Edgar Filing: FORGENT NETWORKS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A-2

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2002

COMMISSION FILE NUMBER 0-20008

FORGENT NETWORKS, INC.
(f.k.a. 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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]

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. [X]

The aggregate market value of 19,008,407 shares of the registrant's
Common Stock held by nonaffiliates on February 28, 2003 was approximately
$26,041,518. 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 February 28, 2003 there were 24,690,544 shares of the registrant's
Common Stock, $.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

PART I

ITEM 1. BUSINESS

GENERAL

Forgent Networks, Inc. ("Forgent" or "Company") is an enterprise
software and services provider that enables organizations to collaborate
effectively and efficiently. The Company has three business lines - enterprise
software and services, intellectual property licensing, and legacy services.
Forgent's Video Network Platform ("VNP") is a leading network management
software that improves quality of service and cost of ownership in multi-vendor
and multi-protocol environments. Combining VNP with the newly acquired Global
Scheduling System ("GSS"), a state-of-the-art web-based scheduling application,
VideoWorks is a powerful self-contained package for managing videoconferencing.
Forgent's intellectual property licensing business is derived from the Company's
Patent Licensing Program. As a vendor-neutral service provider, the Company's
legacy services continue to offer customers maintenance and technical support on
thousands of devices and endpoints, hardware units through which a video call is
placed, as well as installation and other related services.

The Company was founded in 1985 as an early pioneer of the
videoconferencing equipment industry with the innovation of utilizing an open PC
architecture for videoconferencing endpoints with a platform that allowed using
a broad range of PC applications, as well as simultaneous access to the
Internet. The Company manufactured and installed videoconferencing endpoints
worldwide and continues to provide service for thousands of these endpoints, as
well as other endpoints, under maintenance agreements through its legacy
services business. The Company consummated the sale of its manufacturing
products business on January 23, 2002, shifting its focus from hardware
manufacturing to enterprise software and services. The Company also changed its
name from VTEL Corporation to Forgent Networks, Inc. in January 2002.

During fiscal 2002, the Company has transitioned itself from a
videoconferencing hardware manufacturer and hardware-related services provider
to an enterprise software and services provider. As the Company has evolved, it
has focused its efforts on managing the collaboration environment, particularly
video. Forgent started with a focus on videoconferencing and addressed the many
problems that have plagued the industry in terms of usability and manageability.
Based on its heritage and expertise, the Company is exploring the viability of
managing other types of collaboration media. Examples include web and audio
conferencing, which are challenged by the same technical issues and lack of
standards prevalent in the videoconferencing industry. With its refocused
efforts and resources, Forgent believes it is poised to provide the greatest
opportunity for long-term success for the Company and its stockholders.

INDUSTRY BACKGROUND

Videoconferencing was born out of the need to communicate and
collaborate, and while that is still an essential driver of this technology, the
use of all types of real-time media to ease and enhance collaboration is
becoming increasingly widespread. The increased use of a variety of electronic
and web-based technologies is also being driven by the current economic climate,
which is forcing companies to dramatically reduce travel and other expenses.
Over the past several years an array of products and services have entered the
market that allow for collaboration among workers regardless of geographical
location. Forgent's experience in delivering video network management software,
services and solutions positions the Company to address the requirements of this
evolving market.

Videoconferencing, which became commercially viable in the early
1980's, has a wide range of uses including business and professional meetings,
education and training classes, and technical and medical consultations. The
technology is used to reduce operating costs, improve customer service, reduce
cycle times, and improve intra- or inter-company communications.

Videoconferencing endpoints are available as room or group
videoconferencing products, or set-top products. As broadband-based networks
became more widely available, the demand for set-top or appliance type

products increased and price points decreased, thereby encouraging the
proliferation of video throughout the enterprise and down to the desktop. In
addition, the composition of video networks evolved from single vendor endpoints
to multi-vendor, multi-protocol endpoints and devices, and from pure Integrated
Services Digital Network, or ISDN, to mixed ISDN and Internet Protocol ("IP")
environments.

Key drivers of the videoconferencing industry and, more broadly,
collaboration in general, have been social, economic, and technological in
nature. As video networks have grown in complexity, customers needed an
efficient and effective way to manage, monitor and control video networks from a
single console. Leveraging its expertise in video communications, Forgent
recognized the need for new management tools to address the problems that
plagued videoconferencing to date such as manageability, reliability and ease of
use.

After months of research, end user surveys and market assessment, in
the second fiscal quarter of 2002, Forgent launched Video Network Platform, a
video network management software product that delivers a robust set of features
and capabilities for managing multi-protocol, multi-vendor video networks,
commonly referred to as heterogeneous environments. Unlike other solutions from
traditional device manufacturers that are based on proprietary protocols and
therefore focused on managing only the device, VNP focuses on managing complex
heterogeneous environments from the network out and overcomes the ease-of-use,
reliability and manageability problems of heterogeneous video networks.
Understanding that the video network world was moving from unmanaged isolated
devices in an unconnected world to a world of connected, monitored, scheduled
and managed network of devices, Forgent emulated the PC market, and developed a
standards-based solution that enables administrators to monitor and manage all
video devices on the network. VNP's ability to centralize management of the
video network greatly reduces administrative costs of running the video network.
In addition, VNP's ability to report on all videoconferencing activity provides
users the ability to demonstrate return on investment of the videoconferencing
network.

According to a June 2002 Frost and Sullivan industry analyst report on
the video network management market, this industry is expected to show healthy
growth rates due to the untapped demand for solutions that enhance the ease of
use and manageability of videoconferencing. According to the report, the
compound annual growth rate from 2001 to 2008 for the video network management
market is forecasted to be 48.6 percent.

As videoconferencing becomes increasingly widespread and users begin to
rely more heavily on the technology, enterprise resources may become more
constrained and the need for higher reliability and more cost effective
solutions will become even greater. As is happening today in the industry,
enterprises are looking to consolidate rich media traffic, such as video, onto
their IP networks to save costs and increase efficiency. This drive to
consolidate data and other traffic onto one network will, in turn, drive the
need for tools to manage the non-data traffic on these networks.

In addition to the network management platform, scheduling is a
critical component of an enterprise software solution that facilitates
collaboration. Businesses, government and educational institutions have begun to
recognize the need to schedule capital resources such as videoconferencing
events and meeting rooms. To address those requirements, organizations have
begun to create their own homegrown systems, adapt existing software
applications to schedule rooms and equipment, or purchase stand-alone scheduling
software applications. Appreciating the industry's need for scheduling software
that provides increased levels of flexibility, robustness, and functionality for
increasingly complex meeting environments due to the exponential growth of
collaboration media, Forgent's Global Scheduling System, a web-based scheduling
application, schedules rooms and all associated services such as equipment,
technician support and catering. This robust capability augments existing
scheduling applications such as Microsoft Outlook and Lotus Notes that are
designed primarily to schedule people, as opposed to room and services
schedulers. GSS streamlines conference scheduling, reduces conflicts associated
with complex meetings and empowers users to schedule meetings without involving
support queries.

CORPORATE STRATEGY

Forgent's focus is on providing software and services that enable
enterprises to collaborate effectively and efficiently. The Company's enterprise
software products manage collaboration such that people can work together

and drive to decisions faster with increased efficiency. Forgent's award-winning
software and services help organizations manage the essential elements of
collaboration - people, resources and technology - to maximize productivity.
Forgent has emerged as a leading provider of a scheduling application and a
network management platform, and plans to continue to enhance these products to
extend its offerings beyond videoconferencing to include the management of other
key collaboration media. As the Company evolves and enhances its product
offerings, it will continue to adhere to the following strategies:

- develop standards-based management tools that will allow effective and
efficient collaboration to occur, regardless of the hardware or
software brands that comprise the environment

- support ISDN and IP-based networks, as well as the transition from ISDN
to IP-based networks

- develop industry-leading technology that makes collaboration work

- design software solutions that promote the ease of use, manageability
and reliability of collaboration

- support heterogeneous environments and alleviate the complexity
associated with them

- design increasing levels of automation into Forgent's software
solutions

- partner with leading software providers to offer best-of-breed
solutions

Forgent's initial foray into the enterprise software space has focused
on the collaboration media of videoconferencing. This starting point was driven
by the needs of the industry to have videoconferencing be more manageable,
reliable and easier to use. Forgent intends to expand this strategy beyond
videoconferencing into other collaboration media with the same goals in mind --
to make the user's experience seamless in terms of organizing and scheduling the
meeting, regardless of media involved, and to make the manageability of the
meeting as simple and efficient as possible for those responsible for
maintaining the technologies.

Forgent also intends to continue efforts to grow its network consulting
and software integration services. The Network Consulting Services include a
wide range of planning activities, deployment services and post installation
support from the Company's H.320 and H.323 videoconferencing experts who provide
customers with operational, tactical and strategic options with their video
networks. Forgent has developed its Software Deployment and Integration Services
offering to assist customers who have licensed Forgent's software products, and
need assistance installing and fully deploying the software.

In addition, Forgent intends to continue efforts to drive revenue from
its new intellectual property licensing business and its legacy services
business as a means to funding the software core business. Today, the Company's
legacy service group supports thousands of customers worldwide and will continue
to offer services such as total call management, 24x7 hotline support, emergency
on-site support, and resident engineering services. While Forgent plans to
continue actively pursuing new support and maintenance contracts for hardware
products, primarily non-VTEL endpoints, the Company does expect to see continued
decline in revenue from this line of business but anticipates replacing it over
time with increased revenue from its other activities.

The Company intends to also continue its efforts to generate revenue
from its world class interoperability testing lab, which allows for real-world
testing of video networking technology, regardless of brand. Forgent is the
independent verification testing center for the Cisco Architecture for Voice and
Video Integrated Data ("AVVID") Partner Program. The Company is authorized to
perform compliance testing for IP videoconferencing clients and provide the
testing services to verify that videoconferencing products meet the criteria of
the program. Companies that want to be AVVID certified must come through
Forgent's interoperability testing lab to gain that certification. Forgent plans
to continue expanding testing for Cisco and other customers, and extend the type
of testing that is performed.

Forgent believes its in-depth and broad-scoped experience in providing
enterprise software and services for specific customer needs makes the Company
positioned to addressing the past limitations with videoconferencing in order to
generate new sources of revenue and provide increased growth in stockholder
value. However, there can be no assurances that Forgent's strategy will be
successful. Furthermore, if this strategy is successful, it is likely that other
companies will attempt to duplicate this business model.

ENTERPRISE SOFTWARE & SERVICES

With more than 20 years of expertise in the videoconferencing industry,
Forgent was able to leverage its rich history to develop the industry's first
multi-vendor, multi-protocol video network management platform - Video Network
Platform - which was successfully launched in December 2001. Ensuring
interoperability, the VNP software monitors and manages video and network
devices from multiple vendors through a Common Operating Environment, and
overcomes the ease-of-use, reliability and manageability problems that have
plagued videoconferencing. Its intuitive graphical uses interface enables call
administrators to easily configure scheduled or ad-hoc point-to-point or
multi-point calls, as well as constantly manage companies' video devices,
including LAN/WAN connected video endpoints, multiple control units,
gatekeepers, gateways, and other network devices through customized views to
provide real-time quality of service measurements. VNP further enhances the
quality of service via real-time notifications and diagnostics of faults, events
and network alarms to alert network administrators before critical problems
impact users and via Call Detail Reports that accurately report on all call
activity, thus reducing downtime and improving response time. By centralizing
and automating the management of thousands of devices across disparate
technologies, vendors, and locations, VNP allows companies to cost-effectively
scale their video network to any size environment.

Also in the fall of 2001, the Company formed a technology partnership
with Global Scheduling Solutions, Inc., a provider of enterprise conference room
scheduling and resource management solutions. The purpose of the technology
partnership was to integrate VNP with Global Scheduling Solutions, Inc.'s
flagship product, Global Scheduling System, a leading scheduling software
product, to provide customers with a robust tool to schedule and manage video
communications. Global Scheduling Solutions, Inc. and Forgent continued to build
on that relationship and solution. After several months of successful
co-marketing and joint sales activities, market acceptance of the integrated
solution, and joint product development, Forgent acquired certain assets and
liabilities of Global Scheduling Solutions, Inc., including GSS, in June 2002.
GSS is a web-based scheduling application designed for organizations needing to
manage large-scale meeting environments effectively and efficiently. The
acquisition enabled Forgent to expand its market presence beyond video network
management and into the realm of broader conference management.

The Company continued to enhance the integration between the products
and built on VNP's management strengths and GSS's scheduling capabilities to
deliver an additional, powerful product - VideoWorks, a complete turnkey
videoconference scheduling, automation and management solution, to the market in
June 2002. VideoWorks allows a user to schedule a highly complex
multi-participant, multi-timezone videoconference that is automatically resource
validated, autoconfigured and automatically launched on time and with quality,
thus eliminating the need for administrative oversight of the videoconference.
By combining the power of GSS, which allows corporations to schedule
conflict-free meetings, along with VNP, which configures and launches
conferences automatically, VideoWorks saves a corporation valuable time and
money by maximizing uptime and avoiding the costs of manually conducting and
managing meetings and videoconferences. In recognition of this technological
leadership, Forgent was awarded the Frost & Sullivan Market Engineering Award
for Technology Innovation in June 2002 for its successful development and
introduction of new technology through well-designed products that provide
significant performance contributions to the industry.

Forgent also provides network consulting, software installation,
training and comprehensive related services to support its software products
throughout the planning, preparation, configuration and deployment processes.
Helping companies meet the challenges of deploying new technologies across the
enterprise, the Company's Network Consulting and Integration Services offer
expert assistance in evaluating current and evolving video network requirements
including baseline audits, preparation of capacity plans, development of
time-saving migration and implementation plans, and customized integration of
Forgent's software with existing third-party

applications or with customers' proprietary in-house applications. In terms of
assisting customers with deployment of new technologies, Forgent's experienced
engineers work side-by-side with customers in the Company's interoperability
labs to conduct hands-on extensive testing of their networks to reproduce and
resolve problems and to assure all devices work flawlessly together once
deployment occurs. For customers who have selected VNP, GSS, or VideoWorks,
Forgent's Software Deployment Services provide dedicated engineers to oversee
and manage the installation, configuration, and roll-out to assure the
application is up and running optimally to maximize the customer's return on
their investment.

With the introduction of its enterprise software and related services,
Forgent is providing enterprise software products designed with the goal of
transforming the videoconferencing industry from one proliferated with limiting
proprietary architectures to one that offers functionality across multiple
vendors and protocols for the end users. As the creator of a complete turnkey
videoconferencing network management and scheduling solution, and an authorized
provider of multiple brand-name hardware equipment, Forgent is able to deliver
one-stop videoconferencing solutions.

Forgent began its video network software and services business in
fiscal 2002, and revenues as of the fiscal year ended July 31, 2002 were $2.2
million. While management believes it has made substantial progress to date in
introducing its software products and services, the Company's results to date
have been limited, and there can be no assurance that Forgent will be successful
in building a business around its video network software and services. The
Company has devoted significant resources and infrastructure to support the
development of this line of business. These costs will be incurred, regardless
of whether the software products and services are accepted in the market place.
If these software products and services are not accepted as anticipated, the
Company's results from operations will be adversely affected.

INTELLECTUAL PROPERTY LICENSING

The Company's Patent Licensing Program 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.
Manufacturers in various industries use still-compression technology in their
products, including digital cameras, printers, scanners, and wireless devices,
as well as new emerging products such as new cell phones and wireless sharing
networks. Since the end of fiscal 2002, Forgent has entered into additional
licenses and the Company is continuing to actively seek licenses with other
users of its technology. Forgent's licensing program involves risks inherent in
technology licensing, 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 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.

LEGACY SERVICES

With years of planning, deployment, and problem-resolution experience
across a vast array of video equipment, topologies, and applications, Forgent
offers service programs to companies that deploy video networks. Forgent helps
companies maximize their video communications investment through maintenance,
installation, technical support, and resident engineer services.

Traditionally, service has been viewed as a break-fix situation in
which companies only fix that which is broken. However, Forgent takes a much
more proactive and comprehensive approach to the service equation. Its
comprehensive after-market support programs provide varying levels of support to
meet companies' specific needs to keep their video networks up and running. The
Company currently provides consistent and seamless delivery of services that
support thousands of endpoints 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 third-party
products. Through service and maintenance offerings, Forgent augments its
experience

and knowledge of the multiple endpoints available within the industry, thus
reinforcing the Company as the industry expert in visual communication
solutions.

In addition to installation and maintenance services, Forgent's
commitment to supporting its customers with all of such customers' technical
support regardless of the customers' locations is evidenced by several other
services. The Company's Technical Assistance Center ("TAC") operates on a 24x7
basis and can quickly and efficiently tackle a wide range of technical support
situations. Or customers can take advantage of Forgent's Total Call Management,
which gives customers a single point of contact for all of their video needs.
For more substantive technical support, customers may outsource their technical
video support to Forgent through its Resident Engineer Services which provides a
Forgent engineer on-site who can provide emergency on-site support for repairs,
preventative maintenance, ongoing equipment evaluations and upgrades, and other
required technical assistance. Additionally, Forgent has two exclusive
interoperability labs that allow for real-world testing of video networking
technology, regardless of brand, from personal and group communications products
to peripheral components and network technology. In these labs, Forgent provides
its customers the means to ensure that the products and components work, and
more importantly, that they work together - before they buy - in order to
receive the full value of their video network investments.

In the past, the service group has successfully integrated systems into
boardrooms and auditoriums for Forgent's corporate customers as well as
classrooms in primary schools, colleges and universities. Due to the economic
slow down during the recent past, capital budgets were drastically reduced,
causing sales of fully integrated videoconferencing systems to decline.
Additionally, the sale of integrated videoconferencing systems is no longer
consistent with the Company's strategy of becoming a leading provider of
enterprise software and services. Therefore, in April 2002 Forgent sold the
inventory and certain other assets related to its integration business to SPL
Integrated Solutions ("SPL"), the largest independent integrator of large
videoconferencing systems and fully-integrated multimedia systems.

