#### **Table of Contents**

 

 

 

#### **UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**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 January 31, 2009**                                                   |
|   |       | ** **                                                                                                  |
|   |       | **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) |

 

----

 

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  o |   | Smaller reporting company  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

 

On March 11, 2009, the registrant had outstanding 31,111,278 shares of its Common Stock,$0.01 par value.

 

 

 

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# **Table of Contents**

 

# **INDEX TO FINANCIAL STATEMENTS**

 
| ** **                              | ** **                                                                                                                    | ** ** | **Page**   |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                              | ** **                                                                                                                    | ** ** | **Number** |
| **PART I - FINANCIAL INFORMATION** | ** **                                                                                                                    |
|                                    |                                                                                                                          |       |       |
|                                    | Item 1 –  Condensed  Consolidated Financial Statements                                                              |       |
|                                    | Condensed Consolidated Balance Sheets as of January 31, 2009  (unaudited) and July 31, 2008                         | 3          |
|                                    | Unaudited Condensed Consolidated Statements  of Operations for the Three and Six Months Ended January 31, 2009 and  2008 | 4          |
|                                    | Unaudited Condensed Consolidated Statements  of Cash Flows for the Six Months Ended January 31, 2009 and 2008            | 5          |
|                                    | Notes to the Unaudited Condensed  Consolidated Financial Statements                                                           | 6          |
|                                    | Item 2  -  Management’s Discussion and Analysis of Financial Condition and  Results of Operations              | 12         |
|                                    | Item 3  -  Quantitative and Qualitative Disclosures About Market Risk                                               | 19         |
|                                    | Item 4 –   Controls and Procedures                                                                                  | 20         |
|                                    |                                                                                                                          |       |       |
| **PART II - OTHER INFORMATION**    | ** **                                                                                                                    |
|                                    |                                                                                                                          |
|                                    | Item 1 - Legal Proceedings                                                                                                    | 20         |
|                                    | Item 1A - Risk Factors                                                                                                        | 21         |
|                                    | Item 2 - Unregistered Sales of Equity  Securities and Use of Proceeds                                                         | 21         |
|                                    | Item 3 - Defaults upon Senior Securities                                                                                      | 21         |
|                                    | Item 4 - Submission of Matters to a Vote of  Security Holders                                                                 | 21         |
|                                    | Item 5 - Other Information                                                                                                    | 21         |
|                                    | Item 6 - Exhibits                                                                                                             | 21         |
|                                    |                                                                                                                          |
| **Signatures**                          | 23                                                                                                                            |
|                                    |                                                                                                                          |
| **Index to Exhibits**                   | 24                                                                                                                            |

 

2

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Tableof Contents

 

**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Amounts in thousands, except per share data)

 
| ** **                                                                                                                                                                                    | ** ** | **JANUARY 31,  2009** | ** ** | **JULY 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **(UNAUDITED)**            | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                    |       |                       |       |                    |       |
| Current Assets:                                                                                                                                                                               |       |                       |       |                    |       |
| *Cash and  cash equivalents*                                                                                                                                                                  |       | $                          | 9,056      |                    | $          | 12,062 |   |
| Short-term investments                                                                                                                                                                        |       | 3,074                      |       | 2,627                   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $56 and $41 at January 31, 2009 and July 31,  2008, respectively                                                    |       | 1,528                      |       | 1,718                   |       |
| Inventory                                                                                                                                                                                     |       | 31                         |       | 74                      |       |
| Prepaid expenses and other current assets                                                                                                                                                     |       | 222                        |       | 191                     |       |
| Total Current  Assets                                                                                                                                                                         | ** ** | **13,911**                 | ** ** | **16,672**              | ** ** |
|                                                                                                                                                                                          |       |                       |       |                    |       |
| Property and equipment, net                                                                                                                                                                   |       | 775                        |       | 907                     |       |
| Intangible  assets, net                                                                                                                                                                       |       | 4,338                      |       | 4,729                   |       |
| ** **                                                                                                                                                                                    | ** ** | **$**                      | **19,024** | ** **              | **$**      | **22,308** | ** ** |
| ** **                                                                                                                                                                                    |       |                       |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                 |       |                       |       |                    |       |
| Current Liabilities:                                                                                                                                                                          |       |                       |       |                    |       |
| Accounts payable                                                                                                                                                                              |       | $                          | 3,779      |                    | $          | 3,778 |   |
| Accrued compensation and benefits                                                                                                                                                             |       | 157                        |       | 203                     |       |
| Lease impairment and advance                                                                                                                                                                  |       | 336                        |       | 373                     |       |
| Other accrued liabilities                                                                                                                                                                     |       | 455                        |       | 384                     |       |
| Deferred revenue                                                                                                                                                                              |       | 1,901                      |       | 1,844                   |       |
| Total Current Liabilities                                                                                                                                                                     | ** ** | **6,628**                  | ** ** | **6,582**               | ** ** |
|                                                                                                                                                                                          |       |                       |       |                    |       |
| Long-Term Liabilities:                                                                                                                                                                        |       |                       |       |                    |       |
| Deferred revenue                                                                                                                                                                              |       | 53                         |       | 25                      |       |
| Lease impairment and advance                                                                                                                                                                  |       | 375                        |       | 564                     |       |
| Other long-term obligations                                                                                                                                                                   |       | 170                        |       | 217                     |       |
| Total Long-Term Liabilities                                                                                                                                                                   | ** ** | **598**                    | ** ** | **806**                 | ** ** |
| ** **                                                                                                                                                                                    | ** ** | ** **                 | ** ** | ** **              | ** ** |
| Stockholders’ Equity:                                                                                                                                                                    |       |                       |       |                    |       |
| Preferred stock, $.01 par value; 10,000  shares authorized; none issued or outstanding                                                                                                        |       | —                     |       | —                  |       |
| Common stock, $.01 par value; 40,000 shares  authorized; 32,901 and 32,892 shares issued; 31,111 and 31,102 shares  outstanding at January 31, 2009 and July 31, 2008, respectively |       | 329                        |       | 329                     |       |
| Treasury stock at cost, 1,790 shares at  January 31, 2009 and July 31, 2008                                                                                                         |       | (4,815                     | )          | (4,815                  | )          |
| Additional paid-in capital                                                                                                                                                                    |       | 270,712                    |       | 270,657                 |       |
| Accumulated deficit                                                                                                                                                                           |       | (254,292                   | )          | (251,214                | )          |
| Accumulated other comprehensive income                                                                                                                                                        |       | (136                       | )          | (37                     | )          |
| Total Stockholders’ Equity                                                                                                                                                               | ** ** | **11,798**                 | ** ** | **14,920**              | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **$**                      | **19,024** | ** **              | **$**      | **22,308** | ** ** |

