and professional services revenues increased by $0.6 million,
or 175%, to $1.0 million for the quarter ended January 31, 2003 from $0.4
million for the quarter ended January 31, 2002. Software and professional
services revenues increased by $1.7 million, or 391%, to $2.2 million for the
six months ended January 31, 2003 from $0.5 million for the six months ended
January 31, 2002. Software and professional services revenues as a percentage of
total revenues were 12% and 14% for the three and six months ended January 31,
2003 and 2002, respectively, and were 100% for the three and six months ended
January 31, 2002. Revenues from this line of business include sales of Forgent's
Video Network Platform ("VNP"), Global Scheduling System ("GSS"), and
VideoWorks, which is a bundling

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of Forgent's software products and may include hardware devices based on
customer preference. Also included are professional services, and royalties. VNP
is an enterprise-class network management software product designed to manage
video, voice and web content on multi-protocol, multi-vendor networks, and is
designed to schedule, monitor and manage enterprise video networks from a
central location, thus improving ease-of-use, reliability, and manageability of
video communications, as well as cost of ownership. GSS is a web-based
scheduling application that helps organizations plan, execute, and manage their
meeting environments effectively and efficiently. Forgent's professional
services include software customization, installation, and training, and network
consulting services to evaluate and analyze customers' networks as well as to
test multiple network systems for manageability, interoperability, and optimum
connectivity.

During the three months ended January 31, 2003, Forgent sold additional
software licenses. However, software and professional services revenues
decreased by 15% over the first fiscal quarter. Despite a significant increase
in the number of customers interested in the Company's software during the three
months ended January 31, 2003, unpredictable delays in the sales cycle caused
anticipated sales for the second fiscal quarter to be delayed. Management
believes that these delays are attributable to the current lack of spending by
corporate IT departments and the seasonality impact, which caused customer
reviews and approvals to be lengthened. As the Company's sales organization
matures and fully implements its strategies to demonstrate to potential
customers the comprehensive and cost saving solutions Forgent provides,
management expects software and professional services revenues to become more
predictable.

Intellectual property licensing revenues were $7.3 million and $13.5
million for the three and six months ended January 31, 2003, respectively. No
such revenues were generated during the three and six months ended January 31,
2002. Intellectual property licensing revenues represented 88% and 86% of total
revenues for the three and six months ended January 31, 2003, respectively.
These licensing revenues relate to one-time intellectual property licensing
agreements with companies for Forgent's data compression technology embodied in
U.S. Patent No. 4,698,672 and its foreign counterparts. These licenses were
fully paid during the second fiscal quarter, thus continuing the success of the
Company's developing Patent Licensing Program. The Company does not anticipate
any additional intellectual property revenue from these companies but it
continues to actively seek licenses with other users of its intellectual
property.

The second fiscal quarter of 2003 marks the fourth consecutive quarter
that Forgent has generated intellectual property licensing revenues. To date,
Forgent has achieved $44.6 million in revenues from these licensing agreements.
Although initially targeting manufacturers of digital cameras, the Company is
currently notifying companies with a much broader field of use. Since January
31, 2003, Forgent has entered into additional license agreements and the Company
continues to actively seek licenses with other users of its intellectual
property. With less uncertainty and more evidence of the Company's Patent
Licensing Program's success, management anticipates generating revenues from its
intellectual property licensing segment during the next fiscal quarter, as well
as the next fiscal year. Forgent's Patent Licensing Program involves risks
inherent in licensing intellectual property, including risks of protracted
delays, possible legal challenges that would lead to disruption or curtailment
of the licensing program, increasing expenditures associated with pursuit of the
program, and other risks that could adversely affect the Company's licensing
program. Additionally, the U.S. patent, which has generated the intellectual
property licensing revenues, expires in October 2006 and its foreign
counterparts expire in September 2007. Thus, there can be no assurance that the
Company will be able to continue to effectively license its technology to
others.

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GROSS MARGIN. Gross margins increased $6.3 million, or 261%, to $3.9
million for the three months ended January 31, 2003 from ($2.4) million for the
three months ended January 31, 2002. Gross margins increased $10.0 million, or
396%, to $7.5 million for the six months ended January 31, 2003 from ($2.5)
million for the six months ended January 31, 2002. Gross margin as a percentage
of total revenues was 47% and 48% for the three and six months ended January 31,
2003, respectively, an increase from the gross margin as a percentage of total
revenues of (647%) and (555%) for the three and six months ended January 31,
2002, respectively.

The Company's total gross margins grew significantly during the quarter
ended January 31, 2003 as compared to the quarter ended January 31, 2002 due
primarily to two reasons. First, $3,627, or 57%, of the increase resulted from
the patent license agreements signed during the three months ended January 31,
2003. The cost of sales on the intellectual property licensing business relates
to the legal fees incurred on successfully achieving signed agreements. The
current contingent legal fees are based on 50% of the aggregate recoveries
received on the signed agreements and are paid to a national law firm per the
Company's agreement with this firm. Because of the inherent risks in licensing
intellectual property, including the October 2006 expiration of the U.S. patent
which has generated the licensing revenues and the September 2007 expiration of
the patent's foreign counterparts, gross margins could be adversely affected in
the future if intellectual property licensing revenues decline.

