#### **UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

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** **

**FORM 10-Q**

** **

| **x**                                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|
| ** **                                                | ** ** | ** **                                                                                                  |
| **For the  quarterly period ended October 31, 2007** |
|                                                      |       |                                                                                                        |
| **OR**                                                    |
|                                                      |       |                                                                                                        |
| **o**                                                     | ** ** | **TRANSITION  REPORT****PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from         to        **

 

**Commissionfile number: 0-20008**

 

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**FORGENT NETWORKS, INC.**

(ExactName of Registrant as Specified in its Charter)

 

| **Delaware**                             | ** ** | **74-2415696**      |
|------------------------------------------|------------|---------------------|
| (State of other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **108 Wild Basin Road**                  |       |                |
| **Austin, Texas**                        | ** ** | **78746**           |
| (Address of Principal Executive Offices) |       | (Zip Code)          |

 

**(512) 437-2700**

(Registrant’s Telephone Number, including Area Code)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes x   No o

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

| Large accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|---------------------------------|--------|----------------------------|--------|--------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o   No x

 

At December 11, 2007, the registrant had outstanding 30,935,207 shares of its Common Stock,$0.01 par value.

 

# ** **

# ****

# ** **

# **INDEXTO FINANCIAL STATEMENTS**

 
| ** **                              | ** **                                                                                           | ** **                                                                                                           | ** ** | **Page  Number** |
|-----------------------------------------|------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART I - FINANCIAL INFORMATION** | ** **                                                                                           | ** **                                                                                                           |
| ** **                              | ** **                                                                                           | ** **                                                                                                           |
|                                    | Item 1 – Condensed Consolidated Financial Statements                                            |                                                                                                                 |       |
|                                    |                                                                                                 | Condensed Consolidated Balance Sheets as of  October 31, 2007 (unaudited) and July 31, 2007                |       | 3                |
|                                    |                                                                                                 | Unaudited Condensed Consolidated Statements  of Operations for the Three Months Ended October 31, 2007 and 2006 |       | 4                |
|                                    |                                                                                                 | Unaudited Condensed Consolidated Statements  of Cash Flows for the Three Months Ended October 31, 2007 and 2006 |       | 5                |
|                                    |                                                                                                 | Notes to the Unaudited Condensed  Consolidated Financial Statements                                                  |       | 6                |
|                                    | Item 2 - Management’s Discussion and  Analysis of Financial Condition and Results of Operations |                                                                                                                 | 10         |
|                                    | Item 3 -  Quantitative and Qualitative Disclosures About Market Risk                                 |                                                                                                                 | 16         |
|                                    | Item 4 -  Controls and Procedures                                                                    |                                                                                                                 | 16         |
|                                    |                                                                                                 |                                                                                                                 |       |             |
| **PART II - OTHER INFORMATION**    | ** **                                                                                           | ** **                                                                                                           |
|                                    |                                                                                                 |                                                                                                                 |       |             |
|                                    | Item 1 - Legal Proceedings                                                                           |                                                                                                                 | 17         |
|                                    | Item 1A - Risk Factors                                                                               |                                                                                                                 | 18         |
|                                    | Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                |                                                                                                                 | 23         |
|                                    | Item 3 -  Defaults upon Senior Securities                                                            |                                                                                                                 | 23         |
|                                    | Item 4 -  Submission of Matters to a Vote of Security Holders                                        |                                                                                                                 | 24         |
|                                    | Item 5 - Other Information                                                                           |                                                                                                                 | 24         |
|                                    | Item 6 - Exhibits                                                                                    |                                                                                                                 | 24         |
|                                    |                                                                                                 |                                                                                                                 |       |             |
| **Signatures**                          |                                                                                                 |                                                                                                                 | 25         |
|                                    |                                                                                                 |                                                                                                                 |       |             |
| **Index to Exhibits**                   |                                                                                                 |                                                                                                                 | 26         |
|                                         |                                                                                                      |                                                                                                                      |            |                  |  |  |  |

 

2

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**FORGENTNETWORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Amounts in thousands, except per share data)

 
| ** **                                                                                                                                                                                    | ** ** | **OCTOBER 31,  2007** | ** ** | **JULY 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **(UNAUDITED)**            | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                    |       |                       |       |                    |       |
| Current Assets:                                                                                                                                                                               |       |                       |       |                    |       |
| Cash and equivalents                                                                                                                                                                          |       | $                          | 15,925     |                    | $          | 33,524 |   |
| Short-term investments                                                                                                                                                                        |       | 3,551                      |       | 1,538                   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $56 and  $21 at October 31, 2007 and July 31, 2007, respectively                                                    |       | 1,476                      |       | 1,040                   |       |
| Prepaid expenses and other current assets                                                                                                                                                     |       | 285                        |       | 211                     |       |
| Total Current Assets                                                                                                                                                                          | ** ** | **21,237**                 | ** ** | **36,313**              | ** ** |
|                                                                                                                                                                                          |       |                       |       |                    |       |
| Property and equipment, net                                                                                                                                                                   |       | 1,108                      |       | 767                     |       |
| Goodwill                                                                                                                                                                                      |       | 6,993                      |       | —                  |       |
| Intangible assets, net                                                                                                                                                                        |       | 5,161                      |       | —                  |       |
| Other assets                                                                                                                                                                                  |       | 129                        |       | 212                     |       |
| ** **                                                                                                                                                                                    | ** ** | **$**                      | **34,628** | ** **              | **$**      | **37,292** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                 |       |                       |       |                    |       |
| Current Liabilities:                                                                                                                                                                          |       |                       |       |                    |       |
| Accounts payable                                                                                                                                                                              |       | $                          | 4,058      |                    | $          | 10,970 |   |
| Accrued compensation and benefits                                                                                                                                                             |       | 586                        |       | 557                     |       |
| Other accrued liabilities                                                                                                                                                                     |       | 778                        |       | 855                     |       |
| Deferred revenue                                                                                                                                                                              |       | 1,392                      |       | 1,076                   |       |
| Total Current Liabilities                                                                                                                                                                     | ** ** | **6,814**                  | ** ** | **13,458**              | ** ** |
|                                                                                                                                                                                          |       |                       |       |                    |       |
| Long-Term Liabilities:                                                                                                                                                                        |       |                       |       |                    |       |
| Deferred revenue                                                                                                                                                                              |       | 33                         |       | 28                      |       |
| Other long-term obligations                                                                                                                                                                   |       | 1,060                      |       | 1,186                   |       |
| Total Long-Term Liabilities                                                                                                                                                                   | ** ** | **1,093**                  | ** ** | **1,214**               | ** ** |
| ** **                                                                                                                                                                                    | ** ** | ** **                 | ** ** | ** **              | ** ** |
| Stockholders’ Equity:                                                                                                                                                                    |       |                       |       |                    |       |
| Preferred stock, $.01 par value; 10,000  shares authorized; none issued or outstanding                                                                                                        |       | —                     |       | —                  |       |
| Common stock, $.01 par value; 40,000 shares  authorized; 32,487 and 27,388 shares issued; 30,697 and 25,598 shares  outstanding at October 31, 2007 and July 31, 2007, respectively |       | 325                        |       | 274                     |       |
| Treasury stock at cost, 1,790 shares at  October 31, 2007 and July 31, 2007                                                                                                         |       | (4,815                     | )          | (4,815                  | )          |
| Additional paid-in capital                                                                                                                                                                    |       | 270,590                    |       | 265,647                 |       |
| Accumulated deficit                                                                                                                                                                           |       | (239,424                   | )          | (238,506                | )          |
| Accumulated other comprehensive income                                                                                                                                                        |       | 45                         |       | 20                      |       |
| Total Stockholders’ Equity                                                                                                                                                               | ** ** | **26,721**                 | ** ** | **22,620**              | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **$**                      | **34,628** | ** **              | **$**      | **37,292** | ** ** |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Amounts in thousands, except per share data)

 
| ** **                                              | ** ** | **FOR THE THREE  MONTHS ENDED  OCTOBER 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(UNAUDITED)**                                                  | ** ** |
| **REVENUES:**                                           |       |                                                             |       |   |   |
| Software & service                             |       | $                                                                | 1,875      |   | $ | 962 |   |
| Intellectual property licensing                         |       | —                                                           |       | 8,134 |   |
| Total Revenues                                          | ** ** | **1,875**                                                        | ** ** | **9,096** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **COST OF SALES:**                                      |       |                                                             |       |   |   |
| Software & service                             |       | 330                                                              |       | 310 |   |
| Intellectual property licensing                         |       | —                                                           |       | 3,540 |   |
| Total Cost of Sales                                     | ** ** | **330**                                                          | ** ** | **3,850** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **GROSS MARGIN**                                        | ** ** | **1,545**                                                        | ** ** | **5,246** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **OPERATING EXPENSES:**                                 |       |                                                             |       |   |   |
| Selling, general and administrative                     |       | 2,440                                                            |       | 2,500 |   |
| Research and development                                |       | 291                                                              |       | 116 |   |
| Amortization of intangible assets                       |       | 36                                                               |       | 4 |   |
| Total Operating Expenses                                | ** ** | **2,767**                                                        | ** ** | **2,620** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **(LOSS) INCOME FROM OPERATIONS**                       | ** ** | **(1,222**                                                       | **)**      | **2,626** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **OTHER INCOME AND (EXPENSES):**                        |       |                                                             |       |   |   |
| Interest income                                         |       | 338                                                              |       | 155 |   |
| Interest expense and other                              |       | (20                                                              | )          | (32 | ) |
| Total Other Income and (Expenses)                       | ** ** | **318**                                                          | ** ** | **123** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **(LOSS) INCOME FROM OPERATIONS, BEFORE  INCOME TAXES** | ** ** | **(904**                                                         | **)**      | **2,749** | ** ** |
| Provision for income taxes                              |       | (14                                                              | )          | — |   |
| **NET (LOSS) INCOME**                                   | ** ** | **$**                                                            | **(918**   | **)** | **$** | **2,749** | ** ** |
|                                                    |       |                                                             |       |   |   |
| **BASIC AND DILUTED (LOSS) INCOME PER SHARE:**          |       |                                                             |       |   |   |
| Net (loss) income per share - basic and  diluted        |       | $                                                                | (0.03      | ) | $ | 0.11 |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING:**                |       |                                                             |       |   |   |
| Basic                                                   |       | 27,094                                                           |       | 25,381 |   |
| Diluted                                                 |       | 27,094                                                           |       | 25,522 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Amounts in thousands)