 

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

 

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**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Amounts in thousands, except per share data)

 
| ** **                                    | ** ** | **FOR THE****THREE MONTHS ENDED  JANUARY 31,** | ** ** | **FOR THE****SIX MONTHS ENDED  JANUARY 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                           | ** ** | **2008**                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **(UNAUDITED)**                                                    | ** ** | **(UNAUDITED)**                                                  | ** ** |
|                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| Revenues                                      |       | $                                                                  | 2,421      |                                                             | $          | 2,734 |   | $ | 5,213 |   | $ | 4,608 |   |
| Cost of Sales                                 |       | (469                                                               | )          | (629                                                             | )          | (1,033 | ) | (958 | ) |
| **Gross Margin**                              | ** ** | **1,952**                                                          | ** ** | **2,105**                                                        | ** ** | **4,180** | ** ** | **3,650** | ** ** |
|                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| **OPERATING EXPENSES:**                       |       |                                                               |       |                                                             |       |   |   |   |   |
| Selling, general and  administrative          |       | 3,034                                                              |       | 2,962                                                            |       | 6,231 |   | 5,402 |   |
| Research and development                      |       | 525                                                                |       | 640                                                              |       | 1,086 |   | 931 |   |
| Amortization of intangible assets             |       | 149                                                                |       | 155                                                              |       | 298 |   | 191 |   |
| Total Operating Expenses                      | ** ** | **3,708**                                                          | ** ** | **3,757**                                                        | ** ** | **7,615** | ** ** | **6,524** | ** ** |
| ** **                                    | ** ** | ** **                                                         | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LOSS FROM OPERATIONS**                      | ** ** | **(1,756**                                                         | **)**      | **(1,652**                                                       | **)**      | **(3,435** | **)** | **(2,874** | **)** |
|                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| **OTHER INCOME AND (EXPENSES):**              |       |                                                               |       |                                                             |       |   |   |   |   |
| Interest income                               |       | 35                                                                 |       | 195                                                              |       | 89 |   | 533 |   |
| Foreign currency translation                  |       | (22                                                                | )          | (4                                                               | )          | 99 |   | (11 | ) |
| Gain on sale of assets                        |       | 250                                                                |       | —                                                           |       | 250 |   | — |   |
| Interest expense and other                    |       | (23                                                                | )          | (16                                                              | )          | (33 | ) | (29 | ) |
| Total Other Income                            | ** ** | **240**                                                            | ** ** | **175**                                                          | ** ** | **405** | ** ** | **493** | ** ** |
| **LOSS FROM OPERATIONS, BEFORE INCOME TAXES** | ** ** | **(1,516**                                                         | **)**      | **(1,477**                                                       | **)**      | **(3,030** | **)** | **(2,381** | **)** |
| Provision for income taxes                    |       | (23                                                                | )          | (7                                                               | )          | (48 | ) | (21 | ) |
| **NET LOSS**                                  | ** ** | **$**                                                              | **(1,539** | **)**                                                            | **$**      | **(1,484** | **)** | **$** | **(3,078** | **)** | **$** | **(2,402** | **)** |
|                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| **BASIC AND DILUTED LOSS PER  SHARE:**        |       |                                                               |       |                                                             |       |   |   |   |   |
| Net loss per share — basic and  diluted  |       | $                                                                  | (0.05      | )                                                                | $          | (0.05 | **)** | $ | (0.10 | ) | $ | (0.08 | ) |
|                                          |       |                                                               |       |                                                             |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING:**     |       |                                                               |       |                                                             |       |   |   |   |   |
| Basic                                         |       | 31,110                                                             |       | 30,940                                                           |       | 31,107 |   | 29,017 |   |
| Diluted                                       |       | 31,110                                                             |       | 30,940                                                           |       | 31,107 |   | 29,017 |   |

 

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

 