Second, $2,381, or 38%, of the increase resulted from the impairment of
capitalized software development costs associated with the video streaming
technology during the three months ended January 31, 2002. Initially, management
intended to further develop its video streaming technology, which is a server
application with the abilities to create video e-mail programs and to store
streamed video for later non-real time playback as an added feature to its VNP
software. Based upon customer feedback regarding the VNP software during the
second quarter of fiscal 2002, customers did not need these advanced features
but desired fundamental network management applications with more robust device
level support and valued added network level instrumentation for ISDN and IP
networks to enable them to understand and monitor how well their networks were
performing. Therefore, management determined the video streaming technology
would not be used in the development of VNP and impaired $2,381 of the related
capitalized software development costs, which was included in software and
professional services cost of sales during the three months ended January 31,
2002.

Similarly, of the $10,044 increase in gross margins for the six months
ended January 31, 2003 as compared to the six months ended January 31, 2002,
approximately 67% resulted from patent license agreements during the three
months ended January 31, 2003 and approximately 24% resulted from the impairment
of capitalized software development costs associated with the video streaming
technology during the three months ended January 31, 2002.

For the three months ended January 31, 2003, approximately 66% of the
cost of sales associated with the software and professional services business
resulted from the amortization of the Company's capitalized software development
costs and compensation. Thus, the cost of sales from this line of business is
relatively fixed, and remained relatively flat compared to the cost of sales
incurred during the first fiscal quarter. Therefore, gross margins from the
software and professional services business is directly affected by the related
revenues generated. As discussed above, software and professional services
revenues slightly declined during the second fiscal quarter as compared to the
first fiscal quarter, which caused a decrease in gross margins. Based on
identified strategies to grow revenues from this line of business, management
anticipates additional sales to generate higher gross margins in absolute terms
and in terms of percentage of revenue.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expenses increased by $0.5 million, or 27%, to $2.5
million for the quarter ended January 31, 2003 from $2.0

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million for the quarter ended January 31, 2002. SG&A expenses increased by $1.8
million, or 47%, to $5.6 million for the six months ended January 31, 2003 from
$3.8 million for the six months ended January 31, 2002. SG&A expenses as a
percentage of revenues were 30% and 532% for the three months ended January 31,
2003 and 2002, respectively, and were 35% and 831% for the six months ended
January 31, 2003 and 2002, respectively.

The $0.5 million increase in SG&A expenses during the three months
ended January 31, 2003, as compared to the three months ended January 31, 2002,
is due primarily to $0.3 million in expenses related to the Patent Licensing
Program, and a $0.3 million increase in sales and marketing expenses. Similarly,
the $1.8 million increase in SG&A expenses during the six months ended January
31, 2003, as compared to the six months ended January 31, 2002, is due primarily
to $0.8 million in expenses related to the Patent Licensing Program, and a $1.1
million increase in sales and marketing expenses.

When Forgent acquired certain assets and liabilities of Global
Scheduling Systems Inc. during the fourth fiscal quarter of 2002, Forgent's
sales force more than doubled. Additionally, Forgent hired a Senior
Vice-President of Sales during the first fiscal quarter. These additional
personnel, among a few other sales hires, primarily account for the increase in
sales and marketing expenses during the three and six months ended January 31,
2003. Forgent's new sales structure was implemented during the first fiscal
quarter and has been improved during the second fiscal quarter to hire
experienced enterprise software sales veterans, to implement improved sales
execution tactics, and to modify the sales commission structure. As a result,
the sales organization significantly increased the sales pipeline during the
three months ended January 31, 2003. There can be no assurance, however, that
sales from this pipeline will be finalized. The Company will continue to
implement its sales strategy to further increase its sales pipeline and more
importantly, to finalize sales transactions to generate revenues. Additionally,
during the three and six months ended January 31, 2003, Forgent's Patent
Licensing Program incurred consulting expenses, international travel and other
related expenses, which were not incurred during the comparable periods ended
January 31, 2002.

As compared to the prior fiscal quarter, Forgent decreased its SG&A
expenses during the three months ended January 31, 2003 by $0.5 million, or 17%
and intends to further decrease any unnecessary SG&A expenses that do not
directly support the generation of revenues for Forgent. However, the future
expense reductions will not impact the Company's ability to engage with its
customers.

RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
increased by $30 thousand, or 4%, to $0.7 million for the quarter ended January
31, 2003 from $0.7 million for the quarter ended January 31, 2002. R&D expenses
increased by $0.4 million, or 29%, to $1.9 million for the six months ended
January 31, 2003 from $1.5 million for the six months ended January 31, 2002.
R&D as a percentage of revenues were 9% and 182% for the three months ended
January 31, 2003 and 2002, respectively, and were 12% and 319% for the six
months ended January 31, 2003 and 2002, respectively.