 
| ** **                                                                  | ** ** | **FOR THE THREE  MONTHS ENDED  OCTOBER 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | **(UNAUDITED)**                                                  | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                   |       |                                                             |       |   |   |
| (Loss) income from operations                                               |       | $                                                                | (918       | ) | $ | 2,749 |   |
| Adjustments to reconcile net (loss) income  to net cash used in operations: |       |                                                             |       |   |   |
|                                                                        |       |                                                             |       |   |   |
| Depreciation and amortization                                               |       | 141                                                              |       | 239 |   |
| Amortization of leasehold advance and lease  impairment                     |       | (97                                                              | )          | (106 | ) |
| Provision for doubtful accounts                                             |       | (2                                                               | )          | 1 |   |
| Share-based compensation                                                    |       | 5                                                                |       | 128 |   |
| Foreign currency translation gain                                           |       | 7                                                                |       | 5 |   |
| Changes in operating assets and  liabilities:                               |       |                                                             |       |   |   |
| Accounts receivable                                                         |       | 137                                                              |       | (5,392 | ) |
| Prepaid expenses and other current assets                                   |       | 22                                                               |       | (87 | ) |
| Accounts payable                                                            |       | (8,041                                                           | )          | 1,170 |   |
| Accrued expenses and other long-term  obligations                           |       | (248                                                             | )          | 140 |   |
| Deferred revenue                                                            |       | (70                                                              | )          | 94 |   |
| Net cash used in operating activities                                       | ** ** | **(9,064**                                                       | **)**      | **(1,059** | **)** |
|                                                                        |       |                                                             |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                   |       |                                                             |       |   |   |
| Net sales of short-term investments                                         |       | (1,483                                                           | )          | — |   |
| Net purchases of property and equipment                                     |       | (18                                                              | )          | (32 | ) |
| Change in other assets                                                      |       | 164                                                              |       |   |   |
| Acquisition of iSarla, Inc., net of  cash acquired                     |       | (7,213                                                           | )          | — |   |
| Net cash used in by investing activities                                    | ** ** | **(8,550**                                                       | **)**      | **(32** | **)** |
|                                                                        |       |                                                             |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                   |       |                                                             |       |   |   |
| Net proceeds from issuance of stock                                         |       | 2                                                                |       | 2 |   |
| Payments on notes payable and capital  leases                               |       | (1                                                               | )          | (89 | ) |
| Net cash provided by (used in) financing  activities                        | ** ** | **1**                                                            | ** ** | **(87** | **)** |
|                                                                        |       |                                                             |       |   |   |
| Effect of translation exchange rates                                        |       | 14                                                               |       | 10 |   |
|                                                                        |       |                                                             |       |   |   |
| Net decrease in cash and equivalents                                        |       | (17,599                                                          | )          | (1,168 | ) |
| Cash and equivalents at beginning of period                                 |       | 33,524                                                           |       | 16,206 |   |
| Cash and equivalents at end of period                                       | ** ** | **$**                                                            | **15,925** | ** ** | **$** | **15,038** | ** ** |
|                                                                        |       |                                                             |       |   |   |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                                    |       |                                                             |       |   |   |
| Issuance of stock for  acquisition of iSarla, Inc.                     |       | $                                                                | 4,987      |   | $ | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Amounts in thousands, except per share dataunless otherwise noted)

 

**NOTE 1 - GENERAL AND BASIS OF FINANCIALSTATEMENTS**

** **

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission and accordingly, do not include allinformation and footnotes required under U.S. generally accepted accounting principles forcomplete financial statements. In the opinion of management, these interimfinancial statements contain all adjustments, consisting of normal, recurringadjustments, necessary for a fair presentation of the financial position ofForgent Networks, Inc. (“Forgent” or the “Company”) as of October 31,2007 and July 31, 2007, and the results of operations and cash flows forthe three months ended October 31, 2007 and 2006. These condensedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements and notes thereto filedwith the Securities and Exchange Commission in the Company’s annual report on Form 10-K/Afor the fiscal year ended July 31, 2007.  The results for the interim periods are not necessarily indicative ofresults for a full fiscal year.

 

**NOTE 2 - ACQUISITION**

** **

On October 5, 2007, Forgent acquired all ofthe outstanding capital stock of iSarla Inc., a Delaware corporation andapplication service provider that offers on-demand workforce managementsolutions that help simplify the Human Resource process and improve employeeproductivity by managing and communicating human resources, employee benefitsand payroll information. iSarla Inc. conducts its business under the trade name“iEmployee” and provides hosted application services, including Time &Attendance, Timesheets, Human Resource Benefits, Expenses and othersolutions.  iEmployee is a profitablebusiness with a high percentage of recurring revenues and delivers its softwareas a service under the “SaaS” model.  Theacquisition expands Forgent’s current target markets, significantly augmentsthe Company’s product and service offerings to customers, and increasesrevenues from its software and services segment considerably.  Due to these factors, the Company purchasedthe iEmployee business at a premium (i.e. goodwill) over the fair value of thenet assets acquired.

 

In consideration for the acquisition, Forgent paid approximately$12,661, including $6,602****in cash,5,095 shares of its Common Stock, valued at approximately $4,987 andtransaction cost of approximately $1,072. The shares of Common Stock issued were valued based upon the price of$0.98 when the number of shares to be issued became fixed.  Upon closing, $990 in cash and 764 sharestotaling $748 of the purchase price were held in escrow for representations andwarranties.  The purchase agreement didnot include provisions for any other contingent payments, options or commitments.  As a result of the acquisition, iEmployee’sresults of operations since October 5, 2007 have been included in theCompany’s Consolidated Statement of Operations for the three months ended October 31,2007.

 

The business combination wasaccounted for under Financial Accounting Standard Board (“FASB”) Statement No. 141, *“Business Combinations.” *The application of purchaseaccounting under Statement No. 141 requires the total purchase price to beallocated to the fair value of assets acquired and liabilities assumed based ontheir fair values at the acquisition date, with amounts exceeding fair valuebeing recorded as goodwill.  The Companyis currently in the process of assessing and finalizing the fair value of theassets acquired and the liabilities assumed. The following table summarizes the preliminary estimated fair values ofthe iEmployee assets acquired and liabilities assumed:

 
| **Assets Acquired**       |       |       |       |
|---------------------------|------------|------------|------------|
| Cash                      |       | $          | 460        |   |
| Short-term investments    |       | 526        |       |
| Accounts receivable       |       | 577        |       |
| Prepaid assets            |       | 96         |       |
| Fixed assets              |       | 416        |       |
| Goodwill                  |       | 6,993      |       |
| Intangible assets         |       | 5,209      |       |
| Other assets              |       | 22         |       |
| **Total assets acquired** | ** ** | **14,299** | ** ** |
|                           |            |            |            |  |

 

6

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| **Liabilities assumed**           |       |       |       |
|-----------------------------------|------------|------------|------------|
| Accounts payable                  |       | (1,099     | )          |
| Accrued compensation and benefits |       | (110       | )          |
| Accrued other liabilities         |       | (33        | )          |
| Deferred revenue                  |       | (396       | )          |
| **Total liabilities assumed**     | ** ** | **(1,638** | **)**      |
|                              |       |       |       |
| **Net assets acquired**           | ** ** | **$**      | **12,661** | ** ** |
|                                   |            |            |            |  |

 

Through the acquisition of the iEmployee business, Forgent’s workforcegrew by 142 employees, 121 of whom are located in Mumbai, India.  The co-founders of iEmployee now serveas Forgent’s Vice-Presidents of the iEmployee operations.

 

Thefollowing summary presents unaudited pro forma consolidated financialinformation for the three months ended October 31, 2007 and 2006, as ifthe iEmployee acquisition had occurred as of August 1, 2006.  The pro forma information does not purport tobe indicative of the actual results which would have occurred had theacquisition been completed as of August 1, 2006, nor is it necessarilyindicative of the results of operations which may occur in the future.

 
| ** **                           | ** ** | **OCTOBER 31, 2007** | ** ** | **OCTOBER 31, 2006** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **AS  REPORTED**               | ** ** | **PRO  FORMA**                 | ** ** | **AS  REPORTED** | ** ** | **PRO  FORMA** | ** ** |
|                                 |       |                           |       |                           |       |   |   |   |   |
| Revenues                             |       | $                              | 1,875      |                           | $          | 2,888 |   | $ | 9,096 |   | $ | 10,455 |   |
| Net (loss) income                    |       | (918                           | )          | (773                           | )          | 2,749 |   | 2,946 |   |
|                                 |       |                           |       |                           |       |   |   |   |   |
| Net (loss) income per common share:  |       |                           |       |                           |       |   |   |   |   |
| Basic                                |       | $                              | (0.03      | )                              | $          | (0.03 | ) | $ | 0.11 |   | $ | 0.10 |   |
| Diluted                              |       | (0.03                          | )          | (0.03                          | )          | 0.11 |   | 0.10 |   |
|                                 |       |                           |       |                           |       |   |   |   |   |
| Weighted average shares outstanding: |       |                           |       |                           |       |   |   |   |   |
| Basic                                |       | 27,094                         |       | 30,749                         |       | 25,381 |   | 30,476 |   |
| Diluted                              |       | 27,094                         |       | 30,749                         |       | 25,522 |   | 30,617 |   |

 

**NOTE 3 - COMPREHENSIVE INCOME (LOSS)**

** **

In accordancewith the disclosure requirements of Statement of Financial Accounting Standard No. 130,*“Reporting Comprehensive Income,”*theCompany’s comprehensive income (loss) is comprised of net income (loss),foreign currency translation adjustments and unrealized gains and losses onshort-term investments held as available-for-sale securities. Comprehensiveloss for the three months ended October 31, 2007 was $893****and comprehensive income for the threemonths ended October 31, 2006 was $2,751.

 

**NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS**

** **

In February 2007,the FASB issued Statement No. 159, *“TheFair Value Option for Financial Assets and Financial Liabilities.”*StatementNo. 159 provides companies with an option to report selected financialassets and liabilities at fair value. The standard’s objective is to reduceboth complexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently.  The standard requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of the company’s choice to usefair value on its earnings. It also requires companies to display the fairvalue of those assets and liabilities for which the company has chosen to usefair value on the face of the balance sheet. This new statement does noteliminate disclosure requirements included in other accounting standards,including requirements for disclosures about fair value measurements includedin Statement No. 157, *“Fair ValueMeasurements,”*and Statement No. 107, *“Disclosures about Fair Value of FinancialInstruments.”*

 

7

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Statement No. 159 iseffective as of the beginning of fiscal years beginning after November 15,2007. Forgent is currently evaluating the effect that the adoption of StatementNo. 159 will have on its financial position and results of operations.