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** **

**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Amounts in thousands)

 
| ** **                                                         | ** ** | **FOR THE SIX MONTHS  ENDED JANUARY 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | **(UNAUDITED)**                                                    | ** ** |
| ** **                                                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                          |       |                                                               |       |   |   |
| Net loss from operations                                           |       | $                                                                  | (3,078     | ) | $ | (2,402 | ) |
| Adjustments to reconcile net loss to net  cash used in operations: |       |                                                               |       |   |   |
|                                                               |       |                                                               |       |   |   |
| Depreciation and amortization                                      |       | 655                                                                |       | 474 |   |
| Amortization of leasehold advance and lease  impairment            |       | (190                                                               | )          | (192 | ) |
| Provision for doubtful accounts                                    |       | 22                                                                 |       | 2 |   |
| Share-based compensation                                           |       | 53                                                                 |       | 72 |   |
| Foreign currency translation (gain) loss                           |       | (97                                                                | )          | 3 |   |
| Gain on sale of assets                                             |       | (5                                                                 | )          | — |   |
| Changes in operating assets and  liabilities:                      |       |                                                               |       |   |   |
| Accounts receivable                                                |       | 119                                                                |       | 144 |   |
| Inventory                                                          |       | 43                                                                 |       | — |   |
| Prepaid expenses and other current assets                          |       | (62                                                                | )          | 9 |   |
| Accounts payable                                                   |       | (33                                                                | )          | (8,142 | ) |
| Accrued expenses and other long-term  obligations                  |       | 22                                                                 |       | (284 | ) |
| Deferred revenue                                                   |       | 134                                                                |       | (277 | ) |
| Net cash used in operating activities                              | ** ** | **(2,417**                                                         | **)**      | **(10,593** | **)** |
|                                                               |       |                                                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                          |       |                                                               |       |   |   |
| Net purchases of short-term investments                            |       | (431                                                               | )          | (1,784 | ) |
| Net purchases of property and equipment                            |       | (152                                                               | )          | (123 | ) |
| Change in other assets                                             |       | —                                                             |       | 164 |   |
| Acquisition of iSarla, Inc., net of  cash acquired            |       | —                                                             |       | (7,267 | ) |
| Net cash used in investing activities                              | ** ** | **(583**                                                           | **)**      | **(9,010** | **)** |
|                                                               |       |                                                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                          |       |                                                               |       |   |   |
| Net proceeds from issuance of stock                                |       | 2                                                                  |       | 11 |   |
| Payments on capital leases                                         |       | (15                                                                | )          | (1 | ) |
| Net cash (used in) provided by financing  activities               | ** ** | **(13**                                                            | **)**      | **10** | ** ** |
|                                                               |       |                                                               |       |   |   |
| Effect of translation exchange rates                               |       | 7                                                                  |       | 8 |   |
|                                                               |       |                                                               |       |   |   |
| Net decrease in cash and cash equivalents                          |       | (3,006                                                             | )          | (19,585 | ) |
| Cash and cash equivalents at beginning of  period                  |       | 12,062                                                             |       | 33,524 |   |
| Cash and cash equivalents at end of period                         | ** ** | **$**                                                              | **9,056**  | ** ** | **$** | **13,939** | ** ** |
|                                                               |       |                                                               |       |   |   |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                           |       |                                                               |       |   |   |
| Issuance of stock for  acquisition of iSarla, Inc.            |       | $                                                                  | —     |   | $ | 4,987 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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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 all informationand 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 January 31,2009 and July 31, 2008, the results of operations for the three and sixmonths ended January 31, 2009 and January 31, 2008, and the cash flows for the six months ended January 31, 2009and January 31, 2008. These condensed consolidated financialstatements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto filed with the Securitiesand Exchange Commission in the Company’s annual report on Form 10-K/A forthe fiscal year ended July 31, 2008.  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 of the outstanding capital stock of iSarla Inc., aDelaware corporation and application service provider that offers on-demandsoftware solutions that help simplify the human resource process and improveemployee productivity by managing and communicating human resources, employeebenefits and payroll information. iSarla Inc. conducted its business under thetrade name “iEmployee” and provided hosted application services, including Time &Attendance, Timesheets, Human Resource Benefits, Expenses and othersolutions.  iEmployee was a profitablebusiness with a high percentage of recurring revenues and delivered itssoftware as a service under the “SaaS” model. The acquisition expanded Forgent’s current target markets, significantlyaugmented the Company’s product and service offerings to customers, andincreased revenues from its operations 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 12 and 18 monthsfor representations and warranties.  Thepurchase agreement did not include provisions for any other contingentpayments, options or commitments.  Asa result of the acquisition, iEmployee’s results of operations since October 5,2007 have been included in the Company’s Consolidated Statement of Operations.

 

Thebusiness combination was accounted for under Financial AccountingStandard Board (“FASB”) StatementNo. 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.  Thefollowing table summarizes the final adjusted fair values of the iEmployeeassets acquired and liabilities assumed:

 
| ** **                | ** ** | **Final**      | ** ** |
|---------------------------|------------|----------------|------------|
| ** **                | ** ** | **Allocation** | ** ** |
| **Assets Acquired**       |       |           |       |
| Cash                      |       | $              | 460        |   |
| Short-term investments    |       | 526            |       |
| Accounts receivable, net  |       | 452            |       |
| Prepaid assets            |       | 90             |       |
| Fixed assets              |       | 340            |       |
| Goodwill                  |       | 7,391          |       |
| Intangible assets         |       | 5,368          |       |
| Other assets              |       | 11             |       |
| **Total assets acquired** | ** ** | **14,638**     | ** ** |
|                           |            |                |            |  |

 

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**FORGENT NETWORKS, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts in thousands, except per share data unless otherwise noted)

 
| **Liabilities assumed**           | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| Accounts payable                  |       | (1,279     | )          |
| Accrued compensation and benefits |       | (134       | )          |
| Accrued other liabilities         |       | (189       | )          |
| Deferred revenue                  |       | (375       | )          |
| **Total liabilities assumed**     | ** ** | **(1,977** | **)**      |
|                              |       |       |       |
| **Net assets acquired**           | ** ** | **$**      | **12,661** | ** ** |
|                                   |            |            |            |  |

 

Dueto its continued depressed stock price and the current market conditions duringthe fourth fiscal quarter of 2008, Forgent determined that the decline in itsmarket capitalization may not be temporary. Due to the decline in its market capitalization, the Company was required to perform an impairment analysis onits goodwill.  As a result of theimpairment analysis, Forgent recorded a non-cash $7,391 goodwill impairmentrelated to its acquisition of iEmployee to its Consolidated Statement ofOperations during the fourth quarter of fiscal 2008.  This impairment had no impact to the Company’stangible net book value or liquidity.