During the three and six months ended January 31, 2003, the Company
incurred $0.7 million and $1.9 million, respectively, in research and
development expenses, which are related to the continued efforts on enhancing
Forgent's award-winning Video Network Platform ("VNP") and Global Scheduling
System ("GSS"). VNP 3.0, the Company's upcoming version of its network
management software product, leverages in-house bridges to reduce reliance on
costly audio service providers in order to schedule mixed audio and video or
standalone audio conferences. The new release will allow for the seamless
hand-off of overflow requests for internal resources to specified external
service providers. VNP 3.0 also will add several new administrative options for
autoconfiguring and dialing complex calls and support for automatically alerting
and handling unanticipated calls involving ISDN and IP endpoints. These
additions will allow administrators to set policies which automatically
terminate unwanted calls or

13

notify operations that unauthorized calls are in progress. GSS Version 4.0 fully
integrates its capabilities with corporate scheduling standards Microsoft(R)
Outlook(R) and Lotus Notes and will enable organizations to empower their users
to concurrently schedule all elements of their meetings including rooms,
audio/video conferencing, catering, equipment, and technicians, directly from
their current scheduling tool. Additionally, GSS 4.0 will provide organizations
improved abilities to control and track the access, use, and costs associated
with their meeting environment. Both enhanced versions of the Company's software
products will be made available to the general public in the United States,
Europe, and Australia starting in July 2003.

The R&D expenses are net of $0.8 million and $1.6 million capitalized
during the three and six months ended January 31, 2003, respectively. 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 for sale, the capitalized software is amortized
over the estimated economic life of the related projects, generally three years.
As of January 31, 2003, approximately 92% of the Company's capitalized software
development costs related to efforts on designing Forgent's VNP and 8% related
to efforts on designing GSS.

During the three months ended January 31, 2003, Forgent filed five new
collaboration management patents with the United States Patent and Trademark
Office. Forgent currently has fifty-nine applications on file with the United
States Patent and Trademark Office, including patents originally filed by the
Company's divested products business unit. Forgent holds approximately forty
issued patents related to videoconferencing, data compression, video mail and
other technology developed or acquired by the Company.

Forgent's ability to successfully develop software solutions to enable
enterprise collaboration networks is a significant factor in the Company's
success. As Forgent develops its research and development strategy, management
anticipates additional costs associated with the recruiting and retention of
engineering professionals. Management will attempt to maintain research and
development expenses at reasonable levels in terms of percentage of revenue.
However, the Company's control of its R&D expenses will not impact Forgent's
ability to develop new products since management believes Forgent's ultimate
future success is based primarily on the development and success of its solution
offerings related to its software roadmap.

OTHER INCOME. Other income decreased by $13 thousand, or 325%, to ($9)
thousand for the quarter ended January 31, 2003 from $4 thousand for the quarter
ended January 31, 2002. Other income decreased by $1.6 million, or 97%, to $0.0
million for the six months ended January 31, 2003 from $1.6 million for the six
months ended January 31, 2002. Other income as a percentage of revenues were 0%
and 1% for the three months ended January 31, 2003 and 2002, respectively, and
were 0% and 367% for the six months ended January 31, 2003 and 2002,
respectively. The $1.6 million decrease during the six months ended January 31,
2003 is due primarily to the 76,625 shares of Polycom common stock that were
sold under a cash flow hedge, resulting in a $1.7 million realized gain for the
first fiscal quarter of 2002. The Company no longer had any investment in
Polycom as of October 31, 2001.

INCOME (LOSS) FROM DISCONTINUED OPERATIONS. During fiscal year 2002,
the Company sold the operations and substantially all of the assets of its VTEL
products business, including the VTEL name, to VTEL Products Corporation
("VTEL") and the operations and assets of its integration business to SPL
Integrated Solutions. During the three months ended January 31, 2003, Forgent
signed a definitive agreement to sell the operations and substantially all of
the assets of its videoconferencing hardware services business, based in King of
Prussia, Pennsylvania, to a privately held international equity firm. These
sales allow the Company to focus on growing its software and professional
services business and its intellectual property licensing business. Accordingly,
the products, integration and videoconferencing

14

hardware services businesses have been accounted for and presented as
discontinued operations in the consolidated financial statements.

