FORGENT NETWORKS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

OR

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

FOR THE FISCAL YEAR ENDED JULY 31, 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 if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]

The aggregate market value of 20,044,754 shares of the registrant's Common
Stock held by nonaffiliates on October 21, 2002 was approximately $32,873,397.
For purposes of this computation all officers, directors and 5% beneficial
owners of the registrant are deemed to be affiliates. Such determination should
not be deemed an admission that such officers, directors and beneficial owners
are, in fact, affiliates of the registrant.

At October 21, 2002 there were 24,568,643 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the 2002 Annual Meeting are incorporated by reference into
Part III.

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 shareholders.

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 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.

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After months of research, end user surveys and market assessment, in the
second fiscal quarter of 2002, Forgent launched Video Network Platform ("VNP"),
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 ("GSS"), 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:

o 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

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

o develop industry-leading technology that makes collaboration work

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

o support heterogeneous environments and alleviate the complexity
associated with them

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

o 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 their solutions.

In addition, Forgent intends to continue efforts to drive revenue from its
new intellectual property licensing business and its legacy services business as
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 shareholder
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 ("VNP") - 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 ("GSS"), 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.

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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 through-out
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, an authorized
provider of multiple brand-name hardware equipment, and the largest and most
experienced independent service provider in the video industry, Forgent is able
to deliver one-stop videoconferencing solutions.

Forgent began its video network software and services business in fiscal
2002, and revenues to date are $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.

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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 their 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, HP, EDS, Hewlett-Packard and the like, the team was
able to deliver several 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.

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.

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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. The partners in the program, including International
Video-Conferencing, Inc., Audio Video Systems, York Telecom, Signet and TKO,
have successful track records in selling and supporting videoconferencing and
communications solutions in commercial, educational and government accounts. By
working with these partners, Forgent expands the reach of its direct sales force
and gains access to key opportunities in major market segments.

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 is
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. However, while interested in
covering the widest breadth of device types, these vendors do not have the same
depth of understanding of video as Forgent and, today, have no mechanism to
discover, monitor, diagnose, or report on video application or device level
issues. 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 ("GSS") 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:

o operational advantages and cost savings provided by a product,

o product quality and functional depth,

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

o ease of use,

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

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

o quality of support and product documentation, and

o 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.
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 a U.S. patent that will expire in October 2006 and its
foreign counterparts that will expire in September 2007. Although management
fully anticipates signing more patent license agreements with other prominent
companies from multiple industries, there can be no assurance the additional
licenses can be obtained 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 -

8

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 178 employees as follows:

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 57, 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 45, joined the Forgent 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 49, joined the Company in November 1995 as Vice
President - Service Operations when Forgent acquired the Integrated
Communications Systems Group of Pierce-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 41, 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 hold five patents.

H. Russell Caccamisi, age 53, joined 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,

9

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
Integrated Solutions ("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.

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:

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.

10

On October 21, 2002, Forgent's common stock closed at $1.70 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.

(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

11

Forgent's consolidated statement of operations:

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 Video Network Platform ("VNP") 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 Global Scheduling
System ("GSS") 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. Service and other revenues represent 100.0%, 100.0%,
and 43.0% of total revenues for the years ended July 31, 2000, 2001 and

12

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 is
offsetting the decrease in renewal of VTEL contracts with service contracts for
other third party products. However, the average selling price of the new
maintenance contracts has generally been lower and therefore, the sales in the
new contracts have not fully offset the decline in renewals of VTEL contracts.
Thus, the Company anticipates further declines in service revenues, although
rate of the decline is uncertain. Forgent will continue to sell equipment
through its MVP program. Management intends to continue efforts to drive revenue
from its new intellectual property licensing business and its legacy services
business as means to funding the software core business.

GROSS MARGIN

Consolidated gross margins were $8.5 million in fiscal 2000, $7.0 million in
fiscal 2001, and $26.8 million in fiscal 2002. The decline was $1.5 million from
2000 to 2001 and the increase was $19.8 million from 2001 to 2002. This is a
decrease of 17.9% for 2001 and an increase of 283.0% for 2002. Consolidated
gross margin percentages were 31.3% for fiscal 2000, 26.0% for fiscal 2001, and
45.7% for fiscal 2002.

The 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 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 standard percentage of the
signed agreement and are paid to a national law firm, which has personally
invested and continues to invest in developing Forgent's licensing program.
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.

Since the costs associated with the network software and services business
result primarily from the amortization of the Company's capitalized software
development costs on a straight-line basis and from minimal royalty payments to
outside vendors, 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.