 

Thefollowing summary presents unaudited pro forma consolidated financialinformation for the six months ended January 31, 2008, as if the iEmployeeacquisition had occurred as of August 1, 2007.  The pro forma consolidated financialinformation for the second fiscal quarter of 2008 is not presented since theiEmployee acquisition occurred prior to the start of this fiscal quarter andthe combined financial results are reported on the Company’s CondensedConsolidated Statement of Operations for the three months ended January 31,2008.  The pro forma information does notpurport to be indicative of the actual results which would have occurred hadthe acquisition been completed as of August 1, 2007, nor is it necessarilyindicative of the results of operations which may occur in the future.

 
| ** **                            | ** ** | **For the Six Months**     | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **Ended January 31, 2008** | ** ** |
| ** **                            | ** ** | **As Reported**                      | ** ** | **Pro Forma** | ** ** |
| ** **                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Revenues                              |       | $                                         | 4,608      |   | $ | 5,622 |   |
| Net loss                              |       | (2,402                                    | )          | (2,255 | ) |
|                                  |       |                                      |       |   |   |
| Net loss per  common share:           |       |                                      |       |   |   |
| Basic                                 |       | $                                         | (0.08      | ) | $ | (0.07 | ) |
| Diluted                               |       | (0.08                                     | )          | (0.07 | ) |
|                                  |       |                                      |       |   |   |
| Weighted average  shares outstanding: |       |                                      |       |   |   |
| Basic                                 |       | 29,017                                    |       | 30,817 |   |
| Diluted                               |       | 29,017                                    |       | 30,817 |   |

 

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**FORGENT NETWORKS, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

 

**NOTE 3 - INTANGIBLE ASSETS**

 

Forgent accounts for itsacquisition in accordance with FASB Statement No. 141, *“BusinessCombination.”*The Company records intangible assets apartfrom goodwill if the assets have contractual or other legal rights or if theassets can be separated and sold, transferred, licensed, rented orexchanged.  Forgent’s intangible assetsrelate to its acquisition of iSarla Inc. and the iEmployee operations.

 

In accordance with FASBStatement No. 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets,”* Forgent reviews andevaluates its long-lived assets, including intangible assets with finite lives,for impairment whenever events or changes in circumstances indicate that theirnet book value may not be recoverable. The gross carrying amount and accumulated amortization of the Company’sintangible assets as of January 31, 2009 and July 31, 2008 are asfollows:

 
| ** **                | ** ** | ** **                      | ** ** | **January 31, 2009** | ** ** |
|---------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **Amortization**                | ** ** | ** **                     | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **Intangible Asset** | ** ** | **Period (in Years)** | ** ** | **Gross**                      | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                      |       |                            |       |                           |       |   |   |   |   |
| Developed Technology      |       | 5                               |       | $                              | 915        |   | $ | (242 | ) | $ | 673 |   |
| Customer Relationships    |       | 8                               |       | 2,470                          |       | (408 | ) | 2,062 |   |
| Ceridian Contract         |       | 8                               |       | 1,545                          |       | (255 | ) | 1,290 |   |
| Trade Names               |       | 5                               |       | 288                            |       | (76 | ) | 212 |   |
| Covenant not-to-compete   |       | 4                               |       | 150                            |       | (49 | ) | 101 |   |
| ** **                | ** ** | ** **                      | ** ** | **$**                          | **5,368**  | ** ** | **$** | **(1,030** | **)** | **$** | **4,338** | ** ** |

 
| ** **                | ** ** | ** **                      | ** ** | **July 31, 2008** | ** ** |
|---------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **Amortization**                | ** ** | ** **                  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **Intangible Asset** | ** ** | **Period (in Years)** | ** ** | **Gross**                   | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                      |       |                            |       |                        |       |   |   |   |   |
| Developed Technology      |       | 5                               |       | $                           | 915        |   | $ | (150 | ) | $ | 765 |   |
| Customer Relationships    |       | 8                               |       | 2,470                       |       | (253 | ) | 2,217 |   |
| Ceridian Contract         |       | 8                               |       | 1,545                       |       | (158 | ) | 1,387 |   |
| Trade Names               |       | 5                               |       | 288                         |       | (47 | ) | 241 |   |
| Covenant not-to-compete   |       | 4                               |       | 150                         |       | (31 | ) | 119 |   |
| ** **                | ** ** | ** **                      | ** ** | **$**                       | **5,368**  | ** ** | **$** | **(639** | **)** | **$** | **4,729** | ** ** |

 

Amortization expense is recorded using the straight-line method overthe estimated economic useful lives of the intangible assets, as notedabove.  Amortization expense for thethree months ended January 31, 2009 and 2008 were $195 and $202,respectively.  Amortizationexpense for the six months ended January 31, 2009 and 2008 were $390 and$250, respectively.  Thefollowing table summarizes the estimated amortization expense relating to theCompany’s intangible assets for the next five fiscal years and thereafter as ofJanuary 31, 2009:

 
| **Fiscal Years** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| Remaining 2009        |       | $          | 390        |   |
| 2010                  |       | 780        |       |
| 2011                  |       | 780        |       |
| 2012                  |       | 749        |       |
| 2013                  |       | 545        |       |
| Thereafter            |       | 1,094      |       |
| ** **            | ** ** | **$**      | **4,338**  | ** ** |

 

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**FORGENT NETWORKS, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts in thousands, except per share data unless otherwise noted)

 

**NOTE 4 — FAIR VALUE MEASUREMENTS**

 

Effective August 1,2008, Forgent adopted FASB Statement No. 157, *“Fair Value Measurements.”  *Statement No. 157defines fair value, establishes a framework for measuring fair value in U.S.generally accepted accounting principles and expands disclosures about fairvalue measurements.  The adoption of Statement No. 157 did not have amaterial impact to the Company’s consolidated financial statements.

