ASURE SOFTWARE INC - Annual Report: 2005 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

FOR THE FISCAL YEAR ENDED JULY 31, 2005

OR

COMMISSION FILE NUMBER 0-20008

FORGENT NETWORKS, INC.

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 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the 21,442,057 shares of the registrant’s Common Stock held by nonaffiliates on January 31, 2005 was approximately $43,956,217. 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, 2005 there were 25,180,302 shares of the registrant’s Common Stock, $.01 par value, issued and outstanding.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

Forgent Networks, Inc. (“Forgent” or “Company”) is a licensor of intellectual property as well as a provider of low-cost, easy-to-use scheduling and asset management software solutions that enable organizations to schedule and manage their office environment effectively and efficiently. Forgent currently generates a significant portion of its revenues and cash flow from the licensing of its patent portfolio on a worldwide basis.

Forgent is a Delaware corporation incorporated in 1985 with principal executive offices located at 108 Wild Basin Road, Austin, Texas 78746. The Company telephone number is (512) 437-2700 and the Company website is www.forgent.com. The Company does not intend for information contained on its website to be part of this Form 10-K. Forgent makes available free of charge, on or through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material or furnishes it to the Securities and Exchange Commission. The Company has two main business segments - intellectual property licensing and scheduling and asset management software and services. Additional segment information is contained elsewhere in this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company” and the segment footnote in the accompanying financial statements.

Forgent’s intellectual property licensing business is derived from the Company’s Patent Licensing Program. The Company’s Patent Licensing Program is currently focused on generating licensing revenues related to the Company’s data compression technology embodied in U.S. Patent No. 4,698,672 (the “672 patent”) and its foreign counterparts and is currently conducted through the Company’s wholly-owned subsidiary, Compression Labs, Inc. The Company’s aggregate intellectual property licensing revenues, which were generated by the licensing of these patents, totaled over $103.0 million from the inception of the licensing program through July 31, 2005. Other patents are currently being investigated for additional licensing opportunities.

In October 2003, Forgent acquired software products from Network Simplicity Software Inc. and molded these products into the Company’s NetSimplicity software product line, which is currently sold through the Company’s web and telesales business model. NetSimplicity’s flagship product, Meeting Room Manager (“MRM”), automates the entire facility scheduling process: reserving rooms, requesting equipment, ordering food, sending invitations, reporting on the meeting environment and more. The product is easy to install and easy to deploy, which allows customers to be utilizing the software within minutes of starting their deployment. Other products currently marketed in the NetSimplicity portfolio include Resource Scheduler, a scheduling application built on the same technological platform as MRM but designed for scheduling resources such as equipment, computers, etc., and Visual Asset Manager, an easy-to-use total asset tracking and management tool.

Using its expertise in the videoconferencing equipment industry, the Company previously manufactured and installed videoconferencing endpoints. In January 2002, the Company sold its manufacturing products business and shifted its focus from hardware manufacturing to software and services. To further expedite this shift, during fiscal year 2002, Forgent sold its integration business, which designed and installed custom integrated visual communication systems primarily in meeting spaces of large corporations. During fiscal year 2003, the Company completed the divestiture of its videoconferencing hardware services business, devoting itself entirely to its intellectual property licensing business, as well as its software and services business.

During the year ended July 31, 2005, Forgent continued focusing on licensing its intellectual property and growing its software business. Forgent achieved several goals including: (1) generated additional licensing revenues from its Patent Licensing Program, (2) transferred the litigation related to the ‘672 patent to the United States District Court for the Northern District of California without significant delays, (3) included Microsoft Corporation in the ongoing litigation process, (4) initiated litigation to protect its U.S. Patent No. 6,285,746, (5) grew revenues from its NetSimplicity product line by 97.5% over prior year, (6) and completed the divestiture of its ALLIANCE operations. Despite these achievements, uncertainties and challenges remain, and there can be no assurance that the Company can successfully grow its revenues or achieve profitability.

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CORPORATE STRATEGY

Since the Company’s inception, Forgent has designed, developed and acquired strategies to help find new and better ways to solve problems in its area of expertise. As these solutions were found, the Company patented and then sought to commercialize these innovative technologies. This effort has created a diverse portfolio of intellectual property such as data compression, video mail, videoconferencing, video call scheduling and many others. The Company’s patent portfolio includes the combined invention of Compression Labs, Inc., VTEL Corporation and Forgent Networks, Inc.

The Company licenses its intellectual property to companies, which manufacture and sell hardware or software devices that incorporate Forgent’s technology. Through the licensing program, the Company seeks to monetize its investment in its intellectual property portfolio and leverage the resulting cash flow from licensing revenues in order to achieve a profitable and growing business as well as returning value to its stockholders. The Company has taken a portion of the intellectual property cash flows and invested them in NetSimplicity, the Company’s software business. As the Company further evolves, Forgent’s strategy will continue to adhere to the following key elements:

Intellectual Property Licensing Business

The Company’s success is largely dependent on its ability to license and commercialize its intellectual property from its patent portfolio, which currently includes over two-dozen issued patents and several pending patent applications. Forgent intends to continue its efforts to derive revenue from its intellectual property licensing business in order to provide stability and serve as an internal source of funding for the Company’s future growth. The Company’s Patent Licensing Program is currently focused on generating licensing revenues related to the Company’s data compression technology embodied in the ‘672 patent and its foreign counterparts and is currently conducted through the Company’s wholly-owned subsidiary, Compression Labs, Inc. The licensing revenues generated by the ‘672 patent primarily relate to one-time intellectual property license agreements and the Company does not anticipate any additional intellectual property revenue from these companies. However, Forgent continues to actively seek new licenses and put more companies on notice by extending the ‘672 patent’s global reach.

Between April 2004 and November 2004, Forgent initiated litigation against multiple companies for infringement of its ‘672 patent. In July 2005, Forgent initiated litigation against 15 companies for infringement of its United States Patent No. 6,285,746 (“‘746 patent”), which relates to technology that stores incoming multimedia in a controlled video system and allows retrieval and playback during the recording. In addition to these proceedings, Forgent continues to pursue license agreements with targeted companies, whether or not named in the litigation. Additionally, Forgent is currently investigating other patents for additional licensing opportunities.

The timing of signing the license agreements and the timing of the litigation results continue to pose forecasting challenges, which inevitably causes peaks and valleys in the Patent Licensing Program. Management anticipates its licensing program will generate additional intellectual property licensing revenues. However, uncertainties and challenges remain and there can be no assurances that Forgent’s strategy will be successful. See Item 3 “Legal Proceedings” for more detail.

Software & Services Business

Forgent’s software products provide simple and affordable solutions to common office administration problems. Forgent’s customers include businesses, educational institutions, healthcare organizations and legal entities of all sizes. In October 2003, Forgent acquired software products from Network Simplicity Software Inc. and has molded these products into the Company’s NetSimplicity software product line. NetSimplicity’s flagship product, Meeting Room Manager, provides a complete meeting logistics and room scheduling solution

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in an easy-to-buy and easy-to-deploy application. Management believes that its current scheduling and asset management software and services help minimize or eliminate the inefficiencies plaguing meeting environments. As Forgent expands the market awareness of its products and services, management feels it will successfully generate additional revenue. However, uncertainties and challenges remain and there can be no assurances that Forgent’s strategy will be successful.

Focus on Expenses

The Company continues to work to reduce operating expenses and has employed a variety of strategies including office space rationalization, equipment lease terminations and asset divestitures among others. The Company’s software development efforts are in its NetSimplicity office in Vancouver, Canada where it can realize lower operating costs due to salary and overhead costs savings. The Company will continue to explore additional overall spending reductions while increasing spending in the intellectual property business and also maintaining its investment in the software business.

INTELLECTUAL PROPERTY LICENSING BUSINESS

Background

In the past, Forgent licensed its intellectual property to various users and developed this practice into the Company’s Patent Licensing Program. During fiscal year 2002, the Company signed two patent license agreements, including one with Sony Corporation. These patent license agreements related to the Company’s data compression technology embodied in the ‘672 patent that will expire in October 2006 and its foreign counterparts that will expire in September 2007.

In May 1997, the Company’s stockholders approved a merger with Compression Labs, Incorporated (“CLI”), a Delaware corporation that developed, manufactured and marketed visual communication systems. As a result, CLI became a direct wholly-owned subsidiary of the Company. Through this merger, the Company acquired certain patents, including the ‘672 patent. Forgent also has foreign counterparts of this patent in force in Great Britain, France, Germany and Italy. The ‘672 patent covers a type of encoding and decoding that plays a principle role in JPEG.

Joint Photographic Experts Group (“JPEG”) is a standardized image compression mechanism, designed for compressing and decoding full-color or gray images. Since JPEG is designed for still images, it works well on photographs and other similar material. The JPEG standard compresses the still images into smaller files, which take less time to transmit across networks and saves significant disk space for archiving purposes. Additionally, JPEG can store full color information, thus allowing images to be exchanged among people with widely varying display hardware.

A wide variety of products create and manipulate digital images by using JPEG. Manufacturers, software product providers and media services providers in various industries worldwide use JPEG in their products, including many digital cameras, personal computers, camera cell phones, scanners, printing devices, video cameras, rendering devices, etc. The Company’s ‘672 patent covers all of these types of products that utilize JPEG and accordingly, Forgent seeks to commercialize the patent through license agreements with companies making, using or selling these products. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company – Results of Operations” for more detail.

Forgent has also identified another patent, the ‘746 patent, which management hopes to garner licensing revenues from. The ‘746 patent relates to technology for storing and retrieving multimedia data in a manner that allows playback during recording. A variety of products that record audio-video programming content use this technology, including cable television and satellite television set-top-boxes with digital video recording functionality. The Company developed and patented this technology, and the patent expires in May 2011.

Patent Licensing Program

To date, the Company has signed several license agreements with international consumer and commercial electronics firms. As a result of pursuing license agreements related to the ‘672 patent, Forgent’s intellectual property licensing segment has aggregated over $103.0 million in licensing revenues since inception. The Company expends significant efforts and expenses identifying potential licensees and negotiating license agreements. During the negotiations, the Company typically seeks consideration for sales made prior to the effective date of the license agreement, as well as a license fee or royalties for future sales. Additionally, most of Forgent’s license agreements to date are fully paid upon signing and do not require further payments. Management expects that most new license agreements will follow this model.

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Forgent recognizes intellectual property licensing revenues and the related cost of sales in the period the license agreements are signed. The cost of sales on the intellectual property licensing business relates to contingent legal fees incurred on successfully achieving signed agreements, as well as legal fees incurred for legal counsel’s time. Historically, Forgent’s fee arrangement with its counsel engaged in connection with its Patent Licensing Program was based on a percentage of the licensing revenues received on signed agreements. On October 27, 2004, Forgent formally terminated its counsel and engaged new counsel, Godwin Gruber, LLP (“Gruber”), to advise it in connection with its Patent Licensing Program. Forgent worked with both counsels to ensure a timely and efficient transition in legal services.

On October 17, 2005, Forgent terminated Gruber as lead legal counsel for its Patent Licensing Program. However, Gruber will continue to provide legal services to the Company and will be paid on an hourly basis. On October 26, 2005, Forgent engaged Susman Godfrey, LLP (“Susman”) to lead its Patent Licensing Program. Under the new agreement, Forgent agrees to pay Susman 33% of all net proceeds received from licensing and litigation once Forgent receives $6.0 million in gross recoveries received on or after October 27, 2004. Additionally, Forgent agreed to pay Susman a fixed monthly fee of $116,000 for time incurred.