RESEARCH AND DEVELOPMENT

During fiscal 2002, the Forgent development team continued to display
technical leadership in the delivery of innovative video network management
solutions. The technical staff demonstrated proficiency in many cutting-edge
development disciplines, including Java, device management, client-server
architectures, automation, database design, user interface design and web-based
application development. Leveraging decades of enterprise software development
experience obtained at IBM, EDS, Hewlett-Packard and the like, the team was able
to deliver two major product releases during fiscal 2002. A robust software
development process was used that relied on traditional and proven development
methods, while being flexible enough to quickly respond to evolving market
requirements and urgent customer needs.

During fiscal 2002, the Forgent development team released its new Video
Network Platform which manages heterogeneous vendor hardware equipment from a
single management console. In addition, the Company deployed a new lights out
automation software package known as VideoWorks. The software contained the
Company's management software, a scheduling software, called Global Scheduling
System or GSS, from a private company called International Video Conferencing
Incorporated ("IVCI"), and integration software that creates a seamless
interface to the user. Later in the year, the software scheduling product, GSS,
was purchased by Forgent from IVCI and enhanced with two major point releases.
Much of Forgent's research and development effort was to facilitate its
collaboration software vision for the convergence of audio, video, and web into
the conferencing experience.

Quality remained a major focus for the development team during fiscal
2002 and a goal of zero defects inspired an attention to detail in all phases of
the development process. Many quality-related tools and techniques became
standard practice: source control, daily builds, defect tracking, code reviews
and automated regression testing.

The test organization experienced significant growth in both personnel
and its use of technology and ended the 2002 fiscal year with almost 7,000 test
cases. In addition, a third-level customer support group was created

within the test organization to handle critical customer problems. The group's
in-depth knowledge of the products, and access to the core development staff,
help speed problem resolution and ensure customer satisfaction.

DISTRIBUTION STRATEGY

Forgent sells its network software and services principally through a
direct sales force. During fiscal 2002, the Company expanded its software sales
organization to include telemarketing, inside sales, pre-sales engineers and
territory managers. This structure enables Forgent to have all critical
functions aligned by territory to support the end-to-end selling process -- from
prospecting, pre-sale, close, and post-sale customer account management. The
Company supplements the efforts of its direct sales force with its Partner
Program. By working with these partners, Forgent expands the reach of its direct
sales force and gains access to key opportunities in major market segments.

The Company has two distinct levels of partners in its Partner Program.
The first level is the Premium Reseller Partner. Partners in this level are
typically large firms specializing in total video integration projects. They
contract to completely install the hardware, infrastructure and management
software required for a complete videoconferencing system in a large company or
government agency. The Company's contract with them allows the Premium Reseller
Partner to resell the Company's products to the partner's end user customer as a
part of a larger integration project. The Premium Reseller Partner commits to a
minimum level of business per year with the Company, and for that commitment
they receive a channel discount. The Company trains the Premium Reseller
Partners to deal with all aspects of the sale and installation of the Company's
software, which results in minimal costs of sales associated with these
transactions. Currently, we have four active partners in the Premium Reseller
Program - SPL, Inc., International Video Conferencing Incorporated (IVCI), York
Telecommunications, Inc., and AVS, Inc., all of which have experience in selling
and supporting videoconferencing and communications solutions in commercial,
educational and/or government accounts. Several others are under evaluation for
inclusion into the program, such as AT&T Networks, Verizon Telecommunications
and IBM Global Services.

The second level in the Company's Partner Program is the Preferred
Referral Partner. The partners in this level are typically smaller regional
firms that provide distribution for videoconferencing hardware vendors. From
time to time, as a byproduct of the Preferred Referral Partners' normal business
activities, they become aware of customer needs where the Company's products may
provide value. A Preferred Referral Partner provides the Company with the name
and particular information about this type of customer and their needs as a
sales lead. If the Company accepts the sales lead, registers it for a particular
Preferred Referral Partner, and subsequently closes a deal as a direct result of
such a lead, the Company will pay the Preferred Referral Partner a sales lead
referral fee. The Preferred Referral Partners make minimal best-efforts
commitments to business volumes. These partners receive minimal sales training
to familiarize them with the Company's products, which results in only a
negligible reduction in the Company's cost of sales. Currently we have three
active partners in the Preferred Referral Partner Program - TKO, Inc. (Southern
California), ISI (Mid-South), and Signet (Northeast), all of which have
experience in selling and supporting videoconferencing and communications
solutions in commercial, educational and/or government accounts. There are
others under evaluation for inclusion in this program, including GBH (Los
Angeles) and Vertella (Colorado).

In addition to the software sales force, a separate sales force sells
Forgent's legacy videoconferencing services. Additionally, Forgent's legacy
services are also sold through channel partners.

COMPETITION

The competitive landscape in which Forgent finds itself has changed
significantly in the last year, as the Company has transitioned its business to
focus on enterprise software and services. Forgent now evaluates itself against
companies providing enterprise software and services to schedule and manage
collaboration environments, particularly video. Part of Forgent's strengths are
the breadth, depth and scalability of its products. They have been designed from
the ground up to scale to meet the needs of large, global enterprises with
thousands of multi-vendor and multi-protocol endpoints and devices across
multiple enterprise environments.

Although big network providers sell videoconferencing equipment along
with the network they are installing, they do not usually provide software to
manage the network or post-installation services, such as product

services and training. In terms of the software landscape as it relates to video
network management, many of today's management tools do not provide in-depth
information about video devices (endpoints, gateways, gatekeepers, multipoint
control units, bridges, etc.). The traditional network management systems
vendors like Hewlett Packard, Sun Microsystems, and others have traditionally
focused on managing devices and are moving to managing system level
applications. Similarly, videoconferencing manufacturers may offer a small
amount of proprietary device level software to be used on their products but do
not usually provide a complete view of the entire network infrastructure showing
all the network touch points. Other competition comes from a few start-up
companies that are attempting to develop software that manage video networks but
they are limited in scope in terms of brands that they can manage and depth of
functionality that they can offer. These companies' products are often based on
proprietary software and do not have the level of industry experience that
Forgent brings to the market. With the emergence of the video network services
market, it is possible that other companies, including large and substantial
competitors such as Hewlett Packard and Sun Microsystems, among others, could
develop and introduce competing products and services. These companies have
significantly more marketing and financial resources, and there can be no
assurance that the Company could compete effectively with these types of
competitors.

In the scheduling arena, which is a recent addition to Forgent's
enterprise software portfolio, the competitors are many but Forgent's Global
Scheduling System can be differentiated in a number of ways. In particular, GSS
maintains a centralized status of critical physical resources such as rooms,
services and technology while it interfaces with corporate calendaring systems
such as Microsoft Outlook to present the most up-to-date status of people
resources to the user. Many of the competitive scheduling products in the market
today specialize in room scheduling, time and attendance scheduling, facility
management (including catering and maintenance) and specialized scheduling for
videoconferencing. A few of these products incorporate limited interfaces to
Microsoft Outlook and IBM Lotus Notes calendar interfaces but none of them
present the universal view of schedulable resources that GSS does in a unified
status view. GSS was created with key customer input, which required a global
view of all resources that must be inventoried, categorized, and made available
to the corporate user population while tracking cost and utilization for every
resource. However, there can be no assurance that this differentiation will
result in increased purchases of GSS as compared to other products.

Forgent believes that the key criteria considered by potential
purchasers of its products are as follows:

- operational advantages and cost savings provided by a product,

- product quality and functional depth,

- product price and terms under which the product is licensed,

- ease of use,

- ease of integration with the customer's existing applications,

- ability to easily adapt the product to their unique requirements,

- quality of support and product documentation, and

- experience and financial stability of the vendor.

In addition to its software products, Forgent brings software-related
services and traditional lines of services to bear as part of its offerings. In
offering its legacy services, the Company competes with hardware manufacturers
who often bundle services and maintenance contracts with hardware systems sales,
and since the sale of its VTEL products business, Forgent has experienced a
decline in its legacy services business. The Company's ability to provide a
turnkey videoconference solution including hardware, software and services from
a single vendor sets it apart from others in the industry.

MARKETING

Forgent has developed a comprehensive integrated marketing plan for
promoting its products and services throughout the United States and Europe. The
integrated elements include a mix of public relations, industry analyst
relations, investor relations, demand generation and other corporate
communications activities to ensure a consistent and accurate flow of
information to and from the Company's key stakeholders and target audiences.

Efforts have been focused on developing clear and concise messages
regarding the launch of Forgent's enterprise software and services business and
relaying that message to shareholders, customers, prospects, trade and technical
media, and the business media. In addition, the messages reinforce the core
aspect of the Company's strategy, which is to build a software business while
driving revenue from its intellectual property business and its legacy services
business to support the growth of the core business. The Company revamped its
corporate web site to reflect the focus on its software and services business
and streamline information for visitors. The web site plays an important role in
providing audiences with the most up-to-date and accurate information available
on the Company's business, its products and services, successes, and trends and
issues the Company faces.

PATENTS AND TRADEMARKS

The United States Patent and Trademark Office has issued Forgent
approximately 40 patents related to videoconferencing, data compression, video
mail, and other technology developed by the Company. These patents comprise the
Company's intellectual property portfolio. Forgent currently has in excess of 34
patent applications related to its VNP software that are filed but not yet
issued by the U.S. Patent and Trademark Office. Forgent anticipates filing an
additional four patent applications during the first fiscal quarter of 2003 to
protect its intellectual property. There can be no assurance that the pending
patents will be issued or that issued patents can be defended successfully.
However, other than with respect to U.S. Patent No. 4,698,672 and its foreign
counterparts, we do not consider patent protection crucial to our success. We
believe that, due to the rapid pace of technological change in our industry,
legal protection for our products are less significant than factors such as our
use of an open architecture, the success of our distribution strategy, the
ongoing product innovation and the knowledge, ability and experience of our
employees. Forgent retained all patents related to the products division sold
during fiscal 2002.

During fiscal 2002 the Company signed two significant license
agreements with two international consumer and commercial electronics firm,
including Sony Corporation. The license agreements relate to the Company's data
compression technology embodied in U.S. Patent No. 4,698,672 that will expire in
October 2006 and its foreign counterparts that will expire in September 2007.
Manufacturers in various industries use still-compression technology in their
products, including digital cameras, printers, scanners, wireless devices, as
well as new emerging products such as new cell phones, and wireless sharing
networks. All of the Company's intellectual property licensing revenues in the
fiscal year ended July 31, 2002, which were $31.2 million and represented 53.2%
of the Company's total revenues, were generated by the licensing of these
patents. Since the end of fiscal 2002, Forgent has entered into additional
licenses and the Company is continuing to actively seek to license other users
of its technology. Although management anticipates signing more patent license
agreements with other companies from multiple industries, there can be no
assurance the additional licenses can be obtained or, if obtained, that any new
license agreements will be on similar favorable terms.

Applications for the "Forgent" mark are currently pending both in the
United States and abroad. The Company was issued trademarks and service marks by
the U.S. Patent and Trademark Office and by certain foreign countries and
entities covering the "VTEL" mark and the "VTEL" logo. These trademarks and
service marks were sold to VTEL Corporation as part of the sale of the products
business division.

EMPLOYEES

Certain business elements that did not contribute to Forgent's core
competencies were eliminated as part of the Company's restructuring activities
in August 2001. Consequently, 65 employees (17% of Forgent's workforce) were
terminated and were provided outplacement support and severance. As a result of
the sales of the products business and the integration business, the Company's
workforce was further reduced by 117 employees in January

2002 and by 15 employees in May 2002. Forgent's personnel grew by 19 employees
in June 2002 when the Company acquired certain assets and liabilities of Global
Scheduling Solutions, Inc.

As the Company continues to evolve its business strategy, Forgent's
workforce is continually evaluated and adjusted accordingly - both in number and
composition. Forgent believes it retains the appropriate management team and
employees to fully implement its business strategy and that its current employee
relations are good. None of the Company's employees are represented by a labor
union.

Currently, Forgent employs 166 employees as follows:

NUMBER OF
FUNCTION EMPLOYEES
-------- ---------

Sales and marketing ........................................... 35
Research and development ...................................... 38
Service, support and systems integration ...................... 66
Finance, human resources and administration ................... 28
---------
Total .................................................. 167
=========

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. The Company uses 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. Forgent's future success is dependent upon its
ability to effectively attract, retain, train, motivate and manage its
employees. However, there can be no assurance that the Company will continue to
attract and retain personnel with the requisite capabilities and experience. The
loss of one or more of Forgent's key management or technical personnel could
have a material and adverse effect on its business and operating results.

EXECUTIVE OFFICERS

Forgent's executive officers are as follows:

Richard N. Snyder, age 58, 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 Forgent's President and Chief Executive Officer. Mr.
Snyder has over twenty-five years of senior management experience including
Founder and Chief Executive Officer at Corum Cove Consulting, LLC, Senior Vice
President of Worldwide Sales, Marketing, Service and Support at Compaq Computer
Corporation, and Group General Manager at Hewlett-Packard. 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 46, 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 eleven years with IBM Corporation. Mr. Peterson holds a Masters
in Business Administration and a Bachelor of Arts in Economics from the
University of Wisconsin.

Dennis M. Egan, age 51, joined the Company in November 1995 as Vice
President - Service Operations when Forgent acquired the Integrated
Communications Systems Group of Peirce-Phelps, Inc. 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 thirteen 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.

Kenneth A. Kalinoski, age 42, joined the Company in February 2001 as
Vice-President - Development, currently serves as Chief Technology Officer, and
is responsible for all aspects of technology for the company. Mr. Kalinoski's
previous 19 year career focused on client/server and communications technology.
He was the founder, company officer, and Vice-President of Development at
Netpliance from February 1999 to January 2001 and was responsible for delivering
the first information appliance to the consumer marketplace. Prior to that, Mr.
Kalinoski spent 17 years at IBM and held multiple management positions,
including director of IBM PC Systems and Licensing (1998), program director of
AIX Development from January 1993 to 1995, and program director of IBM
Multimedia Systems 1995-1997. Mr. Kalinoski received a Masters in Computer
Engineering from State University of New York, and a Bachelor of Science from
Wilkes University and currently holds five patents.

H. Russell Caccamisi, age 53, joined the Company in September 2002 as
Senior Vice President of Sales, responsible for worldwide sales of all software
and software-related services. Mr. Caccamisi has over thirty years of experience
in sales, marketing, and management, including Executive Vice President at
productmarketing.com from June 1999 to February 2001, President and Chief
Executive Officer at Reliant Data Systems from June 1996 to February 1999, Vice
President of Marketing at Tivoli Systems, Vice President of Worldwide Marketing
at BMC Software, Vice President of Sales and Marketing at System One
Corporation, and numerous sales and management positions at IBM Corporation. Mr.
Caccamisi received a Bachelor of Arts from Mississippi State University.

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. As a result of the sale of the products business
unit, 52,000 square feet of this space was vacated by the VTEL group.
Additionally, Forgent had existing unoccupied leased space inventory due to the
downsizing of the Company on account of the recent restructurings. Therefore,
during fiscal 2002, Forgent actively engaged in subleasing its available area
and incurred a one-time charge of $2.0 million related to these lease
impairments. Currently, the Company subleases approximately 48,000 square feet
and anticipates continuing to sublease the under-utilized space. The Company
also occupied approximately 60,000 square feet of a facility that is situated in
a light industrial area in Austin, Texas. This site housed the manufacturing of
VTEL equipment and consequently, during the sale of the products division, the
lease was assigned to VTEL Corporation, who assumed all obligations under the
existing lease.

Forgent's legacy services group occupies a facility of approximately
41,000 square feet in the Philadelphia, Pennsylvania vicinity which is leased
through June 2006. After the Company sold its integration business division to
SPL in May 2002, Forgent subleased approximately 6,000 square feet to SPL to
facilitate on-site operations.

The Company continues to consolidate its office space in remote
locations and currently holds office space in Atlanta, Georgia, Houston, Texas,
and Chicago, Illinois. Management believes that the facilities in Texas and
Pennsylvania are adequate to meet Forgent's current requirements and can
accommodate further physical expansion of corporate and development operations,
as well as additional sales and marketing offices.

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. None of the pending
legal proceedings to which the Company is a party involve claims for damages in
excess of 10% of the Company's current assets for the period covered by this
report.

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

None

PART II

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

MARKET INFORMATION

Starting June 1, 2001, Forgent's common stock has been traded in the
NASDAQ-National Market System under the symbol "FORG." Previously, the Company's
common stock was traded under the symbol "VTEL." The following table sets forth
the range of high and low intra-day prices for each fiscal quarter of 2002 and
2001:

FISCAL YEAR FISCAL YEAR
2002 2001
----------------- ------------------
HIGH LOW HIGH LOW

1st Quarter........... $ 4.19 $ 0.80 $ 3.63 $ 1.59
2nd Quarter........... $ 4.70 $ 2.25 $ 2.25 $ 0.72
3rd Quarter........... $ 3.93 $ 1.76 $ 1.69 $ 0.72
4th Quarter........... $ 5.67 $ 2.65 $ 1.51 $ 0.89

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 February 28, 2003, Forgent's common stock closed at $1.37 on the
NASDAQ. At that date there were approximately 14,000 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. The selected consolidated balance
sheet data as of July 31, 2001 and 2002 and the selected consolidated operations
data for the years ended July 31, 2000, 2001, and 2002 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, 1998,
1999 and 2000 and the selected consolidated operations data for the year ended
July 31, 1998 and 1999 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.

FOR THE YEARS ENDED JULY 31,
-------------------------------------------------------------------
1998(a) 1999(b) 2000(c) 2001(d) 2002(e)
------- ------- ------- ------- -------
(In thousands, except per share amounts)

STATEMENT OF OPERATIONS DATA:
Network software & service revenues ......... $ -- $ -- $ -- $ -- $ 2,236
Technology licensing revenues ............... -- -- -- -- 31,150
Service and other revenues .................. 28,692 29,698 27,217 26,912 25,206
Gross margin ................................ 10,823 11,261 3,400 6,999 24,422
Income (loss) from continuing
operations ............................... 2,185 (2,277) 22,198 (12,410) 2,701
Income (loss) from discontinued operations .. 594 (13,288) (19,901) (20,130) (8,804)
Net income (loss) ........................... 2,779 (15,565) 2,297 (32,540) (6,103)
INCOME (LOSS) PER COMMON SHARE:
Basic income (loss) from continuing
Operations ............................... 0.09 (0.10) 0.90 (0.50) 0.11
Diluted income (loss) from continuing
Operations ................................ 0.09 (0.10) 0.89 (0.50) 0.11
Basic income (loss) from discontinued
Operations ............................... 0.03 (0.57) (0.81) (0.81) (0.36)
Diluted income (loss) from discontinued
Operations ............................... 0.03 (0.57) (0.80) (0.81) (0.35)
Basic net income (loss) ..................... 0.12 (0.66) 0.09 (1.31) (0.25)
Diluted net income (loss) ................... 0.12 (0.66) 0.09 (1.31) (0.24)

BALANCE SHEET DATA:
Working capital ............................. $ 28,946 $ 12,977 $ 35,967 $ 12,921 $ 9,757
Total assets ................................ 128,895 123,697 123,139 69,340 52,222
Long-term liabilities ....................... 3,848 15,930 4,665 3,034 2,998
Stockholders' equity ........................ 81,258 68,019 82,661 41,622 32,278

(a) 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.