Income from discontinued operations was $0.7 million and $2.2 million
for the three and six months ended January 31, 2003, respectively. Loss from
discontinued operations was $3.5 million and $5.0 million for the three and six
months ended January 31, 2002, respectively. Income from discontinued operations
was 8% and 14% of total revenues for the three and six months ended January 31,
2003. Loss from discontinued operations was 921% and 1,095% of total revenues
for the three and six months ended January 31, 2002. The increase in income from
discontinued operations for the three months ended January 31, 2003, as compared
to the three months ended January 31, 2002, is due to $6.2 million loss
generated by the products and integration businesses for the second fiscal
quarter in fiscal 2002. No such losses were incurred during the three months
ended January 31, 2003. The decrease in losses were offset by a $2.1 million
decrease in income generated by the videoconferencing hardware services business
during the same time period. Similarly, the increase in income from discontinued
operations for the six months ended January 31, 2003, as compared to the six
months ended January 31, 2002, is due to $8.7 million loss generated by the
products and integration businesses for the first half in fiscal 2002. No such
losses were incurred during the six months ended January 31, 2003. The decrease
in losses were offset by a $2.1 million decrease in income generated by the
videoconferencing hardware services business during the same time period and the
$0.5 million partial reversal of the reserve on the notes receivable from VTEL
(see Note 2).

NET INCOME (LOSS). Forgent generated net income of $1.3 million, or
$0.05 per share, during the quarter ended January 31, 2003, as compared to a net
loss of $8.6 million, or $0.34 per share, during the quarter ended January 31,
2002. Forgent generated net income of $2.2 million, or $0.09 per share, for the
six months ended January 31, 2003, as compared to a net loss of $11.1 million,
or $0.45 per share, for the six months ended January 31, 2002. Net income (loss)
as a percentage of total revenues was 16% and (2,281%) for the three months
ended January 31, 2003 and 2002, respectively. Net income (loss) as a percentage
of total revenues was 14% and (2,434%) for the six months ended January 31, 2003
and 2002, respectively.

Net income increased by $9.9 million or 115% during the three months
ended January 31, 2003 as compared to the three months ended January 31, 2002.
Approximately 42%, or $4.1 million, of the increase is due to the improvement in
earnings from discontinued operations and 37%, or $3.6 million, is due to the
gross margins generated by the intellectual property licensing business. Net
income increased by $13.4 million or 120% during the six months ended January
31, 2003 as compared to the six months ended January 31, 2002. The increase is
due primarily to $7.2 million improvement in earnings from discontinued
operations and $6.7 million gross margins generated by the intellectual property
licensing business, which was offset by $1.7 million decrease in gain from
investment.

During the three months ended January 31, 2003, as compared to the
prior fiscal quarter, Forgent grew total revenues by 12%, decreased total
operating expenses by 23%, and improved earnings per share by $0.01. The second
fiscal quarter also marked Forgent's fourth consecutive quarter of intellectual
property licensing revenues and profitability. Additionally, the Company signed
a definitive agreement to sell its videoconferencing hardware services business,
thus eliminating efforts required to improve operations unrelated to Forgent's
core competencies. These significant indicators, as well as those achieved in
the research and development of the Company's software products, further
strengthen the Company's resolve to become a collaboration software company that
delivers enterprise solutions. However, uncertainties and challenges remain, and
there can be no assurance that the Company can successfully grow its revenues or
maintain profitability.

15

LIQUIDITY AND CAPITAL RESOURCES

On January 31, 2003, Forgent had working capital of $14.8 million,
including the Company's principal source of liquidity, which consisted of $18.6
million in cash, cash equivalents and short-term investments. During the three
months ended January 31, 2003, the Company grew its cash and short-term
investments balance by over 27% and its working capital by over 17% from the end
of the previous fiscal quarter.

Cash used in operating activities was $0.2 million for the six months
ended January 31, 2003 due to a $1.3 million of non-cash depreciation and
amortization expenses, which was offset by a $1.4 million decrease in accounts
payable and other accrued liabilities. Cash provided by operating activities was
$0.4 million for the six months ended January 31, 2002 and largely resulted from
a $6.1 million net loss and a $2.1 million decrease in other accrued
liabilities, which were offset by a $4.5 million sale and decrease in accounts
receivable, $2.4 million of non-cash impairment, and $1.5 million of non-cash
depreciation and amortization expenses. During the six months ended January 31,
2003, the Company collected $6.7 million in royalties from its intellectual
property licensing agreements and anticipates collecting additional royalties in
future quarters. This significant internal source of cash provides funding for
the Company's current software and professional services operations and allows
management to strategically utilize this positive cash flow to invest further in
developing Forgent's VNP, GSS, and VideoWorks software. Furthermore, management
is exploring other opportunities for growing the software business through
acquisitions. As more license agreements are signed and related payments are
received under the continued success of the Company's Patent Licensing Program,
management anticipates that the Company's cash position will strengthen.
However, risks and uncertainties remain as to the timing of the receipts of
license fees due, in part, to the inherent nature of a patent licensing program.
Therefore, there is no assurance that the Company will be able to limit its cash
consumption and continue to preserve its cash balances, and it is possible that
the Company's business demands may lead to cash utilization at levels greater
than recently experienced due to investments in research and development,
increased expense levels and other factors. During the six months ended January
31, 2003, the Company's discontinued operations generated $1.5 million in cash.
Therefore, with the final divestiture of Forgent's videoconferencing hardware
service business, management expects a decrease in cash provided by its
discontinued operations.