In addition to generating licensing revenues from the ‘672 patent, the Company has identified the ‘746 patent as another source of licensing revenues and is currently investigating other patents for additional licensing opportunities. However, efforts related to the other patents may ultimately not result in any additional revenues generated for the Company. In addition to the current litigations as discussed in the following “Litigation” section, Forgent will continue to pursue license agreements with targeted companies, whether or not named in the litigation. Although management anticipates signing more patent license agreements with other companies from various industries, there can be no assurance that additional licenses can be obtained or, if obtained, that any new license agreements will be on similar or favorable terms. Additionally, the timing of signing the license agreements and the timing of the litigation results continue to pose forecasting challenges, which inevitably causes peaks and valleys in the Patent Licensing Program.

Forgent’s Patent Licensing Program involves risks inherent in licensing intellectual property, including risks of protracted delays, legal challenges that would lead to disruption or curtailment of the program, increasing expenditures associated with pursuit of the program and other risks that could adversely affect the Company. Additionally, the ‘672 patent expires in October 2006 in the United States and its foreign counterparts expire in September 2007. Upon expiration of the ‘672 patent, no additional damages will accrue but the Company’s ability to recover for past damages will not be affected but may be limited by any applicable statue of limitations. However, there can be no assurance that the Company will be able to continue to effectively license its technology to other companies. Additionally, there are no guarantees that the Company can protect its intellectual property rights in its current litigation or prevent the unauthorized use of its technology in the future. However, Forgent will continue to seek to enforce and will pursue its rights through the legal system when necessary.

Litigation

Between April 2004 and November 2004, Forgent initiated litigation against multiple companies for infringement of its ‘672 patent (the “‘672 Litigation”). In July 2005, Forgent initiated litigation against 15 companies for infringement of its ‘746 patent (the “‘746 Litigation”). Several defendants in the ‘672 Litigation have sued Forgent, claiming, among other assertions, that their products do not infringe Forgent’s patent and that the patent is invalid. The discovery process continues with respect to each proceeding. Management believes the litigation process is on track and has not discovered any new information that would lead the Company to change its current plans. Due to uncertainties inherent with litigation, management is unable to accurately predict the ultimate outcome. Forgent anticipates that it will continue to incur significant litigation costs and there can be no assurances that the Company will be able to recover these costs.

As of the date of filing, Forgent has settled with five of the defendants in the ‘672 Litigation. Forgent is also currently in discussions with other companies who are defendants in the ‘672 Litigation as well as the ‘746 Litigation. Therefore, management is encouraged that other defendants, as well as companies not currently named in the lawsuits, will choose to sign licensing agreements. See Item 3 “Legal Proceedings” for more detail.

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In order to improve communication and information flow with its stockholders regarding the complicated litigation process, the Company has enhanced the intellectual property section of its corporate website to include viewing of selected court filings and links to related court websites.

Other Patents and Trademarks

Since the Company’s inception, Forgent has designed, developed and acquired technologies in the Company’s areas of expertise. In several cases, the Company obtained patents and then sought to commercialize these innovative technologies. The U.S. Patent and Trademark Office and foreign patent offices have issued the Company several dozen patents related to data compression, scheduling, videoconferencing, systems management and other technologies developed or acquired by Forgent. These patents comprise Forgent’s diverse intellectual property portfolio. Additionally, Forgent has several patent applications pending with the U.S. Patent and Trademark Office and anticipates continuing to pursue these pending applications in order to protect its intellectual property. However, there can be no assurance that Forgent’s pending patent applications will be issued as patents or that the issued patents can be licensed and/or litigated successfully. Management continues to expand the Company’s intellectual property program beyond its current focus on its patent related to data compression by attempting to license, enforce or sell the Company’s intellectual property. However, these efforts may ultimately not result in any additional revenues generated for the Company.

The Company has registered with the U.S. Patent and Trademark Office the “Forgent” trademark under its current business practices in the United States. The Company also registered with the U.S. Patent and Trademark Office and in certain foreign countries the “VTEL” mark and the “VTEL” logo. These trademarks and service marks were sold to VTEL Products Corporation as part of the sale of the products business segment in fiscal year 2002. Forgent retained all patents related to its discontinued products, integration, videoconferencing hardware services and ALLIANCE software businesses divested during fiscal years 2002, 2003 and 2005.

SOFTWARE & SERVICES BUSINESS

Background

Due to competitive pressures compelling companies to improve their critical business processes, the marketplace has witnessed a movement in which companies are re-examining opportunities for fundamental business improvement. Organizations of all sizes have realized that they can no longer schedule their facilities and related logistics, such as equipment, catering and other services, using a manual approach, which is fraught with inefficiencies such as double-booked rooms, catering errors and other time-consuming, costly issues. These inefficiencies have a significant negative business impact, including decreased productivity, diffused communications and delayed decisions, thus ultimately undermining the organization’s competitiveness. As a result of these inefficiencies, businesses have recognized a need for scheduling software that streamlines and optimizes their approach to meeting planning.

Leveraging this desire to streamline operations and improve efficiencies, Forgent’s scheduling software enables customers to quickly reserve rooms and other meeting logistics in a simplified manner. Because of its built-in capabilities to notify all service providers on the back end, needs such as special equipment and catering are communicated in advance and services are provided on time and without error. Additionally, Forgent’s total asset management software meets businesses’ need to efficiently and effectively discover, track and value company assets such as computers, software, printers, furniture and other key assets throughout the office environment. By streamlining and automating scheduling and office administration tasks, Forgent helps reduce costs associated with day-to-day office operations and increases productivity of those involved with meetings. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company – Results of Operations” for more detail.

Products & Services

In October 2003, Forgent acquired software products from Network Simplicity Software Inc. and has molded these products into the Company’s NetSimplicity software product line. NetSimplicity’s flagship product, Meeting Room Manager, provides a complete meeting and meeting room scheduling solution in an easy-to-buy and easy-to-deploy application. MRM enables users to instantly find and book available meeting rooms, schedule meeting services, such as catering or audio and visual devices, and invite attendees to the meeting. It provides a powerful but easy-to-use web-based user interface, enabling everyone in an organization to access the system without requiring software to be deployed at each desktop. MRM also includes a SQL database and rich and extensible reports, which provide management oversight into resource utilization and costs associated with the meeting environment.

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The Company also markets Resource Scheduler, a derivative scheduling product of MRM. Resource Scheduler allows businesses to schedule resources other than meeting rooms, such as shared equipment or other resources, through an intuitive and customizable interface.

In addition to MRM, Forgent’s current NetSimplicity software product line also includes Visual Asset Manager (“VAM”). VAM enables companies to efficiently inventory, track and manage their fixed, mobile and IT assets across the entire organization – from any web browser. VAM also solves an organization’s needs to administer its assets by automatically locating IT assets, such as computers and software, and tracks these assets as well as other office equipment, furniture and other fixed assets. VAM provides a powerful but easy-to-use web-based interface that makes it easy to deploy in any environment, enabling organizations to map and display the locations of each asset on their floor plans as well as track maintenance coverage, equipment leases, warranties, repairs and depreciation for each asset in the inventory in a simple and cost-effective manner.

As an extension of its software product offerings, Forgent offers its customers maintenance and support contracts that provide ready access to qualified support staff, software patches as necessary and upgrades to the Company’s next software version without any additional costs. Additionally, Forgent also provides professional services for installation of and training on its software at the customer’s request.

Product Development

The future success of Forgent’s software products depends largely on the Company’s ability to develop innovative software solutions and to enhance its current software products in order to satisfy an evolving range of customer requirements and needs. The Company’s development team, based in Richmond, British Columbia, Canada, consists of skilled software developers, testers and technical writers who work closely with sales and marketing teams to build products based on market requirements, customer feedback and technical support needs. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company – Results of Operations – Research and Development” for more detail.

Forgent’s research and development strategy is to continue to enhance Meeting Room Manager’s and Visual Asset Manager’s functionalities through new releases and new feature developments to satisfy the requirements of current and prospective customers. Forgent will continue to evaluate opportunities and develop new software that enables organizations to streamline the tasks associated with administering a business, simultaneously allowing organizations to improve their productivity while reducing costs associated with those tasks.

Despite the Company’s best efforts, there can be no assurance that Forgent will complete its existing and future development efforts within the anticipated schedule or that new and enhanced software products will adequately meet the requirements of the marketplace and achieve market acceptance. Additionally, Forgent may experience difficulties that could delay or prevent the successful development or introduction of new or enhanced software products. In the case of acquiring new or complementary software products or technologies, the Company may not be able to integrate the acquisitions into its current product line. Furthermore, despite extensive testing, errors may be found in the Company’s new software products or releases after shipment, resulting in a diversion of development resources, increased service costs, loss of revenue and/or delay in market acceptance.

Sales and Distribution

Forgent sells its scheduling and asset management software principally through a direct telesales model. The Company’ web and telesales business model enables it to sell its software solutions in an efficient, cost-effective manner. The prospect visits Forgent’s website, gathers the product information needed, can optionally download the product for a 30-day free trial if desired and then can either purchase the software via credit card on the website or engage with a sales representative to purchase the software via purchase order. Additionally, the Company supplements the efforts of its direct sales force with its Partner Program described below. By working with these partners, Forgent expands the reach of its direct sales force and gains access to key opportunities in major market segments worldwide.

The Company has two distinct levels of partners in its Partner Program: the Reseller Partner and the Referral Partner. Reseller Partners are companies that represent Forgent in geographies outside the United States or in the Federal government as well as companies with video room integration projects or information technology integration projects. The Reseller Partner commits to a minimum level of business per year with the Company, and for that commitment they receive a

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channel discount. Forgent has the following Reseller Partners that represent the Company’s software outside the United States: BusinessSolve, Ltd. in the United Kingdom, Meeting Manager, Gmbh and TeDeG Gmbh in Germany, Symetria Ltd. in Switzerland and Corporate Initiatives in the Asia/Pacific region. Additionally, Forgent has several Reseller Partners that represent the Company’s software in the Federal government space. A Referral Partner provides the Company with the name and particular information about a customer and their needs as a sales lead. If the Company accepts the sales lead, registers it for a particular Referral Partner and subsequently makes a sale as a direct result of such a lead, the Company will pay the Referral Partner a sales lead referral fee. Currently Forgent’s Referral Partners include PolyVision Corp./Steelcase, Vmeals, e-Innovative Solutions and Marenzana Group.

Competition

For the MRM product, a primary source of competition is point schedulers that include vendor-specific and homegrown tools that corporations have purchased or created to solve each individual scheduling problem in isolation of other problems. These disparate solutions each have a unique interface and users must be trained how to work with each separate tool. Additionally, many organizations have adopted personal calendaring tools such as Microsoft Outlook^® in an attempt to meet their needs. These tools provide little in the way of end-to-end scheduling and management of meetings and meeting rooms. MRM has effectively delivered a unified meeting and meeting room management solution that truly solves the organization’s problems in an easy, affordable and universally accessible manner. Management believes that no other product combines these attributes and offers the value that MRM does to its customers.