 

In September 2006,the FASB issued Statement No. 157, *“FairValue Measurements.”  *Statement No. 157 defines fairvalue, establishes a framework for measuring fair value in U.S. generallyaccepted accounting principles and expands disclosures about fair valuemeasurements.  Statement No. 157 is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. Forgent is currently evaluating the effect that the adoption ofStatement No. 157 will have on its financial position and results ofoperations.

 

## **NOTE 5 – SHARE BASED COMPENSATION**

## ** **

Share based compensation for the Company’sstock option, restricted stock and stock purchase plans for the three monthsended October 31, 2007 and 2006 was $5 and $24,respectively.  The Company issued 4 and 45 shares of common stockrelated to exercises of stock options granted from its Stock Option and StockPurchase Plans for the three months ended October 31, 2007 and 2006, respectively.

 

**NOTE 6 – INCOME TAXES**

**               **

     InJune 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”* (“FIN 48”).  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with Statement No. 109, *“Accounting for Income Taxes.” *

 

     Weadopted FIN 48 as of August 1, 2007. FIN 48 applies to all “tax positions”accounted for under SFAS No. 109. FIN 48 refers to “tax positions” aspositions taken in a previously filed tax return or positions expected to betaken in a future tax return which are reflected in measuring current ordeferred income tax assets and liabilities reported in the financialstatements. FIN 48 further clarifies a tax position to include, but not belimited to, the following: 

 
|   | **•** |   | An allocation  or a shift of income between taxing jurisdictions;                                   |
|--------|------------|--------|-----------------------------------------------------------------------------------------------------|
|   |       |   |                                                                                                |
|   | **•** |   | The  characterization of income or a decision to exclude reporting taxable income  in a tax return; |
|   |       |   |                                                                                                |
|   | **•** |   | A decision to  classify a transaction, entity, or other position in a tax return as tax  exempt.    |
|   |

 

     FIN48 provides that a tax benefit may be reflected in the financial statementsonly if it is “more likely than not” that a company will be able to sustain thetax return position, based on its technical merits. If a tax benefit meets thiscriterion, it should be measured and recognized based on the largest amount ofbenefit that is cumulatively greater than 50% likely to be realized. Thisapproach is a change from previous practice under which a tax benefit could berecognized only if it was probable a tax position could be sustained. 

 

     FIN 48 requireswe make qualitative and quantitative disclosures, including a discussion ofreasonably possible changes that might occur in unrecognized tax benefits overthe next twelve months, a description of open tax years by major jurisdictionsand a roll-forward of all unrecognized tax benefits, presented as areconciliation of the beginning and ending balances of the unrecognized taxbenefits on an aggregated basis. 

 

     We and certainof our subsidiaries file income tax returns in the U.S. federal jurisdiction,various state jurisdictions, and certain foreign jurisdictions. Generally, weare no longer subject to examinations for U.S. federal income taxes for yearsprior to 2003 and for state income taxes for years prior to 2002. Examinationsfor foreign income taxes for previous years remain open, but tax considerationsin those jurisdictions are not material to us. 

 

     The adoption ofFIN 48 did not have a material impact on our financial statements ordisclosures. As of August 1, 2007 and October 31, 2007, we did notrecognize any assets or liabilities for unrecognized tax benefits relative touncertain tax positions. We anticipate no significant increase or decrease togross unrecognized tax benefits will be recorded during the next twelve months.Any interest or penalties resulting from examinations will be recognized as acomponent of the income tax provision. However, since there are no unrecognizedtax benefits as a result of tax positions taken, we have no accrued interestand penalties.

 

**NOTE 7 – RELATED PARTY TRANSACTIONS**

** **

As a result of the iEmployee acquisition, theCompany leases approximately9,000 square feet of office space in Mumbai, India for sales, marketing,development and support efforts.  Theproperty is leased from a foreign company that is controlled by stockholdersand officers of the Company.  Under thelease agreement, the Company pays monthly rent of approximately $13 until thelease expires in July 2009.  Duringthe three months ended October 31, 2007, the Company incurred $13 in rentexpenses related to this lease.

 

### **NOTE8 - SEGMENT INFORMATION**

### ** **

Currently,the Company operates in two distinct segments: software and services andintellectual property licensing.  Forgent’ssoftware and services business provides customers with scheduling software,asset management software, workforce management software as well as softwaremaintenance and support, installation and training services and hardwaredevices.  Under Forgent’s intellectualproperty licensing segment, the Company settled with the remaining defendantsin the litigations related to its technologies embodied in U.S. Patent No. 4,698,672and its foreign counterparts, as well as in U.S. Patent No. 6,285,746during fiscal year 2007.  Going forward,Forgent does not anticipate generating additional licensing revenues related tothese patents.  However, the Company’sintellectual property licensing segment continues to explore its patentportfolio for additional opportunities. In order to evaluate the software and services segment and theintellectual property licensing segment as stand-alone businesses, the Companyrecords all unallocated corporate operating expenses in the Corporate segment.

 

The Company evaluates the performance as well as the financial resultsof its segments. Included in the segment operating income (loss) is anallocation of certain corporate operating expenses. The Company does not 

 

8

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identify assets or capital expenditures byreportable segments, and the Company’s Chief Executive Officer and ChiefFinancial Officer do not evaluate the segments based on these criteria.

 

The table below presents segment information aboutrevenue from unaffiliated customers, gross margins and operating income (loss)for the three months ended October 31, 2007 and 2006:

 
| ** **                                                   | ** ** | **Software &  Services** | ** ** | **Intellectual  Property  Licensing** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|---------------|------------|------------|------------|
| ** **                                                   | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **For the Three Month Period Ending  October 31, 2007** | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers                         |       | $                                 | 1,875      |                                  | $          | —        |       | $          | —     |   | $ | 1,875 |   |
| Gross margin                                                 |       | 1,545                             |       | —                                |       | —        |       | 1,545      |       |
| Operating income (loss)                                      |       | (28                               | )          | (82                                   | )          | (1,112        | )          | (1,222     | )          |
| ** **                                                   | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **For the Three Month Period Ending  October 31, 2006** |       |                              |       |                                  |       |          |       |       |       |
| Revenues from unaffiliated customers                         |       | $                                 | 962        |                                  | $          | 8,134         |       | $          | —     |   | $ | 9,096 |   |
| Gross margin                                                 |       | 652                               |       | 4,594                                 |       | —        |       | 5,246      |       |
| Operating income (loss)                                      |       | (289                              | )          | 3,800                                 |       | (885          | )          | 2,626      |       |

 

### **NOTE9 – CONTINGENCIES**

### ** **

Forgent is the defendant or plaintiff in various actions that arose inthe normal course of business. With the exception of the proceedings described below, none of thepending legal proceedings to which the Company is a party are material to theCompany.

 

**Litigation with Jenkens & Gilchrist, P.C.**

** **

On July 16, 2007, Jenkens &Gilchrist, P.C. (“Jenkens”), Forgent’s former legal counsel, filed a complaintagainst Forgent and Compressions Labs, Inc., in the District Court ofDallas County, Texas.  In its complaint,Jenkens alleges a breach of contract and is seeking a declaratoryjudgment.  Forgent disputes Jenkens’claims and is seeking relief through the court system.

 

After Forgent terminated Jenkens, the Company entered into a ResolutionAgreement with Jenkens in December 2004. Under the Resolution Agreement, the Company believes Jenkens is entitledto $1.4 million for all related contingency fees and expenses related to thesettlements from the litigation regarding the Company’s U.S. Patent No. 6,285,746(the “ ‘746 patent”).  Jenkens interpretsthe Resolution Agreement on broader terms and now believes it is entitled to$3.4 million, including attorneys’ fees related to the litigation andinterest.  Management currently cannotpredict how long it may take to resolve the Jenkens lawsuit.  However, until the Jenkens litigation isfinalized, the related contingency fees and expenses may be adjusted in afuture period and could have a material impact to the Company’s consolidatedfinancial statements.

 

**Litigation with Wild Basin**

** **

On September 6, 2007, Forgent filed apetition against Wild Basin One & Two, Ltd. (“Wild Basin”) in theDistrict Court of Travis County, Texas. The petition claims Wild Basin is in breach of contract relating toForgent’s lease agreement by unreasonably withholding and delaying its consentto a pending lease assignment.  On October 19,2007, Forgent amended its petition to include claims of fraud and breach offiduciary duty against Wild Basin. Forgent is seeking to recover all damages as a result of the delay inclosing its pending assignment, among other damages.

 

9

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** **

**ITEM 2.****  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingreview of Forgent’s financial position as of October 31, 2007 and July 31,2007 and for the three months ended October 31, 2007 and 2006 should beread in conjunction with the Company’s 2007 Annual Report on Form 10-K/Afiled with the Securities and Exchange Commission.  Forgent’s internet website address ishttp://www.asuresoftware.com.  The Company’s annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 are available through theinvestor relations page of the Company’s internet website free of chargeas soon as reasonably practicable after they are electronically filed, orfurnished to, the Securities and Exchange Commission.  Forgent’s internetwebsite and the information contained therein or connected thereto are notintended to be incorporated into this Quarterly Report on Form 10-Q.

 

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

** **

Certain statements inthis Report represent forward-looking statements. These statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults of operations, levels of activity, economic performance, financialcondition or achievements to be materially different from future results ofoperations, levels of activity, economic performance, financial condition orachievements as expressed or implied by such forward-looking statements.

 

Forgenthas attempted to identify these forward-looking statements with the words “believes,”“estimates,” “plans,” “expects,” “anticipates,” “may,” “could” and othersimilar expressions. Although these forward-looking statements reflectmanagement’s current plans and expectations, which are believed to bereasonable as of the filing date of this report, they inherently are subject tocertain risks and uncertainties.  Suchrisks and uncertainties include, but are not limited to, those described under “RiskFactors” in this report and other risks indicated in Forgent’s filings with theSecurities and Exchange Commission from time to time.  Additionally, Forgent is under no obligationto update any of the forward-looking statements after the date of this Form 10-Qto conform such statements to actual results.