Similarly, 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 were deteriorating as evidenced by
the $1.5 million or 17.9% decrease 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 expenses were $12.3 million in fiscal
2000, $16.5 million in fiscal 2001, and $11.4 million in fiscal 2002. The
increase was $4.2 million from 2000 to 2001 and the decrease was $5.1 million
from 2001 to 2002. This is an increase of 34.1% for 2001 and a decrease of 30.8%
for 2002. Selling, general and administrative ("SG&A") expenses were 45.3%,
61.4% and 19.5% 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 $2.3 million, or 16.6%, 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

13

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 restructuring contributed directly to
the decrease in SG&A expenses during the year ended July 31, 2002. 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 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. Research and development 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 research and development
expenses, respectively. Due to the weakening environment for start-up businesses
and related tightening of the venture capital marketplace, the Company absorbed
its OnScreen24 operations back into the operations of its core business and
terminated ArticuLearn during fiscal 2001.

Without the effects of the Internet ventures, the Company incurred $0.0
million, $2.3 million, and $3.2 million in research and development ("R&D")
expenses during fiscal 2000, 2001 and 2002, respectively. These 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 ("VNP"). 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.

14

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.

WRITE-DOWN OF IMPAIRED ASSETS

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.

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. This non-cash impairment was 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. This impairment loss
was recorded on the consolidated statement of operations as follows:

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

15

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 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.

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 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 is largely due to less available cash balance
held for investment and a decline in interest rates. The slight increase in
interest income during fiscal 2001 is due primarily to a higher average cash
balance held for investment in fiscal 2001 than in fiscal 2000.

INCOME TAXES

As of July 31, 2002, Forgent had federal net operating loss carryforwards of
$147.6 million, research and development credit

16

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 $15.1 million in
fiscal 2002. Loss from discontinued operations was 73.1%, 70.6%, and 25.8% of
revenues for the years ended July 31, 2000, 2001, and 2002.

In April 2002, VTEL did not remit payment on its first subordinated
promissory note, as stipulated in the sales agreement. Management is currently
renegotiating the terms of the note. Due to this default and the uncertainty in
collecting the two outstanding notes from VTEL, the losses from discontinued
operations for the year ended July 31, 2002 included a $5.9 million charge for
the reserve of the both notes from VTEL. 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 $0.4 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 primarily 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.

Despite the significant loss from discontinued operations, the increase in
net income during the year ended July 31, 2002 is largely due to the revenues
generated from the licensing of intellectual property and the decrease in
operating expenses. 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.

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

17

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. Changes in cash from operating
activities are primarily the result of the net loss or income generated and
changes in working capital, primarily decreases in accounts receivable, and
accounts payable. 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. During fiscal year 2002, the Company
had 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
$13,000. 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, Forgent received $16.5
million from its technology licensing business during the year ended July 31,
2002. Included in net income for fiscal 2000 was the favorable settlement of
litigation in which the Company received $44.5 million in cash and securities
(see "Non-recurring events").

Cash 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 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
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, Inc.
("Polycom") common stock shares as a result of Polycom's acquisition of Accord.
The cash provided by investing activities in fiscal 2001 was primarily due to
the proceeds received from the sale of the Polycom and Accord shares and other
short-term investments. During fiscal 2000, the cash used in investing
activities was primarily from the investment of cash received from the
settlement of litigation (see "Non-recurring events"). Investments were also
made in additional property and equipment and capitalized research and
development. Capital expenditures incurred during the year ended July 31, 2002
primarily related to the purchase of the Company's new accounting system. For
fiscal 2003, Forgent 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. Cash used in
financing activities during fiscal 2002 is due primarily to the purchase of
treasury stock, which was offset by proceeds received from the issuance of
stock. Cash used in financing activities during fiscal 2001 primarily relates to
the Company settling 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

18

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 continuing operations. 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

In general, the Company recognizes revenue when persuasive evidence of an
arrangement exists, service delivery has occurred, fee is fixed or determinable,
and collectibility is probable.

In accordance with Statement of Position 97-2, "Software Revenue
Recognition," software and product revenues are recognized when the software or
product is shipped and invoiced. When a sale contains both delivered and
deferred elements, the Company utilizes vendor-specific objective evidence to
allocate the sale price first to deferred elements and then the residual value
is allocated to the delivered elements.

Service revenues are recorded at the time the services are rendered.

Integration revenues are recognized after the customized systems are tested,
installed, and the Company has no significant further obligations to the
customer.

Revenues for maintenance agreements are recorded ratably over the contract
period. Customer prepayments are deferred until services have been rendered and
there are no significant further obligations to the customer.

Gross intellectual property licensing revenue is recognized at the time a
license agreement has been executed and related costs are recorded as cost of
goods sold.

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

19

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:

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 acces