The VAM product competes in a different marketplace: asset management in general and IT asset management in particular, both of which are well-defined and well-served software categories. VAM is differentiated by the strength of its visual, floor-plan-oriented user interface and its low price. Management believes there is an opportunity to continue to enrich the VAM feature set while maintaining price advantage to disrupt the more well-established products in the marketplace.

Marketing

Forgent’s software business has a large roster of more than 1,700 domestic and international customers, including many Fortune 500 companies. The consistent growth of the customer base relies on the development and implementation of a comprehensive integrated marketing plan, which is primarily aimed at reaching small to medium-sized businesses (“SMBs”) and departments of enterprise organizations throughout the United States, Europe and Asia Pacific. The integrated elements of Forgent’s marketing plan include a mix of demand generation, public relations and other corporate communications activities to ensure a consistent and accurate flow of information to and from prospects, customers and other key stakeholders.

In December 2003, Forgent established NetSimplicity as a brand in order to appeal more directly to its target audiences. In terms of ongoing demand generation activities, the Company focuses its efforts primarily on Internet pay-per –click advertising and search engine optimization. Additional marketing mix elements include direct mail and e-mail marketing.

EMPLOYEES

As of October 13, 2005, Forgent had 33 employees in the following departments:

As the Company continues to evolve its business strategy, Forgent’s workforce is continually evaluated and adjusted accordingly - both in number and composition. The Company occasionally hires contractors to support its sales and marketing, engineering, information technology and administrative functions. Forgent believes it retains the appropriate management team and employees to fully implement its business strategy. None of the Company’s employees are represented by a collective bargaining agreement. Forgent has not experienced any work stoppages and considers its relations with its employees to be good.

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The future performance of the Company depends largely on its continuing ability to effectively attract, train, retain motivate and manage highly qualified technical, sales, marketing and managerial personnel. Forgent’s development and 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 generally does not have employment agreements with key management personnel or technical employees and uses incentives, including competitive compensation and stock option plans to attract and retain well-qualified 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 61, 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 Forgent’s President and Chief Executive Officer. Mr. Snyder has over 29 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 48, joined the Company in September 1995 as Manager of Corporate Planning and has served as Chief Financial Officer and Vice President of Finance since May 2000. Prior to joining the Company, Mr. Peterson performed as Assistant Controller with the Dell Direct Channel that generated $1 billion in annual sales at Dell Computer Corporation and held various financial positions during 11 years with IBM Corporation. Mr. Peterson holds a Masters in Business Administration and a Bachelor of Arts in Economics from the University of Wisconsin.

Nancy L. Harris, age 42, joined the company in October 2001 as Vice-President of Marketing. She currently serves as Vice-President of Software and is responsible for the daily operations of the Company’s software business. Ms. Harris has 19 years experience in the software industry, serving in both marketing and development capacities. Prior to joining the Company, Ms. Harris was the Director of Marketing and Product Management at Clear Commerce, an Internet transaction-processing software company (2000 to 2001). Prior to that, Ms. Harris spent eight years with BMC Software in various positions including Director of Field Marketing, Director of Product Marketing and Development Manager. Ms. Harris also spent several years with Andersen Consulting in various capacities. Ms. Harris holds a Masters of Science in Marketing and a Bachelor of Science in Journalism from Northwestern University.

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ITEM 2. PROPERTIES

Forgent’s headquarters and sales and marketing facility leases approximately 137,000 square feet at Wild Basin in Austin, Texas under a lease that expires in March 2013. Due to the downsizing of the Company on account of past divestitures and restructurings, Forgent had existing unoccupied leased space inventory, which was actively subleased. During fiscal year 2003, Forgent was able to sublease the vacated space quicker than originally anticipated; however, the rates on the subleases were considerably less than originally anticipated due to then current depressed market rates. Therefore, management calculated the economic value of the lost sublease rental income and recorded a lease impairment charge of $0.5 million. During fiscal year 2004, the current depressed market rates continued to drive rates on the subleases to levels less than anticipated. As a result, management calculated the economic value of the lost sublease rental income and recorded an additional charge of $1.5 million. As of July 31, 2005, Forgent had $1.5 million recorded as a liability on the Consolidated Balance Sheet related to its Wild Basin property. Currently, the Company occupies approximately 26,000 square feet, subleases approximately 102,000 square feet and anticipates continuing to sublease the remaining under-utilized space.

Forgent’s discontinued videoconferencing hardware services business partially occupies a facility of approximately 41,000 square feet in King of Prussia, Pennsylvania, which the Company leases through June 2006. As a result of the sale of Forgent’s videoconferencing hardware services business to an affiliate of Gores Technology Group (“Gores”) in fiscal year 2003, a portion of the total lease space was subleased to Gores. Gores and another subtenant currently sublease approximately 93% of the total lease space. Since management was unable to sublease the space at the Company’s lease rate, management calculated the economic value of the lost sublease rental income and recorded in discontinued operations a one-time charge of $0.5 million for the lease impairment related to its Pennsylvania facility in fiscal year 2003. As of July 31, 2005, Forgent had $0.1 million recorded as a liability on the Consolidated Balance Sheet related to its King of Prussia property.

Forgent also holds approximately 3,000 square feet of office space in Richmond, British Columbia, Canada. The Canadian facility provides office space for sales and marketing and development efforts. Management believes that the facility in Austin, Texas is adequate to meet Forgent’s current requirements and can accommodate further physical expansion of office space as needed.

ITEM 3. LEGAL PROCEEDINGS

Forgent is the defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters, including those discussed below, may have a material adverse effect on the Company’s financial condition or results of operations. With the exception of the proceedings described below, none of the pending legal proceedings to which the Company is a party involves claims for damages in excess of 10% of the Company’s current assets for the period covered by this report on Form 10-K.

Litigation of United States Patent No. 4,698,672 (JPEG)

Between April 2004 and November 2004, Forgent’s wholly-owned subsidiary, CLI, initiated litigation against 44 companies for infringement of the ‘672 patent in the United States District Court for the Eastern District of Texas, Marshall Division, seeking royalties from sales of infringing products and monetary damages, among other relief sought. The defendants are Adobe Systems Incorporated; Agfa Corporation; Apple Computer, Incorporated; Axis Communications, Incorporated; Cannon USA; Concord Camera Corporation; Creative Labs, Incorporated; Dell Incorporated; Eastman Kodak Company; Fuji Photo Film Co. U.S.A.; Fujitsu Computer Products of America; Gateway, Inc.; Hewlett-Packard Company; International Business Machines Corp.; JASC Software; JVC Americas Corporation; Kyocera Wireless Corporation; Macromedia, Inc.; Matsushita Electric Corporation of America; Oce’ North America, Incorporated; Onkyo Corporation; PalmOne, Inc.; Panasonic Communications Corporation of America; Panasonic Mobile Communications Development Corporation of USA; Ricoh Corporation; Riverdeep, Incorporated (d.b.a. Broderbund); Savin Corporation; Thomson S.A.; Toshiba Corporation; Xerox Corporation; Acer America Corporation; AudioVox Corporation; BancTec, Inc.; BenQ America Corporation; Color Dreams, Inc. (d/b/a StarDot Technologies); Google Inc.; ScanSoft, Inc.; Sun Microsystems Inc.; TiVo Inc.; Veo Inc.; Yahoo! Inc.; Creo, Inc. and Creo Americas, Inc. Forgent has since settled with defendants Adobe Systems, Inc., Macromedia, Inc., Onkyo Corporation, AudioVox Corporation, Axis Communications, Incorporated and Color Dreams, Inc.

In three separate lawsuits filed in July, August and September of 2004, 30 of the above defendants sued CLI and Forgent in the United States District Court for Delaware, seeking declaratory relief that the ‘672 patent is not infringed, is

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unenforceable, and is invalid, among other claims for relief. Additionally, in July and September 2004, Sun Microsystems, Inc. and Google, Inc. filed suit against CLI and Forgent in the San Jose and Oakland Divisions of the United States District Court for Northern California, seeking similar declaratory relief. Forgent and CLI moved to stay, dismiss or transfer the Delaware actions, asserting that all such issues should be heard in the U.S. District for the Eastern District, Marshall Division, rather than in Delaware.

On September 27, 2004, two defendants filed a motion with the Judicial Panel on Multidistrict Litigation (“MDL Panel”) requesting the court to transfer the ‘672 Litigation to either the Delaware or California courts, where the actions filed by the defendants are pending. In October 2004, the Company filed its response opposing transfer of the ‘672 Litigation to Delaware or California and the remaining defendants filed a response joining in the motion to transfer the ‘672 Litigation to Delaware or California. In February 2005, the MDL Panel ordered the eight actions related to the ‘672 Litigation to be centralized and transferred to the United States District Court for the Northern District of California for pre-trial proceedings.

On April 15, 2005, Microsoft Corporation (“Microsoft”) sued CLI and Forgent in the United States District Court for the Northern District of California, seeking declaratory relief. On April 21, 2005, the Company initiated litigation against Microsoft in the United States District Court for the Eastern District of Texas, Marshall Division, seeking monetary damages, among other relief sought, for the infringement of the ‘672 patent. On June 8, 2005, Forgent filed a notice to dismiss its suit against Microsoft in the United States District Court for the Eastern District of Texas, Marshall Division, without prejudice. On June 9, 2005, Forgent filed a motion to dismiss or stay the Microsoft Corp. v. Forgent Networks, Inc. and CLI suit in the United States District Court for the Northern District of California. Forgent will continue to protect its intellectual property rights through licensing or litigation against Microsoft.

At a proceeding on May 19, 2005, the United States District Court for the Northern District of California set the claims construction hearing date for the ‘672 Litigation to be on February 13, 2006. The February 13^th date was confirmed at a case management proceeding held on October 3, 2005. Also, based on the October 3^rd proceeding, Microsoft is subject to the same claims construction schedule.

Although Forgent is currently unaware of any other suits against CLI and itself regarding the ‘672 patent, it is possible that other defendants, and/or other accused infringers, could file similar suits for declaratory relief.

Federal Trade Commission Inquiry

In December 2003, the Company received notification from the Federal Trade Commission (the “FTC”) that it is conducting a non-public investigation to determine whether the Company may have engaged in violation of the Federal Trade Commission Act by reason of the alleged involvement of CLI in the JPEG standard-setting process during the 1980’s and very early 1990’s and its subsequent licensing of the ‘672 patent, which the Company believes is infringed by the implementation of that standard. If the FTC proceeds with an investigation and thereafter determines that the Company acted improperly, further proceedings before the FTC could ensue, which could result in a challenge to the Company’s ‘672 patent licensing process. The Company believes that CLI has not acted improperly and advised the FTC as such. In April 2004, Forgent received a Subpoena Duces Tecum (“Subpoena”) and a Civil Investigative Demand (“CID”) in this FTC proceeding. The Company responded in May 2004 by filing a petition to quash and/or limit the Subpoena and CID. In November 2004, the FTC issued a ruling denying Forgent’s Petition to Quash, but modifying the Subpoena and CID. In February 2005 and March 2005, the Company responded to the Subpoena and the CID by providing the required documents and other responsive material. Forgent continues to respond to the FTC as required but has not received any final conclusion from the FTC on its inquiries.