Cash used in investing activities was $0.3 million for the six months
ended January 31, 2003 due to the $1.6 million capitalization of software
development costs, which was offset by $1.5 million in net sales of short-term
investments. Cash used in investing activities was $0.6 million for the six
months ended January 31, 2002 due primarily to the $1.9 million capitalization
of software development, which was offset by $1.6 million net sales of
short-term investments. During the three months ended October 31, 2001, Forgent
sold its remaining investment in Polycom, resulting in a net cash inflow of $1.8
million, which significantly contributed to decreasing the cash used in
investing activities.

Cash used in financing activities was $0.8 for the six months ended
January 31, 2003 due primarily to the $0.7 million purchase of treasury stock.
Cash used in financing activities was $0.5 for the six months ended January 31,
2002 due largely to the $1.4 million purchase of treasury stock, which was
offset by $0.7 million net proceeds from the issuance of stock. In fiscal 2001
Forgent announced a stock repurchase program to purchase up to two million of
the Company's common stock. During the first fiscal quarter of 2003, Forgent's
board of directors approved the repurchase of an additional million shares of
the Company's stock. During the six months ended January 31, 2003, the Company
repurchased 354,686 shares for $0.7 million, bringing the total number of shares
repurchased to date to 1.2 million shares. Management intends to repurchase
additional shares in fiscal 2003, depending on the Company's cash position,
market conditions, and other factors. During the six months ended January 31,

16

2002 Forgent entered into a three-year notes payable of $0.5 million for the
purchase of the Company's new accounting system. At January 31, 2003, Forgent
did not have a line of credit in place. Based on the Company's strong cash
position and the significant cash inflows generated from the intellectual
property licensing agreements, management does not expect to obtain any line of
credit during the current fiscal year.

LEGAL MATTERS

Forgent 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.

In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been rendered
by Mr. Matthews in connection with his alleged involvement in the Company's
Patent Licensing Program. In late February 2003, the Company initiated an action
in the 261st District Court in Travis County Texas, styled Forgent Networks,
Inc. v. Monika Matthews, et al, for the purposes of declaring that the Company
has no obligation to the defendant. In that action, the defendant has filed a
counter claim asserting that the independent executrix of the Estate of Gordon
Matthews is entitled to recover in quantum meruit for the reasonable value of
the work and services claimed to have been provided by Gordon Matthews, a former
member of the Board of Directors and consultant to the Company, which the
defendant asserts is at least $5 million. The Company does not believe the
counter claim has merit and intends to vigorously pursue declaratory relief from
the court that no liability is due to the independent executrix of the Estate of
Gordon Matthews.

CRITICAL ACCOUNTING POLICIES

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 the
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. 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.

Management believes the following represent Forgent's critical
accounting policies:

REVENUE RECOGNITION

The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. The Company recognizes revenue in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4 and SOP 98-9, and Securities and Exchange Commission Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements.

17

The Company does not recognize revenue for agreements with rights of
return, refundable fees, cancellation rights or acceptance clauses until such
rights of return, refund or cancellation have expired or acceptance has
occurred. The Company's arrangements with resellers does not allow for any
rights of return.

Software and professional service revenue consists of license and
service fees. License fee revenue is earned through the licensing or right to
use the Company's software and from the sale of specific software products.
Service fee income is earned through the sale of maintenance and technical
support, training, and installation services related to the sale of the software
products. The Company allocates the total fee to the various elements based on
the relative fair values of the elements specific to the Company. The Company
determines the fair value of each element in the arrangement based on
vendor-specific objective evidence ("VSOE") of fair value. When VSOE of fair
value for the license element is not available, license revenue is recognized
using the residual method. Under the residual method, the contract value is
first allocated to the undelivered elements (maintenance and service elements)
based upon their VSOE of fair value; the remaining contract value, including any
discount, is allocated to the delivered element. For maintenance, VSOE of fair
value is based upon the renewal rate specified in each contract, which is in
accordance with the Company's standard price list. For training and installation
services, VSOE of fair value is based upon the rates charged for these services
when sold separately. Revenue allocated to maintenance and technical support is
recognized ratably over the maintenance term (typically one year). Revenue
allocated to training and installation service elements is recognized as the
services are performed. The Company's training and installation services are not
essential to the functionality of its products as (1) such services are
available from other vendors and (2) the Company has sufficient experience in
providing such services. For instances in which VSOE cannot be determined for
undelivered elements, and these undelivered elements do not provide significant
customization or modification of the Company's software product, Forgent
recognizes the entire contract amount ratably over the period during which the
services are expected to be performed.

Intellectual property licensing revenue is derived from the Company's
Patent Licensing Program, which is currently focused on generating license
revenues relating to the Company's data compression technology embodied in U.S.
Patent No. 4,698,672, and its foreign counterparts. Gross intellectual property
licensing revenue is recognized at the time a license agreement has been
executed and related costs are recorded as cost of sales.