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

(c) 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.

(d) 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.

(e) Net income for the year ended July 21, 2002 includes an expense of $6.0
million for the reserve of the notes receivable from VTEL Products
Corporation and an expense of $4.4 million for the impairment of
certain assets.

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:

FOR THE YEARS ENDED JULY 31,
---------------------------------
2000 2001 2002
---- ---- ----

Network software and services revenues . . --% --% 3.8%
Technology licensing revenues ............ -- -- 53.2(1)
Services and other revenues .............. 100.0 100.0 43.0
Gross margin ............................. 12.5 26.0 41.7
Selling, general and administrative ...... 45.3 61.4 20.6
Research and development ................. 31.1 27.6 5.5
Impairment of assets ..................... 8.2 4.3 13.7
Amortization of intangibles .............. 6.7 4.1 --
Restructuring expense .................... -- -- 1.4
Total operating expenses ................. 110.1 97.4 41.2
Other income, net ........................ 162.6 24.2 3.8
Income (loss) from continuing operations.. 81.6 (46.1) 4.6
(Loss) from discontinued operations ...... (73.1) (74.8) (15.0)
Net income (loss) ........................ 8.4% (120.9)% (10.4)%

----------------------------------
(1) 53% of the Company's revenue was generated by one-time intellectual property
license agreements with two companies. While the Company does not anticipate any
additional intellectual property revenue from these two companies, it continues
to actively seek licenses with other users of its technology.

FOR THE YEARS ENDED JULY 31, 2000, 2001, AND 2002

REVENUES

Consolidated revenue was $27.2 million in fiscal 2000, $26.9 million in
fiscal 2001, and $58.6 million in fiscal 2002. The decline was $0.3 million from
2000 to 2001 and the increase was $31.7 million from 2001 to 2002. This is a
decrease of 1.1% for 2001 and an increase of 117.7% for 2002. Consolidated
revenue represents the combined revenues including sale of Forgent's software,
network consulting, installation, training, maintenance services, and
multi-vendor products 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, or the Company's discontinued integration business, which provided
customized videoconferencing solutions (see Note 5, in the accompanying
financial statements).

Network software and services revenues were $2.2 million and represent
3.8% of total revenues for the year ended July 31, 2002. Revenues from this new
line of business include sales of Forgent's Video Network Platform and other
software, network consulting services, and royalties. VNP, an enterprise-class
network management software that manages video, voice and other types of rich
media on multi-protocol, multi-vendor networks, 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. Forgent's network consulting services provide
technical market research, evaluation and analysis to customers in addition to
the means to test multiple network systems for manageability, interoperability,
and optimum network connectivity prior to installation. As a result of acquiring
certain assets from Global Scheduling Solutions, Inc., Forgent's sales force
increased by ten members, thus positioning Forgent to grow its customer base
into extended geographical locations. VNP, combined with the Global Scheduling
System and related hardware, creates VideoWorks, which is currently being
assessed by numerous educational, governmental and commercial providers. With
Forgent's continued capitalization of the synergies with Global Scheduling
Solutions, Inc., the growing potential customer base, and the success of VNP's
most recent release 2.0, management expects further increases in network
software and services revenues during the next several quarters.

Intellectual property licensing revenues were $31.2 million and
represent 53.2% of total revenues for the year ended July 31, 2002. The Company
began its licensing program during fiscal 2002. During the year ended July 31,
2002, the Company signed two patent license agreements with two international
consumer and commercial electronics firms, including Sony Corporation. The
licenses relate to the Company's data compression technology embodied in U.S.
Patent No. 4,698,672 and its foreign counterparts, and were fully paid during
the fourth fiscal quarter of 2002. Manufacturers in various industries use
still-compression technology in their products, including digital cameras,
printers, scanners, wireless devices, as well as new emerging products such as
new cell phones, and wireless sharing networks. Since the end of fiscal 2002,
Forgent has entered into additional licenses and the Company is continuing to
actively seek to license other users of its technology. Forgent's licensing
program involves risks inherent in technology licensing, 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 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.

Service and other revenues were $27.2 million in fiscal 2000, $26.9 million
in fiscal 2001, and $25.2 million in fiscal 2002. The decline was $0.3 million
from 2000 to 2001 and $1.7 million from 2001 to 2002. This is a decrease of 1.1%
for 2001 and 6.3% for 2002. The decline in revenue during fiscal 2002 was due
approximately 75% to the decrease in systems under contract and approximately
25% to lower average selling prices. Service and other revenues represent
100.0%, 100.0%, and 43.0% of total revenues for the years ended July 31, 2000,
2001 and 2002, respectively. Service and other revenues include the maintenance
and support of thousands of endpoints and bridges under maintenance agreements,
as well as sales of a variety of third-party manufactured equipment through its
Multi-Vendor Partners Program ("MVP"). The decline in revenues over the past
three fiscal years is largely due to the decrease in the renewal rate of service
contracts for VTEL products. As a vendor-neutral service provider, offering
installation, technical support, and maintenance to a wider array of
videoconferencing devices, including endpoints, multipoint control units,
gateways, gatekeepers, and traditional network switches and routers, Forgent has
replaced 14.1% of the decrease in renewal of VTEL contracts with service
contracts for other third party products. The Company anticipates further
declines in service revenues, although the rate of the decline is uncertain. For
the last two fiscal years, the Company's service contracts, under which the
Company generates revenue, supported platforms consisting of mainly VTEL and
VTEL related legacy equipment. The decreases in service revenue during this time
are closely aligned with the decrease in the total number of systems under
contract. Therefore, the volume of systems under service contracts has been the
driver of the decrease in revenue, as opposed to, falling average selling prices
of the underlying systems. Forgent will continue to sell equipment through its
MVP program and management intends to continue efforts to drive revenue from its
new intellectual property licensing business and its legacy services business,
which is under contract to be sold, as a means to funding the software core
business.

GROSS MARGIN

Consolidated gross margins were $3.4 million in fiscal 2000, $7.0
million in fiscal 2001, and $24.4 million in fiscal 2002. The increase was $3.6
million from 2000 to 2001 and the increase was $17.4 million from 2001 to 2002.
This is an increase of 51.4% for 2001 and an increase of 248.9% for 2002.
Consolidated gross margin percentages were 12.5% for fiscal 2000, 41.7% for
fiscal 2001, and 45.7% for fiscal 2002.

The $17.4 million increase in gross margins, as well as the increase in
gross margins as a percentage of total revenues, for the year ended July 31,
2002, is due primarily to the $16.5 million gross margins resulting from the
patent license agreements obtained during fiscal 2002. The cost of sales on the
intellectual property licensing business relates to the legal fees incurred on
successfully achieving signed agreements. The contingent legal fees are based on
a percentage of the revenues received on the signed agreements and are paid to a
national law firm. The percentage payment to this law firm was set based on a
sliding scale that began at 35% and increased to 50% based on the aggregate
recoveries achieved. Future percentage payments will be 50% of license receipts
per the agreement with this firm. Because of the inherent risks in technology
licensing, 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 licensing revenues decline.

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 current 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 are performing. Therefore, management reviewed
its capitalized software development costs and determined the video streaming
technology would not be used in the development of VNP. As a result, the $2.4
million capitalized software development costs associated with the video
streaming technology was impaired during the year ended July 31, 2002. This
impairment represented 58.7% of the network software and professional services'
cost of sales during fiscal 2002. Of the remaining $1.7 million cost of sales in
fiscal 2002, 64.3% of the costs associated with the network software and
services business resulted from the amortization of the Company's capitalized
software development costs on a straight-line basis, and labor. With the
exception of the capitalized software impairment, the cost of sales from this
line of business is relatively fixed. During the year ended July 31, 2002,
Forgent sold twelve VNP licenses. As more licenses are sold, management expects
to achieve higher gross margins from the network software and services business,
in absolute terms and in terms of percentage of revenue.
During fiscal year 2000, management reviewed the recoverability of certain
long-lived assets, including capitalized software, in accordance with Statement
of Financial Accounting Standard, No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As a result of
this analysis, the Company impaired $5.1 million of its capitalized software
related to terminated projects from its OnScreen24(TM) subsidiary. Thus, the
network software and professional services cost of sales during the year ended
July 31, 2000 is due solely to this impairment.

The costs associated with the service and maintenance business are
labor intensive and relatively fixed, which causes gross margins to be directly
affected by the level of revenue generated from new and renewed service
contracts. Gross margins from other revenues are subject to product mix shifts
based on the types of MVP products sold. With decreasing VTEL maintenance
contract renewals, Forgent's gross margins from its services and other benefits
deteriorated by $1.5 million or 17.9% from 2000 to 2001. Therefore, in August
2001, the Company resized its infrastructure to incur costs that more closely
matched the projected revenue levels. As a result, gross margins from the
service and other business significantly increased by 39.6% from $7.0 million to
$9.8 million for the year ended July 31, 2002.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("SG&A") expenses were $12.3
million in fiscal 2000, $16.5 million in fiscal 2001, and $12.1 million in
fiscal 2002. The increase was $4.2 million from 2000 to 2001 and the decrease
was $4.5 million from 2001 to 2002. This is an increase of 34.1% for 2001 and a
decrease of 27.1% for 2002. SG&A expenses were 45.3%, 61.4% and 20.6% of total
revenues for the years ended July 31, 2000, 2001, and 2002, respectively.

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 increased $3.4
million, or 32.5%, from 2000 to 2001 and decreased $1.7 million, or 12.1%, from
2001 to 2002.

During first fiscal quarter of 2001, the Company announced a new
business charter and the reorganizing of its operations, which contributed to
reducing a large amount of the Company's global administrative infrastructure.
The related workforce reductions and consolidations of office space reduced
costs and focused resources on efforts to support the new business strategy.
These efforts to find efficiencies and to significantly reduce administrative
costs as a percent of expected revenues, including the closing of the Sunnyvale,
California facility and the replacement of Forgent's Enterprise Reporting
Platform, continue to be realized in fiscal 2002. Additionally, the Company
reexamined its overall staffing needs, restructured its operations and recorded
a one-time charge of $0.8 million during the year ended July 31, 2002. This
one-time charge consisted entirely of severance payments paid to 65 employees
who were terminated in August 2001. SG&A expenses were reduced by approximately
$1.5 million for the fiscal year, as a result of the workforce reduction.
Severance payments equal to $0.8 million were made during the year; and as a
result, cash flows were reduced by approximately $2.9 million.

In acquiring certain assets and liabilities of Global Scheduling
Solutions Inc. during the latter half of fiscal 2002, Forgent's sales force has
more than doubled and thus, SG&A expenses are projected to increase. However,
management is committed to maintaining SG&A expenses at reasonable levels in
terms of percentage of revenue and to further decreasing any unnecessary SG&A
expenses that do not directly support the generation of revenues for Forgent.

RESEARCH AND DEVELOPMENT

Research and development ("R&D") expenses were $8.5 million in fiscal
2000, $7.4 million in fiscal 2001, and $3.2 million in fiscal 2002. The decrease
was $1.1 million from 2000 to 2001 and $4.2 million from 2001 to 2002. This is a
decrease of 12.0% for 2001 and 56.8% for 2002. R&D expenses were 31.1%, 27.6%,
and 5.5% of revenues for the years ended July 31, 2000, 2001, and 2002,
respectively.

During the year ended July 31, 2000, the Company created two
subsidiaries focused on the development and delivery of visual communication
products and services over the Internet. OnScreen24 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 the Company's web streaming product
line, Turbocast (TM). ArticuLearn created and managed custom e-learning portals
that enabled organizations to create, deliver and manage their learning content
directly online as well as offered various professional services to assist
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 R&D expenses,
respectively. In fiscal year 2001, management determined the products and
services provided by its Internet ventures were not critical to the Company's
current corporate strategy. 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. Therefore, the decreases
in the Company's total research and development expenses between 2000 and 2002
largely resulted from the termination of its Internet ventures. The Company
believes that the reductions in research and development have had no material
effect on its competitive stature and new product and technology development in
its core lines of business.

Without the effects of the Internet ventures, the Company incurred $0.0
million, $2.3 million, and $3.2 million in R&D expenses during fiscal 2000, 2001
and 2002, respectively. These increasing expenses, which represent 8.6% and 5.5%
of revenue in fiscal 2001 and 2002, respectively, are related to the development
of Forgent's network management software, Video Network Platform. Unlike
proprietary device management software from manufacturers that only support
their brand and consequently lock customers into a single vendor purchase
decision, VNP is the industry's only enterprise video network management
software that improves quality of service and reduces cost of ownership for
multi-protocol and multi-vendor environments. Forgent developed a Common
Operating Environment, which uses standards-based interfaces and methods to
recognize a host of video devices, as well as traditional network devices, thus
allowing companies to grow their video networks and make future purchase
decisions that are independent of hardware configurations.

The R&D expenses are net of $0.6 million and $3.5 million capitalized
during the years ended July 31, 2001 and July 31, 2002, 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 July 31, 2002, $1.6 million
of the Company's net capitalized software expenses relates to the efforts on
Forgent's VNP Release 1.0, which finds, controls and manages multi-vendor video
devices with network management tools and offers extensive device diagnostics.
An additional $1.7 million of the Company's net capitalized software expenses
relates to efforts on Forgent's VNP Release 2.0, which offers an intuitive,
user-friendly interface that provides an at-a-glance summary and statistics of
the entire video network including calls, video devices, and bandwidth
utilization and enables users to manage their networks and to quickly resolve
problems, even from remote locations. Additionally, VNP Release 2.0 features a
new easy-to-use reporting wizard with a rich set of reports that can be
customized to meet specific customer requirements. The remaining $0.2 million of
the Company's net capitalized software expenses relates to efforts on Forgent's
VNP Release 2.5, which delivers group operations support, hot-pluggable devices
and failover support for increased scalability and availability. Forgent's
development team has fully integrated the acquired Global Scheduling Solutions
Inc. development team. The combined team now functions with a shared vision for
collaboration management and is developing GSS Version 3.9, which will include
additional quality and performance improvements, a new outsourcing in security
module, and an extension that will allow users to schedule rooms and attendees
directly from Outlook. Both VNP 2.5 and GSS 3.9 are scheduled for general
availability in the first quarter of fiscal year 2003.

The Company's ability to successfully develop software solutions to
enable enterprise video networks is a significant factor in Forgent's success.
As Forgent develops its research and development strategy, management
anticipates additional costs associated with the recruiting and retention of
engineering professionals adept at these technologies. Management will attempt
to maintain research and development expenses at reasonable levels in terms of
percentage of revenue. However, management believes Forgent's ultimate future
success is based significantly on the development and success of its solution
offerings related to its software roadmap.

IMPAIRMENT OF ASSETS

During the fiscal year ended July 31, 2002, Forgent recorded impairment
losses on the consolidated statement of operations as follows:

FOR THE YEAR ENDED JULY 31, 2000
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ---------- ----------

Property lease................................... $ 2,063 $ - $ 2,063
Notes receivables................................ 5,967 - 5,967
------------ ---------------- ----------------
Impairment in operating expenses................. 8,030 - 8,030
============ ================ ================
Capitalized software............................. 2,381 - 2,381
------------ ---------------- ----------------
Total impairment................................. $ 10,411 $ - $ 10,411
============ ================ ================

Due to the disposition of the Products business in fiscal 2002, the
VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin Road in
Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in Austin,
Texas. This relocation left a vacancy of approximately 52,000 rentable square
feet, or 38% of the total lease space. Additionally, Forgent had existing
unoccupied space inventory due to the downsizing of the Company on account of
the recent restructurings. In fiscal 2002, Forgent was able to sublease some of
the vacated space, but was unable to fully sublease the space due to the
economic downturn during the year. Therefore, management analyzed the future
undiscounted cash flows related to the lease on the Wild Basin property and
determined the economic value of the lost sublease rental income. As a result,
Forgent recorded a one-time $2.0 million impairment charge for the unleased
space as of July 31, 2002. However, Forgent remains obligated to make lease
payments in accordance with the original term of the lease. Additionally,
Forgent received two subordinated promissory notes from VTEL as a result of the
disposition of the Products business. However, VTEL did not remit payment on its
first subordinated promissory note due in April 2002, as stipulated in the sales
agreement. As a result of this default and due to the uncertainty in collecting
both of the outstanding notes from VTEL, the Company recorded a $5.9 million
charge for the reserve of both notes from VTEL for the year ended July 31, 2002.
These impairments were reported as part of continuing operations on the
consolidated statement of operations,

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 Forgent's property in Sunnyvale,
California. During the third fiscal quarter of fiscal 2001, 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 million impairment in fiscal 2001 was all related to
continuing operations.

As a result of the new charter announced in August 2000, management
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, the Company
adjusted the long-lived assets associated with its manufacturing operations and
the long-lived assets related to the foreign operations and capitalized
software. Management 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. Of
the total impairment in fiscal year 2000, $5.1 million of the capitalized
software development cost impairment was reported as part of cost of sales. This
impairment loss was recorded on the consolidated statement of operations as
follows:

FOR THE YEAR ENDED JULY 31, 2000
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ---------- ----------

Property, plant and equipment.................... $ 1,909 $ 3,983 $ 5,892
Intangible assets................................ 332 1,908 2,240
Other............................................ -- 156 156
------------ -------------- ----------------
Impairment in operating expenses 2,241 6,047 8,288
============ ============== ================
Capitalized software............................. 5,120 664 5,784
------------ -------------- ----------------
Total impairment................................. $ 7,361 $ 6,711 $ 14,072
============ ============== ================

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

AMORTIZATION OF INTANGIBLES

Amortization expenses were $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. In November 1995, the Company acquired certain assets and a
specified work force of the Integrated Communications Systems Group ("ICS") of
Pierce-Phelps, Inc., which developed into Forgent's legacy 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 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. In accordance with SFAS No. 142, the Company is
required to complete its transitional impairment test, with any resulting
impairment loss recorded as a cumulative effect of a change in accounting
principle. Subsequent impairment losses are reflected in operating income from
continuing operations on the Consolidated Statement of Operations. Upon adoption
of SFAS No. 142, the Company did not record any goodwill amortization expenses
during the year ended July 31, 2002. Additionally, as a result of the
transitional impairment test, the Company did not record any impairment of its
goodwill for the year ended July 31, 2002.