Litigation of United States Patent No. 6,285,746 (DVR)

In July 2005, Forgent initiated litigation against 15 companies for infringement of the United States Patent No. 6,285,746 in the United States District Court for the Eastern District of Texas, Marshall Division, seeking injunctive relief against sales of infringing products and monetary damages, among other relief sought. The defendants are Cable One, Inc., a subsidiary of the Washington Post Company; Charter Communications, Inc.; Comcast Corporation; Cox Communications, Inc., a subsidiary of Cox Enterprises, Inc.; EchoStar Communications Corporation; The DIRECTV Group, Inc.; Time Warner Inc.; and their respective subsidiaries.

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On September 19, 2005, two companies filed a declaratory judgment against Forgent in the United States District Court for the Eastern District of Texas, Tyler Division, claiming, among other assertions, that their products do not infringe Forgent’s patent and that the patent is invalid.

Estate of Gordon Matthews

In February 2003, the Company received a letter from legal counsel for the independent executrix of the Estate of Gordon Matthews, asserting that the Company was obligated to pay the independent executrix of the Estate of Gordon Matthews for the asserted value of services claimed to have been rendered by Mr. Matthews in connection with his alleged involvement in the Company’s Patent Licensing Program. In February 2003, the Company initiated an action in the 261st District Court in Travis County, Texas, styled Forgent Networks, Inc. v. Monika Matthews, et al., for the purposes of declaring that the Company has no obligation to the defendant. In that action, the defendant filed a counter claim asserting that the independent executrix of the Estate of Gordon Matthews was entitled to recover in quantum meruit for the reasonable value of the work and services claimed to have been provided by Gordon Matthews, a former member of the board of directors and consultant to the Company, which the defendant asserted was at least $5.0 million.

The matter went to trial on April 26, 2005. On May 6, 2005, the jury unanimously concluded that Forgent has no further liability to the Estate of Gordon Matthews. Additionally, the Company was successful in its claim for payment of prior officer loans and attorney’s fees. As a result of the final judgment entered by the court, Forgent and the independent executrix entered into a Settlement Agreement and Mutual Release of Claims on August 9, 2005. Pursuant to the agreement, Forgent will not make any payments to the independent executrix and waived its rights to receive payment of prior officer loans and attorney’s fees.

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

On August 18, 2005, an annual meeting of the stockholders was held in Austin, Texas, whereby the stockholders voted on the following proposals:

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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 2005 and 2004:

The Company has not paid cash dividends on its common stock during fiscal years 2005 and 2004 and presently intends to continue a policy of retaining earnings for reinvestment in its business.

On October 21, 2005, Forgent’s common stock closed at $1.36 on the NASDAQ. At that date there were approximately 11,420 stockholders of record of the common stock.

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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, 2004 and 2005 and the selected consolidated operations data for the years ended July 31, 2003, 2004 and 2005 have been derived from Forgent’s audited consolidated financial statements included elsewhere in this Report. The selected consolidated balance sheet data as of July 31, 2001, 2002 and 2003 and the selected consolidated operations data for the year ended July 31, 2001 and 2002 have been derived from Forgent’s audited consolidated financial statements not included in this Report.

The selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company,” 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.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report represent forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results of operations, levels of activity, economic performance, financial condition or achievements to be materially different from future results of operations, levels of activity, economic performance, financial condition or achievements as expressed or implied by such forward-looking statements.

Forgent has attempted to identify these forward-looking statements with the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “may,” “could” and other similar expressions. Although these forward-looking statements reflect management’s current plans and expectations, which are believed to be reasonable as of the filing date of this report, they inherently are subject to certain risks and uncertainties, including:

In addition to the items noted above, such risks and uncertainties include, but are not limited to, those described under “Risk Factors” and other risks indicated in Forgent’s filings with the Securities and Exchange Commission from time to time. Forgent is under no obligation to update any of the forward-looking statements after the date of this Form 10-K to conform such statements to actual results.

RESULT OF OPERATIONS

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

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FOR THE YEARS ENDED JULY 31, 2003, 2004 AND 2005

Revenues

Consolidated revenues were $49.8 million in fiscal year 2003, $15.8 million in fiscal year 2004 and $9.9 million in fiscal year 2005. The decrease was $33.9 million, or 68.2%, from 2003 to 2004. The decrease was $5.9 million, or 37.5%, from 2004 to 2005. Consolidated revenues represent the combined revenues of the Company and its subsidiaries, including royalties received from licensing the Company’s intellectual property as well as sales of Forgent’s NetSimplicity software, installation and training and software maintenance services. Consolidated revenues do not include any revenues from Forgent’s discontinued ALLIANCE operations, which provided conferencing and scheduling software and maintenance, installation, training and network consulting, or the Company’s discontinued videoconferencing hardware services business, which provided hardware maintenance, installation, technical support and resident engineer services (see Note 4, in the accompanying financial statements).

Intellectual Property Licensing Business

Intellectual property licensing revenues were $49.2 million in fiscal year 2003, $14.8 million in fiscal year 2004 and $7.9 million in fiscal year 2005. The decrease was $34.4 million, or 69.9% from 2003 to 2004. The decrease was $6.9 million, or 46.7%, from 2004 to 2005. Intellectual property licensing revenues represent 98.9%, 93.4% and 79.7% of total revenues for the years ended July 31, 2003, 2004 and 2005 respectively. Forgent’s licensing revenues relate primarily to one-time intellectual property license agreements with companies for Forgent’s data compression technology embodied in U.S. Patent No. 4,698,672 and its foreign counterparts, which cover several types of products including many digital cameras, personal computers, camera cell phones, scanners, printing devices, video cameras, rendering devices and other technologies. Additionally, the ‘672 patent is included in a group of Moving Picture Experts Group (“MPEG”) patents that garners royalties. Also included in Forgent’s licensing revenues are royalties received from this MPEG-2 consortium.

The Company began realizing revenue from one-time intellectual property license agreements related to the ‘672 patent during fiscal year 2002. During the past fourteen consecutive quarters, Forgent has achieved approximately $103.0 million in aggregate revenues generated from international consumer and commercial electronics firms in multiple countries, including the United States. Licensing of the ‘672 patent is currently conducted through the Company’s wholly-owned subsidiary, Compression Labs, Inc. (“CLI”). These one-time license agreements generated approximately 99.5%, 97.6% and 94.0% of the intellectual property segment’s licensing revenues for the years ended July 31, 2003, 2004 and 2005, respectively. Therefore, the $34.4 million decrease during fiscal year 2004 and the $6.9 million decrease during fiscal year 2005 are due primarily to the change in the number of license agreements signed related to the ‘672 patent as well as the amount of each license fee received during these periods. The timing of signing the license agreements as well as the variable amount of each license fee continues to pose forecasting challenges.

Although Forgent’s past licensing revenues were primarily generated from foreign-based corporations, the trend changed during fiscal year 2004. During the fiscal years ended July 31, 2003, 2004 and 2005, approximately 3.7%, 64.6% and 94.4% of Forgent’s licensing revenues were generated from U.S. based corporations, respectively. However, uncertainties remain and there are no assurances that the Company will continue this trend and derive future licensing revenues primarily from domestic companies. In addition, the Company does not anticipate any additional licensing revenue from companies that have previously signed license agreements. However, Forgent will continue to actively seek new licenses from its ‘672 patent as well as its ‘746 patent.

At the end of the first fiscal quarter of 2005, Forgent changed its lead legal counsel in the ‘672 Litigation. Under the leadership of Forgent’s new legal counsel, the Company’s Patent Licensing Program has separate licensing and litigation teams, each team focusing on its respective tasks and goals. Forgent’s licensing strategy is to achieve fair market-based licensing royalties. To date, over 1,100 companies have been contacted and Forgent’s licensing team is in varying stages of discussions and negotiations with several of these companies.

Between April 2004 and November 2004, Forgent initiated litigation against multiple companies for infringement of its ‘672 patent. The Company has since settled with six of the defendants. In February 2005, the Judicial Panel on Multidistrict Litigation ordered the eight actions related to the ‘672 Litigation to be centralized and transferred to the United States District Court for the Northern District of California for pre-trial proceedings. In April 2005, Microsoft Corporation sued CLI and Forgent in the United States District Court for the Northern District of California, seeking declaratory relief that the ‘672 patent is not infringed, is unenforceable and is invalid, among other claims for relief. At a case management proceeding held on October 3, 2005, the United States District Court for the Northern District of

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California reconfirmed the Markman hearing on claims construction for February 13, 2006. The Court also placed Microsoft Corporation on the same claims construction schedule. Claims construction is the process by which specific terms in the patent are given precise meaning for the case. Forgent will complete the exchange of proposed terms and claim elements, start on the claims construction discovery and submit claims construction briefs and related materials. In July 2005, Forgent initiated litigation against 15 companies for infringement of its ‘746 patent, which relates to technology for storing and retrieving multimedia data in a manner that allows playback during recording. During the next several months, Forgent’s litigation teams will continue its efforts related, most importantly, to the claims construction process as well as to discovery and the exchange of various contentions. See Item 3 “Legal Proceedings” for more detail.

Although there continues to be uncertainties and risks related to the Company’s Patent Licensing Program, management anticipates generating revenues from its intellectual property licensing segment during fiscal year 2006. However, Forgent’s Patent Licensing Program involves risks inherent in licensing intellectual property, including risks of protracted delays, legal challenges that would lead to disruption or curtailment of the program, increasing expenditures associated with pursuit of the licensing program and other risks that could adversely affect the Company. Additionally, the ‘672 patent, which has generated the intellectual property licensing revenues, expires in October 2006 in the United States and its foreign counterparts expire in September 2007. Upon expiration of the ‘672 patent, no additional damages will accrue but the Company’s ability to recover for past damages will not be affected but may be limited by any applicable statue of limitations. However, there can be no assurance that the Company will be able to continue to effectively license its technology to other companies. Additionally, there are no guarantees that the Company can protect its intellectual property rights in its current litigation or prevent the unauthorized use of its technology in the future. However, Forgent will continue to seek to enforce and will pursue its rights through the legal system when necessary.

Software and Services Business

Software and services revenues were $0.0 million in fiscal year 2003, $1.0 million in fiscal year 2004 and $2.0 million in fiscal year 2005. The increase was $1.0 million from 2003 to 2004. The increase was $1.0 million, or 97.4%, from 2004 to 2005. Software and services revenues represent 0.0%, 6.4% and 20.3% of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively. Revenues from this line of business include sales of Forgent’s NetSimplicity scheduling and asset management software. The NetSimplicity software includes Meeting Room Manager, Visual Asset Manager and Resource Scheduler. Also included in this line of business’s revenues are software maintenance and professional services, such as add-on software customization, installation and training.

Since acquiring its Meeting Room Manager (“MRM”) and Visual Asset Manager (“VAM”) software products in October 2003, Forgent has continued to develop its NetSimplicity software products and has introduced new related products as well as new releases of existing products. As a result of the acquisition, NetSimplicity’s results of operations since October 6, 2003 have been included in the Company’s Consolidated Statement of Operations. During the year ended July 31, 2005, Forgent increased revenues from its NetSimplicity product line by 97.4%, as compared to the year ended July 31, 2004. The increased revenues are attributable to NetSimplicity’s new releases of MRM and VAM, and expansion of its direct sales organization as well as the refinement of its marketing mix, including Internet marketing, direct marketing and print advertising.