 

**RESULTS OF OPERATIONS**

** **

Thefollowing table sets forth for the fiscal periods indicated the percentage oftotal revenues represented by certain items in Forgent’s ConsolidatedStatements of Operations:

 
| ** **                                | ** ** | **FOR THE THREE  MONTHS ENDED  OCTOBER 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
|                                      |       |                                                             |       |   |   |
| Software and services revenues            |       | 100                                                              | %          | 11 | % |
| Intellectual property licensing  revenues |       | —                                                           |       | 89 |   |
| Gross margin                              |       | 82                                                               |       | 58 |   |
| Selling, general and  administrative      |       | 130                                                              |       | 28 |   |
| Research and development                  |       | 16                                                               |       | 1 |   |
| Total operating expenses                  |       | 148                                                              |       | 29 |   |
| Other income, net                         |       | 17                                                               |       | 1 |   |
| Net income (loss)                         |       | (49                                                              | )%         | 30 | % |

 

##### **THREE MONTHS ENDEDOCTOBER 31, 2007 AND 2006**

##### ** **

**Revenues**

 

Revenues for the three months ended October 31,2007 were $1.9 million, a decrease of $7.2 million, or 79%, from the $9.1 millionreported for the three months ended October 31, 2006.  Consolidated revenues represent the combinedrevenues of the Company and its subsidiaries, including sales of the Company’s scheduling software, asset management software,workforce management software, software maintenance and support services, 

 

10

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professional services, installation and trainingservices and hardware devices, as well as royalties and settlements receivedfrom licensing the Company’s intellectual property.

 

In September 2007, the Company announced a change in the name underwhich it does business by adopting the dba “Asure Software” to reflect theCompany’s focus on its software and services segment for its futuregrowth.  Effective September 13,2007, the Company now trades in the NASDAQ Global Market System under thesymbol “ASUR”.

 

***Software and ServicesBusiness***

*** ***

Software and servicesrevenues for the three months ended October 31, 2007 were $1.9 million, anincrease of $0.9 million, or 95%, from the $1.0 million reported for the threemonths ended October 31, 2006. Software and services revenues as a percentage of total revenues were100% and 11% for the three months ended October 31, 2007 and 2006,respectively. Revenues from this line of business include sales of Forgent’sNetSimplicity scheduling and asset management software, including Meeting Room Manager (“MRM”) and VisualAsset Manager (“VAM”), and sales of the Company’s iEmployee workforcemanagement software.  Also included in this segment’s revenues aresoftware maintenance and support services, professional services, such as add-onsoftware customization, installation and training, and hardware devices.

 

During the first fiscal quarter of 2008, increases in software subscription revenues,software license revenues and maintenance revenues accounted for approximately83% of the $0.9 million increase in the software and services segment’s totalrevenues.  In October 2007, theCompany acquired the iEmployee workforce management software.  The workforce management software, as well asthe Company’s MRM On Demand software, are delivered to customers under the “SaaS”model, which is software as a service on a subscription basis.  The SaaS model allows customers to useForgent’s software without installing or maintaining it on their ownservers.  The acquisition of iEmployeeand the continued growth of MRM On Demand led to a $0.3 million increase inservice revenues.  Software licenserevenues increased $0.3 million due primarily to continued focus on divisionsof enterprises and larger customers, which is driving sales with higher averagesales prices during the three months ended October 3,1 2007, and increasedfocus on international sales.  The increase in software license sales, as wellas the continued pursuit of maintenance renewals, led to additional sales ofmaintenance and support contracts, which increased maintenance revenues by $0.1million.

 

Forgent will continue to target North American andinternational companies in the education, governmental, healthcare and legalsectors, which generated approximately 53% of its software and servicesrevenues during the three months ended October 31, 2007.  As the Company continues to fully integratethe iEmployee operations, develop its sales force to increase salesperformance, and release new software updates and enhancements, managementbelieves its software and services revenues will continue to increase.

** **

***Intellectual Property Licensing Business***

*** ***

The Company did not haveany intellectual property licensing revenues for the three months ended October 31,2007, which led to a decrease of $8.1 million, or 100%, from the $8.1 millionreported for the three months ended October 31, 2006. Intellectualproperty licensing revenues as a percentage of total revenues were 0% and 89%for the three months ended October 31, 2007 and 2006, respectively

 

In prior fiscal years, the Company’s intellectual property licensingrevenues have been derived from licensing U.S. Patent No. 4,698,672(the “ ‘672 patent”) and U.S. Patent No 6,285,746 (the “ ‘746 patent”). However, the ‘672 patent has expired and the ‘746 patent will be expiringin May 2011.  Additionally, thelitigations related to these two patents were concluded in fiscal year 2007.Therefore, management does not anticipate any additional licensing revenuesfrom these patents.  Although Forgentcontinues to explore its patent portfolio for additional opportunities, therecan be no assurance that the Company will be able to continue to license itstechnology to others.  Additionally,management believes any revenues to be generated from the Company’s remainingpatent portfolio may be less than those generated historically.

 

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### ** **

### **GrossMargin**

### ** **

Grossmargins for the three months ended October 31, 2007 were $1.5 million, adecrease of $3.7 million, or 71%, from the $5.2 million reported for the threemonths ended October 31, 2006. Gross margins as a percentage of totalrevenues were 82% and 58% for the three months ended October 31, 2007 and2006, respectively.

 

Forthe three months ended October 31, 2006, the intellectual propertylicensing segment generated 88% of the total gross margins.  As such, the $3.7 million decrease in grossmargin for the three months ended October 31, 2007, is due primarily tothe $4.6 million decrease in gross margin resulting from licensing revenuesgenerated during first fiscal quarter of 2007. Since the litigations related to the ‘672 patent and the ‘746patent were concluded during fiscal year 2007, the decline in intellectualproperty licensing revenues has adversely affected the Company’s total grossmargin.  However, gross margin as apercentage of total revenues has improved during the three months ended October 31,2007 due to the accomplishments achieved by the software and services segmentduring the first fiscal quarter of 2008.

 

***Software and Services Business***

*** ***

Softwareand services gross margins forthe three months ended October 31, 2007 were $1.6 million, an increase of$0.9 million, or 137%, from the $0.7 million reported for the three monthsended October 31, 2006. Software and services gross margins as apercentage of total revenues were 82% and 7% for the three months ended October 31,2007 and 2006, respectively.

 

The cost of salesassociated with the software and services segment is relatively fixed andresults primarily from the amortization of the Company’s purchased softwarecosts and compensation expenses.  Duringthe three months ended October 31, 2007, cost of sales from the softwareand services segment increased slightly. During the first fiscal quarter of 2007, the Company fully amortized itspurchased software costs related to the acquisition of its NetSimplicitysoftware products, thereby decreasing the cost of sales by $0.1 million duringthe three months ended October 31, 2006. In October 2007, the Company acquired the iEmployee softwareproducts.  This acquisition resulted in a$0.1 million increase in cost of sales due to the amortization of the newlypurchased software costs, as well as the compensation expenses related to theiEmployee operations.  Despite theoverall increase in cost of sales, the increase in software and servicesrevenues caused the gross margins as a percentage of revenues for the softwareand services segment to increase from 68% for the three months ended October 31,2006 to 82% for the three months ended October 31, 2007.  Since Forgent expects togenerate more business from this segment, management expects gross margins fromthe software and services segment to improve during the next fiscal quarter, interms of total dollars, and to remain relatively consistent in terms ofpercentage of revenues for the segment.

 

##### **Selling, General andAdministrative**

##### ** **

Selling,general and administrative expenses for the three months ended October 31,2007 were $2.4 million, a decrease of $0.1 million or 2%, from the $2.5 millionreported for the three months ended October 31, 2006. Selling, general andadministrative (“SG&A”) expenses as a percentage of revenues were 130% and28% for the three months ended October 31, 2007 and 2006, respectively.

 

Although total SG&Aexpenses decreased slightly during the three months ended October 31,2007, the net decrease was due primarily to two driving factors.  Due to the conclusion of the litigationsrelated to the ‘672 patent and the ‘746 patent in fiscal year 2007, legalexpenses for the intellectual property licensing segment decreased by $0.2million during the first fiscal quarter of 2008.  This decrease was offset by an increase of$0.1 million in SG&A expenses incurred by the acquired iEmployeeoperations.  Additionally, the decreasein compensation expenses for the intellectual property licensing segment wasoffset by an increase in sales and marketing compensation expenses for thesoftware and services segment during the three months ended October 31,2007.  In order to increase revenues fromits software business, the Company hired additional sales and marketingpersonnel during the first fiscal quarter of 2008 and will continue to hireadditional sales personnel.  Managementbelieves the additional personnel have contributed to the increase in softwareand services revenues during the three months ended October 31, 2007 andanticipates further increases in revenues as the Company continues to expandits sales force.  Forgent will alsocontinue to evaluate and reduceany unnecessary SG&A expenses that do not directly support the generationof revenues for the Company.

 

12

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### **Researchand Development**

### ** **

Researchand development expenses for the three months ended October 31, 2007 were$0.3 million, an increase of $0.2 million, or 150%, from the $0.1 millionreported for the three months ended October 31, 2006. Research and development(“R&D”) expenses as a percentage of revenues were 16% and 1% for the threemonths ended October 31, 2007 and 2006, respectively.

 

During the three monthsended October 31, 2007, Forgent continued developing its MRM product andreleased several minor versions, which included stronger compatibility withMicrosoft Outlook©.  R&D effortsrelated to MRM will remain focused on supporting the Company’s largerenterprise customers with a robust software platform that they can standardizeon and on enhancing the MRM Outlook Scheduling plug-in and Active Directorysupport.  Also during the first fiscalquarter of 2008, the Company released VAM 5.7. This new version of VAM introduced the new VAM importer module, whichenables customers to import data from legacy or external sources into VAM andprovides a technological foundation for further development efforts forgathering and depositing data into VAM.

 

Themajority of the increase in R&D expenses during the three months ended October 31,2007 is due to the acquisition of the iEmployee R&D workforce in October 2007.  As the Company integrates the iEmployeeR&D workforce into the existing R&D team, management is exploringopportunities to create synergies within the group and is investigating allmethods for managing its R&D efforts in the most cost-effectivemanner.  Although R&D expenses willincrease during the next fiscal quarter due to the acquisition, management will attempt to maintain R&Dexpenses at reasonable levels in terms of percentage of revenue.