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 core competencies 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 $0.8 million in the first quarter
of fiscal 2002 for the restructuring. As of July 31, 2002, all of the
involuntary termination benefits had been paid.

NON-RECURRING EVENTS

On March 3, 2000 Forgent settled a lawsuit pending in the 126th
Judicial District Court in Travis County, Texas in which the Company had
previously initiated suit against five former employees who left the Company 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 paid $2.5 million in cash and delivered to the Company
300,800 shares of common stock of Polycom, Inc. in settlement of the claims
asserted by Forgent. These shares were sold during fiscal 2000 for $33.7
million, net of settlement costs. The parties agreed to dismiss all claims,
counterclaims and third party claims in the lawsuit, ending the litigation.
Separately, Forgent 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 Forgent as a fully paid up royalty in
exchange for such license. In turn and without any payments by the Company,
Polycom also granted Forgent 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 $1.2 million in fiscal 2000, $1.2 million in fiscal
2001, and $0.3 million in fiscal 2002. The increase was minimal from 2000 to
2001 and the decrease was $0.9 million from 2001 to 2002. This is an increase of
3.0% for 2001 and a decrease of 72.3% for 2002. Interest income was 4.4%, 4.5%,
and 0.6% of revenues for the years ended July 31, 2000, 2001, and 2002.

Changes in interest income are based on interest rates earned on
invested cash and cash equivalent balances available for investment. The
decrease in interest income during fiscal 2002 as compared to fiscal 2001, is
largely due to a 35.2% lower average cash balance held for investment and a
61.8% decline in the average interest rates. The slight increase in interest
income during fiscal 2001, as compared to fiscal 2000, is due primarily to a
1.6% higher average cash balance held for investment and a 5.4% increase in the
average interest rates.

INCOME TAXES

As of July 31, 2002, Forgent had federal net operating loss
carryforwards of $147.6 million, research and development credit carryforwards
of $6.1 million, and alternative minimum tax credit carryforwards of $0.1
million. The net operating loss and credit carryforwards will expire in varying
amounts from 2003 through 2021, if not utilized. Minimum tax credit
carryforwards do not expire and carry forward indefinitely. Net operating losses
related to the Company's foreign subsidiaries of $6.4 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 Forgent's 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, Forgent 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, 2000, 2001, and
2002. The valuation allowance increased by $2.1 million during the year ended
July 31, 2002.

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

During the year ended July 31, 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 (see Note 18, in the
accompanying financial statements). Accordingly, the products and integration
businesses have been accounted for and presented as discontinued operations in
the consolidated financial statements. Loss from discontinued operations was
$19.9 million in fiscal 2000, $19.0 million in fiscal 2001, and $8.5 million in
fiscal 2002. Loss from discontinued operations was 73.1%, 70.6%, and 14.6% of
revenues for the years ended July 31, 2000, 2001, and 2002.

During the fiscal year 2002, the Company wrote-off $1.6 million of its
account receivables. This increase in write-offs, as compared to prior years, is
attributable to several one-time factors. As a result of five of the Company's
customers declaring bankruptcy, the Company wrote-off the related accounts
receivable in fiscal 2002. These bankruptcies accounted for 42.9% of the
Company's write-offs, only 6.2% of which were related to continuing operations.
Due to the Company's current strategy of becoming an enterprise software and
services provider, the operations of which are based in the United States,
Forgent continued its efforts on closing down its international operations.
Consequently, personnel were terminated, and difficulties were experienced in
collecting many outstanding international accounts receivable, which were
written-off and accounted for 24.2% of Forgent's write-offs. Additionally, the
Company sold its Products business division, and subsequently experienced
difficulties collecting certain outstanding related accounts receivable. These
VTEL accounts receivable were written-off and accounted for 15.4% of Forgent's
total write-offs. The remaining 17.5% of the write-offs were incurred as part of
the Company's normal operations. Accordingly, the Company's bad debt expense
significantly increased, as compared to prior years. Approximately 84% of the
bad debt expense was recorded as part of discontinued operations on the
Consolidated Statement of Operations. Management does not anticipate write-offs
or bad debt expense of similar magnitude in future periods.

Since the sale of the products business occurred several months after
it was originally anticipated to close, and since the operations performed
significantly worse than expected, an additional loss of $8.8 million was
recorded to discontinued operations in fiscal 2002. The remaining $0.3 million
loss is related to the Company's discontinued integration business.

LOSS ON DISPOSAL, NET OF INCOME TAXES

As of July 31, 2001, the Company estimated the loss from the disposal
of the VTEL products business unit to be $1.1 million. The loss was related to
legal and consulting fees associated with the sale. During the second fiscal
quarter of 2002, Forgent recorded an additional $0.2 million in expenses
associated with the completion of the sale. 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 fiscal quarter of
2002.

NET INCOME (LOSS)

Net income was $2.3 million in fiscal 2000; net loss was $32.5 million
in fiscal 2001; and net loss was $6.1 million in fiscal 2002. The decrease was
$34.8 million from 2000 to 2001 and the increase was $26.4 million from 2001 to
2002. This is a decrease of 1,516.6% for 2001 and an increase of 81.2% for 2002.
Net income (loss) was 8.4%, (120.9%), and (10.4%) of revenues for the years
ended July 31, 2000, 2001, and 2002, respectively.

The $26.4 million increase in net income during the year ended July 31,
2002 is largely due to the $16.5 million gross margins generated from the
licensing of intellectual property and the $11.3 million decrease in losses from
discontinued operations. The one-time $44.5 million gain achieved in fiscal 2000
contributed significantly to the net income for the year ended July 31, 2000 and
is the primary cause for the decrease in net income during fiscal 2001. The
Company's continuing operations currently include net income from its technology
licensing business, which started to generate revenue and income in the third
fiscal quarter of 2002. Although the Company's historical results show losses
because the historical results do not include any proceeds from technology
licensing agreements, the Company continued to maintain profitability after the
last two fiscal quarters of 2002 and into the first and second fiscal quarters
of 2003.

During fiscal 2002, Forgent has taken significant steps (1) to grow its
revenues through software sales, patent licensing agreements, and increased
video network consulting, integration and deployment services, (2) to improve
gross margins, (3) to reduce costs by resizing its infrastructure, (4) to
maintain a strong cash and investments balance, and (5) to finalize the sales of
its less profitable businesses. Despite the current difficult economic business
environment in which companies are minimizing capital expenditures, these
significant milestones are evidence that Forgent continues to make progress on
its business plan. Based upon a solid financial foundation with new and
expanding revenue sources, additional joint VNP and GSS software offerings, and
a cash generating legacy business, management's vision and direction are
advancing the Company's financial results towards growth and profitability.
However, uncertainties and challenges remain, and there can be no assurance that
the Company can successfully grow its revenues or maintain profitability.

OTHER FACTORS AFFECTING RESULTS OF OPERATIONS

Forgent's future results of operations and financial condition could be
impacted by many factors, including other competitors entering the same market,
technical problems in delivering video solutions over enterprise networks, and
slow adoption to videoconferencing over enterprise networks. Due to these
factors and others noted elsewhere in Management's Discussion and Analysis of
Financial Condition and Results of Operations, Forgent's past earnings and stock
prices have been, and future earnings and stock prices 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, the Company participates 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 $53.5 million in fiscal 2000;
cash used in operating activities was $3.5 million in fiscal 2001; and cash
provided by operating activities was $14.7 million in fiscal 2002. At July 31,
2002, Forgent had working capital of $9.8 million, including $20.0 million in
cash, cash equivalents and short-term investments. The $14.7 million cash
provided in fiscal 2002 is due primarily to $2.7 million in net income, $15.0
million of non-cash depreciation, amortization and impairment expense, and a
$7.7 million decrease in accounts receivable, which were offset by an $11.1
million decrease in accounts payable, accrued expenses and other long term
obligations, and deferred revenue. During fiscal year 2002, the Company had sold
$9.3 million of its outstanding accounts receivable, without any recourse, in
efforts to recapture approximately $7.0 million in cash lost due to an
unanticipated significant drop in sales from discontinued operations and
approximately $2.1 million in payments of the remaining outstanding payables
related to the discontinued operations. Silicon Valley Bank purchased the assets
for a fee of approximately 1.8% of the value of the accounts receivable sold and
a one-time set-

up fee of $13,000. The Company received proceeds from Silicon Valley Bank of
$9.1 million. As a result of the sale of accounts receivable, the Company
excluded the related receivables from the Consolidated Balance Sheet and
recorded related expenses of $178,000 for the year ended July 31, 2002.
Additionally, the Company received $16.5 million from its technology licensing
business during the year ended July 31, 2002. The liquidation of the Internet
ventures, which historically required significant funding for operations, as
well as the completion of the restructuring efforts and the sale of its less
profitable businesses, improved the Company's cash flows from operations during
the year ended July 31, 2002, as compared to the year ended July 31, 2001. The
cash used in operating activities during fiscal year 2001 was $3.5 million. The
cash provided from operating activities in fiscal year 2000 was $53.5 million.
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 used in investing activities was $32.3 million in fiscal 2000;
cash provided by investing activities was $21.9 million in fiscal 2001; and cash
used in investing activities was $7.7 million in fiscal 2002. The $7.7 million
cash used in investing activities during fiscal 2002 was largely the result of
the goodwill acquired among other assets from Global Scheduling Solutions, Inc.
and the $3.5 million capitalization of software development costs. Forgent's
ability to successfully develop software solutions to enable enterprise video
networks is a significant factor in the Company's success and management will
continue to strategically invest in developing its software products. 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 common stock shares as a result of Polycom's acquisition of Accord.
The $21.9 million cash provided by investing activities in fiscal 2001 was
primarily due to the $25.2 million net proceeds received from the sale of the
Polycom and Accord shares and other short-term investments. During fiscal 2000,
the $32.2 million cash used in investing activities was primarily from the $24.7
million net investment of cash received from the settlement of litigation (see
"Non-recurring events") and other available cash balances. Investments were also
made in additional property and equipment and capitalized research and
development. Approximately $0.5 million of the capital expenditures incurred
during the year ended July 31, 2002 related to the purchase of the Company's new
accounting system. As of July 31, 2002, the Company leased computers, furniture,
equipment, and office space under non-cancelable operating leases that expire at
various dates through 2013. Certain leases obligate the Company to pay property
taxes, maintenance and insurance. Additionally, the Company also had several
capital leases for computer and office equipment. Amounts payable under these
leases are as follows:

AMOUNTS PAYABLE
(IN THOUSANDS)
FISCAL YEAR ENDING OPERATING LEASES CAPITAL LEASES TOTAL

2003 $ 5,008 $ 485 $ 5,493
2004 4,418 39 4,457
2005 4,237 4 4,241
2006 4,076 - 4,076
2007 3,469 - 3,469
Thereafter 19,219 - 19,219
-----------------------------------------------------
TOTAL $ 40,427 $ 528 $ 40,955
=====================================================

For fiscal 2003, Forgent's capital budget is approximately $0.8 million and will
be used principally to invest in demonstration equipment, spare parts to support
the Company's warranties and services, and various other operational equipment
as needed.

Cash used in financing activities was $11.0 million, $0.6 million, and
$0.9 million in fiscal years 2000, 2001 and 2002, respectively. The $0.9 million
of cash used in financing activities during fiscal 2002 is due primarily to the
$2.7 million purchase of treasury stock, which was offset by the $1.3 million
net proceeds received from the issuance of stock. The $0.6 million of cash used
in financing activities during fiscal 2001 primarily relates to the Company
paying $1.5 million to settle its notes payable. 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. In April 2001
Forgent 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. Forgent purchased an additional 787,700
shares for $2.7 million, including fees, during the year ended July 31, 2002. In
September 2002, Forgent's board of directors approved the repurchase of an
additional million shares of the Company's stock under

the current Share Repurchase Program. Management fully anticipates repurchasing
more shares during fiscal 2003, depending on the Company's cash position, market
conditions and other factors.

In March 2000, the Company repaid the outstanding balance on its line
of credit with a banking syndicate. At July 31, 2002, Forgent did not have a
line of credit in place. Based on the Company's strong cash position and ability
to generate positive cash flow from its continuing operations, management does
not anticipate acquiring any additional lines of credit in the near future.

Forgent's principal sources of liquidity at July 31, 2002 consist of
$20.0 million of cash, cash equivalents and short-term investments, and the
ability to generate cash from its technology licensing business. This ability to
generate cash is subject to certain risks as discussed under the "Risk Factors -
License Program" section of the "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company." Over the past
several quarters, the Company's cash and short-term investment balances have
remained relatively stable. With the success of the Company's Patent Licensing
Program, management expects the Company's cash position to strengthen as more
license agreements are signed and related payments are received. As previously
stated above, however, there remain risks and uncertainties as to the timing of
the receipts of license fees due, in part, to the inherent nature of a patent
licensing program. Management plans to strategically utilize this positive
cashflow to invest further in developing Forgent's VNP, GSS, and VideoWorks
software and to explore more opportunities for growing the business. However,
there is no assurance that the Company will be able to continue to limit its
cash consumption and 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.

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 our
financial condition or results of operations.

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.

We believe the following represent our 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.

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 do not allow for any rights
of return.

Network software and 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 our network software.
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 is recognized as the services are performed. Revenue
allocated to installation is recognized upon completion of these services due to
their short-term nature. 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 our software product, we recognize the entire
contract amount ratably over the period during which the services are expected
to be performed.

Service and other revenue consist of legacy service programs as well as
integration services. Legacy service programs provide maintenance, technical
support, installation and resident engineering services to companies that deploy
video networks. Integration revenues consist of network consulting to assist
customers with their video networking requirements, including baseline audits,
preparation of capacity plans, development of time-saving migration and
implementation plans, and customized integration of the Company's software with
existing third-party applications or with customers' proprietary in-house
applications. Legacy service and other revenues are recognized ratably over the
term of the service agreement, as there is no discernible pattern of service
delivery. Integration revenues are recognized after the customized systems have
been tested, installed, and the Company has no significant further obligations
as evidenced by acceptance from the customer.

Technology 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 technology licensing revenue
is recognized at the time a license agreement has been executed and related
costs are recorded as cost of sales. The cost of sales on the intellectual
property licensing business relates to the legal fees incurred on successfully
achieving signed agreements. The contingent legal fees are based on a percentage
of the revenues received on the signed agreements and are paid to a national law
firm. The percentage payment to this law firm was set based on a sliding scale
that began at 35% and increased to 50% based on the aggregate recoveries
achieved. Future percentage payments will be 50% of license receipts per the
agreement with this firm.

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.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

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.

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 as of July 31,

2001. During the first quarter of fiscal year 2002, 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.

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible 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. In accordance with SFAS No. 142,
the Company is required to complete its transitional impairment test, with any
resulting impairment loss recorded as a cumulative effect of a change in
accounting principle. Subsequent impairment losses are reflected in operating
income from continuing operations on the Consolidated Statement of Operations.
Effective August 1, 2001, the Company chose early adoption of SFAS No. 142, and
therefore did not record any goodwill amortization expenses during the year
ended July 31, 2002. As a result of the transitional impairment test, the
Company did not record any impairment of its goodwill for the year ended July
31, 2002. The Company's goodwill, net of accumulated amortization, was $10.6
million and $15.8 million at July 31, 2001 and July 31, 2002, respectively.

As required by SFAS No. 142, the results for the prior years have not
been restated. A reconciliation of the previously reported net loss and earnings
per share for the years ended July 31, 2000, 2001, and 2002 as if SFAS No. 142
had been adopted is presented as follows:

2000 2001 2002
---------- ---------- ----------

Reported net income (loss) ..................... $ 2,297 $ (32,540) $ (6,103)
Add back goodwill amortization ................. 1,824 1,101 --
---------- ---------- ----------
Adjusted net income (loss) ..................... $ 4,121 $ (31,439) $ (6,103)
========== ========== ==========

Basic earnings per share:
As reported .................................... $ 0.09 $ (1.31) $ (0.25)
Goodwill amortization .......................... 0.07 0.04 --
---------- ---------- ----------
Adjusted earnings per share .................... $ 0.16 $ (1.27) $ (0.25)
========== ========== ==========

Diluted earnings per share:
As reported..................................... $ 0.09 $ (1.31) $ (0.24)
Goodwill amortization........................... 0.07 0.04 --
---------- ---------- ----------
Adjusted earnings per share..................... $ 0.16 $ (1.27) $ (0.24)
========== ========== ==========

In August 2001, the FASB issued Statement 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-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. The provisions of SFAS No. 144 will be effective for
the Company's fiscal year beginning August 1, 2002. The Company does not expect
that the adoption of SFAS No. 144 will have a significant impact on its
financial statements.

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.

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 network software and services
or legacy 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 services and legacy 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 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 network 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 restructuring efforts previously described, the
Company is currently transitioning its business and realigning its strategic
focus towards a new core market, network software and 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 network
product and 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 restructuring. 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 network software and 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 accurately 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.

SOFTWARE MARKETING AND SALES

Forgent's network software product was introduced in the fall of 2001,
and as such, it has limited market awareness and, to date, limited sales. The
Company's future success will be dependent in significant part on its ability to
generate demand for its network software products and 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 our
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.

NETWORK SOFTWARE AND 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 existing 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 licensing program involves risks inherent in technology
licensing, 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 our 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.

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 effect 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 network software and 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 our 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.

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, 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

INTEREST RATE RISK

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 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, resulting in
net cash flows of $1.8 and $1.8 million, respectively.