 

StatementNo. 157 establishes a three-tier fair value hierarchy, which is based onthe reliability of the inputs used in measuring fair values. These tiersinclude:

 
| Level 1: | Quoted prices in active markets for *identical*  assets or liabilities;                                                                                                                                                                       |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level 2: | Quoted prices in active markets for *similar*  assets or liabilities; quoted prices in markets that are not active for  identical or similar assets or liabilities; and model-driven valuations whose  significant inputs are observable; and |
| Level 3: | Unobservable inputs that are supported by little or no market activity  and that are significant to the fair value of the assets or liabilities.                                                                                              |

 

The following table presents the fair value hierarchy for the Company’sfinancial assets (cash equivalents and short-term investments) measured at fairvalue on a recurring basis as of January 31, 2009:

 
| ** **                                | ** ** | ** **           | ** ** | **Fair Value Measure at January 31 , 2009** | ** ** |
|-------------------------------------------|------------|----------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Total**            | ** ** | **Quoted**                                                                     | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Carrying**         | ** ** | **Prices**                                                                     | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                | ** ** | **Value at**    | ** ** | **in Active**                                                             | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                | ** ** | **January 31,** | ** ** | **Market**                                                                     | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                           | ** ** | **2009**             | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Money Market Funds                        |       | $                    | 9,056      |                                                                           | $          | 9,056 |   | $ | — |   | $ | — |   |
| Short-term investments available for sale |       | 3,074                |       | 3,074                                                                          |       | — |   | — |   |
| **Total**                                 | ** ** | **$**                | **12,130** | ** **                                                                     | **$**      | **12,130** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

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 statement does not eliminatedisclosure requirements included in other accounting standards, includingrequirements for disclosures about fair value measurements included inStatement No. 157, *“Fair ValueMeasurements,”*and Statement No. 107, *“Disclosures about Fair Value of FinancialInstruments.”*  Forgent adoptedStatement No. 159, effective August 1, 2008, and elected not tomeasure any additional financial instruments at fair value.  Therefore, the adoption of Statement No. 159did not have a material impact to the Company’s consolidated financialstatements.

 

**NOTE 5 - COMPREHENSIVE INCOME (LOSS)**

 

In accordancewith the disclosure requirements of FASB Statement 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. The followingtable presents the Company’s comprehensive loss and its components for thethree and six

 

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**FORGENT NETWORKS, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts inthousands, except per share data unless otherwise noted)

 

months ended January 31,2009 and 2008:

 
| ** **                                | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **Ended January 31,**         | ** ** | **Ended January 31,**       | ** ** |
| ** **                                | ** ** | **2009**                                | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                      |       |                                    |       |                                  |       |   |   |   |   |
| Net Loss                                  |       | $                                       | (1,539     | )                                     | $          | (1,484 | ) | $ | (3,078 | ) | $ | (2,402 | ) |
| Foreign currency gain (loss)              |       | 47                                      |       | (10                                   | )          | (115 | ) | 12 |   |
| Unrealized gain on short-term investments |       | 12                                      |       | 10                                    |       | 16 |   | 13 |   |
| **Comprehensive Loss**                    | ** ** | **$**                                   | **(1,480** | **)**                                 | **$**      | **(1,484** | **)** | **$** | **(3,177** | **)** | **$** | **(2,377** | **)** |

 

##### **NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS**

##### ** **

In December 2007,the FASB issued Statement No. 141(R), *“Business Combinations.”*Statement No. 141(R) establishes principles and requirements for howan acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any non-controllinginterest in the acquiree and the goodwill acquired in the businesscombination.  The statement alsoestablishes disclosure requirements which will enable users to evaluate thenature and financial effects of the business combination. Statement No. 141(R) iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. As such, the Company will adoptthese provisions for any business combination after August 1, 2009.  The adoption of Statement No. 141(R) mayhave an impact on Forgent’s accounting for future business combinations onceadopted.

 

## **NOTE7 — SHARE BASED COMPENSATION**

## ** **

Share based compensation for the Company’sstock option, restricted stock and stock purchase plans for the three and sixmonths ended January 31, 2009 was $17and $53, respectively.  Sharebased compensation for the Company’s stock option, restricted stock and stockpurchase plans for the three and six months ended January 31, 2008 was $67 and $72, respectively.  The Company issued 2 and 9 shares of common stock relatedto its Stock Option, Restricted Stock, and Stock Purchase Plans for the threeand six months ended January 31, 2009, respectively.  The Company issued 252 and 256 shares of common stock related to its Stock Option,Restricted Stock, and Stock Purchase Plans for the three and six months ended January 31,2008, respectively.

 

**NOTE 8 — PENDING CHANGE IN COMPANY’S PUBLICSTATUS**

 

 On January 29,2009, Forgent announced its plan to take the Company private and filed apreliminary proxy statement and Schedule 13E-3 with the Securities and ExchangeCommission on January 30, 2009. This plan furthers the Company’s goals of maximizing shareholder valueand realizing substantial cost savings while accelerating the attainment ofprofitability and positive cash flow. Following review by the Securities and Exchange Commission and subjectto approval by the Company’s shareholders, Forgent’s common stock will bevoluntarily withdrawn from listing on the Nasdaq Capital Market.  Subsequently, the Company anticipates thatits stock may be traded via Pink Sheets® on the Over the Counter Market.  However, trading opportunities in the Pink Sheets® will be dependentupon whether any broker-dealers commit to make a market for the Company’scommon stock, and the Company cannot guarantee or anticipate whether its commonstock will be quoted in the Pink Sheets®.

 

**NOTE 9 - CONTINGENCIES**

 

Forgent is the defendant or plaintiff invarious actions that arose in the 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, 

 

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**FORGENT NETWORKS, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Amounts inthousands, except per share data unless otherwise noted)

 

Jenkensalleges a breach of contract and is seeking a declaratory judgment.  Forgent disputes Jenkens’ claims and isseeking 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 no more than $1,400 pursuant to the ResolutionAgreement as a result of the amounts received by Forgent in the pastlitigation.  Jenkens interprets theResolution Agreement on broader terms and believes it is entitled to $3,400,including attorneys’ fees and interest.

 

On March 3, 2008, Forgent and Jenkensappeared before the Court regarding a hearing on a motion for summary judgmentfiled by Jenkens.  On May 20, 2008,the Court granted Jenkens’ motion and ordered Forgent to pay Jenkens $2,800 forpast recoveries and other amounts including attorney’s fees and interest.  Forgent asked the Court to reconsider itsorder and, on September 3, 2008, the Court granted Forgent’s Motion toReconsider Order.