 

**Net (Loss) Income**

 

Forgentgenerated a net loss of $0.9 million, or $0.03 per share, during the threemonths ended October 31, 2007, compared to a net income of $2.7 million,or $0.11 per share, during the three months ended October 31, 2006.  Net (loss) income as a percentage of totalrevenues were (49%) and 30% for the three months ended October 31, 2007and 2006, respectively. The $3.6 million decrease in the Company’s net incomeis primarily attributable to the $3.7 million decrease in gross margin, whichis mainly associated with the reduction in intellectual property licensingrevenues during the first fiscal quarter of 2008.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 
| ** **                                        | ** ** | **FOR THE THREE  MONTHS ENDED  OCTOBER 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                                         | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                                          | ** ** |
|                                              |       |                                                             |       |   |   |
| Working capital                                   |       | $                                                                | 14,423     |   | $ | 14,063 |   |
| Cash, cash equivalents and short-term investments |       | 19,476                                                           |       | 15,038 |   |
| Cash used in operating activities                 |       | (9,064                                                           | )          | (1,059 | ) |
| Cash used in investing activities                 |       | (8,550                                                           | )          | (32 | ) |
| Cash provided by (used in) financing activities   |       | 1                                                                |       | (87 | ) |
|                                                   |            |                                                                  |            |  |  |  |  |

 

Cashused in operating activities was $9.1 million for the three months ended October 31,2007 due primarily to a $8.0 million decrease in accounts payable and $0.9million in net loss.  Cash used inoperating activities was $1.1 million for the three months ended October 31,2006 due primarily to a $5.4 million increase in accounts receivable, which wasoffset by the $2.8 million in net income and a $1.2 million increase inaccounts payable.  During the threemonths ended October 31, 2007, Forgent paid its legal counsel $7.4 millionin contingency fees related to its ‘746 patent’s settlement and licenseagreements.  The Company will pay therelated contingency fees to Jenkens & Gilchrist, P.C. (“Jenkens”) in afuture period, once the litigation with Jenkens is finalized.  Forgent’s average days sales outstandingfor its software and services segment was 49 days for the first fiscal quarterof 2008, consistent with the 50 days for the first and fourth fiscal quartersof 2007.

 

Cashused in investing activities was $8.6 million for the three months ended October 31,2007 due primarily to $7.2 million paid in cash related to the iEmployeeacquisition and $1.5 million purchase of short-term 

 

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investments.Cash used in investing activities was $32 thousand for the three months ended October 31,2006 due to purchases of fixed assets. Forgent manages its investments portfolio in order to fulfill corporateliquidity requirements and maximize investment returns while preserving thequality of the portfolio.  During thefirst fiscal quarter of 2008, Forgent shifted its investment portfolio toinvestments with slightly longer maturities in order to maximize its interestincome.  As a result of this shift andthe increase in the average cash equivalents and short-term investment balancesduring the three months ended October 31, 2007, Forgent achieved a 117%increase in interest income during the three months ended October 31,2007, as compared to the three months ended October 31, 2006.

 

Theacquired iEmployee business has on-going capital requirements.  Management is currently reviewing theserequirements to determine how best to manage operations without expendingsignificant additional resources.  Additionally,as the Company evaluates facilitating its growth within its existing officespace, Forgent will be investing in leasehold improvements in the next fiscalquarter to accommodate this growth. Management anticipates spending approximately $0.1 million during theremainder of fiscal year 2008 to fulfill these requirements.

 

The Company leases office space and equipment undernon-cancelable operating leases that expire at various dates through 2013.Certain leases obligate Forgent to pay property taxes, maintenance andinsurance and include escalation clauses. The total amount of baserentals over the term of the Company’s leases is charged to expense on astraight-line basis, with the amount of the rental expense in excess of thelease payments recorded as a deferred rent liability.  Forgent may periodicallymake other commitments and thus become subject to other contractualobligations.  Forgent’s future minimumlease payments under all operating and capital leases as of October 31, 2007 areas follows:

 
| ** **                  | ** ** | **Payments Due By Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **(in thousands)**                   | ** ** |
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3- 5 years** | ** ** | **More than  5 years** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations |       | $                                         | 18,812     |   | $ | 3,754 |   | $ | 6,997 |   | $ | 6,836 |   | $ | 1,225 |   |
| Capital lease obligations   |       | 1                                         |       | 1 |   | — |   | — |   | — |   |
| **Total**                   | ** ** | **$**                                     | **18,813** | ** ** | **$** | **3,755** | ** ** | **$** | **6,997** | ** ** | **$** | **6,836** | ** ** | **$** | **1,225** | ** ** |

 

Approximately 95% of the Company’s operating leaseobligations relates to its corporate office location at Wild Basin in Austin,Texas.  As of October 31, 2007,Forgent had $4.0****million in futureminimum lease payments receivable under non-cancelable subleasearrangements.  Additionally, Forgent hada $0.7 million liability related to impairment charges for the economic valueof the lost sublease rental income related to its Austin property.

 

Cash provided by financing activities was $1 thousandfor the three months ended October 31, 2007. Cash used in financingactivities was $87 thousand for the three months ended October 31, 2006due primarily to $0.1 million in notes payable payments. As of October 31,2007, Forgent had $1.0 million available from a credit line from Silicon Valley Bank, although no debt was outstanding atquarter-end.  Advances obtained from the Silicon Valley Bankcredit line will be notes payables that bear interest at prime plus 0.75% andrequire monthly installments over a three year term.  The Silicon Valley Bank credit line expireson May 1, 2008.  If Forgent renewsthis source of financing, the Company may not be able to obtain similar termsfor the future credit line.

 

Forgent’s stock repurchase program allows the Company topurchase up to three million shares of the Company’s common stock. No shareswere repurchased during the three months ended October 31, 2007 or2006.  As of October 31, 2007,Forgent had repurchased 1,790,401 shares for approximately $4.8 millionand had the authority to repurchase approximately 1.2 million additionalshares. Management will periodically assess repurchasing additional sharesduring fiscal year 2008, depending on the Company’s cash position, marketconditions and other factors.

 

As of October 31,2007, Forgent’s principal sources of liquidity consisted of $19.5 million ofcash, cash equivalents and short-term investments.  Management currently plans to utilize itscash balances to further develop its software operations by making additionalprudent investments to grow organically, continue exploring potential 

 

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opportunities inacquiring a growing and profitable public or privately held technology businessor product line, and may repurchase outstanding shares.  There is no assurance that the Company will be able to limit its cashconsumption and preserve its cash balances, and it is possible that the Company’sfuture business demands may lead to cash utilization at levels greater thanrecently experienced due to the iEmployee acquisition, potential otheracquisitions and other factors. Management believes that the Company hassufficient capital and liquidity to fund and cultivate the growth of itscurrent and future operations for the next 12 months and thereafter.  However, due to uncertainties related to thetiming and costs of these efforts, Forgent may need to raise additional capitalin the future.  Yet, there is noassurance that the Company will be able to raise additional capital if and whenit is needed.

 

#### **CRITICAL ACCOUNTING POLICY**

#### ** **

TheCompany’s condensed consolidated financial statements have been prepared inaccordance with U.S. generally accepted accounting principles and include theaccounts of Forgent’s wholly owned subsidiaries. All significant intercompanytransactions and balances have been eliminated in the consolidation.Preparation of the condensed consolidated financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of the assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. The more significant estimates made by managementinclude the valuation allowance for the gross deferred tax asset, contingencyreserves, useful lives of fixed assets, the determination of the fair value ofits long-lived assets and the fair value of assets acquired and liabilitiesassumed during the recent acquisition. These estimates could be materiallydifferent under different conditions and assumptions.  Additionally, the actual amounts could differfrom the estimates made. Management periodically evaluates estimates used inthe preparation of the financial statements for continued reasonableness.Appropriate adjustments, if any, to the estimates used are made prospectivelybased upon such periodic evaluation.

 

Management believes thefollowing represents Forgent’s critical accounting policy:

 

**RevenueRecognition**

 

TheCompany recognizes revenue when persuasive evidence of an arrangement exists,delivery has occurred, the fee is fixed or determinable and collectibility isprobable.  The Company recognizessoftware license revenue in accordance with Statement of Position (“SOP”) 97-2,*“Software Revenue Recognition,”*asamended by SOP 98-4, “*Deferral of the EffectiveDate of a Provision of SOP 97-2,”* and SOP 98-9, “*Modification of SOP 97-2 With Respect to CertainTransactions,”* Securities and Exchange Commission StaffAccounting Bulletin 104, *“RevenueRecognition,”*and Emerging Issues Task Force (“EITF”) Issue No. 00-21,*“Revenue Arrangements with MultipleDeliverables.”* The Company recognizes software subscription revenuein accordance with EITF Issue No. 00-3, *“Applicationof AICPA Statement of Position 97-2 to Arrangements That Include the Right toUse Software Stored on Another Entity’s Hardware”*and EITF Issue No. 00-21.

 

Software and servicerevenue consists of software license, software subscription and servicefees.  Revenue from the software elementis earned through the licensing or right to use the Company’s software and fromthe sale of specific software products. Service fee income is earned through the sale of maintenance andtechnical support, training and installation. Revenue from the sale of hardware devices isrecognized upon shipment of the hardware. Forgent sells multiple elements within a single sale.  For software license arrangements, theCompany allocates the total fee to the various elements based on the relativefair values of the elements specific to the Company.  For software subscription arrangements, theCompany recognizes the total contract value ratably over the contract term.

 

The Company determinesthe fair value of each element in the arrangement based on vendor-specificobjective evidence (“VSOE”) of fair value. VSOE of fair value for the software, maintenance, and training andinstallation services are based on the prices charged for the software,maintenance and services when sold separately. Revenue allocated to maintenance and technical support is recognizedratably over the maintenance term (typically one year).  Revenue allocated to installation andtraining is recognized upon completion of these services.  The Company’s training and installationservices are not essential to the functionality of its products as suchservices can be provided by a third party or the customers themselves.

 

Forinstances in which VSOE cannot be determined for undelivered elements, andthese undelivered elements do not provide significant customization ormodification of its software product, Forgent recognizes the entire contractamount ratably over the period during which the services are expected to beperformed.

 

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Intellectual propertylicensing revenue is derived from the Company’s Patent Licensing Program, whichhas generated licensing revenues relating to the Company’s technologiesembodied in the ‘672 patent and the ‘746patent.  Gross intellectualproperty licensing revenue is recognized at the time a license agreement hasbeen executed and collection has been deemed probable.  Related costs are recorded as cost ofsales.  The cost of sales in theintellectual property licensing business relates to contingentlegal fees incurred on successfully achieving signed agreements, aswell as legal fees incurred based upon legal counsel’s time.