FOREIGN EXCHANGE RISK

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. The principal currencies hedged
during fiscal years 2000 and 2001 were the Euro and Australian dollar. The
amount of unrealized gain or (loss) related to these contracts was $38,000 in
fiscal 2000 and $0 for fiscal years 2001 and 2002. As of July 31, 2001 and 2002
the Company held no foreign currency contracts. Due to the Company's reduction
in international offices and related reduction in foreign exchange risks,
Forgent does not anticipate any additional foreign currency hedges.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

As of the fiscal year ended July 31, 2002, the Company's Board of
Directors consists currently of four directors. Directors are elected for
one-year terms and serve until their successors are elected and qualified. All
of the executive officers of the Company are full-time employees of the Company.
Executive officers of the Company are appointed for a one-year term and serve
until their respective successors have been selected and qualified; provided,
however, such officers are subject to removal at any time by the affirmative
vote of a majority of the Board of Directors.

Reference is made to Part I hereof for a description of the executive
officers of the Company.

The following is a description of the principal occupations and other
employment during the past five years and their directorships in certain
companies of the directors of the Company.

PRESENT
OFFICE(S) HELD DIRECTOR
NAME AGE IN THE COMPANY SINCE
---- --- -------------- --------

Richard N. Snyder........................... 58 Chairman of the Board, President and 1997
Chief Executive Officer

Kathleen A. Cote............................ 54 None 1999

James H. Wells.............................. 56 None 1999

Lou Mazzucchelli............................ 47 None 2002

The following information regarding the principal occupations and other
employment of the directors during the past five years and their directorships
in certain companies is as reported by the respective directors:

RICHARD N. SNYDER, age 58, has served as a director of the Company since
December 1997 and was elected chairman of the board in March 2000. In June 2001,
Mr. Snyder was elected as president and chief executive officer of the Company.
From September 1997 until assuming the positions of president and chief
executive officer of the Company, Mr. Snyder served as founder and chief
executive officer of Corum Cove Consulting, LLC, a consulting firm specializing
in providing strategic guidance to high technology businesses. From 1996 until
1997, Mr. Snyder was the senior vice president of World Wide Sales, Marketing,
Service and Support of Compaq Computer Corp., a worldwide computer company. From
1995 until 1996, Mr. Snyder was the senior vice president and general manager of
Dell Americas, a computer manufacturer and marketer. Prior to 1995, Mr. Snyder
served as group general manager of the Deskjet Products Group of Hewlett
Packard. He also serves as a director of Symmetricom, Inc., based in San Jose,
California.

KATHLEEN A. COTE, age 54 has served as a director of the Company since
December 1999. She is currently the chief executive officer of WorldPort
Communications, Inc., a provider of internet managed services to the European
market. In January 1998, Ms. Cote founded Seagrass Partners, a provider of
expertise in business planning and strategic development, and served as its
president until May 24, 2001, when she began her role as chief executive officer
of Worldport. From November 1996 to January 1998, Ms. Cote served as chief
executive officer of ComputerVision Corporation, a hardware, software and
consulting business. From November 1986 to November 1996, she held various
senior management positions with ComputerVision Corporation. In January 1998,
ComputerVision Corporation was acquired by Parametric Technology Corporation.
Ms. Cote is also a director of WorldPort Communications, Inc., based in
Lincolnshire, Illinois, Radview Corporation and Western Digital Corporation.

JAMES H. WELLS, age 56, has served as a director of the Company since
December 1999. He currently consults with early stage internet start-up
companies. Mr. Wells was the senior vice president of marketing and business
development of Dazel, a Hewlett Packard enterprise software company, from
January 1999 through

February 2000. From April 1995 to March 1998, Mr. Wells served as vice president
of sales and was a founding officer in the internet streaming company,
RealNetworks, Inc.

LOU MAZZUCCHELLI, age 47, has served as a director of the Company since
February 2002. He is currently a venture partner at Ridgewood Capital, a venture
capital firm focusing its investments in the information technology industry.
Prior to joining Ridgewood Capital in 2001, Mr. Mazzucchelli was an investment
banker at Gerard Klauer Mattison in New York, which he joined in 1996 as their
PC and digital media technology analyst. Previously, Mazzucchelli spent 13 years
leading Cadre Technologies, a pioneering computer-aided software engineering
tools company that he founded in 1982 and grew to become one of the top 50 U.S.
independent software vendors before its sale in 1986.

None of the directors is related to any other director or to any executive
officer of the Company by blood, marriage or adoption (except relationships, if
any, more remote than first cousin).

SECTION 16(a) BENEFICIAL REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who beneficially own more than 10% of the
Company's common stock (the "Common Stock"), par value $.01 per share (the "10%
Stockholders"), to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely upon information provided to
the Company by individual officers, directors and 10% Stockholders, the Company
believes that all of these filing requirements were satisfied by the Company's
officers, directors and 10% Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes certain information regarding
compensation paid or accrued to (i) the Company's Chief Executive Officer, (ii)
each of the Company's three other most highly compensated executive officers,
and (iii) one additional former executive officer for whom disclosure would have
been required by the rules of the Securities and Exchange Commission but for the
fact that this individual was not serving as an executive officer as of July 31,
2002 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
---------------------------------------- -------------------------
RESTRICTED SECURITIES
PERIOD BONUS AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
ENDED COMMISSIONS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION JULY 31 SALARY($) ($) ($)(1) ($) (#) ($)(2)
--------------------------- ------- --------- ------------ ------------ ---------- ------------ ------------

Richard N. Snyder............. 2002 300,833 176,552(3) -0- -0- 250,000 3,316
Chief Executive Officer and 2001 98,333 32,100 -0- -0- 250,000 824
President 2002 N/A N/A -0- N/A 12,500 N/A

Jay Peterson..................
Chief Financial 2002 179,860 51,956(3) -0- 19,500(4) 125,599 1,054
Officer, and Vice 2001 165,259 59,040 -0- -0- 40,000 745
President, Finance 2000 126,667 9,751 -0- -0- 10,000 481

Kenneth Kalinoski.............
Chief Technology 2002 213,333 62,876(3) -0- 19,500(4) 95,000 1,105
Officer and Vice President, 2001 85,185 34,881 -0- -0- 200,000 11,630
Engineering 2000 N/A N/A N/A N/A N/A N/A

2002 175,149 47,412(3) -0- -0- 25,000 1,454
Dennis Egan................... 2001 178,549 82,508 -0- -0- 15,000 1,172
Vice President, Service 2000 154,600 23,895 -0- -0- 20,000 921

Robert R. Swem (5)............
Former Vice President, 2002 95,158 2,815(3) -0- -0- -0- 1,802
Operations 2001 191,067 81,500 -0- -0- 40,000 2,977
2000 172,473 -0- -0- -0- 27,500 2,673

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

(1) Includes perquisites and other personal benefits if value is
greater than the lesser of $50,000 or 10% of reported salary and bonus.

(2) Represents the dollar value of any insurance premiums paid by
the Company during the covered fiscal year with respect to term life insurance
and long term disability insurance for the benefit of the chief executive
officer or Named Executive Officer.

(3) Includes $2,815 tax preparation allowance.

(4) The closing market price on the date of grant of such awards,
July 11, 2002, was $3.90 per share. As of July 31, 2002, the aggregate number of
shares and the aggregate value of restricted stock held by our executive
officers was as follows: 5,000 shares with a value of $21,050 held by Mr.
Peterson and 5,000 shares with a value of $21,050 held by Mr. Kalinoski. Fifty
percent of each of the grants to Mr. Peterson and Mr. Kalinoski will vest on
July 11, 2003 and 50% will vest on July 11, 2004. The Company does not
anticipate paying any dividends, however, in the event that dividend is declared
on the Company's common stock, those dividends would be paid to holders of such
restricted stock at the time that the restrictions lapse.

(5) On January 23, 2002, the products division of the Company was
sold to the management team of the products division, which was led by Mr. Swem.
Mr. Swem resigned as an officer of the Company, effective January 23, 2002.

STOCK OPTION GRANTS DURING FISCAL 2002

The following table sets forth information with respect to grants of
stock options to purchase Common Stock pursuant to the Company's equity plans to
the Company's Named Executive Officers reflected in the Summary Compensation
Table above. No stock appreciation rights (SARs) were granted during fiscal 2002
and none were outstanding as of July 31, 2002.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS/SARs VALUE OF ASSUMED ANNUAL
SECURITIES GRANTED TO RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION TERM(1)
OPTIONS/SARs IN OR BASE EXPIRATION -------------------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 0% ($)(4) 5% ($) 10% ($)
---- ----------- ------------ ------------ ---- -------- ------ -------

Richard N. Snyder....... 250,000 9.31 4.000 5/24/2012 (263,750) 199,274 909,643

Jay Peterson............ 50,000 1.86 3.040 10/16/2011 -0- 95,592 242,249
25,000 0.93 3.750 7/11/2012 -0- 58,959 149,413
50,599 1.88 4.190 7/19/2012 -0- 133,332 337,889

Kenneth Kalinoski....... 30,000 1.12 3.750 7/11/2012 -0- 70,751 179,296
65,000 2.42 4.190 7/19/2012 -0- 171,279 434,056

Dennis Egan............. 25,000 .93 3.040 10/16/2011 -0- 47,796 121,124

Robert R. Swem.......... -0- -0- -0- N/A -0- -0- -0-

All employee options 2,636,719 100 3.278 N/A (263,750) 5,006,240 13,091,438

All stockholders (3) N/A N/A N/A N/A N/A 51,155,264 129,637,483

Optionee gains as % of
all stockholder gains N/A N/A N/A N/A N/A 9.79% 10.10%

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

(1) The dollar amounts under these columns represent the potential realizable
value of each grant of options assuming that the market price of the Common
Stock appreciates in value from the date of grant at the five percent and
ten percent annual rates compounded over the ten year term of the option as
prescribed by the Securities and Exchange Commission and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Common Stock.

(2) Weighted average grant price of all stock options granted to employees in
fiscal 2002.

(3) Appreciation for all stockholders is calculated using the average exercise
price for all employee optionees of $3.278 granted during fiscal 2002 and
using the number of shares of the Common Stock outstanding on July 31, 2002
of 24,814,384.

(4) Negative values in this column reflect that the exercise price of certain
of the options granted to Mr. Snyder were greater than the market price of
the underlying common stock on the date of grant. The market price on the
date of grant was $2.945.

AGGREGATED STOCK OPTION/SAR EXERCISES DURING FISCAL 2002 AND STOCK OPTION SAR
VALUES AS OF JULY 31, 2002

The following table sets forth information with respect to the
Company's Named Executive Officers concerning the exercise of options during
fiscal 2002 and unexercised options held as of July 31, 2002:

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES (1)

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARs AT FISCAL IN-THE-MONEY OPTIONS/SARs
SHARES YEAR END (#) AT FISCAL YEAR END ($)
ACQUIRED ON VALUE ---------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------

Richard N. Snyder........ 255,902 1,051,256 12,695 255,903 2,206 89,992

Jay Peterson............. -0- -0- 50,986 142,438 51,365 149,853

Kenneth Kalinoski........ -0- -0- 85,416 209,584 255,820 365,404

Dennis Egan.............. -0- -0- 108,480 34,020 68,377 56,047

Robert R. Swem........... 23,664 49,969 -0- -0- -0- -0-

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

(1) All options held by the Company's Named Executive Officers were granted
under the Company's 1989 Stock Option Plan (the "1989 Plan") or the
Company's 1996 Stock Option Plan (the "1996 Plan"). All options granted
under the 1989 Plan and the 1996 Plan are immediately exercisable. However,
the Company can repurchase shares issued upon exercise of those options, at
the exercise price, to the extent of the number of shares that have not
vested if the optionee's employment terminates before all of the optionee's
option shares become vested. The amounts under the headings entitled
"Exercisable" reflect vested options as of July 31, 2002 and the amounts
under the headings entitled "Unexercisable" reflect option shares that have
not vested as of July 31, 2002.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries or had any relationship
requiring disclosure pursuant to Item 404 of Securities and Exchange Commission
Regulation S-K (Certain Relationships and Related Transactions), with the
exception of Mr. Trimm, who resigned as a director of the Company, effective
September 5, 2002, is also a principal of Strategic Management, Inc. and Mr.
Matthews.

Agreement with Strategic Management, Inc.

On October 5, 2000, the Company agreed to pay a fee to Strategic
Management, Inc., a company in which T. Gary Trimm, one of the Company's former
directors, is a principal, to assist the Company in developing a plan to
establish the Company's videoconferencing systems products division as an
independent, self-sustaining unit, and to assist the Company in assessing
strategic alternatives for this division as part of the Company's efforts to
restructure the Company's business around its video network software and
services business. Pursuant to this engagement, the Company agreed to pay
Strategic Management, Inc. an hourly rate for services rendered, up to a maximum
of $60,000. If the products division was sold, the engagement also provided
additional contingent compensation to Strategic Management, Inc., equal to 7% of
the consideration received by the Company. The engagement was approved by the
disinterested directors of the Company. During fiscal 2001, the Company paid
$69,000 related to this agreement. With the assistance of Strategic Management,
Inc., the Company completed the sale of its products

division to VTEL Corporation on January 23, 2002. However, since payment to
Strategic Management, Inc. was contingent upon receipt of payment from VTEL
Corporation and VTEL Corporation defaulted on payments of its notes to the
Company and there is uncertainty of collection of these notes, no liability was
accrued for a payment to Strategic Management, Inc. as of July 31, 2002. Mr.
Trimm resigned as a director of the Company, effective September 5, 2002. The
board of directors determined that Mr. Trimm's relationship with Strategic
Management, Inc. did not affect his ability to exercise independent judgment as
a member of the Compensation Committee while he served on that committee.

Agreement with Matthews Consulting

In October 2000, the Company agreed to pay an hourly consulting fee to
Matthews Consulting, a company owned by Gordon Matthews, one of the Company's
directors, to assist the Company in maximizing the value of the Company's
intellectual property through prosecution of patents and licensing efforts. The
Company paid an aggregate of $119,508 under this agreement in fiscal 2002. Mr.
Matthews passed away on February 23, 2002. Mr. Matthews, who was one of the
Company's directors during the fiscal year ended July 31, 2002, died on February
23, 2002. He owned Matthews Consulting during his lifetime. We do not have any
information regarding, and are unable to obtain, the rate that Matthews
Consulting charged non-affiliated customers for services similar to those Mr.
Matthews provided to our company because Mr. Matthews is now deceased. The board
of directors determined that prior to his death, Mr. Matthews' relationship with
Matthews Consulting did not affect his ability to exercise independent judgment
as a member of the Compensation Committee while he served on that committee. In
addition, at the time of entering into the agreement with Matthews Consulting,
such fees were considered reasonable and fair compensation for the services to
be rendered and the arrangement was approved by disinterested members of the
board. No member of the Compensation Committee served on the compensation
committee or as a director of another corporation, one of whose directors or
executive officers served on the Compensation Committee of or whose executive
officers served on the Company's board of directors.

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 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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company has only one outstanding class of equity securities, its
common stock, par value $.01 per share.

The following table sets forth certain information with respect to
beneficial ownership of the common stock as of February 28, 2003 by: (i) each
person who is known by the Company to beneficially own more than five percent of
the common stock; (ii) each of the Company's directors and Named Executive
Officers; and (iii) all directors and officers as a group.

SHARES BENEFICIALLY
OWNED(1,2)
------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
------------------------------------ ----------- -------

Dimensional Fund Advisors Inc.
1299 Ocean Avenue
Santa Monica, CA 90401..................................................... 1,734,888 7.0%

Corbin & Company (formerly Marathon Fund L.P.)............................. 1,895,925(3) 7.7%
University Drive, Suite 500
Fort Worth, TX 76109

Royce & Associates, LLC.................................................... 1,245,800 5.1%
1414 Avenue of the Americas
New York, NY 10019

Richard N. Snyder.......................................................... 754,542(4) 3.0%

Kathleen A. Cote........................................................... 37,111(5) *

James H. Wells............................................................. 58,111(6) *

Lou Mazzucchelli........................................................... 10,277(7) *

Jay Peterson............................................................... 244,104(8) *

Kenneth Kalinoski.......................................................... 521,122(9) 2.1%

Dennis M. Egan............................................................. 142,500(10) *

Harry R. Caccamisi......................................................... 207,000(11) *

Robert R. Swem............................................................. -0- *

All directors and officers as a group
(9 persons) (4, 5, 6, 7, 8, 9, 10, 11)................................ 1,974,767(12) 7.6%

* Indicates ownership of less than 1% of Common Stock

(1) Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. The persons and entities named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them, except as noted below. Amounts shown include shares of Common Stock
issuable upon exercise of certain outstanding options within 60 days after
February 28, 2003.

(2) Except for the percentages of certain parties that are based on presently
exercisable options which are indicated in the following footnotes to the
table, the percentages indicated are based on 24,690,544 shares of Common
Stock issued and outstanding on February 28, 2003. In the case of parties
holding presently exercisable options, the percentage ownership is
calculated on the assumption that the shares presently held or purchasable
within the next 60 days underlying such options are outstanding.

(3) David A. Corbin, the Chairman, President and Chief Executive Officer of
Corbin & Company, has shared power to vote and dispose of all shares held
by Corbin & Company.

(4) Consists of 488,722 shares held by Mr. Snyder directly and 265,820 shares
(250,000 of which are subject to repurchase at April 29, 2003 by the
Company at the optionee's exercise prices pursuant to the option
agreements) which Mr. Snyder may acquire upon the exercise of options
within 60 days after February 28, 2003.

(5) Consists of 11,000 shares held by Ms. Cote directly and 26,111 shares which
Ms. Cote may acquire upon the exercise of options within 60 days after
February 28, 2003.

(6) Consists of 32,000 shares held by Mr. Wells directly and 26,111 shares
which Mr. Wells may acquire upon the exercise of options within 60 days
after February 28, 2003.

(7) Consists of 45,680 shares which Mr. Mazzucchelli may acquire upon the
exercise of options within 60 days after February 28, 2003.

(8) Consists of 45,305 shares held by Mr. Peterson directly and 198,424 shares
(110,864 of which are subject to repurchase at April 29, 2003 by the
Company at the optionee's exercise prices pursuant to the option
agreements) which Mr. Peterson may acquire upon the exercise of options
within 60 days after February 28, 2003.

(9) Consists of 221,122 shares held by Mr. Kalinoski directly and 300,000
shares (126,150 of which are subject to repurchase at April 29, 2003 by the
Company at the optionee's exercise prices pursuant to the option
agreements) which Mr. Kalinoski may acquire upon the exercise of options
within 60 days after February 28, 2003.