 

Although thetrial date for this litigation was scheduled to commence on April 27,2009, the judge assigned to the case will be retiring prior to the trialdate.  Forgent and Jenkens have jointlyagreed to file a motion to request the Court to extend the trial setting to adate no sooner than July 6, 2009.  Managementcurrently cannot predict how long it ultimately will take to resolve theJenkens lawsuit.  Until the Jenkenslitigation is finalized, the related amounts charged by Jenkens pursuant to theResolution Agreement may be adjusted in a future period and could have amaterial impact to the Company’s consolidated financial statements.

 

**Litigation with Wild Basin**

 

On September 6,2007, Forgent filed a petition against Wild Basin One & Two, Ltd. (“WildBasin”) in the District Court of Travis County, Texas.  The petition claimed Wild Basin was in breachof contract relating to Forgent’s lease agreement by unreasonably withholdingand delaying its consent to Forgent’s lease assignment to a third party.  Forgent sought to recover all damages as aresult of the delay in closing its pending assignment and amounts notdistributed in the past, among other damages.

 

The trial for thislitigation commenced on September 22, 2008.  Prior to the conclusion of the trial, Forgentand Wild Basin reached a settlement agreement, effective September 25,2008.  This settlement agreementrequires, among other terms, that Wild Basin consent to Forgent’s leaseassignment.  In return, Forgent paid WildBasin $75 in November 2008.  Both partiesagreed to mutually release claims against each other.

 

AfterForgent and Wild Basin participated in mediation on November 11, 2008 tofinalize the terms of the settlement agreement, Wild Basin consented to Forgent’slease assignment and the documents were submitted to Wild Basin’s lender forfinal approval.  Although the lendergranted its final approval on February 11, 2009, the third party lessee iscurrently having difficulties obtaining the required financing due to thetightened capital markets, so there is no assurance that Forgent will finalizea lease agreement with the third party. Therefore, Forgent is now also offering a lease assignment to otherinterested parties.

 

**NOTE 10 — SUBSEQUENT EVENT**

 

InFebruary 2009, Forgent sold certain assets associated with its VisualAsset Manager (“VAM”) software product to E-Innovative Services Group, LLC (“EISG”),the Company’s key partner in providing a complete asset management solution toits customers.  EISG has agreed to payForgent quarterly royalty payments equal to 20% of all net revenue generated byEISG’s sales of the VAM products, or any products derived from any of theacquired assets, up to a total sum of $1,000. EISG has also agreed to assume all contractual obligations related tothe Company’s VAM maintenance and support agreements.  Management does not expect the sale to have amaterial impact to its consolidated financial statements in the third fiscalquarter of 2009 or thereafter.  Bydivesting its VAM software product and services, Forgent will now be able tofocus its investment on NetSimplicity’s scheduling software, Meeting Room Manager,which the Company believes has the greater potential for the Company’s futuregrowth and profitability.  Forgent’siEmployee operations were not affected by this sale.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

The followingreview of Forgent’s financial position as of January 31, 2009 and July 31,2008, and for the three and six months ended January 31, 2009 and 2008,should be read in conjunction with the Company’s 2008 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 report 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.

 

On February 4, 2008, Forgent received a Nasdaq deficiency letterindicating that, for 30 consecutive business days, the bid price per share ofthe Company’s common stock closed below the minimum $1.00 per sharerequirement.  Since Forgent was unable toregain compliance through improving its operating results, the Company appliedfor a transfer listing on the Nasdaq Capital Market, which Nasdaq approved,effective September 19, 2008.  TheCompany’s trading symbol continued to be “ASUR” and the trading of the Company’sstock was unaffected by this change.

 

Due to current unprecedentedmarket conditions, on December 19, 2008, Nasdaq further suspended theenforcement of its rules requiring a minimum $1.00 share bid price for allNasdaq-listed companies until April 20, 2009.  Consequently, Forgent’s compliance deadlinehas been extended until August 4, 2009. If the Company cannot achieve compliance with the minimum share pricerequirement by such date, Nasdaq will provide written notification that theCompany’s securities will be de-listed from the Capital Market Exchange.

 

On January 29, 2009, Forgent announced itsplan to take the Company private and filed a preliminary proxy statement andSchedule 13E-3 with the Securities and Exchange Commission on January 30,2009.  This plan furthers the Company’sgoals of maximizing shareholder value and realizing substantial cost savingswhile accelerating the attainment of profitability and positive cash flow.  Following review by the Securities andExchange Commission and subject to approval by the Company’s shareholders,Forgent’s common stock will be voluntarily withdrawn from listing on the NasdaqCapital Market.  Subsequently, theCompany anticipates that its stock may be traded via Pink Sheets® on the Overthe Counter Market.  However, trading opportunities in the PinkSheets® will be dependent upon whether any broker-dealers commit to make amarket for the Company’s common stock, and the Company cannot guarantee oranticipate whether its common stock will be quoted in the Pink Sheets®.

 

**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 be reasonableas of the filing date of this report, they inherently are subject to certainrisks and uncertainties.  Additionally,Forgent is under no obligation to update any of the forward-looking statementsafter the date of this Form 10-Q to conform such statements to actualresults.