Deferred revenue includes amounts received from customers in excess of
revenue recognized, and is comprised of deferred maintenance, service and other
revenue. Deferred revenues are recognized in the statement of operations over
the terms of the arrangements, primarily ranging from one to three years.

CREDIT POLICY

The Company reviews potential customers' credit ratings to evaluate
customers' ability to pay an obligation within the payment term, which is net
thirty days. When payment is reasonably assured, and no known barriers exist to
legally enforcing the payment, the Company extends credit to customers, not to
exceed 10% of their net worth. An account is placed on "Credit Hold" if it is
thirty days past due or a placed order exceeds the credit limit, and may be
placed on "Credit Hold" sooner if circumstances warrant. The Company follows its
credit policy consistently and constantly monitors all of its delinquent
accounts for indications of uncollectibility.

18

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-six months), using the straight-line method.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains an allowance for doubtful accounts to estimate
losses from uncollectable customer receivables. This estimate is based in the
aggregate, on historical collection experience, age of receivables and general
economic conditions. It also considers individual customers' payment experience,
credit-worthiness and age of receivable balances.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

The Company adopted Statement of Financial Accounting Standards
('SFAS") No. 142, "Goodwill and Other Intangible Assets" on August 1, 2001 and
thus is required to review the carrying value of goodwill and other intangible
assets annually. Forgent also reviews goodwill and other intangibles for
possible impairment whenever specific events warrant. Events that may create an
impairment review include, but are not limited to: significant and sustained
decline in the Company's stock price or market capitalization; significant
underperformance of operating units; significant changes in market conditions
and trends. If a review event has occurred, the value of the goodwill or
intangible is compared to the estimate of future cash flows, and if required, an
impairment is recorded.

RISK FACTORS

There are many factors that affect the Company's business, prospects
and the results of its operations, some of which are beyond the control of the
Company. The following is a discussion of some of these and other important risk
factors that may cause the actual results of the Company's operations in future
periods to differ materially from those currently expected or desired.

GENERAL ECONOMIC AND INDUSTRY CONDITIONS

Any adverse change in general economic, business or industry conditions
could have a material adverse effect on the Company's business, prospects and
financial performance if those conditions caused customers or potential
customers to reduce or delay their investments in software and professional
services. Due to the current economic circumstances affecting U.S. businesses,
there has been a slow down in capital spending, which adversely affects the
willingness of companies to purchase enterprise software products and
professional services. If this slow down is prolonged, current economic
conditions could have a continued adverse effect on the demand for the Company's
products and services and could result in declining revenue and earnings growth
rates for the Company.

TECHNOLOGICAL CHANGES AND PRODUCT TRANSITIONS

The technology industry is characterized by continuing improvements in
technology, which results in the frequent introduction of new products, short
product life cycles and continual improvement in product price/performance
characteristics. These improvements could render the Company's products
noncompetitive, if the Company fails to anticipate and respond effectively to
these improvements and new product introductions. While the Company believes
that its experience in the videoconferencing

19

industry affords it a competitive advantage over some of its competitors, rapid
changes in technology present some of the greatest challenges and risks for any
software and technology-based company.

SALES CYCLE

Forgent has a long sales cycle because it generally takes time to
educate potential customers regarding the use and benefits of its software
applications. The long sales cycle makes it difficult to predict the quarter in
which sales may fall. Because the Company's expense levels are relatively fixed,
the shift of sales from one quarter to a later quarter will adversely affect
results in operations in an affected quarter, as the Company would not be able
to adjust its expense levels to match fluctuations in revenues. If the Company
failed to meet expectations by shareholders, analysts or others as to products
sales anticipated in any particular quarter, the market price of the Company's
stock may significantly decrease.

PRODUCT IMPLEMENTATION

The Company recognizes a portion of its revenue from product sales upon
implementation of its software, and the timing of product implementation could
cause significant variability in product license revenues and operating results
for any particular period.

NEW BUSINESS MODEL

In accordance with its reorganization efforts previously described, the
Company is currently transitioning its business and realigning its strategic
focus towards a new core market, software and professional services. Internal
changes resulting from the business restructuring announced during 2001 and 2002
are substantially complete, but many factors may negatively impact the Company's
ability to implement its strategic focus, including the ability or possible
inability to manage the implementation and development of its new product and
professional service business, sustain the productivity of Forgent's workforce
and retain key employees, manage operating expenses and quickly respond to and
recover from unforeseen events associated with the reorganization. The Company
may be required by market conditions and other factors to undertake additional
restructuring efforts in the future. Forgent's business, results of operations
or financial condition could be materially adversely affected if it is unable to
manage the implementation and development of its new business strategy, sustain
the productivity of its workforce and retain key employees, manage its operating
expenses or quickly respond to and recover from unforeseen events associated
with any future restructuring efforts.