(10) Consists of 142,500 shares (22,397 of which are subject to repurchase at
April 29, 2003 by the Company at the optionee's exercise prices pursuant to
the option agreements) which Mr. Egan may acquire upon the exercise of
options within 60 days after February 28, 2003.

(11) Consists of 7,000 shares held by Mr. Caccamisi directly and 200,000 shares
(170,834 of which are subject to repurchase at April 29, 2003 by the
Company at the optionee's exercise prices pursuant to the option
agreements) which Mr. Caccamisi may acquire upon the exercise of options
within 60 days after February 28, 2003.

(12) All options held by the chief executive officer and the Named Executive
Officers were granted under the 1989 Plan or the 1996 Plan. Pursuant to
these stock option plans, all options granted thereunder are immediately
exercisable, however, shares issued upon exercise are subject to repurchase
by the Company, at the exercise price, to the extent of the number of
shares that have not vested in the event that the optionees' employment
terminates prior to all such optionees' options becoming vested.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

CERTAIN TRANSACTIONS

Officer and Director Stock Loan Program

As of July 31, 2002, under the Company's Officer and Director Stock
Loan Program, the aggregate principal amount of stock loans outstanding was
$415,029. Of this balance, the Named Executive Officers had stock loans
outstanding in the aggregate principal amount of $101,430. For the fiscal year
ended July 31, 2002, the following table presents the largest amount of
indebtedness of each of our executive officers who participated in the program:

Gordon Matthews................................... $ 61,672
Richard N. Snyder................................. $ 59,405
F.H. (Dick) Moeller............................... $ 164,040*
Robert R. Swem.................................... $ 65,566*
T. Gary Trimm..................................... $ 62,032*

----------
*Indicates that this was the largest amount of indebtedness outstanding
under such program for such officer or director.

As of January 31, 2003, the following table presents the amounts
outstanding for each of our executive officers who participated in the program:

Gordon Matthews................................... $ 63,565*
Richard N. Snyder................................. $ 61,229*
F.H. (Dick) Moeller............................... $ 162,143
Robert R. Swem.................................... $ 14,562
T. Gary Trimm..................................... $ 0

----------
*Indicates that this was the largest amount of indebtedness outstanding
under such program for such officer or director.

As of July 31, 2002, Messrs. Moeller and Trimm, former directors of our
company, and Mr. Swem, a former Vice President, Operations, had loans
outstanding under this program in the aggregate principal amount of $157,314,
$62,032 and $42,025, respectively.

No new loans are allowed to be made under this program. This program
had previously allowed our directors and officers to acquire shares of our
common stock with the proceeds of the loans. The interest rates charged on these
loans is fixed at 6.09%. The term of each loan is generally nine years.

Director Resignations

T. Gary Trimm resigned as a member of the Company's Board of Directors,
effective September 5, 2002. Subsequent to his resignation, Mr. Trimm entered
into a consulting agreement with the Company effective September 1, 2002 until
December 31, 2002. Mr. Trimm's officer loan balance outstanding at October 31,
2002 was $39,280.

F.H. (Dick) Moeller resigned as a member of the Company's Board of
Directors, effective September 9, 2002. Certain options issued to Mr. Moeller,
as a Director of the Company, on December 17, 2001 were accelerated at the date
of his resignation. The result of the accelerated vesting is that Mr. Moeller's
options to purchase 12,500 shares are all vested, bringing his total vested
options on September 9, 2002 to 24,500 shares. Mr. Moeller's officer loan
balance outstanding at October 31, 2002 was $159,728.

Our company also agreed to pay fees to Strategic Management, Inc., of
which Mr. Trimm was a principal, and to Matthews Consulting, a company owned by
Mr. Matthews, and both transactions are described under the heading
"Compensation Committee Interlocks and Insider Participation."

EQUITY COMPENSATION PLAN INFORMATION

------------------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted-average Number of securities remaining available
issued upon exercise of exercise price of for future issuance under equity
outstanding options, outstanding options, compensation plans (excluding securities
Plan category warrants and rights warrants and rights reflected in the first column) (1) (2)
------------------------------------------------------------------------------------------------------------------------

Equity
compensation plans
approved by stock
holders 3,735 $ 3.92 2,986
------------------------------------------------------------------------------------------------------------------------
Equity
compensation plans
not approved by
stock holders 0 $ - 0
------------------------------------------------------------------------------------------------------------------------
Total 3,735 $ 3.92 2,986
------------------------------------------------------------------------------------------------------------------------

(1) These numbers include 889 shares of stock that may be issued under the
Company's 1999 Restricted Stock Plan.

(2) The Company's 1996 Stock Option Plan provides that the aggregate number
of shares that may be optioned and sold under the plan is 700,000, plus
any shares reacquired by the Company on the open market, but which
shall not, at the time of reference, exceed, in the aggregate, the
lesser of (1) shares having an aggregate purchase price equal to the
cash proceeds received by the company from the exercise of stock
options under the Company's 1989 Stock Option Plan, the 1996 Stock
Option Plan and the Employee Stock Purchase Plan, and (2) 50% of the
aggregate shares (excluding any reacquired shares) authorized to be
granted to any one employee during any calendar year (the "reacquired
shares").

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Reports of Independent Auditors ..................................................................... 44
Financial Statements:
Consolidated Balance Sheets as of July 31, 2001 and 2002 .......................................... 45
Consolidated Statements of Operations for the years ended
July 31, 2000, 2001 and 2002 ................................................................... 46
Consolidated Statements of Changes in Stockholders' Equity
for the years ended July 31, 2000, 2001 and 2002 ............................................... 48
Consolidated Statements of Cash Flows for the years ended July
31, 2000, 2001 and 2002 ........................................................................ 49
Notes to Consolidated Financial Statements ........................................................ 51
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts .................................................. 80

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

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of Forgent Networks, Inc. (f.k.a. VTEL Corporation)

We have audited the accompanying consolidated balance sheets of Forgent
Networks, Inc. as of July 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three fiscal years in the period ended July 31, 2002. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Forgent
Networks, Inc. at July 31, 2001 and 2002 and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended July 31, 2002 in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

Austin, Texas
September 13, 2002 Ernst & Young LLP

FORGENT NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

JULY 31,
------------------------------
2001 2002
---------- ----------

ASSETS
Current assets:
Cash and equivalents........................................ $ 15,848 $ 17,237
Short-term investments...................................... 6,128 2,715
Accounts receivable, net of allowance for doubtful
accounts of $1,089 and $815 at July 31, 2001 and July
31, 2002, respectively.................................... 13,770 5,390
Notes receivable, net of reserve of $121 and $967 at
July 31, 2001 and July 31, 2002, respectively .......... 50 189
Inventories ................................................ 454 563
Prepaid expenses and other current assets................... 1,355 609
---------- ----------
Total current assets................................... 37,605 26,703
Property and equipment, net................................... 9,500 5,734
Goodwill, net................................................. 10,617 15,833
Capitalized software.......................................... 2,998 3,537
Other assets.................................................. 616 415
Net assets from discontinued operations....................... 8,004 --
---------- ----------
$ 69,340 $ 52,222
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable............................................ $ 9,594 $ 5,687
Accrued compensation and benefits........................... 3,636 1,264
Other accrued liabilities................................... 2,652 2,049
Notes payable, current portion............................... -- 899
Deferred revenue............................................ 8,802 7,047
---------- ----------
Total current liabilities .................................... 24,684 16,946
Long-term liabilities:
Deferred Revenue............................................ 1,600 1,015
Other long-term obligations................................. 1,434 1,983
---------- ----------
Total long-term liabilities................................... 3,034 2,998

Stockholders' equity:
Preferred stock, $.01 par value; 10,000 authorized; none
issued or outstanding.................................... -- --
Common stock, $.01 par value; 40,000 authorized; 24,976
and 25,755 shares issued, 24,889 and 24,880 shares
outstanding at July 31, 2001 and July 31, 2002,
respectively............................................. 249 257
Treasury stock, 87 and 875 issued at July 31, 2001 and
July 31, 2002............................................ (108) (2,857)
Additional paid-in capital ................................. 261,713 263,334
Accumulated deficit......................................... (221,908) (228,011)
Unearned compensation....................................... -- (227)
Accumulated other comprehensive income...................... 1,676 (218)
---------- ----------
Total stockholders' equity.................................... 41,622 32,278
---------- ----------
$ 69,340 $ 52,222
========== ==========

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

FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED JULY 31,
----------------------------
2000 2001 2002
---- ---- ----

REVENUES:
Network software & services................................. $ -- $ -- $ 2,236
Technology licensing........................................ -- -- 31,150
Service and other........................................... 27,217 26,912 25,206
-------- -------- ---------
Total revenues................................................ 27,217 26,912 58,592

COST OF SALES:
Network software & services................................. 5,120 -- 4,057
Technology licensing........................................ -- -- 14,675
Service and other........................................... 18,697 19,913 15,438
-------- -------- ---------
Total cost of sales........................................... 23,817 19,913 34,170

GROSS MARGIN.................................................. 3,400 6,999 24,422

OPERATING EXPENSES:
Selling, general and administrative......................... 12,324 16,531 12,054
Research and development.................................... 8,456 7,439 3,210
Impairment of assets........................................ 2,241 1,147 8,030
Amortization of intangible assets........................... 1,824 1,101 --
Restructuring expense....................................... -- -- 818
-------- -------- ---------
Total operating expenses ..................................... 24,845 26,218 23,493

(LOSS) INCOME FROM OPERATIONS................................. (21,445) (19,219) 310

OTHER INCOME (EXPENSES):
Interest income............................................. 1,186 1,222 338
Non-recurring events........................................ 44,501 -- --
Gain on investment.......................................... -- 6,514 1,670
Loss on disposal of assets.................................. -- (1,453) --
Interest expense and other ................................. (1,431) 222 206
-------- -------- ---------
Total other income (expenses)................................. 44,256 6,505 2,214

INCOME (LOSS) FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES........................................ 22,811 (12,714) 2,524
(Provision) benefit for income taxes ......................... (613) 304 177
-------- -------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS................................................. 22,198 (12,410) 2,701

Loss from discontinued operations, net of income taxes........ (19,901) (19,010) (8,549)
Loss on disposal, net of income taxes......................... -- (1,120) (255)
-------- -------- ---------
LOSS FROM DISCONTINUED OPERATIONS............................. (19,901) (20,130) (8,804)

NET INCOME (LOSS)............................................. $ 2,297 $(32,540) $ (6,103)
-------- -------- ---------

BASIC INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations...................... $ 0.90 $ (0.50) $ 0.11
Income (loss) from discontinued operations ................... $ (0.81) $ (0.81) $ (0.36)

FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss)............................................. $ 0.09 $ (1.31) $ (0.25)
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations...................... $ 0.89 $ (0.50) $ 0.11
Income (loss) from discontinued operations.................... $ (0.80) $ (0.81) $ (0.35)
Net income (loss)............................................. $ 0.09 $ (1.31) $ (0.24)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................................... 24,530 24,878 24,814
Diluted..................................................... 25,044 24,878 25,559

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

FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)

COMMON STOCK
------------
Number of Additional Accumulated
Shares Paid-In Treasury Accumulated Unearned
Outstanding Amount Capital Stock Deficit Compensation
----------- ------ ---------- -------- ----------- ------------

BALANCE AT JULY 31, 1999 24,423 $ 244 $ 260,057 $ (191,665) $ (535)
Proceeds from stock issued under
employee plans................... 592 6 2,234
Receipts from stock subscriptions
Receivable...................... 150
Forfeiture of stock held in escrow (150)
Amortization of unearned
Compensation.................... (2) (324) 126
Forfeiture of unearned
compensation.................... (18) (255) 255
Net income........................... 2,297
Change in unrealized gain/loss
on available-for-sale
securities......................
Foreign currency translation
Adjustment......................
Comprehensive Income...............
----------- ------ ---------- -------- ----------- ------------
BALANCE AT JULY 31, 2000 24,847 248 261,712 (189,368) (4)
Proceeds from stock issued
under employee plans............. 131 1 174
Purchase of Treasury Stock......... (87) (108)
Net shares received in
settlement....................... (2) (173)
Amortization of unearned
Compensation.................... 4
Net Loss........................... (32,540)
Change in unrealized gain/loss
on available-for-sale
securities......................
Foreign currency translation
Adjustment......................
Comprehensive Income...............
----------- ------ ---------- -------- ----------- ------------
BALANCE AT JULY 31, 2001 24,889 249 261,713 (108) (221,908) --
Proceeds from stock issued
under employee plans............ 779 8 1,288
Purchase of Treasury Stock......... (788) (2,749)
Issuance of restricted stock to
employees and consultants....... 333 (333)
Amortization of unearned
Compensation.................... 106
Net Loss........................... (6,103)
Change in unrealized gain/loss
on available-for-sale
securities......................
Foreign currency translation
Adjustment......................
Comprehensive Income...............
----------- ------ ---------- -------- ----------- ------------
BALANCE AT JULY 31, 2002 24,880 $ 257 $ 263,334 (2,857) $ (228,011) $ (227)
=========== ====== ========== ======== =========== ============

Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------- -------------

BALANCE AT JULY 31, 1999 $ (82) $ 68,019
Proceeds from stock issued under
employee plans................... 2,240
Receipts from stock subscriptions
Receivable...................... 150
Forfeiture of stock held in
escrow (326)
Amortization of unearned
Compensation.................... 126
Forfeiture of unearned
compensation.................... --
Net income........................... --
Change in unrealized gain/loss
on available-for-sale 10,003 --
securities......................
Foreign currency translation
Adjustment...................... 152 --
Comprehensive Income............... 12,452
------------- -------------
BALANCE AT JULY 31, 2000 10,073 82,661
Proceeds from stock issued
under employee plans............. 175
Purchase of Treasury Stock......... (108)
Net shares received in
settlement....................... (173)
Amortization of unearned
Compensation.................... 4
Net Loss........................... --
Change in unrealized gain/loss
on available-for-sale
securities...................... (8,462)
Foreign currency translation
Adjustment...................... 65
Comprehensive Income............... (40,937)
------------- -------------
BALANCE AT JULY 31, 2001 1,676 41,622
Proceeds from stock issued
under employee plans............ 1,296
Purchase of Treasury Stock......... (2,749)
Issuance of restricted stock to
employees and consultants....... 0
Amortization of unearned
Compensation.................... 106
Net Loss...........................
Change in unrealized gain/loss
on available-for-sale
securities...................... (1,541)
Foreign currency translation
Adjustment...................... (353)
Comprehensive Income............... (7,997)
------------- -------------
BALANCE AT JULY 31, 2002 $ (218) $ 32,278
============= =============

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

FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED JULY 31
----------------------------
2000 2001 2002
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations.................... $ 22,198 $ (12,410) $ 2,701
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization................................. 9,721 8,624 4,571
Impairment of assets.......................................... 7,361 -- 10,411
Amortization of unearned compensation......................... 126 4 106
Foreign currency translation loss............................. 267 46 319
Loss on sale of fixed assets.................................. 271 2,600 133
Changes in operating assets and liabilities:
Accounts receivable......................................... 14,923 9,548 7,740
Inventories................................................. -- (455) (792)
Prepaid expenses and other current assets................... 410 448 626
Accounts payable............................................ (3,418) (5,364) (4,316)
Accrued expenses and other long term obligations............ 551 (2,535) (4,761)
Deferred revenue ........................................... 1,045 (4,009) (2,023)
---------- --------- ----------
Net cash provided by (used in) operating activities............... 53,455 (3,503) 14,715

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................. (199,748) (98,510) (3,180)
Sales and maturities of short-term investments.................. 175,048 123,663 5,052
Purchases of property and equipment............................. (3,888) (2,763) (1,135)
Sales of property and equipment................................. -- 56 82
Purchase of business net of cash acquired....................... -- -- (4,000)
Collection (issuance) of notes receivable....................... 84 (16) 243
Increase in capitalized software................................ (3,945) (617) (3,471)
Decrease (increase) in other assets............................. 132 81 (1,273)
---------- --------- ----------
Net cash (used in) provided by investing activities............... (32,317) 21,894 (7,682)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock............................. 2,240 175 1,288
Purchase of treasury stock...................................... -- (108) (2,741)
Payments on line of credit agreements........................... (11,200) -- --
Payments on notes payable....................................... (2,178) (1,500) (787)
Proceeds from notes payable..................................... -- 852 1,353
Receipts from stock subscription receivable..................... 150 -- --
---------- --------- ----------
Net cash used in financing activities............................. (10,988) (581) (887)

CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash used in discontinued operations........................ (10,972) (8,849) (4,086)
Effect of translation exchange rates on cash...................... (115) 19 (671)
Net (decrease) increase in cash and equivalents................... (937) 8,980 1,389
Cash and equivalents at beginning of period....................... 7,805 6,868 15,848
Cash and equivalents at end of period............................. $ 6,868 $ 15,848 $ 17,237
========== ========= ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................... $ 954 $ 134 $ 144
Income taxes paid............................................... 434 129 --
Income taxes refunded........................................... -- -- 177

FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

Notes payable issued for acquired asset......................... -- -- 700
Issuance of restricted stock to employees and consultants....... -- -- 333
Net shares received in settlement............................... -- (173) --
Mark to market of investments................................... 8,461 1,541

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

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

1. THE COMPANY

Forgent Networks, Inc. (Forgent or the Company) is a provider of
enterprise software and services that enable organizations to collaborate
effectively and efficiently, to expedite decision making, and to streamline
operations. Forgent's software manages the essential elements of collaboration:
people, resources, and technology, and provides one-stop scheduling of all
resources necessary for complex conference automation and management of
communication networks. With a 20-year history of video communications
experiences, Forgent develops neutral network management software for rich media
networks and also offers a full spectrum of top-rated services to the visual
communications industry, regardless of brand, to make collaboration easy,
reliable and effective. Forgent's services and software are designed to improve
industry-wide multi-vendor platform interoperability as well as to improve video
network management and reliability standards throughout the industry.