 

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**RESULTS OF OPERATIONS**

 

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

 

| ** **                           | ** ** | **FOR THE THREE   MONTHS ENDED****   JANUARY 31,** | ** ** | **FOR THE SIX****   MONTHS ENDED   JANUARY 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                                                         | ** ** | **2008**                                                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                 |       |                                                                             |       |                                                                           |       |   |   |   |   |
| Revenues                             |       | 100                                                                              | %          | 100                                                                            | %          | 100 | % | 100 | % |
| Gross margin                         |       | 81                                                                               |       | 77                                                                             |       | 80 |   | 79 |   |
| Selling, general and  administrative |       | 125                                                                              |       | 108                                                                            |       | 119 |   | 117 |   |
| Research and development             |       | 22                                                                               |       | 23                                                                             |       | 21 |   | 20 |   |
| Amortization of intangible  assets   |       | 6                                                                                |       | 6                                                                              |       | 6 |   | 4 |   |
| Total operating expenses             |       | 153                                                                              |       | 137                                                                            |       | 146 |   | 142 |   |
| Other income, net                    |       | 10                                                                               |       | 6                                                                              |       | 8 |   | 11 |   |
| Net loss                             |       | 64                                                                               | %          | 54                                                                             | %          | 59 | % | 52 | % |

 

**THREE AND SIX MONTHS ENDED JANUARY 31, 2009and 2008**

 

### **Revenues**

 

Revenues for the three months ended January 31,2009 were $2.4 million, a decrease of $0.3 million, or 11%, from the $2.7million reported for the three months ended January 31, 2008. Revenues forthe six months ended January 31, 2009 were $5.2 million, an increase of$0.6 million, or 13%, from the $4.6 million reported for the six months ended January 31,2008. Consolidated revenues represent the combined revenues of the Company andits subsidiaries, including sales of the Company’s scheduling software, asset management software,human resource and time and attendance software, complementary hardware devices to enhance itssoftware products, software maintenance and support services, installation andtraining services and other professional services.

 

During the second fiscalquarter, Forgent continued to experience a decrease in its software licenserevenues.  This $0.3 million decline,which accounts for approximately 87% of the total decrease in revenues duringthe three months ended January 31, 2009, is due to the currentmacroeconomic environment.  As a resultof the current recessionary economic environment, customers have reduced theircapital budgets and deferred projects, significantly impacting Forgent’ssales.  Similarly, software licenserevenues decreased by $0.5 million during the six months ended January 31,2009.  This decrease was offset by increasesin software subscription revenues and maintenance revenues, the combination ofwhich accounted for approximately 103% of the $0.6 million increase in revenuesduring the six months ended January 31, 2009.

 

In October 2007, theCompany acquired iEmployee’s human resource and time and attendance softwarealong with its operations.  Thissoftware, as well as the Company’s Meeting Room Manager (“MRM”) On Demandsoftware, are delivered to customers under the “SaaS” model, which is softwareas a service offered on a subscription basis. Since the iEmployeeacquisition occurred in October 2007, the Company did not generate a fullsix months’ worth of revenues from the iEmployee operations during the sixmonths ended January 31, 2008. Therefore, the $0.9 million increase in software subscription revenuesduring the six months ended January 31, 2009 is due primarily to theCompany generating revenues from the iEmployee operations for the entire sixmonth period in fiscal 2009. Additionally, Forgent experienced an increase in software subscriptionrevenues from its MRM On Demand product in 2009.  In order to meet operational goals whilereducing capital expenditures during this current recessionary economicenvironment, some customers have opted to purchase MRM on a subscription basis,which allows customers to use Forgent’s software without installing ormaintaining the software on their own servers. Purchasing an annual subscription also may not require as stringentapproval requirements as purchasing a perpetual license.  This shift in sales from software license tosoftware subscriptions has also resulted in an increase in Forgent’s deferredrevenue for its SaaS contracts for both MRM On Demand and iEmployee.

 

AsForgent’s cumulative license base continues to grow with additional licensesales, the Company’s related maintenance base also continues to grow.  This growing maintenance base led to a $0.3million increase in maintenance revenues during the six months ended January 31,2009.

 

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In addition to continuing to develop its workforcemanagement solutions and releasing new software updates and enhancements, Forgent is implementing several initiatives toincrease sales during the remainder of fiscal year 2009, including emphasizingsales of its On Demand subscription services. Forgent will also continue targeting small and medium businessesand divisions of enterprises and employing targeted vertical marketingprograms, as appropriate.  Although the macroeconomic environment iscurrently causing challenges for the Company to grow its revenues, managementcontinues to believe that Forgent is operating in a growth business.

 

### **GrossMargin**

 

Gross margin for the three months ended January 31, 2009 was $2.0million, a decrease of $0.1 million, or 7%, from the $2.1 million reported forthe three months ended January 31, 2008. Gross margin for the six monthsended January 31, 2009 was $4.2 million, an increase of $0.5 million, or15%, from the $3.7 million reported for the six months ended January 31,2008. Gross margin as a percentage ofrevenues were 81% and 77% for the three months ended January 31, 2009 and2008, respectively.  Gross margin as a percentage of total revenues were 80% and79% for the six months ended January 31, 2009 and 2008, respectively.

 

The $0.1 million decreasein gross margin during the three months ended January 31, 2009 is due tothe decrease in revenues. Forgent’scost of sales relates primarily to compensation expenses, hardwareexpenses and the amortization of the Company’s purchased software costs.  These expenses represented approximately 69%and 67% of the total cost of sales for the three months ended January 31,2009 and 2008, respectively.  After theCompany fully integrated the iEmployee operations into its existing operationsin fiscal 2008, Forgent released all non-vital iEmployee personnel in May 2008.  This workforce reduction drove a 26% decreasein cost of sales during the three months ended January 31, 2009.  Despite this decrease, Forgent’s total costof sales is relatively fixed and any decrease in revenues will directly impactthe Company’s gross margin negatively. Although Forgent’s total gross margin decreased, gross margin as apercentage of revenue increased from 77% during the three months ended January 31,2008 to 81% during the three months ended January 31, 2009.

 

Since the iEmployeeacquisition occurred in October 2007, the Company did not benefit fromhaving a full six months’ worth of revenues from the iEmployee product lineduring the six months ended January 31, 2008.  The $0.5 million increase in gross marginduring the six months ended January 31, 2009 is largely due to the Companygenerating revenues from the iEmployee operations for the entire six monthperiod in 2009.  Gross margin as apercentage of revenue also increased from 79% during the six months ended January 31,2008 to 80% during the six months ended January 31, 2009.  Forfuture periods,  Forgent expectsgross margins will remain relatively consistent with the gross margins for thesix months ended January 31, 2009, in terms of percentage of revenues.