During fiscal year 2005, Forgent released version 6.0 of MRM, which includes an enhanced web-based interface and other feature enhancements requested by customers. Additionally, Forgent introduced three new packages of MRM during the year: MRM Team, MRM Web and MRM Enterprise. By packaging the MRM software with certain capabilities for various levels of usage, Forgent has provided solutions that are easy to understand and allow customers to make quicker purchasing decisions. During fiscal year 2005, Forgent also released VAM 2004+, which allows asset managers to track the custodial status of shared assets, track and manage assets across multiple locations and define subcategories under primary asset categories to facilitate more precise categorization of their assets. In addition to these new products, Forgent increased software revenues from its international sales by 83.2% during the year ended July 31, 2005. Forgent currently has distribution partners in the United Kingdom, Germany and Australia. Forgent will continue to target North American and international companies in the healthcare, education, legal, and financial industries, which generated approximately 55.1% of its revenues during the year ended July 31, 2005. In August 2005, the Company introduced a premium Advanced Catering Management module for MRM and a new VAM Enterprise edition. Based on additional new software releases and extensions thereof, as well as its efforts to find additional distribution partners in key geographies around the world, management anticipates its NetSimplicity software business will continue to grow during fiscal year 2006.

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Other

Other revenues were $0.6 million in fiscal year 2003, $22 thousand in fiscal year 2004 and $0.0 million in fiscal year 2005. The decrease was $0.5 million, or 96.1%, from 2003 to 2004 and the decrease was $22 thousand, or 100.0%, from 2004 to 2005. Other revenues represent 1.1%, 0.1% and 0.0% of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively. During the year ended July 31, 2003, the Company provided subcontracting services on several integration projects to SPL Integrated Solutions (“SPL”), which had purchased Forgent’s integration business during fiscal year 2002. As a result of these subcontracts, Forgent recorded $0.6 million in other revenue during the 2003 fiscal year. During the first fiscal quarter of 2004, Forgent completed its final integration project and recorded $22 thousand in other revenues. As of October 31, 2003, Forgent no longer provided subcontracting services on any integration projects to SPL and referred all of its integration customers directly to SPL.

Gross Margin

Consolidated gross margins were $24.8 million in fiscal year 2003, $8.0 million in fiscal year 2004 and $2.9 million in fiscal year 2005. The decrease was $16.8 million, or 67.8%, from 2003 to 2004. The decrease was $5.1 million, or 64.1%, from 2004 to 2005. Consolidated gross margin percentages were 49.8% for fiscal year 2003, 50.4% for fiscal year 2004 and 28.9% for fiscal year 2005.

The $5.1 million decrease in gross margin, as well as the related decrease in gross margin as a percentage of total revenues, for the year ended July 31, 2005, is due primarily to the $5.8 million decrease in gross margin resulting from licensing revenues generated during fiscal year 2005. Similarly, the $16.8 million decrease in gross margin for the year ended July 31, 2004, is due primarily to the $17.2 million decrease in gross margin resulting from licensing revenues generated during fiscal year 2004. The cost of sales from the intellectual property licensing business relates to the legal fees incurred on successfully achieving licensing revenues as well as legal expenses incurred from legal counsel’s time in connection with the Company’s Patent Licensing Program.

At the end of the first fiscal quarter of 2005, Forgent terminated its previous legal counsel participating in the Company’s Patent Licensing Program. Prior to this termination, cost of sales from the intellectual property licensing business only included contingent legal fees, which were based on 50% of the licensing revenues received on signed agreements. As a result of discussions following the termination, on December 21, 2004, Forgent entered into a Resolution Agreement with its former counsel and a letter agreement with three law firms who previously served as local counsel in the ‘672 Litigation. Under the Resolution Agreement, the Company agreed to pay its former counsel an initial amount of $1.0 million, 50% of the first $6.0 million in gross recoveries received on or after October 27, 2004 and 10% of all gross recoveries received thereafter. Under the letter agreement, the Company agreed to pay the three local counsel law firms an initial amount of $38 thousand, 7.5% of the first $6.0 million in settlements or judgments received from certain defendants and 1.5% of all settlements or judgments received from such defendants thereafter.

In January 2005, Forgent entered into an agreement with the law firm of Godwin Gruber, LLP (“Godwin”) to represent the Company as lead counsel in its Patent Licensing Program. Under this agreement, Forgent agreed to pay Godwin a contingency fee, net of expenses, once total proceeds from licensing and litigation exceed $6.0 million. Additionally, Forgent agreed to pay Godwin 50% of the firm’s standard hourly rate for time incurred. In May 2005, Forgent amended its agreement with Godwin, effective May 1, 2005, to change the contingency fee percentage amount to 22% and to establish a fixed monthly fee for time incurred at $0.2 million. Also in January 2005, Forgent entered into an agreement with The Roth Law Firm, P.C. (“Roth”) to represent the Company as local counsel in Marshall, Texas. In February 2005, the Judicial Panel on Multidistrict Litigation ordered the eight actions related to the ‘672 Litigation to be centralized and transferred to the United States District Court for the Northern District of California for pre-trial proceedings. As a result, Roth’s and the three local law firms’ legal services are not currently required.

As a result of the agreements disclosed above, Forgent’s cost of sales from its intellectual property licensing business for the year ended July 31, 2005 included $2.4 million for legal counsels’ time incurred. These additional expenses in fiscal year 2005 caused the related cost of sales to exceed 50% of its intellectual property licensing revenues. In October 2005, Forgent signed an agreement to engage new legal counsel to lead its Patent Licensing Program. See Item 1 “Business – Intellectual Property Business – Patent Licensing Program” for more detail. Based on the Company’s legal counsel agreements, management anticipates higher gross margins for the Company once the Company generates licensing revenue sufficient to cease paying its former counsel the 50% contingent fee provided for in the Resolution Agreement. To date, all of the Company’s licensing revenue has been generated by the ‘672 patent. The U.S. ‘672 patent expires in October 2006 and the foreign counterparts expire in September 2007. When the ‘672 patents expire, licensing revenues may decline unless alternative sources are found. If licensing revenues decline, total gross margins may be adversely affected.

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The decreases in gross margin from the intellectual property licensing business were offset by increases of $0.4 million and $0.7 million from the software segment for the years ended July 31, 2004 and 2005, respectively. The cost of sales associated with the software and services business is relatively fixed and results primarily from the amortization of the Company’s purchased software development costs and intangible assets. During fiscal year 2005, cost of sales from the software segment increased by $0.3 million, approximately 83.1% of which relates to increased amortization of purchased software development costs. Despite the increase in cost of sales, gross margin as a percentage of revenues from the software segment increased from 39.9% in fiscal year 2004 to 55.7% in fiscal year 2005. Since revenues generated from the software and services business directly affect gross margins and since management anticipates growing revenues for this segment, management expects gross margins from the software and services business to improve.

The cost of sales associated with other revenues during the years ended July 31, 2003 and July 31, 2004 relate to the costs incurred to complete the Company’s remaining integration projects. The gross margin for the integration projects during fiscal years 2003 and 2004 were 12.2% and (9.1%), respectively. Since Forgent no longer has any remaining integration projects as of July 31, 2004, the low and negative gross margins from this line of business will not affect the Company’s financial results in future periods.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $6.2 million in fiscal year 2003, $8.3 million in fiscal year 2004 and $12.9 million in fiscal year 2005. The increases were $2.1 million, or 32.6%, from 2003 to 2004 and $4.6 million, or 55.5%, from 2004 to 2005. SG&A expenses were 12.5%, 52.2% and 129.8% of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively.

The $4.6 million increase in SG&A expenses during the year ended July 31, 2005, as compared to the year ended July 31, 2004, is due to a $3.1 million increase in legal expenses and a $1.5 million increase in sales and marketing costs related to the NetSimplicity product line. The $3.1 million increase in legal expenses primarily relates to costs incurred in the ‘672 Litigation, in the suit against the Estate of Gordon Matthews and in responding to the Federal Trade Commission (“FTC”) inquiry. Additionally, Forgent incurred approximately $1.2 million in one-time expenses during the second fiscal quarter of 2005 related to the termination of its former legal counsel. Due to the favorable verdict resulting from the Matthews trial, management does not anticipate additional significant legal fees to be incurred from this matter. The $1.5 million increase is a result of the Company’s investment in developing the sales and marketing team for its NetSimplicity product line during fiscal year 2004, which was operational during the entire fiscal year 2005.

During the year ended July 31, 2004, SG&A expenses increased $2.1 million, as compared to the year ended July 31, 2003. This $2.1 million increase is due primarily to a $1.4 million decrease in corporate expenses allocated to discontinued operations in fiscal year 2003 and a $1.0 million increase in sales and marketing costs related to the NetSimplicity product line. Forgent allocates certain corporate operating expenses to its segments. Since the Company sold its Services Business during the fourth fiscal quarter of 2003, the operations of which are shown as discontinued operations in the consolidated financial statements, the Company had one less segment to allocate corporate operating expenses to and thus, SG&A expenses from continuing operations increased by an additional $1.4 million during the year ended July 31, 2004. Additionally, the Company’s NetSimplicity product line did not exist during fiscal year 2003. Therefore, the $1.0 million sales and marketing expenses incurred during fiscal year 2004 for this business have no corresponding expenses in fiscal year 2003.

As Forgent continues to pursue licensing and litigating the ‘672 patent and the ‘746 patent, significant legal fees will continue to be incurred. However, management believes the Company has the necessary financial resources to support all of its current and upcoming licensing and litigation efforts. Due to uncertainties inherent with litigation, management is unable to accurately predict the ultimate outcome and thus, there can be no assurances that the Company will be able to recover these costs. Until the software business becomes profitable, management does not anticipate significant increases or decreases in SG&A expenses for its software segment during fiscal year 2006. Forgent will continue, however, its attempts to further decrease any unnecessary SG&A expenses, including corporate expenses, that do not directly support the generation of revenues for the Company without impacting the Company’s ability to do business.

Research and Development

Research and development (“R&D”) expenses were $69 thousand in fiscal year 2003, $0.3 million in fiscal year 2004 and $0.3 million in fiscal year 2005. The increase was $0.3 million, or 363.8%, from 2003 to 2004. R&D expenses remained constant between fiscal years 2004 and 2005. R&D expenses were 0.1%, 2.0% and 3.2% of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively.

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During fiscal year 2005, Forgent continued developing its flagship software product, Meeting Room Manager (“MRM”) and released version 6.0 of MRM in January 2005. This release, with a new web-based interface and numerous feature enhancements requested by customers, extends MRM’s capabilities in ease of use, performance and scalability and is supported by significant architectural improvements that include Microsoft .NET, Crystal Reports and native SQL server database technologies. Additional development efforts in fiscal year 2005 resulted in the release of MRM version 6.2 in June 2005 and the release of the new Advanced Catering Management module in August 2005. This new premium module provides multi-site enterprises the ability to integrate customized catering requests into their meeting scheduling process, on a site-by-site basis.

Also during fiscal year 2005, Forgent developed the newest release of its Visual Asset Manager (“VAM”) product. VAM 2004+, which was released in November 2004, includes new features that allow asset managers to track the custodial status of shared assets, track and manage assets across multiple locations and define subcategories under primary asset categories to facilitate more precise categorization of their assets. The Company continued to develop VAM throughout fiscal year 2005 and released version 5.5 of VAM in August 2005. A new VAM Enterprise edition, introduced with version 5.5, features new support for handheld barcode scanners, tablet PC input devices and other enhancements designed to meet the needs of large, multi-site organizations seeking to comply with the Sarbanes-Oxley Act and other regulatory requirements.