 

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

 

Deferredrevenue includes amounts received from customers in excess of revenuerecognized, and is comprised of deferred maintenance, service and otherrevenue.  Deferred revenues arerecognized in the Condensed Consolidated Statements of Operations when theservice is completed and over the terms of the arrangements, primarily rangingfrom one to three years.

 

## **Impairmentof Goodwill, Intangible Assets and Long-Lived Assets**

## ** **

Goodwilland other intangible assets with indefinite lives are not requiredto be amortized under Financial Accounting Standard Board (“FASB”)Statement No. 142, *“Goodwill and OtherIntangible Assets,”*and accordingly, the Company reviews itsgoodwill for possible impairment on an annual basis, or whenever specificevents warrant. Events that may create an impairment review include, but arenot limited to: significant and sustained decline in the Company’s stock priceor market capitalization, significant underperformance of operating units andsignificant changes in market conditions and trends. Forgent uses a two-stepprocess and a discounted cash flow model to evaluate itsassets for impairment. If the carrying amount of the goodwill or assetexceeds its implied fair value, an impairment loss is recognized in an amountequal to the excess during that fiscal period. Intangible assets that are not deemed to have indefinite lives areamortized over their useful lives and are tested for impairment in accordancewith FASB Statement No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets.”*

 

Inaccordance with Statement No. 144, Forgent reviews and evaluates itslong-lived assets for impairment whenever events or changes in circumstancesindicate that their net book value may not be recoverable.  When suchfactors and circumstances exist, including those noted above, the Companycompares the assets’ carrying amounts against the estimated undiscounted cashflows to be generated by those assets over their estimated useful lives. If the carrying amounts are greater than the undiscounted cash flows, thefair values of those assets are estimated by discounting the projected cashflows.  Any excess of the carrying amountsover the fair values are recorded as impairments in that fiscal period.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s primary market risk exposure relates tointerest rate risk. Forgent’s interest income is sensitive to changes in U.S.interest rates.  However, due to theshort-term nature of the Company’s investments, Forgent does not consider theserisks to be significant.  Foradditional Quantitative and Qualitative Disclosures about Market Risk,reference is made to Part II, Item 7A, Quantitative and QualitativeDisclosures about Market Risk, in the Company’s Annual Report on Form 10-K/Afor the year ended July 31, 2007.

 

###### **ITEM 4. CONTROLS AND PROCEDURES**

###### ** **

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company.  The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports it files under the Securities and ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission.  Such controlsinclude those designed to ensure that information for disclosure iscommunicated to management, including the Chairman of the Board and the ChiefExecutive Officer (“CEO”), as appropriate to allow timely decisions regardingrequired disclosure.

 

The CEO and Chief Financial Officer, with theparticipation of management, have evaluated the effectiveness of the Company’sdisclosure controls and procedures as of October 31, 2007.  Based on their 

 

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evaluation, they have concluded, to the bestof their knowledge and belief, that the disclosure controls and procedures areeffective.  No changes were made in theCompany’s internal controls over financial reporting during the quarter ended October 31,2007, that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.  In making this assessment, management usedthe criteria set forth in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Due to theacquisition of iEmployee in October 2007, Forgent is required to implementinternal controls related to those operations. As of October 31, 2007, theCompany has not tested the operating effectiveness of the internal controlsrelated to iEmployee or the integration of iEmployee. In compliance with thePublic Company Accounting Oversight Board’s and the Securities and ExchangeCommission’s regulations and guidance, Forgent will not report on theeffectiveness of iEmployee’s internal controls over financial reporting underthe Sarbanes-Oxley Act of 2002 until its Annual Report on Form 10-K forfiscal 2008.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Forgentis the defendant or plaintiff in various actions that arose in the normalcourse of business. With the exception of the proceedings describedbelow, none of the pending legal proceedings to which the Company is a partyare material to the Company.

 

**Litigation with Jenkens & Gilchrist, P.C.**

 

On July 16, 2007, Jenkens &Gilchrist, P.C. (“Jenkens”), Forgent’s former legal counsel, filed a complaintagainst Forgent and Compressions Labs, Inc., in the District Court ofDallas County, Texas.  In its complaint,Jenkens alleges a breach of contract and is seeking a declaratoryjudgment.  Forgent disputes Jenkens’claims and is seeking relief through the court system.

 

After Forgent terminated Jenkens, the Companyentered into a Resolution Agreement with Jenkens in December 2004.  Under the Resolution Agreement, the Companybelieves Jenkens is entitled to $1.4 million for all related contingency feesand expenses related to the settlements from the litigation regarding theCompany’s U.S. Patent No. 6,285,746 (the “ ‘746 patent”).  Jenkens interprets the Resolution Agreementon broader terms and now believes it is entitled to $3.4 million, includingattorneys’ fees related to the litigation and interest.  Management currently cannot predict how longit may take to resolve the Jenkens lawsuit. However, until the Jenkens litigation is finalized, the relatedcontingency fees and expenses may be adjusted in a future period and could havea material impact to the Company’s consolidated financial statements.

 

**Litigation with Wild Basin**

 

On September 6, 2007, Forgent filed apetition against Wild Basin One & Two, Ltd. (“Wild Basin”) in theDistrict Court of Travis County, Texas. The petition claims Wild Basin is in breach of contract relating toForgent’s lease agreement by unreasonably withholding and delaying its consentto a pending lease assignment.  On October 19,2007, Forgent amended its petition to include claims of fraud and breach offiduciary duty against Wild Basin. Forgent is seeking to recover all damages as a result of the delay inclosing its pending assignment, among other damages.

 

## **Re-examinationof United States Patent No. 6,285,746**

## ** **

OnOctober 2, 2006, the United States Patent and Trademark Office (the “USPTO”)ordered an **inter partes** re-examination of the ‘746patent and issued its first office action related to this re-examination on October 30,2006.  This first action, which is notthe final conclusion of the re-examination, rejected the five claims in the ‘746patent.  Forgent responded to the USPTO,but the USPTO has not issued any additional office actions related to thisre-examination.

 

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**Re-examination of United States Patent No. 4,698,672**

 

On January 31,2006, the USPTO granted a petition to re-examine the Company’s U.S. Patent No. 4,698,672(the “ ‘672 patent”) and subsequently issued its first office action on May 25,2006.  Forgent responded to this firstoffice action, which confirmed 27 of the 46 claims in the ‘672 patent.  On March 26, 2007, the USPTO issued itsfinal office action, which affirmed its first office action.  Forgent responded to the USPTO on May 11,2007 and is currently waiting for the USPTO’s reply.

 

###### **ITEM 1A. RISK FACTORS**

###### ** **

Manyfactors affect Forgent’s business, prospects, liquidity and the results ofoperations, some of which are beyond the Company’s control. The following is adiscussion of important risk factors that may cause the actual results of theCompany’s operations in future periods to differ materially from thosecurrently expected or desired. Additional risks not presently known tomanagement or risks that are currently believed to be immaterial but which maybecome material, may also affect the Company’s business, prospects, liquidityand results of operations.

 

#### **SOFTWAREAND SERVICES BUSINESS**

#### ** **

**The Company may encounter problems related to its acquisitionof iEmployee, which could create business difficulties and adversely affectoperations.**

 

TheCompany may have difficulties integrating the services, technologies, personneland operations of iEmployee into the Company’s existing software business.These difficulties could disrupt Forgent’s ongoing business, distractmanagement and other personnel, increase expenses and adversely affectoperating results.  If Forgent is unableto fully integrate iEmployee with its existing operations, the Company may notachieve all the intended benefits of the acquisition.

 

**IfForgent is unable to successfully market and sell its software products andservices, future software and services revenues will decline.**

 

The future success of the Company is dependenton its ability to generate demand for its NetSimplicity and iEmployee softwareproducts and services. To this end, Forgent’s marketing and sales operationsmust increase market awareness of the Company’s products and services togenerate increased revenue. All new hires within the sales and marketing departmentswill require training and may take time to achieve full productivity. Forgentcannot be certain that its new hires will become as productive asnecessary.  The Company also cannot becertain that it will be able to hire enough qualified individuals or retainexisting employees in the future, and therefore, cannot be certain that it willbe successful in its efforts to market and sell its products and services.  If Forgent is not successful in buildinggreater market awareness and generating increased sales, future software andservices revenues will decline.

 

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

 

Forgent’s future success andbusiness model depends significantly on its ability to expand the use of itssoftware and services.  The Company mustexecute on its growth objectives by increasing its market share, maintainingand increasing recurring revenues from new and existing customers, and sellingadditional products and services to new and existing customers.  If the Company fails to grow its customerbase or generate repeat and expanded business from its current customers,Forgent’s software and services revenues could be adversely affected.

 

SinceNetSimplicity’s maintenance and other service fees depend largely on the sizeand number of licenses that are sold, any downturn in NetSimplicity’s softwarelicense revenue would negatively impact the Company’s deployment servicesrevenue and future maintenance revenue. Additionally, if customers elect not torenew their maintenance agreements, NetSimplicity’s maintenance revenue couldbe adversely affected.

 

**Increased competition may have an adverse effect on the Company’soperating results.**

 

The Company may encounter new entrants orcompetition from vendors in some or all aspects of its software business. TheCompany currently competes on the basis of price, technology, availability,performance, quality, reliability, service and support. However, there can beno assurance that the Company will be able to maintain a competitive advantagewith respect to any of these factors. Some of Forgent’s competitors, bothcurrent and future, may have greater financial, technical and marketingresources than the Company and, therefore, may be able to respond quicker tonew or emerging technologies and changes in customer requirements.  As a result, they 

 

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may compete more effectively on price and otherterms.  Additionally, these competitorsmay devote greater resources in developing products or in promoting and sellingtheir products to achieve greater market acceptance.  Such competition could adversely affect theCompany’s operating results.

 

**Open source software may increasecompetition, resulting in decreases in the prices of Forgent’s softwareproducts.**

 

Manydifferent formal and informal groups of software developers and individualshave created a wide variety of software and have made that software availablefor use, distribution and modification, often free of charge. Such open sourcesoftware has been gaining in popularity among business users, particularlysmall to medium sized businesses, which are some of Forgent’s targetedcustomers. Although management is currently unaware of any competing opensource software, if developers make scheduling, asset management or workforcemanagement software applications available to the open source community, andthat software has competitive features, Forgent may need to change its pricingand distribution strategy in order to compete.