On August 23, 2000, the Company announced a new business charter that
shifted its core business model from the manufacture of videoconferencing
endpoints to a provider of enterprise software 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. Therefore, the Company planned to leverage its professional
services and software expertise in the deployment and management of
videoconferencing endpoints by continuing to actively market its ability to
integrate, install and service a wide offering of third-party products,
including the products of companies that were traditional competitors when the
focus was hardware. Subsequently, management decided to solely focus its efforts
on its Solutions business and to exit its Products business. Therefore, Forgent
announced in May 2001 that the Company intended to sell its Products business
unit and to rename the remaining Solutions business unit as Forgent Corporation,
subject to the execution and consummation of a sale agreement and stockholder
approval. The Company's stockholders approved the transaction during its 2001
annual meeting and the sale was finalized on January 23, 2002. The Company
renamed its remaining business as Forgent Networks, Inc.

Management believes it must provide network software products and
solutions that support the vast amount of visual communication applications by
improving the interoperability of all the components in a broadband video
network, by expanding the Company's current interoperability labs to create a
center of excellence for standards testing and integration and by developing and
introducing enterprise videoconferencing software that provides a high level of
manageability, reliability and ease-of-use for existing and new enterprise
systems. Furthermore, the development and expansion of Forgent's network
consulting and professional services will contribute in transforming the
majority of its revenue base from endpoint products to a software and solutions
centric provider. Management believes the Company's refocus of its efforts and
resources will provide the greatest opportunity for long-term success for
Forgent and its stockholders.

The Company reclassified $6.5 million from discontinued operations to
continuing operations. $5.9 million of the reclassification resulted from the
write-off of a note receivable arising from the sale of the Products business
unit (see Note 4) subsequent to the Products business unit being classified as a
discontinued operation. $0.6 million of the reclassification was a result of the
write-off of accounts receivable relating to continuing operations which were
inadvertently classified in discontinued operations, and have now been
reclassified to selling, general and administrative expense. The effect of the
reclassification was to reduce income from continuing operations by $6.5 million
and to increase income from discontinued operations by the same amount. The
amounts did not have an effect on net income or stockholders' equity.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

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
provisions for doubtful accounts receivable and notes receivable, inventory
reserve for potentially excess or obsolete inventory, the valuation allowance
for the gross deferred tax asset, contingency reserves, lives of fixed assets,
the determination of the fair value of its long-lived assets, including its
intangible assets, the loss from discontinued operations, and the loss from its
lease impairment. 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.

REVENUE RECOGNITION

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 arrangement with resellers does not allow for any rights
of return.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

Patent No. 4,698,672, and its foreign counterparts. Gross technology licensing
revenue is recognized at the time a license agreement has been executed and
related costs are recorded as cost of sales. The cost of sales on the
intellectual property licensing business relates to the legal fees incurred on
successfully achieving signed agreements. The contingent legal fees are based on
a percentage of the revenues received on the signed agreements and are paid to a
national law firm. The percentage payment to this law firm was set based on a
sliding scale that began at 35% and increased to 50% based on the aggregate
recoveries achieved. Future percentage payments will be 50% of license receipts
per the agreement with this firm.

CREDIT POLICY

SOFTWARE DEVELOPMENT COSTS

The Company capitalized internal software development costs of $3,945,
$617, and $3,471 for the years ended July 31, 2000, 2001, and 2002,
respectively. No amortization of such costs was recorded for the years ended
July 31, 2000 and 2001, respectively. Amortization of capitalized software
development costs for the year ended July 31, 2002 was $552, all of which was
charged to cost of sales for network software and services.

During each of the years ended July 31, 2000 and July 31, 2002,
management made the decision to discontinue further development efforts of
several software projects, and abandoned certain projects previously
capitalized. The resulting charges of $5,120 and $2,381 were included as a
component of cost of sales during the years ended July 31, 2000 and 2002,
respectively. No capitalized software development costs were impaired for the
year ended July 31, 2001.

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. As
of July 31, 2002, the Company holds $683 in certificates of deposit to secure
its note payable to Silicon Valley Bank and one capital lease.

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, 2001 and 2002. The
carrying amounts of the Company's short-term investments at July 31, 2001 and
2002 are as follows:

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

2001 2002
----------------------- ----------------------
MARKET MARKET
COST VALUE COST VALUE
-------- -------- ------- --------

Corporate obligations................. $ 4,445 $ 4,445 $ 722 $ 722
Equity securities..................... 142 1,683 -- --
Other ............................. -- -- 1,993 1,993
-------- -------- ------- --------
$ 4,587 $ 6,128 $ 2,715 $ 2,715
======== ======== ======= ========

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, 2001 and 2002, 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 $1.5 million at July 31, 2001. As of July 31,
2002, the Company did not have any unrealized gains or losses on
available-for-sale securities. The Company realized $6.5 million and $1.7
million in gains during the year ended July 31, 2001 and July 31, 2002,
respectively.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis. Appropriate consideration is given to
obsolescence, excessive levels, deterioration and other factors in evaluating
net realizable value.

PROPERTY AND EQUIPMENT

Property and equipment are 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 therefore recorded at manufactured
cost. Depreciation and amortization are provided using the straight-line method
over the estimated economic lives of the assets, which range from two to eight
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
for the fiscal years ending July 31, 2000 and July 31, 2001. Accumulated
amortization was $5.2 and $6.2 million at July 31, 2000 and 2001, respectively.

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. In
accordance with SFAS No. 142, the Company is required to complete its
transitional impairment test, with any resulting impairment loss recorded as a
cumulative effect of a change in accounting principle. Subsequent impairment
losses are reflected in operating income from continuing operations on the
Consolidated Statement of Operations. Upon adoption of SFAS No. 142, the Company
did not record any goodwill amortization expenses during the year ended July 31,
2002. Additionally, as a result of the transitional impairment test, the Company
did not record any impairment of its goodwill for the year ended July 31, 2002.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

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 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 was based on quoted market rates. As of July 31, 2001 the Company
discontinued using foreign currency contracts. The carrying amount of short-term
investments and notes payable approximates fair value because of the short
maturity and nature of these instruments. The Company places its cash investment
in 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 7).

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.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

The Company records unearned compensation related to equity instruments
that are issued at 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 equity instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

2000 2001 2002
---------- ---------- ----------

Reported net income (loss).................. $ 2,297 $ (32,540) (6,103)
Add back goodwill amortization.............. 1,824 1,101 --
---------- ---------- ----------
Adjusted net income (loss).................. $ 4,121 $ (31,439) $ (6,103)
========== ========== ==========
Basic earnings per share:
As reported................................. $ 0.09 $ (1.31) $ (0.25)
Goodwill amortization....................... 0.07 0.04 --
---------- ---------- ----------
Adjusted earnings per share................. $ 0.16 $ (1.27) $ (0.25)
========== ========== ==========
Diluted earnings per share:
As reported................................. $ 0.09 $ (1.31) $ (0.24)
Goodwill amortization....................... 0.07 0.04 --
---------- ---------- ----------
Adjusted earnings per share................. $ 0.16 $ (1.27) $ (0.24)
========== ========== ==========

3. 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.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

4. DISCONTINUED OPERATIONS

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, 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 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 more profitable software and services business
while still providing multimedia systems to its customers through SPL.

On October 2, 2001, Forgent announced that it had signed a definitive
sales agreement to sell the operations and certain assets of its 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
Company's shareholders approved the transaction during its 2001 annual meeting
and the sale was finalized on January 23, 2002. The sale of 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 $0.5 million, a 90-day subordinated promissory note,
bearing interest at an annual rate of five percent, for approximately $1.0
million, a 5-year subordinated promissory note, bearing interest at an annual
rate of five percent, for $5.0 million 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
$500,000 of their own money at the closing. In addition, VTEL also received a
$750,000 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 $5.9 million charge for the
reserve of both notes from VTEL for the year ended July 31, 2002. This charge
was reported as part of continuing operations on the consolidated statement of
operations. However, management is continuing its efforts on collecting these
outstanding notes receivables. Since the sale of the products business occurred
several months after it was originally anticipated to close, and since the
operations performed significantly worse than expected, an additional loss of
$8.2 million was recorded to discontinued operations in fiscal 2002. As of July
31, 2001, the Company estimated the loss from the disposal of the VTEL Products
business unit to be $1.1 million. During the 2002 fiscal year, Forgent recorded
an additional $0.2 million in expenses associated with the completion of the
sale.

As a result of the sales of the integration and products businesses,
the Company has presented these businesses as discontinued operations on the
accompanying consolidated financial statements. The operating results of the
integration and products businesses for the fiscal years ended July 31, 2000,
2001, and 2002 were as follows:

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

2000 2001 2002
------- ------- ----

Revenues from unaffiliated customers............. 107,094 58,679 15,853
Loss from discontinued operations................ (19,901) (19,010) (8,549)

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

2001 2002
---------- ----------

Current assets..................... $ 7,247 $ --
Non-Current assets................. 1,123 --
Current liabilities................ (366) --
---------- ----------
$ 8,004 $ --
========== ==========

5. ACQUISITIONS

As approved by each company's board of directors, Forgent acquired
certain assets and liabilities in a purchase business combination structured as
an asset purchase of Global Scheduling Solutions, Inc., a global provider of
enterprise conference room scheduling and resource management solutions, on June
4, 2002.

This business combination was completed in order for Forgent to expand
the quality and reach of its existing enterprise software sales and marketing
efforts and to acquire an enterprise scheduling software solution to complement
its existing Video Network Platform solution. Forgent continues to market Global
Scheduling Solutions, Inc.'s 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 becomes the only vendor that can provide complete one-stop
video network scheduling, launching, monitoring and management solution.

Forgent paid Global Scheduling Solutions, Inc. a combination of $4.0
million in cash, $0.7 million tied to certain future contingent "earn-out"
payments and the assumption of certain liabilities. The $0.7 earn-out is
dependent upon the purchased assets generating a certain level of net revenue
between April, 2002 and September, 2002. The contingent liability is recorded as
part of the current notes payable on Forgent's consolidated balance sheet as of
July 31, 2002 because management believes it is probable that this amount will
be paid. The purchase price has been allocated to tangible and identifiable
intangible assets acquired based on their estimated fair values at the date of
acquisition. Total costs in excess of tangible and intangible assets acquired of
approximately $5.2 million have been recorded as goodwill. Results of acquired
operations are included in our consolidated income statements for the period
beginning June 4, 2002 through July 31, 2002. Forgent continues to market Global
Scheduling Solutions, Inc.'s 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 becomes the only vendor that can provide complete one-stop
video network scheduling, launching, monitoring and management solution.

The following table shows the amounts assigned to each major asset and liability
class as of the date of acquisition:

Accounts Receivable $ 269
Software 100
Computers & Equipment 22
Goodwill 5,229
------
Total Assets $5,620

Accounts Payable $ 577
------
Accrued Liabilities 92
Deferred Revenue 251
------
Total Liabilities $ 920

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

6. ASSET IMPAIRMENT

During the fiscal year ended July 31, 2002, Forgent recorded impairment
losses on the consolidated statement of operations as follows:

FOR THE YEAR ENDED JULY 31, 2002
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ---------- ----------

Due to the disposition of the Products business in fiscal 2002, the
VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin Road in
Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in Austin,
Texas. This relocation left a vacancy of approximately 52 thousand rentable
square feet, or 38% of the total lease space. Additionally, Forgent had existing
unoccupied space inventory due to the downsizing of the Company on account of
the recent restructurings. In fiscal 2002, Forgent was able to sublease some of
the vacated space, but was unable to fully sublease the space due to the
economic downturn during the year. Therefore, management analyzed the future
undiscounted cash flows related to the lease on the Wild Basin property and
determined the economic value of the lost sublease rental income. As a result,
Forgent recorded a one-time $2.0 million impairment charge for the unleased
space as of July 31, 2002. However, Forgent remains obligated to make lease
payments in accordance with the original term of the lease. Additionally,
Forgent received two subordinated promissory notes from VTEL as a result of the
disposition of the Products business. However, VTEL did not remit payment on its
first subordinated promissory note due in April 2002, as stipulated in the sales
agreement. As a result of this default and due to the uncertainty in collecting
both of the outstanding notes from VTEL, the Company recorded a $5.9 million
charge for the reserve of both notes from VTEL for the year ended July 31, 2002.
These impairments were reported as part of continuing operations on the
consolidated statement of operations.

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 Forgent's property in Sunnyvale,
California. During the third quarter of fiscal 2001, 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.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

As a result of the new charter announced in August 2000, management
reviewed certain long-lived assets including property, plant and equipment,
goodwill and other intangible assets, 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, the Company
adjusted the long-lived assets associated with its manufacturing operations and
the long-lived assets related to the foreign operations and capitalized
software. Management 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. Of
the total impairment in fiscal year 2000, $5.1 million of the capitalized
software development cost impairment was reported as part of cost of sales. This
impairment loss was recorded on the consolidated statement of operations as
follows:

FOR THE YEAR ENDED JULY 31, 2000
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ------------ ----------

Property, plant and equipment............ $ 1,909 $ 3,983 $ 5,892
Intangible assets........................ 332 1,908 2,240
Other.................................... -- 156 156
------- ------- -------
Impairment in operating expenses......... 2,241 6,047 8,288
======= ======= =======
Capitalized software..................... 5,120 664 5,784
------- ------- -------
Total impairment......................... $ 7,361 $ 6,711 $14,072
======= ======= =======

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

7. SALE OF ACCOUNTS RECEIVABLE

During fiscal 2002, the Company sold $9.3 million of its outstanding
accounts receivable, without any recourse, in efforts to recapture cash balances
lost due primarily to an unanticipated significant drop in sales from
discontinued operations and the remaining payments of outstanding payables
related to the discontinued operations. Silicon Valley Bank purchased the assets
for a fee of approximately 1.8% of the value of the accounts receivable sold and
a one-time set-up fee of $13. The Company received proceeds from Silicon Valley
Bank of $9.1 million.

Under the provisions of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which Forgent
adopted as of January 31, 2002, a transfer of receivables may be accounted for
as a sale if the following three conditions are met: (1) the transferred assets
are isolated from the transferor, (2) the transferee has the right to pledge or
sell the transferred assets, and (3) the transferor does not maintain control
over the transferred assets. Accordingly, the Company recorded the transfer of
the accounts receivable as a sale of asset, excluded the related receivables
from the Consolidated Balance Sheet and recorded related expenses of $178 for
the year ended July 31, 2002.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

8. INVENTORIES

Inventories consist of the following:

JULY 31,
----------------------
2001 2002
---- ----

Raw materials .............................. $454 $253
Work-in-process ............................ -- 97
Finished goods ............................. -- 194
Other ...................................... -- 19
$454 $563
==== ====

The inventory held as of July 31, 2002 and July 31, 2001 primarily
represent third-party equipment to be sold to Forgent's customers through its
Multi-Vendor Program ("MVP").

9. PROPERTY AND EQUIPMENT

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

JULY 31,
---------------------
2001 2002
-------- ---------

Furniture, machinery and equipment, 2-8 years ........ $11,822 $8,539
Internal support equipment, 2-4 years ................ 1,140 1,157
Customer service assets, 2-5 years ................... 3,738 4,086
Leasehold improvements, lease term or life of the
Improvement ........................................ 5,340 3,597
-------- --------
22,040 17,379
Less accumulated depreciation ........................ (12,540) (11,645)
-------- --------
$ 9,500 $ 5,734
======== ========

Capital leases of $1,140 and $519 for the years ended July 31, 2001 and
2002, 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 $4,060, $5,354 and $4,450 for the years ended July 31, 2000, 2001
and 2002, respectively.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

10. NOTES PAYABLE

Notes payable at July 31, 2002 consist of the following:

2001 2002
------- -------

Note payable to Silicon Valley Bank in
monthly installments through July 2005, bearing interest
at prime plus 1.50% ...................................... $ -- $499
Note payable to Global Scheduling Solutions, Inc. ..........
subject to "earn-out" provisions through
October 31, 2002, bearing no interest ...................... -- 700
------- -------
-- 1,199
Less: current maturities ................................... -- (899)
------- -------
Long-term notes payable .................................... $ -- 300
======= =======

The note payable to Silicon Valley Bank is secured by a certificate of
deposit equal to the $499 balance due as of July 31, 2002.

11. LINE OF CREDIT

In March 2000, the Company repaid the outstanding balance on its line
of credit with a banking syndicate. At July 31, 2002, the Company did not have a
line of credit in place and does not expect to obtain a new line of credit in
fiscal 2003.

12. STOCKHOLDERS' EQUITY

SHARE REPURCHASE PROGRAM

During fiscal 2001 and 2002, the Company repurchased 87 and 788 shares
of its Common Stock for $108 and $2,741, respectively. These purchased shares
remained in treasury as of the end of fiscal 2002. The repurchase of stock
resulted in an increase in loss per share of $0.01 in fiscal 2001 and 2002.

STOCK SUBSCRIPTIONS RECEIVABLE

During fiscal 1999, the Company loaned certain employees 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

Forgent 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 non-employee

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

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. Total compensation expense recognized in the
consolidated statement of operations for stock based awards was $126, $4 and 106
thousand for fiscal years ending July 31, 2000, 2001 and 2002.

As of July 31, 2002 we had reserved shares of common stock for future
issuance under the 1989, 1992 and 1996 Plans as follows:

Options Outstanding 3,701
Options available for future grant 1,756
=====
Shares reserved 5,457

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, 2000, 2001 and 2002:

2000 2001 2002
-------- -------- ---------

Net income (loss) ...................... As reported $ 2,297 $ (32,540) $ (6,103)
Pro forma $ (1,930) $ (35,471) $ (7,767)
Basic net income (loss) per
common share ....................... As reported $ 0.09 $ (1.31) $ (0.25)
Pro forma $ (0.08) $ (1.43) $ (0.31)
Diluted net income (loss) per
common share ....................... As reported $ 0.09 $ (1.31) $ (0.24)
Pro forma $ (0.08) $ (1.43) $ (0.30)

The pro forma effect on net income (loss) for 2000, 2001 and 2002 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, 2000, 2001 and 2002:

2000 2001 2001
---------- ---------- ----------

Dividend yield................................... -- -- --
Expected volatility.............................. 70.86% 73.57% 78.87%
Risk-free rate of return......................... 6.13% 4.95% 4.00%
Expected life.................................... 7.36 years 7.41 years 5.84 years

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

The following table summarizes activity under all Plans for the years
ended July 31, 2000, 2001 and 2002.