LIMITED OPERATING HISTORY

Despite being founded in 1985, Forgent has a limited operating history
because of the Company's recent transition to a software and professional
services company. As a result of its limited operating history, Forgent cannot
forecast revenue and operating expenses based on historical results. The
Company's ability to forecast accurate quarterly revenue is limited because
Forgent's software products have a long sales cycle that makes it difficult to
predict the quarter in which sales will occur. The Company's business, operating
results and financial condition will be materially adversely affected if
revenues do not meet projections and if results in a given quarter do not meet
expectations.

COMPETITION AND NEW ENTRANTS

The Company may encounter new entrants or competition from competitors
in some or all aspects of its business. The Company competes on the basis of
price, technology availability, performance, quality, reliability, service and
support. The Company believes that its experience and business model creates a
competitive advantage over its competitors. However, there can be no assurance
that the Company will be able to maintain this advantage. Many of the Company's
current and possibly future competitors have greater resources than the Company
and therefore, may be able to compete more effectively on price and other terms.

20

SOFTWARE MARKETING AND SALES

Forgent's software products are relatively new to the market and the
Company, and as such, have limited market awareness and to date, limited sales.
Forgent's VNP software product was introduced in the fall of 2001, and Forgent
acquired GSS in June 2002. The Company's future success will be dependent in
significant part on its ability to generate demand for its software products and
professional services. To this end, Forgent's direct and indirect sales
operations must increase market awareness of its products to generate increased
revenue. The Company's products and services require a sophisticated sales
effort targeted at the senior management of its prospective customers. All new
hires will require training and will take time to achieve full productivity.
Forgent cannot be certain that its new hires will become as productive as
necessary or that it will be able to hire enough qualified individuals or retain
existing employees in the future. The Company cannot be certain that it will be
successful in its efforts to market and sell its products, and if it is not
successful in building greater market awareness and generating increased sales,
future results of operations will be adversely affected.

SOFTWARE AND PROFESSIONAL SERVICES DEVELOPMENT

Forgent expects that its future financial performance will depend
significantly on revenue from existing and future enterprise software products
and the related tools that the Company plans to develop, which is subject to
significant risks. There are significant risks inherent in a new product
introduction, such as its VNP and GSS software products. Market acceptance of
these and future products will depend on continued market development for
collaboration management. Forgent cannot be certain that its existing or future
products offerings will meet customer performance needs or expectations when
shipped or that it will be free of significant software defects or bugs. If the
Company's products do not meet customer needs or expectations, for whatever
reason, the Company's sales would be adversely affected and further, upgrading
or enhancing the product could be costly and time consuming.

LICENSE PROGRAM

The Company's intellectual property licensing revenues are difficult to
predict. The Company's Patent Licensing Program involves risks inherent in
licensing intellectual property, including risks of protracted delays, possible
legal challenges that would lead to disruption or curtailment of the program,
increasing expenditures associated with the pursuit of the program, and other
risks that could adversely affect the Company's licensing program. Thus, there
can be no assurance that the Company will be able to continue to license its
technology to others. If the Company fails to meet the expectations of public
market analysts or investors, the market price of Forgent's common stock may
decrease significantly. Quarterly operating results may fail to meet these
expectations for a number of reasons, including the inability of licensees to
pay the license and other fees, a decline in the demand for the Company's
patented technology, higher than expected operating expenses, and license delays
due to legal and other factors.

PATENTS AND TRADEMARKS

The Company's success and ability to compete are substantially
dependent on its proprietary technology and trademarks. The Company seeks to
protect these assets through a combination of patent, copyright, trade secret,
and trademark laws, as well as confidentiality procedures and contractual
provisions. These legal protections afford only limited protection and
enforcement of these rights may be time consuming and expensive. Furthermore,
despite best efforts, the Company may be unable to prevent third parties from
infringing upon or misappropriating its intellectual property. Also, competitors
may independently develop similar, but not infringing, technology, duplicate
products, or design around the Company's patents or other intellectual property.

21

The Company's patent applications or trademark registrations may not be
approved. Moreover, even if approved, the resulting patents or trademarks may
not provide Forgent with any competitive advantage or may be challenged by third
parties. If challenged, patents might not be upheld or claims could be narrowed.
Any litigation surrounding the Company's rights could force Forgent to divert
important financial and other resources away from business operations

ACQUISITION INTEGRATION

The Company has made, and may continue to evaluate and make, strategic
acquisitions in public and privately held technology companies. Because some of
these companies may be early-stage ventures with either unproven business
models, products that are not yet fully developed or products that have not yet
achieved market acceptance, these transactions are inherently risky. Many
factors outside of the Company's control determine whether or not the Company's
investments will be successful. Such factors include the ability of a company to
obtain additional private equity financing, to access the public capital
markets, to affect a sale or merger, or to achieve commercial success with its
products or services. Accordingly, there can be no assurances that any of the
Company's investments will be successful or that the Company will be able to
recover the amount invested.