 

**A systemsfailure or any other service interruption could result in substantial expensesto the Company, loss of customers and claims by customers for damages caused byany losses they incur.**

 

TheCompany offers hosting services through both its NetSimplicity and iEmployeeproduct lines.  These services, which aresupported by hardware, infrastructure, ongoing maintenance and back-upservices, must be operated reliably on a 24 hours per day, seven days per weekbasis without interruption or data loss. If Forgent cannot protect its infrastructure, equipment and customerdata files against damage from human error, power loss or telecommunicationfailures, intentional acts of vandalism, or any other catastrophic occurrences,services to its customers may be interrupted. If services are interrupted,

 

·      Customers may not be able to retrieve their data;

·      The Company could incur significant expenses toreplace existing equipment or purchase services from an alternative datacenter;

·      Customers may not renew their services or canceltheir contracts;

·      Customers may seek reimbursement for losses thatthey incur; and/or

·      The Company’s reputation may be impaired, making itdifficult to attract new customers.

 

Although disaster recoveryplans and strategies are in place, Forgent may not be successful in mitigatingthe effects of any systems failure or other service interruptions. Suchfailures or interruptions could significantly impair the Company’s operationsand adversely affect the Company’s financial results.

 

**If Forgent’s business, systems and/or IT security isbreached, the Company’s businesses may be adversely affected.**

 

Asecurity breach in the Company’s business processes and/or systems has thepotential to impact the Company’s customer information.  Any issues of data privacy as they relate tounauthorized access to or loss of customer information could result in thepotential loss of business, damage to the Company’s reputation andlitigation.  To prevent unauthorizedaccess to confidential information or attempts to breach the Company’ssecurity, Forgent continues to invest in the security of its IT systems andimprove the controls within its IT systems and business processes. However,there is no assurance that the Company’s business and/or systems will not bebreached.  If Forgent’s security is breachedor confidential information is accessed, the Company’s business and operatingresults may be adversely affected.

 

**Claims ofintellectual property infringement by third parties may adversely affectForgent’s business.**

 

The Company maybecome subjected to claims of intellectual property infringement by thirdparties as the number of competitors and available software products continueto grow and the functionality of such products increasingly overlaps. Anyinfringement claims, with or without merit, could be time-consuming, result incostly litigation, divert management’s attention and financial resources, causethe loss or deferral of sales or require the Company to enter into royalty orlicense agreements. In the event of a successful claim of intellectual propertyinfringement against Forgent, the Company’s business, operating results andfinancial condition could be materially adversely affected, unless the Companyis able to either license the technology or similar technology or develop analternative technology on a timely basis. Even if Forgent is able to license the technology, such royalty orlicense agreements may not be available on terms acceptable to the Company.

 

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**If Forgent cannot prevent piracyof its software products, revenues may decline.**

 

Although the Company is unable todetermine the extent to which piracy of its software products occurs, softwarepiracy could be a problem.  Since Forgenthas international resellers and customers, piracy may occur in foreigncountries where laws do not protect proprietary rights to the same extent asthe laws in the United States. Piracy may cause the Company’s revenues todecline.  Forgent seeks to protect itsassets through a combination of patent and trademark laws as well asconfidentiality procedures and contractual provisions. These legal protectionsafford only limited protection and enforcement of these rights may be timeconsuming and expensive.  Furthermore,competitors may also independently develop similar, but not infringing,technology or design around the Company’s products.

 

**TheCompany’s software products’ functionality may be impaired if third-partyhardware devices associated with the software do not operate successfully.**

 

Inaddition to its software products, Forgent currently sells hardware devicesfrom partnered vendors to its customers. The effective implementation of the Company’s software products dependsupon the successful operation of these third-party hardware products. Any undetecteddefects in these third-party products could prevent the implementation of orimpair the functionality of the Company’s software or blemish Forgent’sreputation.

 

**If customers cease using Microsoft Outlook© or if Microsoftchanges its Outlook application significantly, revenues may decline and/or theCompany may incur significant expenses to update its MRM Enterprise software.**

 

TheCompany’s MRM Enterprise software is designed to operate with MicrosoftOutlook©.  Although management believesthat Microsoft Outlook© is currently and widely utilized by businesses in theCompany’s target markets, there are no assurances that businesses will continueto use Microsoft Outlook© as anticipated, will migrate from older versions tonewer versions of Microsoft Outlook©, or will not adopt alternativetechnologies that are incompatible with MRM Enterprise.  Forgent may not be timely in updating its MRMEnterprise software to be compatible with Microsoft Outlook©.  As a result, software revenues maydecline.  Additionally, the Company mayincur significant expenses updating its MRM Enterprise software to becompatible with changes in Microsoft Outlook©.

 

**If Forgent fails to introduce new versions and releases offunctional and scalable software products in a cost-effective and timelymanner, customers may license competing products and Forgent’s revenues willdecline.**

 

The technology industry ischaracterized by continuing improvements in technology, resulting in thefrequent introduction of new products, short product life cycles, changes incustomer needs and continual improvement in product performancecharacteristics.  Forgent expects thatits future financial performance will depend, in part, on revenue generatedfrom future software products and enhancements as well as other softwarerelated products that the Company plans to develop and/or acquire. To besuccessful, Forgent must be cost-effective and timely in enhancing its existingsoftware applications, developing new software technology and solutions that addressthe increasingly sophisticated and varied needs of its existing and prospectiveclients, and anticipating technological advances and evolving industrystandards and practices.

 

Forgentspends a large portion of its research and development resources on productupgrades and may need to invest further in research and development in order tokeep its software applications and solutions viable in the rapidly changingmarketplace. This research and development effort, which may requiresignificant resources, could ultimately be unsuccessful if Forgent does notachieve market acceptance for its new products or enhancements.  Additionally, if the Company fails toanticipate and respond effectively to technological improvements or if Forgent’scompetitors release new products that are superior to Forgent’s products inperformance and/or price, demand for the Company’s software products maydecline and Forgent may lose sales and fail to achieve anticipated revenues.

 

**Errors or defects in Forgent’s software could reduce demandfor its software and result in decreased revenues, decreased market acceptanceand injury to the Company’s reputation.**

 

Errors or defects in theCompany’s software, sometimes called “bugs,” may be found from time-to-time,particularly when new versions or enhancements are released. Any significantsoftware errors or defects may result in loss of sales, decreased revenues,delay in market acceptance and injury to the Company’s reputation. Despiteextensive product testing during development, new versions or enhancements ofForgent’s software may still have errors after commercial shipments begin.  Forgent corrects the “bugs” and delivers thecorrections in subsequent maintenance releases, patches and on-goingservice.  However, errors or defectscould put the Company at a competitive disadvantage and can be costly andtime-consuming to correct.

 

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**If Forgent is unable to develop or maintain strategicrelationships with its resellers and vendor partners who market and sell theCompany’s products, revenues may decline.**

 

Forgent supplements itsdirect sales force by contracting with resellers and vendor partners togenerate additional sales.  Forgent’srevenue growth will depend, in part, on adding new resellers and partners toexpand the Company’s sales channels, as well as leveraging the Company’srelationships with existing resellers and partners. If Forgent is unable toenter into successful new strategic relationships in the future or if the Company’scurrent relationships with its resellers and partners deteriorate or terminate,Forgent may lose sales and revenues may decline.

 

#### **INTELLECTUALPROPERTY LICENSING BUSINESS**

#### ** **

**If the Company is unable to obtain new license agreements,revenues will decline.**

 

Inprior fiscal years, the Company’s intellectual property licensing revenues havebeen derived primarily from the ‘672 patent and the ‘746 patent.  However,the ‘672 patent has expired and the ‘746 patent will be expiring in May 2011.  Additionally, the Company considers thelitigations related to these two patents to be concluded. Therefore, managementdoes not anticipate any additional licensing revenues from these patents.

 

AlthoughForgent continues to explore its patent portfolio for additional opportunities,there can be no assurance that the Company will be able to continue to licenseits technology to others.  Additionally,the Company’s Patent Licensing Program involves risks inherent in licensingintellectual property, including risks of protracted delays, legal orregulatory challenges that would lead to disruption or curtailment of theprogram, increasing expenditures associated with the pursuit of the program andother risks.  Management believes anyrevenues to be generated from the Company’s remaining patent portfolio may beless than those generated historically.

 

#### **OTHER**

#### ** **

****IfForgent’s common stock is delisted from NASDAQ, its stockholders’ ability tosell their shares and the Company’s ability to raise capital may be adverselyaffected.****

 

In the past, the Companyhas received ****Nasdaqstaff**** deficiency letters indicating that, for 30consecutive business days, the bid price per share of the Company’s commonstock closed below the minimum $1.00 per share requirement.  Therefore, its common stock was subject topotential delisting from the ****Nasdaq**** Global MarketExchange pursuant to Nasdaq Marketplace Rule 4450(a)(5). Although theCompany regained bid price compliance after maintaining a share price in excessof $1.00 for ten consecutive business days and currentlydoes not face a potential delisting from the Nasdaq Global Market Exchange,Forgent cannotgive investors in its common stock any assurance that the Company will be ableto maintain compliance with the $1.00 per share minimum price requirement forcontinued listing on NASDAQ or that its stock will not be delisted by NASDAQ inthe future.

 

Ifin the future the Company’s common stock is delisted from NASDAQ, the marketliquidity of the Company’s common stock will be significantly limited, whichwould reduce stockholders’ ability to sell their Company securities in thesecondary market.  Additionally, any suchdelisting would harm Forgent’s ability to raise capital through alternativefinancing sources on acceptable terms, if at all, and may result in the loss ofconfidence in the Company’s financial stability by vendors, customers andemployees.

 

**Forgent may face problems in connection with futureacquisitions, which could create business difficulties and adversely affectoperations.**

 

Aspart of the Company’s business strategy, Forgent may acquire additionalbusinesses, products and technologies that could complement or expand itsongoing business.  However, the Companymay be unable to identify suitable acquisitions or investment candidates. Evenif Forgent identifies suitable candidates, there are no assurances that theCompany will be able to make the acquisitions or investments on favorableterms. Negotiations of potential acquisitions could divert management time andresources and the Company may incorrectly judge the value or worth of anacquired business, product or technology. Additionally, Forgent may incursignificant debt or be required to issue equity securities to pay for suchfuture acquisitions or investments.