Currently, the Company is developing a German version of MRM, which will be translated and marketed on Forgent’s German-language website, and another value-added module for MRM. Forgent expects to release its German software during the first fiscal quarter of 2006 and the new module by December 2005. Additionally, the Company has also started development of its next major release of MRM, version 7.0, which should be available to the market in the spring of 2006.

R&D expenses during fiscal years 2005 and 2004 were incurred primarily due to efforts in developing MRM and VAM. Since Network Simplicity Software, Inc. was not acquired until October 2003, no R&D expenses were incurred by Forgent’s software segment during the year ended July 31, 2003. The R&D expenses incurred during fiscal year 2003 and minimal expenses incurred during fiscal years 2004 and 2005 relate to efforts on strengthening Forgent’s Patent Licensing Program. Forgent will continue to develop scheduling and asset management solutions to assist businesses in streamlining their operations and improving meeting efficiencies in a simplified manner. However, until the software business achieves profitability, management does not anticipate significant increases or decreases in total R&D expenses during fiscal year 2006.

Impairment of Assets

During the fiscal year ended July 31, 2004, Forgent recorded impairment losses on the Consolidated Statement of Operations as follows:

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During the second fiscal quarter of 2004, Forgent faced declining revenues related to its ALLIANCE software products and services and experienced increasing revenues related to its NetSimplicity software products and services. Additionally, management learned that while indicators of demand existed for ALLIANCE, issues regarding price sensitivity, lengthy sales cycle and integration with enterprise infrastructures were preventing ALLIANCE from achieving the revenues that management originally anticipated. Starting in January 2004, management reviewed its software segment, the related cash flows from its ALLIANCE and NetSimplicity product lines and re-evaluated its strategy regarding growing revenues from this segment. As a result, Forgent decided to cease actively marketing and selling its ALLIANCE software products and impaired the ALLIANCE assets. During fiscal year 2005, Forgent divested its ALLIANCE operations (see Note 4, in the accompanying financial statements).

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Software to be Sold, Leased, or Otherwise Marketed,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Forgent evaluated the recoverability of its long-lived assets, including the equipment and capitalized software development costs, related to the ALLIANCE efforts. Based on the projected negative cash flows related to ALLIANCE, Forgent fully impaired the $4.7 million in net capitalized software development costs and $0.2 million in equipment related to ALLIANCE. Additionally, Forgent impaired $0.1 million of certain prepaid assets that specifically supported ALLIANCE. Due to the decrease in software and services revenues and Forgent’s shift in its strategy for its software segment, the Company was also required to perform an impairment analysis in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” As part of the impairment analysis, Forgent determined the implied fair value of goodwill based on a discounted cash flow model. As a result of this valuation, Forgent recorded a $5.0 million impairment of its goodwill related to its acquisitions of Vosaic, LLC and Global Scheduling Solutions, Inc. (“GSS”). The technology obtained from these acquisitions supported the development efforts on ALLIANCE and its predecessor, Forgent’s Video Network Platform. The $10.1 million impairment charge related to ALLIANCE was recorded to the Company’s Consolidated Statement of Operations as part of discontinued operations for the year ended July 31, 2004.

Due to the change in focus of its software segment, Forgent also evaluated the recoverability of its intangible assets and long-lived assets related to its NetSimplicity product line in accordance with SFAS No. 142 and SFAS No. 144. These assets included fixed assets and intangible assets. Based on the estimated future cash flow related to NetSimplicity, Forgent did not record any impairment charge related to its NetSimplicity assets for the year ended July 31, 2004.

In January 2004, the Company closed its ALLIANCE sales office in Melville, New York. Management was unable to sublease the vacated space and upon review of the future discounted cash flows related to this lease, management recorded an impairment charge of $78 thousand. Additionally, management analyzed the discounted cash flows related to its Wild Basin property lease and subleases over the remainder of the lease term. Although Forgent was able to sublease the vacated space more quickly than originally anticipated, the rates on the subleases were less than originally anticipated due to depressed then current market rates. Therefore, management calculated the economic value of the lost sublease rental income and recorded an impairment charge of $1.5 million. During fiscal year 2004, Forgent also analyzed its recorded leasehold improvements at its Wild Basin property. This analysis indicated that certain leasehold improvements were no longer of value. Therefore, management recorded an impairment charge of $0.2 million related to these leasehold improvements. The $1.7 million impairment related to the Wild Basin and New York leases and the leasehold improvements were recorded to the Company’s Consolidated Statement of Operations for the year ended July 31, 2004 with $1.5 million to continuing operations and $0.3 million to discontinued operations.

During the fiscal year ended July 31, 2003, Forgent recorded impairment losses on the Consolidated Statement of Operations as follows:

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Forgent’s discontinued integration and videoconferencing hardware services businesses were located at its facilities in King of Prussia, Pennsylvania, which leases approximately 41,000 square feet. As a result of the sale of Forgent’s videoconferencing hardware services business to Gores in July 2003, approximately 37% of the total lease space was subleased to Gores, based on then current market values. SPL Integration Solutions (“SPL”), who purchased Forgent’s integration business, and another subtenant subleased the remaining 63% of the total lease space during fiscal year 2003. However, in October 2003, SPL’s sublease terminated and the subtenant vacated its leased space. Therefore, management reviewed the undiscounted cash flows of this lease and the related subleases, determined the economic value of the lost sublease rental income and recorded a charge of $0.5 million. Forgent remained obligated to make lease payments in accordance with the original terms of this lease. In November 2002, the ALLIANCE/GSS development operations in Atlanta, Georgia, were relocated to Forgent’s headquarters in Austin, Texas. Management was unable to sublease the vacated space and upon review of the future undiscounted cash flows related to this lease, management recorded an impairment charge of $21 thousand. The lease impairments for the King of Prussia and Atlanta facilities were recorded as part of discontinued operations on the Company’s Consolidated Statement of Operations for the year ended July 31, 2003.

Management also analyzed the discounted cash flows related to its Wild Basin property lease and subleases over the remainder of the lease term. Although Forgent was able to sublease the vacated space more quickly than originally anticipated, the rates on the subleases were considerably less than originally anticipated due to depressed then current market rates. Therefore, management calculated the economic value of the lost sublease rental income and recorded an impairment charge of $0.5 million. Forgent remained obligated to make lease payments in accordance with the original terms of this lease. The Wild Basin lease impairment was recorded as part of continuing operations on the Company’s Consolidated Statement of Operations for the year ended July 31, 2003.

During the 2003 fiscal year, Forgent recorded $0.3 million in accrued interest on both outstanding notes receivable from VTEL Products Corporation (“VTEL”) and fully reserved the accrued interest. Management agreed with VTEL’s management during the first fiscal quarter of 2003 to offset Forgent’s accounts payable to VTEL with its accounts receivable, notes receivable and interest receivable from VTEL. The Forgent liability was fully offset with the accounts receivable and accrued interest and partially offset with the note receivable in default, thus relieving $0.7 million of the related reserves. Since the initial $6.0 million charge to reserve the VTEL notes receivable was reported as part of the asset impairment from continuing operations, the related reduction of the reserves was also reported as part of the asset impairment from continuing operations for the year ended July 31, 2003. No cash was exchanged with these transactions.

The ongoing difficult economic environment and its associated negative impact on the Company’s software business during fiscal year 2003 represented an indicator of a possible impairment on the Company’s software business. Therefore, the Company was required to perform an impairment analysis in accordance with SFAS No. 142 to determine the fair value of the assets and liabilities of its software business. As a result of this analysis, Forgent recorded a $1.3 million impairment of its goodwill related to its acquisition of GSS. This impairment was recorded as part of discontinued operations on the Company’s Consolidated Statement of Operations for the year ended July 31, 2003.

Amortization of Intangible Assets

Amortization expenses were $41 thousand in fiscal year 2004 and $50 thousand in fiscal year 2005. The amortization expenses relate to the amortization of certain identified intangible assets purchased from Network Simplicity in October 2003. No amortization expenses were recorded for the year ended July 31, 2003.

Other Income (Expenses)

Other income (expenses) were ($35.0) thousand in fiscal year 2003, ($0.5) million in fiscal year 2004 and $0.4 million in fiscal year 2005. The decrease was $0.5 million, or 1,391.4%, from 2003 to 2004. The increase was $0.9 million, or 170.1%, from 2004 to 2005. Other income (expenses) were (0.1%), (3.3%) and 3.7% of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively.

During the year ended July 31, 2004, the Company recorded $0.6 million in foreign currency losses associated with ceasing the operations of certain international entities. These losses are the primary cause for the increase in other expenses during fiscal year 2004, as compared to fiscal year 2003. These losses are also the primary cause for the increase in other income during fiscal year 2005, as compared to fiscal year 2004.

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Income Taxes

At July 31, 2005, the Company had federal net operating loss carryforwards of approximately $154.2 million, research and development credit carryforwards of approximately $5.4 million and alternative minimum tax credit carryforwards of approximately $0.3 million. The net operating loss and research and development credit carryforwards will expire in varying amounts from 2006 through 2025, if not utilized. Minimum tax credit carryforwards do not expire and carry forward indefinitely.

As a result of various acquisitions performed by the Company in prior years, utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization.

Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its net deferred tax asset. Accordingly, no deferred tax benefits have been recorded for the tax years ended July 31, 2003, 2004 and 2005. The valuation allowance increased by approximately $1.9 million during the year ended July 31, 2005 primarily due to operating losses not benefited. Approximately $8.0 million of the valuation allowance relates to tax benefits for stock option deductions included in the net operating loss carryforward which, when realized, will be allocated directly to contributed capital to the extent the benefits exceed amounts attributable to book deferred compensation expense.

Undistributed earnings of the Company’s foreign subsidiaries are considered permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon.

Loss from Discontinued Operations, Net of Income Taxes

During the year ended July 31, 2005, Forgent sold assets related to its ALLIANCE software business and fully divested this business as of July 31, 2005 (see Note 4, in the accompanying financial statements). During the year ended July 31, 2003, the Company sold the operations and assets of its videoconferencing hardware services business (see Note 4, in the accompanying financial statements). Accordingly, the ALLIANCE software and videoconferencing hardware service businesses (“Services Business”) have been accounted for and presented as discontinued operations in the consolidated financial statements. Loss from discontinued operations were $8.5 million in fiscal year 2003, $18.6 million in fiscal year 2004 and $0.6 million in fiscal year 2005. The increase in loss was $10.1 million, or 119.7%, from 2003 to 2004. The decrease in loss was $17.9 million, or 96.5%, from 2004 to 2005. Loss from discontinued operations were 17.0%, 117.2% and 6.5% of total revenues for the years ended July 31, 2003, 2004 and 2005.

The $17.9 million decrease during the year ended July 31, 2005 resulted from the fact that the Company ceased actively marketed its ALLIANCE software products as of January 31, 2004, yet still incurred expenses including $11.0 million for impairment and restructuring charges in fiscal year 2004. The $10.1 million increase during the year ended July 31, 2004 is due to a $9.5 million increase in losses from the ALLIANCE software businesses, resulting primarily from the $11.0 million impairment and restructuring charges, and a $0.6 million decrease in income from the Services Business. The Company no longer conducts any business from these business lines as of July 31, 2005.