DIVESTITURE TRANSACTIONS

As a result Forgent's transition to a software and professional
services company, it has substantially completed a program to divest certain
non-core assets, including a videoconferencing endpoint manufacturing business
as well as other related businesses. There can be no assurance that, having
divested such non-core operations, Forgent will be able to achieve greater or
any profitability, strengthen its core operations or compete more effectively in
existing markets. In addition, the Company continues to evaluate the
profitability realized or likely to be realized by its existing businesses and
operations, and Forgent reviews from a strategic standpoint, which, if any, of
its businesses or operations should be divested. Entering into, evaluating or
consummating divestiture transactions may entail risks and uncertainties in
addition to those which may result from the divestiture-related change in the
Company's business operations, including but not limited to extraordinary
transaction costs, unknown indemnification liabilities and unforeseen
administrative complications, any of which could result in reduced revenues,
increased charges, or post-transaction administrative costs or could otherwise
have a material adverse effect on Forgent's business, financial condition or
results of operations.

Due to the risk factors noted above and elsewhere in the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Forgent's 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 the Company's
common stock in any given period.

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 rapid changes in
technology, unexpected changes in customer order patterns, the intensity of
competition, economic conditions, pricing pressures, interest rates
fluctuations, changes in the capital markets,

22

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure relates to interest rate
risk and foreign currency exchange fluctuations. Forgent's interest income is
sensitive to changes in U.S. interest rates. However, due to the short-term
nature of the Company's investments, Forgent does not consider these risks to be
significant. The Company 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 the
Company was apportioned 1.3 million shares. In February 2001, Accord was
acquired by Polycom Inc. ("Polycom") and Forgent'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. The settlement of these hedges and related shares of
Polycom occurred in July and October 2001. During the three months ended October
31, 2001, the remaining Polycom shares were sold under a cash flow hedge,
realizing $1.7 million in gain and $1.8 million in net cash flows. As of October
31, 2001, the Company no longer had market risks related to the Polycom stock.

Forgent's objective in managing its 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, the Company historically utilized forward contracts to hedge its
foreign currency exposure on firm commitments denominated in the Euro and
Australian dollar. As of January 31, 2003 and January 31, 2002, the Company held
no foreign currency contracts. Due to the Company's reduction in international
offices and related reduction in foreign exchange risks, management does not
anticipate any additional foreign currency hedges.

For additional Quantitative and Qualitative Disclosures about Market
Risk reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended July 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, management of the Company has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-14(c) and Rule 15d-14 under the Securities Exchange Act
of 1934) as of a date within 90 days prior to the filing date of this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the date of the evaluation, the Company's
disclosure controls and procedures are effective in timely alerting them to the
material information relating to the Company required to be included in its
periodic filings with the Securities and Exchange Commission.

During the period covered by this report, there were no significant
changes in the Company's internal controls or, to management's knowledge, in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.

23

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Forgent 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 our
financial condition or results of operations.

In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been rendered
by Mr. Matthews in connection with his alleged involvement in the Company's
Patent Licensing Program. In late February 2003, the Company initiated an action
in the 261st District Court in Travis County Texas, styled Forgent Networks,
Inc. v. Monika Matthews, et al, for the purposes of declaring that the Company
has no obligation to the defendant. In that action, the defendant has filed a
counter claim asserting that the independent executrix of the Estate of Gordon
Matthews is entitled to recover in quantum meruit for the reasonable value of
the work and services claimed to have been provided by Gordon Matthews, a former
member of the Board of Directors and consultant to the Company, which the
defendant asserts is at least $5 million. The Company does not believe the
counter claim has merit and intends to vigorously pursue declaratory relief from
the court that no liability is due to the independent executrix of the Estate of
Gordon Matthews.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002

(b) Reports on Form 8-K:

None

* * *

24

SIGNATURES

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

FORGENT NETWORKS, INC.

March 17, 2003 By: /s/ RICHARD N. SNYDER
--------------------------------
Richard N. Snyder
Chief Executive Officer

By: /s/ JAY C. PETERSON
--------------------------------
Jay C. Peterson
Chief Financial Officer

25

FORGENT NETWORKS, INC.
JANUARY 31, 2003
CERTIFICATIONS

I, Richard N. Snyder, Chief Executive Officer of Forgent Networks, Inc., certify
that:

1. I have reviewed this quarterly report on Form 10-Q of Forgent Networks, Inc.
("Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and

6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ RICHARD N. SNYDER
--------------------------------------
Richard N. Snyder
Chief Executive Officer
March 17, 2003

26

FORGENT NETWORKS, INC.
JANUARY 31, 2003
CERTIFICATIONS

I, Jay C. Peterson, Chief Financial Officer of Forgent Networks, Inc., certify
that:

1. I have reviewed this quarterly report on Form 10-Q of Forgent Networks, Inc.
("Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.

5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and

6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ JAY C. PETERSON
----------------------------------------
Jay C. Peterson
Chief Financial Officer
March 17, 2003

27

INDEX TO EXHIBITS