 

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**Historically, the Company has notbeen profitable and Forgent may continue to incur losses, which may result indecreases in revenues if customers raise viability concerns.**

 

AlthoughForgent generated net income for the year ended July 31, 2007, the Companyincurred losses during the prior fiscal years and during the three months endedOctober 31, 2007.  The net incomeduring fiscal year 2007 was due to the income generated from the intellectualproperty licensing segment and is not expected to continue.  Additionally as of October 31, 2007,Forgent had an accumulated deficit of $239.4****millionand may incur additional losses in the future. Continued losses may cause existing and new customers to question theCompany’s viability and be reluctant to purchase from the Company.  If Forgent is unable to increase its salesdue to such concerns, revenues will decline, which would further adverselyaffect the Company’s operating results. Therefore, there are no assurances thatthe Company can achieve or generate sufficient revenues to realizeprofitability.

 

**Forgent may not be able toprotect or enforce its intellectual property rights, which could adverselyaffect the Company’s operations.**

 

TheCompany seeks to protect its assets through patent and trademark laws.  Forgent currently has several patents andtrademarks, as well as patent applications and trademark registrations.  However, the Company’s patent applications ortrademark registrations may not be approved. Additionally, even if approved,the resulting patents or trademarks may not provide the Company with anycompetitive advantage or may be challenged by third parties.  If challenged, patents and trademarks mightnot be upheld or claims could be narrowed. Any challenges or litigationsurrounding the Company’s rights could force Forgent to divert importantfinancial and other resources away from business operations.

 

**If Forgent elects to raiseadditional capital, funds may not be available or, if available, may not be onfavorable terms to the Company.**

 

In the future, Forgent may elect to raiseadditional capital to fund its operations and/or acquisitions. However, Forgentcannot be certain that it will be able to obtain financing on favorableterms.  If Forgent takes out loans, theCompany may incur significant interest expense, which could adversely affectoperating results.  If Forgent issuesequity securities, its stockholders’ percentage of ownership would be reducedand the new equity securities may have rights, preferences or privileges seniorto those existing stockholders of the Company’s common stock.  If Forgent is unable to raise funds onacceptable terms, Forgent may not be able to acquire additional businesses,products or technologies, develop or enhance its existing products, respond tocompetitive pressures or unanticipated requirements, or take advantage offuture opportunities, all of which could adversely affect the Company’sbusiness, operating results and financial condition.

 

**Forgent may experience fluctuations in its quarterly resultsand if the Company’s future results are below expectations, the price for theCompany’s common stock may decline.**

 

Inthe past, the Company’s revenues and operating results have variedsignificantly from quarter to quarter due to the various events experienced bythe intellectual property licensing segment. Although management expects that revenues and operating results mayfluctuate less from quarter to quarter due to the conclusion of theintellectual property licensing segment’s litigations, any fluctuation may leadto reduced prices for the Company’s common stock.  Several factors may cause the quarterlyresults to fluctuate, including:

 

·      marketdemand for the Company’s software products and services;

·      timingof customers’ budget cycles;

·      timingof customer orders and deployment of the Company’s software products andservices;

·      mixof software license and services revenues;

·      timing of introducing newproducts and services or enhancements to existing products and services;

·      new product releases orpricing policies by Forgent’s competitors;

·      seasonalfluctuations in capital spending;

·      changesin the rapidly evolving market for web-based applications;

·      management’sability to manage operating costs, a large portion of which are relativelyfixed in advance of any particular quarter;

·      timingand costs related to potential additional acquisitions of businesses,products or technologies;

·      costsof attracting, retaining and training skilled personnel;

·      management’sability to manage future growth;

·      changes in U.S. generallyaccepted accounting principles; and

·      generaleconomic climate.

 

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

 

**Theloss of key management and personnel could hinder the development of Forgent’stechnology and otherwise adversely affect the Company’s business.**

 

Forgent relies on thecontinued contributions of its senior management, and its sales and marketing,professional services and finance personnel. Forgent’s success depends upon itsability to attract, hire and retainhighly qualified and experienced personnel, especially softwaredevelopers and engineers who design and develop software applications in order to keep pace with client demand forrapidly evolving technologies and varying client needs.  The Company’s operations are also dependenton the continued efforts of its executive officers and senior management,including iEmployee’s senior management and the senior management of anybusiness it may acquire in the future. If any of the Company’s key personnel or senior management are unable orunwilling to continue in his or her present role, or if Forgent is unable to attract,train, retain and manage its employees effectively,Forgent could encounterdifficulties in developing new products and product enhancements,generating revenue through increased sales efforts and providing high qualitycustomer service.

 

**Although Forgent has executed a shareholders rights plan,there are no assurances that a change of control will not occur.**

 

InDecember 2005, the Company’s Board of Directors approved and executed ashareholder rights plan (“Rights Plan”) whereby one preferred share purchaseright was distributed for each outstanding share of the Company’s common stockfor all stockholders of record on December 31, 2005.  The Rights Plan, which was not adopted in responseto any threat to the Company, was designed to guard against any proposedtakeover, partial tender offers, open market accumulations and other tacticsdesigned to gain control of the Company. Under the Rights Plan, the preferredshare purchase rights become exercisable if a person or group thereafteracquires 15% or more of the Company’s common stock or announces a tender offerfor 15% or more of the Company’s common stock. Such events, or if the Companyis acquired in a merger or other business combination transaction after aperson or group acquires 15% or more of its common stock, would entitle theright holder to purchase, at an exercise price of $13.00 per share, a number ofshares of common stock having a market value at that time equal to twice theright’s exercise price. The Rights Plan may have the effect of discouraging,delaying or preventing unsolicited acquisition proposals, but there are noassurances a change of control will not occur.

 

Dueto the risk factors noted above and elsewhere in *“Management’s Discussion and Analysis of Financial Condition andResults of Operations,”*Forgent’s past earnings and stock price havebeen, and future earnings and stock price potentially may be, subject tosignificant volatility, particularly on a quarterly basis. Past financialperformance should not be considered a reliable indicator of future performanceand investors are cautioned in using historical trends to anticipate results ortrends in future periods. Any shortfall in revenue or earnings from the levelsanticipated by market analysts and investors could have an immediate andsignificant effect on the trading price of the Company’s common stock.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On October 5,2007, the Company issued 5,095,000 shares of its Common Stock to the formerstockholders and option holders of iEmployee********as part of theconsideration for the iEmployee acquisition.  As indicated in Note 2 ofthe Notes to the Condensed Consolidated Financial Statements in this Report,such shares had a total value of approximately $4,987,000.  The shareswere not registered with the Securities Exchange Commission at the time ofissuance and were issued in reliance on an exemption from registrationunder the Securities Act of 1933, as amended (the “Securities Act”). Specifically, the shares were sold pursuant to Rule 506 of Regulation Dunder the Securities Act to accredited investors only, such salesbeing further evidenced by the Company’s filing of a Form D with theSecurities Exchange Commission.

 

###### **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

###### ** **

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

### **ITEM6. EXHIBITS**

### ** **

| Exhibits: |   |
|-----------|--------|
|      |   |   |
| 2.2*      |   | Agreement  and Plan of Merger, dated as of September 11, 2007 by and among Forgent  Networks, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc. |
|      |   |   |
| 3.1       |   | Restated  Certificate of Incorporation (incorporated by reference to Exhibit 3.1  to the Company’s quarterly report on Form 10-Q for the three months  ended October 31, 2004). |
|      |   |   |
| 3.2       |   | Restated  Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s  quarterly report on Form 10-Q for the three months ended  October 31, 2004). |
|      |   |   |
| 4.1       |   | Specimen  Certificate for the Common Stock (incorporated by reference to  Exhibit 4.1 to the Company’s Registration Statement on Form S-1,  File No. 33-45876, as amended). |
|      |   |   |
| 4.2       |   | Rights  Agreement, dated as of December 19, 2005 between Forgent  Networks, Inc. and American Stock Transfer & Trust Company,  which includes the form of Series A Preferred Stock, $.01 par value, the  form of Rights Certificate, and the Summary of Rights (incorporated by  reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K  dated December 19, 2005). |
|      |   |   |
| 10.42*    |   | Employment  Agreement with Fenil Shah dated October 5, 2007. |
|      |   |   |
| 10.43*    |   | Employment Agreement with Snehal Shah dated October 5, 2007. |
|      |   |   |
| 31.1*     |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|      |   |   |
| 31.2*     |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|      |   |   |
| 32.1*     |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|      |   |   |
| 32.2*     |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

* Filed herewith

 

24

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                    | FORGENT  NETWORKS, INC. |
|-------------------------|-------------------------|
|                    |                    |
|                    |                    |
| December 17,  2007 | By:                     | /s/ RICHARD N. SNYDER |
|                    |                    | Richard  N. Snyder |
|                    |                    | Chief  Executive Officer |
|                    |                    |
|                    |                    |
| December 17,  2007 | By:                     | /s/ JAY C. PETERSON |
|                    |                    | Jay C. Peterson |
|                    |                    | Chief  Financial Officer |
|                         |                         |  |  |

 

25

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** **

**INDEX TOEXHIBITS**

** **
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2                 |       | Agreement  and Plan of Merger, dated as of September 11, 2007 by and among Forgent  Networks, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc.                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1                 |       | Restated  Certificate of Incorporation (incorporated by reference to Exhibit 3.1  to the Company’s quarterly report on Form 10-Q for the three months ended  October 31, 2004).                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2                 |       | Restated  Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s  quarterly report on Form 10-Q for the three months ended  October 31, 2004).                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1                 |       | Specimen  Certificate for the Common Stock (incorporated by reference to  Exhibit 4.1 to the Company’s Registration Statement on Form S-1,  File No. 33-45876, as amended).                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2                 |       | Rights  Agreement, dated as of December 19, 2005 between Forgent  Networks, Inc. and American Stock Transfer & Trust Company,  which includes the form of Series A Preferred Stock, $.01 par value, the  form of Rights Certificate, and the Summary of Rights (incorporated by  reference to Exhibit 4.1 to the Company’s Current Report on  Form 8-K dated December 19, 2005). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.42               |       | Employment  Agreement with Fenil Shah dated October 5, 2007.                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.43               |       | Employment Agreement with Snehal Shah dated October 5, 2007.                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1                |       | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2                |       | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1                |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.2                |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                          |

 

26

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