2000 2001 2002
-------- -------- --------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
--------- -------- -------- -------- --------- --------

Outstanding at the beginning of the
Year.............................. 4,548 $ 7.11 3,999 $ 5.39 3,613 $ 4.45
Granted........................... 1,436 4.47 1,527 1.29 2,637 3.28
Exercised......................... (437) 4.40 (3) 1.10 (593) 1.83
Canceled.......................... (1,548) 9.89 (1,910) 3.88 (1,956) 4.63
--------- --------- ---------
Outstanding at the end of the year 3,999 $ 5.39 3,613 $ 4.45 3,701 $ 3.94
========= ========= =========
Options exercisable at year end 3,945 $ 5.41 3,563 $ 4.47 3,644 $ 3.95
========= ========= =========
Weighted average fair value of
options granted during the year $ 3.28 $ 0.95 $ 2.19

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -----------------------------

WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES JULY 31, 2002 CONTRACTUAL LIFE PRICE JULY 31, 2002 PRICE
------------------------ -------------- ---------------- -------- -------------- ---------

$ 0.88 -- $ 2.42 786 8.63 years $ 1.37 780 $ 1.37
2.57 -- 3.04 1,035 9.17 2.98 1,026 2.98
3.10 -- 4.00 915 9.54 3.59 883 3.58
4.01 -- 13.36 957 6.07 7.30 947 7.33
20.56 -- 20.56 8 3.31 20.56 8 20.56
---------------- ----- ---------- -------- ----- --------
$ 0.88 -- $20.56 3,701 8.33 $ 3.94 3,644 $ 3.95
================ ===== ========== ======== ===== ========

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, 2002, options to purchase 1,336 shares were vested. At July 31, 2002,
no unvested options had been exercised.

EMPLOYEE STOCK PURCHASE PLAN

On April 29, 1993, Forgent adopted an Employee Stock Purchase Plan
("Employee Plan"), which enables all employees to acquire Forgent stock under
the plan. The Employee Plan authorizes the issuance of up to 1,350 shares of
Forgent'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 155 shares, 103 shares, and
99 shares respectively, for the years ended July 31, 2000, 2001 and 2002.

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

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 one million shares
of Forgent's Common Stock to be used to reward, incent and retain employees.
During fiscal 2002 the Company issued 115 thousand shares under the 1998 plan
with a weighted-average grant date fair market value of $2.64 and resulting in
$85 thousand of expense during fiscal 2002. No shares were issued under the 1998
Plan in fiscal 2000 or 2001.

MODIFICATIONS TO OPTIONS

On July 18, 2002, the Company modified the change of control agreements
of certain officers of the Company. The original option agreements accelerated
the vesting schedule of the officers' unvested options three months for every
year of employment in the event of a change of control as defined in the plan.
The modified agreements vest all unvested options upon a change of control,
regardless of length of service. As of July 18, 2002, the potential charge
related to this modification was approximately $591. As there is no pending or
anticipated change of control event, the Company has not recognized a charge. In
addition, the maximum severance allowed under the agreements was reduced from
1.8 times annual salary to 1.0 times annual salary.

13. 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 $135 and $83 for the years
ended July 31, 2002 and July 31, 2001, respectively and $176 for a portion of
the year ended July 31, 2000. These contributions were recorded as expense in
the consolidated statement of operations.

14. REVENUE CONCENTRATION

53% of the Company's revenue was generated by one-time intellectual
property license agreements with two companies. While the company does not
anticipate any additional intellectual property revenue from these two
companies, it continues to actively seek licenses with other users of its
technology.

15. 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, 2000, 2001 and
2002:

2000 2001 2002
---------- ---------- ----------

Weighted average shares outstanding -- basic...................... 24,530 24,878 24,814
Effect of dilutive stock options.................................. 514 -- 745
---------- ---------- ----------
Weighted average shares outstanding -- diluted.................... 25,044 24,878 25,559
---------- ---------- ----------

Antidilutive securities........................................... 2,576 3,613 1,508
========== ========== ==========

Basic (loss) income earnings per share - from
continuing operations.......................................... $ 0.90 $ (0.50) $ 0.11
Basic (loss) income earnings per share - from
discontinued operations........................................ (0.81) (0.81) (0.36)
---------- ---------- ----------
Basic (loss) income earnings per share -- total................... 0.09 (1.31) (0.25)
========== ========== ==========
Diluted (loss) income earnings per share - from
continuing operations.......................................... $ 0.89 $ (0.50) $ 0.11
Diluted (loss) income earnings per share - from
discontinued operations........................................ (.80) (0.81) (0.35)
---------- ---------- ----------
Diluted (loss) income earnings per share -- total................. 0.09 (1.31) (0.24)
========== ========== ==========

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

16. 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, 2000, 2001
and 2002:

2000 2001 2002
---------- ---------- ----------

Current:
Federal.......................................... $ 416 $ (257) $ (177)
State ........................................... 197 (47) --
---------- ---------- ----------
Total current................................ 613 (304) (177)
Deferred:
Federal.......................................... -- -- --
State ........................................... -- -- --
---------- ---------- ----------
Total deferred............................... -- -- --
---------- ---------- ----------
$ 613 $ (304) $ (177)
========== ========== ==========

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, 2001 and 2002 are as
follows:

2001 2002
-------- --------

DEFERRED TAX ASSETS:
Net operating loss carryforwards......................... $ 51,628 $ 54,599
Research and development credit carryforwards............ 5,802 6,089
Reserve on investment.................................... -- 2,208
Minimum tax credit carryforwards......................... 286 110
Inventory and warranty provisions........................ 651 164
Charitable contributions................................. 56 52
Compensation accruals.................................... 415 39
Deferred revenue......................................... 555 367
Allowance for receivables................................ 272 239
Impaired assets.......................................... 246 668
Other ................................................... 105 --
-------- --------
60,016 64,535
DEFERRED TAX LIABILITIES:
Capitalized software..................................... (9) (1,499)
Accumulated depreciation................................. (1,055) (1,895)
Other ................................................... -- (111)
-------- --------
(1,064) (3,505)
-------- --------
Net deferred tax assets..................................... 58,952 61,030
Valuation allowance......................................... (58,952) (61,030)
-------- --------
$ -- $ --
======== ========

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

At July 31, 2001, the Company had federal net operating loss
carryforwards of $147,566, research and development credit carryforwards of
$6,089, and alternative minimum tax credit carryforwards of $110. The net
operating loss and credit carryforwards will expire in varying amounts from 2003
through 2021, if not utilized. Minimum tax credit carryforwards do not expire
and carry forward indefinitely. Net operating losses related to the Company's
foreign subsidiaries of $6,374 are available to offset future foreign taxable
income.

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 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, 2000, 2001, and 2002. The
valuation allowance increased by $2,078 during the year ended July 31, 2002.

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, 2000, 2001 and 2002 primarily as a result of the following:

2000 2001 2002
-------- --------- --------

Computed at statutory rate.............. $ 989 $ (11,167) $ (2,221)
State taxes, net of federal benefit..... 130 (824) (163)
Foreign losses not benefited............ 2,298 813 395
Permanent items......................... 134 93 21
R&D credit generated.................... (1,023) (399) (287)
Change in state tax rate................ (3,313) -- --
Change in valuation allowance........... 1,398 11,180 2,078
-------- --------- --------
$ 613 $ (304) $ (177)
======== ========= ========

17. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

Forgent leases computers, furniture, equipment, 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, 2002 were as follows:

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

FISCAL YEAR ENDING: OPERATING CAPITAL
------------------- --------- -------

2003 ................................................. $ 5,008 $ 485
2004 ................................................. 4,418 39
2005 ................................................. 4,237 4
2006 ................................................. 4,076
2007 ................................................. 3,469
Thereafter................................................ 19,219

TOTAL ................................................. $ 40,427 $ 528
=========

Less amount representing interest......................... (57)

Net present value of future minimum lease payments........ 471
Less current portion of capital lease obligations......... (432)

-------
$ 39
=======

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

Excluded from the minimum lease payments are the lease payments for the
Company's former manufacturing facility in Austin, Texas. As part of the sale
agreement of the Products business division, Forgent assigned this lease to the
new company, VTEL Corporation, who assumed all obligations under the existing
lease.

Total rent expense under all operating leases for the years ended July
31, 2000, 2001 and 2002 was $7,983, $6,221, and $4,525, respectively. As of July
31, 2002, the Company had a $922 liability remaining on its books related to a
Tenant Improvement Allowance that was paid to the Company by the landlord for
its Wild Basin property in Austin, Texas. The liability is amortized monthly as
a reduction in rental expense over the life of the lease on a straight-line
basis. Approximately $835 of this liability is reported as part of long-term
liabilities on the Company's consolidated balance sheet. Additionally, the
Company recorded a one-time $2.0 million impairment charge during fiscal year
2002 for the unleased office space at its Wild Basin property due primarily to
the relocation of personnel after the disposition of the Company's products
division. As of July 31, 2002, the Company's remaining liability related to this
impairment was $1,806, which included $741 in long-term liabilities. During the
years ended July 31, 2000, 2001, and 2002, the Company received $785, $920, and
$713 respectively, in rent income under sub-leasing arrangements. These amounts
offset against rental expense in the consolidated statement of operations. At
July 31, 2002, future minimum lease payments receivable under non-cancelable
sub-lease arrangements totaled $1,131 for all future years and sub-tenant
deposits totaled $68.

CONTINGENCIES

18. NON-RECURRING EVENTS

On March 3, 2000 the Company settled a lawsuit pending in the 126th
Judicial District Court in Travis County, Texas, which the Company had
previously initiated against five former employees who left the Company 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 paid $2.5 million in cash and delivered to the Company 301
shares of common stock of Polycom, Inc. in settlement of the claims asserted by
the Company. These shares were sold during fiscal 2000 for $33.7 million, net of
settlement costs. The parties agreed to dismiss all

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

claims and counterclaims and third party claims in the lawsuit, ending the
litigation. Separately, the Company 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 as a fully paid up royalty in exchange for
such license. In turn and without any payments by the Company, Polycom also
granted the Company 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.

19. SEGMENT INFORMATION

In the past, Forgent managed its business primarily along the lines of
three reportable segments: Solutions, Products, and Internet Ventures. The
Solutions segment provided a wide variety of maintenance, network consulting and
support services to customers, and designs and installs custom integrated visual
communication systems primarily in meetings spaces of large corporations. The
Company focused on this core business line, and the Solutions segment evolved
into Forgent Networks, Inc. In April 2002, the Company sold its integration
business within this segment and thus accounted for it as discontinued
operations in the consolidated financial statements. The Products segment
designed, manufactured, and sold multi-media visual communication products to
customers primarily through a network of resellers, and to a lesser extent
directly to end-users. As a result of the sale of the Products segment in
January 2002, the Products business was also accounted for as discontinued
operations in the consolidated financial statements. 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.

As a result of the Company's new business strategy, the Company
operates in three distinct segments: network software and services, technology
licensing, and service and other. We have restated segment information for the
fiscal years 2000 and 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. The Company does not identify assets, capital expenditures, or
operating income (loss) by reportable segments in this report. Additionally, the
Chief Executive Officer and Chief Financial Officer do not evaluate the business
groups based on these criteria. Revenue and cost of sales for each of our
reportable segments are disclosed in our Consolidated Statements of Operations.
Goodwill associated with specific segments is as follows:

FOR THE YEARS JULY 31,
------------------------
2001 2002
---------- ----------

Network software and services $ 1,664 $ 6,894
Technology Licensing -- --
Service and Other 8,953 8,939
-------- --------
Total $ 10,617 $ 15,833

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

Revenue and long-lived assets related to operations in the United
States and foreign countries for the three fiscal years ended July 31, 2002 are
presented below. Revenues generated between foreign geographic locations have
historically been insignificant.

FOR THE YEARS ENDED JULY 31,
-----------------------------------
2000 2001 2002
-------- -------- --------

Revenue from unaffiliated customers:
United States..................................... $ 25,470 $ 25,502 $ 57,209
Foreign........................................... 1,747 1,410 1,383
Long-lived assets at the end of year:
United States..................................... $ 31,318 $ 23,489 $ 25,519
Foreign........................................... 756 242 --

20. QUARTERLY INFORMATION (UNAUDITED)

The following tables contain selected unaudited consolidated statement
of operations and earnings per share data for each quarter of fiscal year 2001
and 2002.

FOR THE THREE MONTHS ENDED
---------------------------------------------
OCT. 31 JAN. 31, APRIL 30, JULY 31,
2001 2002 2002 2002
-------- -------- --------- --------

Total revenues, as reported ................. $ 8,466 $ 8,644 $ 22,317 $ 21,589
Integration revenue - discontinued
operations in third fiscal quarter of 2002 .. (1,798) (626)
-------- -------- --------- --------
Total revenues .............................. $ 6,668 $ 8,018 $ 22,317 21,589
======== ======== ========= ========

Gross Margins from continuing
operations, as reported ..................... $ 2,826 $ 3,186 $ 11,708 $ 9,620
Integration margins - discontinued
operations in third fiscal quarter of 2002 .. (494) (43)

Capitalized software impairment ............. (2,381)
-------- -------- --------- --------
Gross margins from
continuing operations ....................... $ 2,332 $ 762 $ 11,708 $ 9,620
======== ======== ========= ========

Gross margin from discontinued operations ... 3,671 1,175 21 (89)
======== ======== ========= ========

Net (loss) income ........................... $ (2,570) $ (8,553) $ 2,481 $ 2,537
======== ======== ========= ========

Basic loss per share ........................ $ (0.10) $ (0.34) $ 0.10 $ 0.10
======== ======== ========= ========

Diluted loss per share ...................... $ (0.10) $ (0.34) $ 0.10 $ 0.10
======== ======== ========= ========

FORGENT NETWORKS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)

FOR THE THREE MONTHS ENDED
---------------------------------------------
OCT. 31 JAN. 31, APRIL 30, JULY 31,
2000 2001 2001 2001
-------- -------- --------- --------

Total revenues, as reported................. $ 10,445 $ 10,170 $ 7,253 $ 6,493
Integration revenue - discontinued
operations in third fiscal quarter of 2002.. (3,825) (3,624)
-------- -------- --------- --------
Total revenues.............................. $ 6,620 $ 6,546 $ 7,253 $ 6,493
======== ======== ========= ========

Gross Margins from continuing
operations, as reported..................... $ 2,660 $ 2,378 $ 1,850 $ 1,672
Integration margins - discontinued
operations in third fiscal quarter of 2002.. (786) (775)
-------- -------- --------- --------
Gross margins from
continuing operations....................... $ 1,874 $ 1,603 $ 1,850 $ 1,672
======== ======== ========= ========
Gross margin from discontinued
operations.................................. 5,369 4,852 3,388 4,029
======== ======== ========= ========

Net income (loss)........................... $(13,789) $ (6,307) $ (4,580) $ (7,864)
======== ======== ========= ========

Basic (loss) income per share............... $ (0.56) $ (0.25) $ (0.18) $ (0.32)
======== ======== ========= ========

Diluted (loss) income per share ............ $ (0.56) $ (0.25) $ (0.18) $ (0.32)
======== ======== ========= ========

21. 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 Forgent in assessing strategic alternatives for its products
business unit as part of the Company's previously disclosed efforts to
restructure its business around its video network software and services
business. Pursuant to this engagement, the Company agreed to pay SMI an hourly
rate for services rendered, up to a maximum of $60. If the products business
unit was sold, the engagement also provided additional contingent compensation
to SMI, equal to 7% of the consideration received by the Company, with a minimum
fee of $750. Gary Trimm, a former director of the Company, is a principal and
officer of SMI. The engagement was approved by the disinterested directors of
the Company. During fiscal 2001, the Company paid $69 related to this agreement.
With the assistance of SMI, Forgent completed the sale of its products division
to VTEL Corporation ("VTEL") in January 2002. However, since payment to SMI is
contingent upon receipt of payment from VTEL, VTEL defaulted on payments of its
notes to Forgent, and there is uncertainty of collection of these notes, no
liability was accrued as of July 31, 2002.

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 43 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 43 of
this Report

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

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).

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).

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. (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1999)

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)

10.24 Officer and Director Stock Loan Program

21.1 -- List of Subsidiaries (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the year
ended July 31, 2002)

23.1 -- Consent of Ernst & Young LLP

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

99.2 -- 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 have been filed during the quarter ended July 31, 2002

(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.

FORGENT NETWORKS, INC.

May 29, 2003 By /s/ JAY C. PETERSON
-----------------------
Jay C. Peterson
Chief Financial Officer

CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Richard N. Snyder, Chief Executive Officer, of Forgent
Networks, Inc. (the "Company"), does hereby certify, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. I have reviewed the amended Annual Report on Form 10-K/A-2 of
the Company for the fiscal year ended July 31, 2002 (the
"Report");

2. Based on my knowledge, the 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 periods covered by this Report;
and

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

/s/ RICHARD N. SNYDER
-----------------------
Richard N. Snyder
Chief Executive Officer

May 29, 2003

CERTIFICATION OF PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Jay C. Peterson, Chief Financial Officer, of Forgent Networks,
Inc. (the "Company"), does hereby certify, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. I have reviewed the amended Annual Report on Form 10-K/A-2 of
the Company for the fiscal year ended July 31, 2002 (the
"Report");

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

May 29, 2003

FORGENT NETWORKS, INC.

VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II

PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF YEAR RECEIVABLE RECEIVABLE YEAR
-----------------------------------------------------------
(IN THOUSANDS)

Accounts receivable --
Allowances for Doubtful accounts
Year ended July 31, 2000.......... $ 1,223 $ 474 $ (809) $ 888
Year ended July 31, 2001.......... 888 468 (267) 1,089
Year ended July 31, 2002.......... 1,089 1,355(1) (1,629) 815

(1) Approximately 16% of the provision for doubtful accounts receivable was
recorded as part of continuing operations and 84% of the provision for doubtful
accounts receivable was recorded as part of discontinued operations on the
Consolidated Statement of Operations.

INDEX TO EXHIBITS

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 43 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 43 of
this Report

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

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).

3.4 -- 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).

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).

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).

10.8 -- 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).

10.13 -- 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).

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

10.22 -- 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(a)-- Brian C. Sullivan

10.23(b)-- Stephen Cox

10.23(c)-- Stephen Von Rump (amended)

10.24 Officer and Director Stock Loan Program

21.1 -- List of Subsidiaries (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the year
ended July 31, 2002)

23.1 -- Consent of Ernst & Young LLP

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

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