Income (Loss) on Disposal, Net of Income Taxes

During the year ended July 31, 2005, Forgent recorded $3.3 million in income upon selling assets related to its ALLIANCE software business and a $0.2 million loss, primarily related to severance expenses, upon divesting the ALLIANCE operations in the fourth fiscal quarter.

In July 2003, Forgent sold substantially all of the assets of its Services Business based in King of Prussia, Pennsylvania, to Gores, a privately held international acquisition and management firm. As consideration for the sale of the Services Business, the Company received $7.3 million in cash and incurred $1.9 million in loss on the disposal. The

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following table shows the amounts of the assets sold and liabilities assumed, as well as the fees incurred, related to this sale:

During fiscal years 2004 and 2005, the Company recorded $0.6 million and $1.0 million, respectively, in income from the disposal of its Services Business, which resulted from cash payments received from Gores in January 2004 and January 2005 related to the sale of the Services Business and the residual activity related to the disposal of the Services Business.

Net Income (Loss)

Net income was $8.0 million in fiscal year 2003; net loss was $20.6 million in fiscal year 2004; and net loss was $6.6 million in fiscal year 2005. The decrease in income was $28.6 million, or 357.4%, from 2003 to 2004. The decrease in loss was $14.0 million, or 68.2%, from 2004 to 2005. Net income (loss) were 16.1%, (130.3%) and (66.3%) of total revenues for the years ended July 31, 2003, 2004 and 2005, respectively.

Year-end Review

During the year ended July 31, 2005, Forgent continued focusing on licensing its intellectual property and growing its software business. Forgent achieved several goals including: (1) generated additional licensing revenues from its Patent Licensing Program, (2) transferred the ‘672 Litigation to the United States District Court for the Northern District of California without significant delays, (3) included Microsoft Corporation in the ongoing litigation process, (4) initiated litigation to protect its ‘746 patent, (5) grew revenues from its NetSimplicity product line by 97.5% over prior year, and (6) completed the divestiture of its ALLIANCE operations. Despite these achievements, uncertainties and challenges remain, and there can be no assurance that the Company can successfully grow its revenues or achieve profitability.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $8.5 million in fiscal year 2003; cash provided by operating activities was $7.3 million in fiscal year 2004; and cash used in operating activities was $8.0 million in fiscal year 2005. At July 31, 2005, Forgent had working capital of $13.6 million, including $17.3 million in cash, cash equivalents and short-term investments.

The $8.0 million of cash used in operating activities during fiscal year 2005 was due primarily to $10.0 million in net loss from continuing operations, which was offset by $1.5 million of non-cash depreciation and amortization expenses. During fiscal year 2005, Forgent collected $4.4 million in accounts receivable from its intellectual property licensing business. Management plans to utilize these cash receipts to invest resources in its Patent Licensing Program, especially due to the anticipated expenditures related to the ‘672 Litigation and the ‘746 Litigation, and manage its software operations towards profitability. The $7.3 million of cash provided by operating activities during fiscal year 2004 was due

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primarily to a $8.4 million decrease in accounts receivable. During fiscal year 2004, Forgent collected $15.6 million in accounts receivable from its intellectual property licensing business. Additionally, the Company sold $1.7 million of its outstanding accounts receivable, without any recourse, to Silicon Valley Bank in order to maintain cash balances at levels considered appropriate by management. The Company received proceeds from Silicon Valley Bank of $1.7 million. The $8.5 million of cash provided by operating activities during fiscal year 2003 was due primarily to $18.4 million in net income from continuing operations, which was offset by a $8.3 million increase in accounts receivable. During the year ended July 31, 2003, the Company collected $16.2 million in accounts receivable from its intellectual property licensing business.

Cash provided by investing activities was $6.3 million in fiscal year 2003; cash used in investing activities was $1.7 million in fiscal year 2004; and cash provided by investing activities was $4.4 million in fiscal year 2005. The $4.4 million of cash provided by investing activities during fiscal year 2005 was due primarily to $3.3 million in cash received from the sale of certain assets, including the ALLIANCE software suite, and $1.0 million in net sales of short-term investments. The $1.7 million of cash used in investing activities during fiscal year 2004 was due primarily to $2.3 million in cash used to purchase certain assets and the operations of Network Simplicity Software Inc. and $0.6 million in net purchases of fixed assets, which were offset by $1.4 million in cash received from net sales of short-term investments. The $6.3 million of cash provided by investing activities during fiscal year 2003 was due primarily to $7.4 million in cash received from the sale of the Services Business, which was offset by $1.1 million in net purchases of short-term investments. Forgent manages its investment portfolio in order to fulfill corporate liquidity requirements and maximize returns while preserving the quality of the portfolio.

The Company leases office space and equipment under non-cancelable operating leases that expire at various dates through 2013. Certain leases obligate Forgent to pay property taxes, maintenance and insurance. Additionally, the Company used the proceeds from its notes payable with Silicon Valley Bank to purchase equipment and fund operations. As of July 31, 2005, Forgent had an additional $0.4 million available in notes payable from Silicon Valley Bank. Additional notes payable obtained from Silicon Valley Bank would bear interest at prime plus 0.75% and require monthly installments over a three year term. Forgent may periodically make other commitments and thus become subject to other contractual obligations. Forgent’s future minimum lease payments under all operating leases and payments on its notes payable as of July 31, 2005 are as follows:

Approximately 96.2% of the Company’s operating lease obligations relates to its corporate office location at Wild Basin in Austin, Texas. As of July 31, 2005, Forgent had $4.0 million in future minimum lease payments receivable under non-cancelable sublease arrangements. Additionally, Forgent had a $1.5 million liability related to impairment charges for the economic value of the lost sublease rental income for its Wild Basin property. Forgent’s current operations are not capital intensive. The Company’s capital budget for fiscal year 2006 is approximately $0.1 million and will be used primarily for subtenant improvements as the Company continues to sublease its vacated office space and equipment.

Cash used in financing activities was $1.4 million in fiscal year 2003; cash provided by financing activities was $18 thousand in fiscal year 2004; and cash provided by financing activities was $0.3 million in fiscal year 2005. The $0.3 million of cash provided by financing activities during fiscal year 2005 was due primarily to $0.4 million in proceeds received from the issuance of the Company’s common stock. The $18 thousand of cash provided by financing activities during fiscal year 2004 was due to $0.7 million in proceeds received from the issuance of the Company’s common stock, which was offset by $0.5 million purchase of treasury stock and $0.2 million in net payments related to the Company’s notes payable and capital leases. The $1.4 million of cash used in financing activities during fiscal year 2003 was due primarily to the $1.4 million purchase of treasury stock.

Forgent’s stock repurchase program allows the Company to purchase up to 3.0 million shares of the Company’s

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common stock. The shares repurchased under the program for the years ended July 31, 2003, 2004 and 2005 are as follows:

The shares repurchased by month during the last quarter of the fiscal year ended July 31, 2005 are as follows:

As of July 31, 2005, the Company has repurchased 1,790,401 shares for approximately $4.8 million. Management will periodically assess repurchasing additional shares during fiscal year 2006, depending on the Company’s cash position, market conditions and other factors.

Forgent’s principal sources of liquidity at July 31, 2005 consist of $17.3 million of cash, cash equivalents and short-term investments and the ability to generate cash from its intellectual property licensing business. However, Forgent’s ability to generate cash from its intellectual property licensing business is subject to certain risks as discussed under the “Risk Factors – Patent Licensing Program” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company.” Management currently plans to utilize its cash balances to focus on the litigation efforts, continue licensing its intellectual property, and fund its software operations. 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. Therefore, there is no assurance that the Company will be able 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 the litigations, increased expense levels and other factors. While management believes that the Company has sufficient capital and liquidity to pursue its licensing and litigation efforts, due to uncertainties related to the timing and costs of these efforts, Forgent may need to raise additional capital in the future. However, there is no assurance that the Company will be able to raise additional capital if and when it is needed.

CRITICAL ACCOUNTING POLICIES

The Company’s 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 the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates made by management include the valuation allowance for the gross deferred tax asset, contingency reserves, useful lives of fixed assets, the determination of the fair value of its long-lived assets, including its intangible assets, the loss and income from discontinued operations and the loss from its impairments. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation.

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

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes software revenue in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2,” and SOP 98-9, “Modification of SOP 97-2 With Respect to Certain Transactions,” and Securities and Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition.”

Intellectual property licensing revenue is derived from the Company’s Patent Licensing Program, which is currently focused on generating licensing revenues relating to the Company’s data compression technology embodied in the ‘672 patent, and its foreign counterparts and is currently conducted through the Company’s wholly-owned subsidiary, Compression Labs, Inc. Gross intellectual property licensing revenue is recognized at the time a license agreement has been executed and related costs are recorded as cost of sales. The cost of sales on the intellectual property licensing business relates to contingent legal fees incurred on successfully achieving signed agreements, as well as legal fees incurred for legal counsel’s time.

Software and service revenue consists of license and service fees. License fee revenue is earned through the licensing or right to use the Company’s software and from the sale of specific software products. Service fee income is earned through the sale of maintenance and technical support, training and installation. The Company allocates the total fee to the various elements based on the relative fair values of the elements specific to the Company. The Company determines the fair value of each element in the arrangement based on vendor-specific objective evidence (“VSOE”) of fair value. VSOE of fair value for the license element is not available and license revenue is recognized using the residual method. Under the residual method, the contract value is first allocated to the undelivered elements (maintenance and service elements) based upon their VSOE of fair value; the remaining contract value, including any discount, is allocated to the delivered element. For maintenance, VSOE of fair value is based upon the renewal rate specified in each contract. For training and installation services, VSOE of fair value is based upon the rates charged for these services when sold separately. Revenue allocated to maintenance and technical support is recognized ratably over the maintenance term (typically one year). Revenue allocated to installation and training is recognized upon completion of these services due to their short-term nature. The Company’s training and installation services are not essential to the functionality of its products as such services can be provided by a third party or the customers themselves. For instances in which VSOE cannot be determined for undelivered elements, and these undelivered elements do not provide significant customization or modification of its software product, Forgent recognizes the entire contract amount ratably over the period during which the services are expected to be performed.

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

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

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Forgent reviews and evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, including significant and sustained decline in the Company’s stock price or market capitalization, significant underperformance of operating units and significant changes in market conditions and trends, the Company compares the assets’ carrying amounts against the estimated undiscounted cash flows to be generated by those assets over their estimated useful lives. If the carrying amounts are greater than the undiscounted cash flows, the fair values of those assets are estimated by discounting the projected cash flows. Any excess of the carrying amounts over the fair values are recorded as impairments in that fiscal period.

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RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standard Board issued SFAS No. 123R “Share-Based Payment,” which supersedes Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and SFAS No. 123, “Accounting for Stock-Based Compensation.” This pronouncement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and requires share-based compensation to employees, including employee stock options and similar awards, to be measured at their fair value on the awards’ grant date using either the Black-Scholes or a binomial option-pricing model. The value of the awards is recognized as compensation expense on the statement of operations over the vesting period of the awards. Forgent currently does not expense its share-based compensation based upon the fair value method, but discloses the effect of these items as required by SFAS No. 123 and SFAS No. 148 (see Note 2 and Note 12, in the accompanying financial statements). SFAS No. 123R is effective for annual periods beginning after June 15, 2005 and Forgent will adopt SFAS No. 123R using the “modified prospective” transition method. The “modified prospective” method requires compensation cost to be recognized beginning with the effective date 1) according to FAS 123R for all share-based payments granted after the effective date and 2) according to FAS123 for all awards granted to employees prior to the effective date of FAS 123R that were unvested on the effective date. Based on current stock options granted, management will continue using the Black-Scholes model to estimate the fair value of its options and anticipates it will incur compensation expense of approximately $0.2 million - $0.3 million during fiscal year 2006 upon adoption of this standard.

RISK FACTORS

There are many factors that affect the Company’s business, prospects, liquidity and the results of operations, some of which are beyond the control of the Company. The following is a discussion of some, but not all, 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. Additional risks not presently known to management or risks that are currently believed to be immaterial, but which may become more material, may also affect the Company’s business prospects and results of operations.

Forgent is largely dependent on its Patent Licensing Program and if the Company is unable to obtain new license agreements, licensing revenues will not grow.

Forgent is largely dependent on its ability to enter into new license agreements. Failure to sign new license agreements would cause operating results to suffer. The Company’s Patent Licensing Program involves risks inherent in licensing intellectual property, including risks of protracted delays, 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 cause the Company’s results of operations to decline. Thus, there can be no assurance that the Company will be able to continue to license its technology to others. See Item 3 “Legal Proceedings” for information regarding the commencement by the Federal Trade Commission of a non-public investigation associated with the Company’s Patent Licensing Program. Additionally, quarterly operating results may fail to meet expectations for a number of reasons, including the unwillingness or inability of licensees to pay for the license and other fees, a decline in the demand for the Company’s patented technology, higher than expected operating expenses and license delays due to legal and other factors.

Forgent’s licensing cycle is lengthy and costly, which could cause the Company to incur significant legal expenditures and earnings to fluctuate.

Forgent’s licensing cycle for its Patent Licensing Program is lengthy and costly, including expenditures related to various legal costs, consultant fees and travel costs. Due to multiple negotiations and legal due diligence required, the licensing process cannot necessarily be expedited. As a result, the Company’s intellectual property licensing revenues will fluctuate from quarter to quarter, making it difficult for Forgent to predict its revenues, which could cause the Company to miss analysts’ expectations. Additionally, these fluctuations and missed expectations may lead to reduced prices for the Company’s common stock.

Forgent may not prevail in its litigation proceedings, which could cause the Company to incur significant legal expenditures without any related earnings.

The Company has initiated the ‘672 Litigation against multiple companies for infringement of its ‘672 patent. Additionally, the Company has initiated the ‘746 Litigation against several companies for the infringement of its ‘746 patent. As with any litigation, the outcome is uncertain, and although the Company intends to vigorously pursue its claims, there are no guarantees that the Company can protect its intellectual property rights in its current litigation or prevent the unauthorized use of its technology in the future. The litigation will be lengthy and costly. Additionally, unintended consequences of the Company’s initiating the litigations may adversely affect the Company’s business,

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including, without limitation, that the Company may have to devote significant time and financial resources to pursuing the litigations, that the Company may become subject to counterclaims or lawsuits and that the expenses of pursuing the litigations could increase based upon new developments occurring. These, and other factors not currently known to or deemed material by management, could have a material and adverse impact on the Company’s business, prospects, liquidity and results of operations.

If Forgent is unable to retain qualified legal counsel to advise it in connection with its Patent Licensing Program, the Company’s operating results and financial condition could suffer.

The Patent Licensing Program is dependent on intensive legal due diligence and negotiations. The Company may still encounter a number of other risks associated with its legal counsel, including but not limited to (1) turnover of individual attorneys working on the Company’s Patent Licensing Program; (2) availability of key attorneys working on the program; (3) financial and other resources available to legal counsel; and (4) the financial position of legal counsel. These risks may cause delays in Forgent’s ability to proceed with its Patent Licensing Program, which could require significant additional legal expenditures and could result in declining revenues and earnings for the Company.

Forgent may not be able to protect or enforce its intellectual property rights which could cause the Company’s ability to license its technologies to be impaired.

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 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. If Forgent cannot protect or enforce these rights, the Company’s ability to obtain future licenses could be impaired. Furthermore, despite best efforts, the Company may be unable to prevent third parties from infringing upon or misappropriating its intellectual property. Competitors may also independently develop similar, but not infringing, technology, duplicate products or design around the Company’s patents or other intellectual property. Additionally, 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 would force Forgent to divert important financial and other resources away from business operations.

The ‘672 patent will be expiring soon and revenues may decline if Forgent is unable to replace this revenue stream.

To date, all of the Company’s intellectual property licensing revenue has been derived from the ‘672 patent. The U.S. ‘672 patent expires in October 2006 and its foreign counterparts expire in September 2007. Revenues from this patent are finite and, if such revenues are not replaced, net income and the market price of Forgent’s common stock will decline following the expiration of the ‘672 patent or the resolution of the ‘672 Litigation.

If Forgent is unable to successfully market and sell its software products and services, future software revenues may decline.

The future success of the Company’s software segment is dependent in significant part on its ability to generate demand for its software products and services. To this end, Forgent’s sales operations must increase market awareness of its products to generate increased revenue. All sales new hires will require training and may 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 software revenues may decline.

Lack of new customers or additional sales from current customers could negatively affect the Company’s ability to grow revenues.

Forgent’s business model depends on the expanded use of its software within its current and new customers’ organizations. Therefore, Forgent must execute on its growth objectives. If the Company fails to grow its customer base or generate repeat and expanded business from its current customers, Forgent’s software revenues could be adversely affected. Since the Company’s maintenance and other service fees depend largely on the size and number of licenses that are sold, any downturn in Forgent’s software license revenue would negatively impact the Company’s deployment services revenue and future maintenance revenue. Additionally, if customers elect not to renew their maintenance agreements, Forgent’s maintenance revenue could be adversely affected.

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If Forgent cannot develop new or enhanced technologies for its software products, technological changes could adversely affect the Company’s operating results.

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 performance characteristics. Forgent expects that its future financial performance will depend, in part, on revenue generated from its existing and future software products and the related products that the Company plans to develop or acquire. There are significant risks inherent in any new product introduction, such as with Forgent’s NetSimplicity software products. To be successful, Forgent must be cost-effective and timely in enhancing its existing software applications, developing new software technology and solutions that address the increasingly sophisticated and varied needs of its existing and prospective clients, and anticipating technological advances and evolving industry standards and practices. Forgent may need to invest further in research and development in order to keep its software applications and solutions viable in the rapidly changing marketplace. This research and development effort may require significant resources and could ultimately be unsuccessful. If the Company fails to anticipate and respond effectively to technological improvements and new product introductions, these improvements could render the Company’s products noncompetitive and adversely affect the Company’s operating results as well as its liquidity.

If Forgent is unable to meet customer needs or expectations, the Company’s sales may suffer.

Forgent cannot be certain that its existing or future software product offerings will meet customer performance needs or expectations when shipped or that they 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 furthermore, upgrading or enhancing the Company’s products could be costly and time consuming. Such upgrades or enhancements could have an adverse effect on the Company’s results of operations and liquidity.

Increased competition may have an adverse effect on the Company’s profitability.

The Company may encounter new entrants or competition from competitors in some or all aspects of its business. The Company currently competes on the basis of price, technology, availability, performance, quality, reliability, service and support. There can be no assurance that the Company will be able to maintain a competitive advantage with respect to any of these factors. 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.

Forgent may experience significant fluctuations in its quarterly results and if the Company’s future results are below expectations from market analysts or investors, the price for the Company’s common stock may decline.

In the past, Forgent’s revenues and operating results have varied significantly from quarter to quarter. Additionally, management expects that revenues and operating results will continue to fluctuate significantly from quarter to quarter. These fluctuations may lead to reduced prices for the Company’s common stock. Several factors may cause the quarterly results to fluctuate, including:

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Some of these factors are within management’s control while others are not. Accordingly, management believes that quarter-to-quarter comparisons of the Company’s revenues and operating results are not necessarily meaningful. Therefore, market analysts and investors should not rely on the results of any particular quarter as an indication of future performance.

The loss of key management and personnel could hinder the development of Forgent’s technology and otherwise adversely affect the Company’s business.

Forgent’s success depends upon its ability to attract, hire and retain highly trained and experienced software developers and engineers to design and develop software applications in order to keep pace with client demand for rapidly evolving technologies and varying client needs. The Company’s operations are also dependent on the continued efforts of its executive officers and senior management. If any of the Company’s key personnel or senior management are unable or unwilling to continue in his or her present role, or if Forgent is unable to retain, hire, train and integrate new personnel effectively, Forgent’s business could be adversely affected.

Compliance with changing laws and regulations could cause the Company to incur additional expenses.

As a result of assessing, implementing and complying with recently proposed and enacted changes in the laws and regulations affecting public companies, including but not limited to, the Sarbanes-Oxley Act of 2002, management anticipates increased accounting, audit and legal fees, as well as increased costs for certain types of insurance. Additionally, the new and proposed rules could also make it more difficult for Forgent to retain qualified individuals to serve on its Board of Directors. Although management continually monitors and evaluates developments with respect to these new and proposed laws and regulations, management cannot estimate the amount of the additional costs the Company may incur or the timing of such costs at this time. However, such increased costs could materially affect Forgent’s results of operations.

Due to Forgent’s limited operating history in its current lines of business, the Company may not be able to accurately predict future operating results, which could cause the Company to miss market analysts’ and investors’ expectations.

Although founded in 1985, Forgent has a limited operating history in its current lines of business due to the Company’s transition to a licensor of intellectual property and a provider of scheduling and asset management software and services. As a result of this limited operating history, Forgent cannot forecast revenues and operating expenses based on historical results. Additionally, the Company’s ability to forecast quarterly revenue accurately is limited because of the relative unpredictability of its intellectual property licensing revenues. 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.

Although Forgent has divested its non-core operations, the Company may not strengthen its core operations and achieve profitability.

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

Due to the risk factors noted above and elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company,” Forgent’s past earnings and stock price have been, and future earnings and stock price potentially may be, subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors are cautioned in using historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company’s common stock in any given period.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company’s primary market risk exposure relates to interest rate risk. Forgent’s interest income is sensitive to changes in U.S. interest rates. However, due to the short-term nature of the Company’s investments, Forgent does not consider these risks to be significant.

FOREIGN CURRENCY EXCHANGE RATE RISK

In the past, Forgent managed its foreign currency exchange rate risk by utilizing forward contracts to hedge its foreign currency exposure on firm commitments. The principal currencies hedged were the Euro and Australian dollars. Forgent ceased utilizing hedges in fiscal year 2001. During the last three fiscal years, the Company has significantly reduced its international operations. The operations from Forgent’s Canadian subsidiary are not significant as to cause a material foreign currency exchange rate risk to the Company. Therefore, Forgent considers its market risk exposure related to foreign currency exchange rates on a go-forward basis to be insignificant.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Forgent Networks, Inc.

We have audited the accompanying consolidated balance sheets of Forgent Networks, Inc. (the “Company”) as of July 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Forgent Networks, Inc. at July 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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FORGENT NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

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

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FORGENT NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)