 

**Selling,General and Administrative**

 

Selling, general and administrative (“SG&A”) expenses for the threemonths ended January 31, 2009 were $3.0 million, an increase of $0.1million, or 2%, from the $2.9 million reported for the three months ended January 31,2008. SG&A expenses for the six months ended January 31, 2009 were$6.2 million, an increase of $0.8 million, or 15%, from the $5.4 millionreported for the six months ended January 31, 2008. SG&A expenses as a percentage of revenues were 125% and 108%for the three months ended January 31, 2009 and 2008, respectively.  SG&A expenses as a percentage of revenues were 119% and 117%for the six months ended January 31, 2009 and 2008, respectively.

 

Approximately 75% of the$0.8 million increase in SG&A expenses during the six months ended January 31,2009 is due to increases in legal, marketing and consulting expenses.  Forgent’scorporate legal expenses increased $0.3 million due primarily to the litigationwith Wild BasinOne & Two, Ltd. duringthe six months ended January 31, 2009.  Althoughthe settlement agreement was completedthrough mediation on November 11, 2008 and the lender granted its approvalon February 11, 2009, thethird party is currently having difficulties obtaining the required financingdue to the tightened capital markets. Therefore, Forgent has not been able to realize the significant savingsin rent expense as originally anticipated. While the Company continues to work on finalizing the lease assignment,management investigated other options for reducing expenses.  As a result, Forgent implemented a mandatory10% pay reduction for all of its personnel between March 2009 and July 2009.  Management plans to lift this reduction inpay at the beginning of fiscal year 2010 but will do so based on an assessmentof the Company’s financial results at the end of fiscal year 2009.

 

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Duringthe six months ended January 31, 2009, the Company’s marketing expensesincreased by $0.2 million.  Since theiEmployee operations were acquired in October 2007, Forgent did not incurmarketing expenses for the iEmployee product line during the first fiscalquarter of 2008.  The $0.2 millionincrease is due primarily to the lack of iEmployee marketing expenses duringthe three months ended October 31, 2007. In an `attempt to generate increased demand for all of its softwareproducts and services in fiscal 2009, the Company approved increases to itsmarketing programs for both the NetSimplicity and iEmployee product lines, thusincreasing marketing expenses by $0.1 million during the six months ended January 31,2009.  Forgent will continue assessingits marketing and sales teams, and will make modest investments as necessary, inorder to increase sales.

 

Since August 2006, Forgent has beenchallenged with complying with Nasdaq’s minimum $1.00 per share bid pricerequirement.  Additionally, the Companycontinued to incur increased audit and other associated expenses related to beinga public company.  Therefore, during thesecond fiscal quarter of 2009, Forgent engaged a consultant to explore thecosts and benefits of taking the Company private.  As a result of this engagement, the Companyincurred $0.1 million in consulting expenses during the six months ended January 31,2009 and on January 29, 2009 announced its intent to go private.  Forgent did not incur such expenses duringthe six months ended January 31, 2008. Forgent has filed a preliminary proxy statement and Schedule 13E-3 withthe Securities and Exchange Commission and management believes the Company ison track with its anticipated timeline for completing the going privatetransaction prior to the end of fiscal 2009. If Forgent is successful in voluntarily withdrawing its common stockfrom listing on the Nasdaq Capital Market, management expects to saveapproximately $1.0 million in expenses annually.  However, there are no assurances that theCompany will be successful in its efforts to go private, or if successful, whenthe Company will complete the process or that the Company will achieve theprojected cost savings.

 

Forgent continues to evaluate and reduce any unnecessary SG&A expenses.

 

### **Researchand Development**

 

Research and development (“R&D”) expenses for the three monthsended January 31, 2009 were $0.5 million, a decrease of $0.1 million, or18%, from the $0.6 million reported for the three months ended January 31,2008. R&D expenses for the six months ended January 31, 2009 were $1.0million, an increase of $0.1 million, or 17%, from the $0.9 million reportedfor the six months ended January 31, 2008. R&D expenses as a percentage of revenues were 22% and 23% forthe three months ended January 31, 2009 and 2008, respectively.  R&D expenses as a percentage of revenues were 21% and 20% forthe six months ended January 31, 2009 and 2008, respectively.

 

Approximately 89% of the $0.1 million decrease in R&D expensesduring the three months ended January 31, 2009 is due to a decrease incompensation and consulting expenses. After the Company fully integrated the iEmployee R&D workforce intothe existing R&D team in fiscal 2008, Forgent released all non-vitaliEmployee personnel in May 2008, thus decreasing compensation expensesduring the three months ended January 31, 2009.  During the three months ended January 31,2008, Forgent incurred a one-time consulting expense related to the iEmployeeacquisition.  No such expenses wereincurred in fiscal 2009.

 

Approximately97% of the $0.1 million increase in R&D expenses during the six monthsended January 31, 2009 resulted froman increase in R&D expenses from the iEmployee operations and compensationexpenses.  Since the iEmployeeoperations were acquired in October 2007, Forgent did not incur a full sixmonths of R&D expenses related to the iEmployee product line during thefirst half of fiscal 2008.  Additionally,the iEmployee acquisition increased the development, quality assurance andsupport personnel by nearly 90 people. In order to provide focused leadership in optimizing the Company’sdevelopment processes and approaches and in developing strategic direction foreach product line within the newly blended company, Forgent hired a VicePresident of Development in March 2008. This position contributed to the increased compensation expenses duringthe six months ended January 31, 2009.

 

During the second fiscal quarter of 2009, Forgentcontinued concentrating its R&D efforts on improving its Time &Attendance and MRM products.  The Companyadded an application programming interface to its Time & Attendancesolution, which expands the software’s interoperability with various timeclocks in addition to Forgent’s Easy Touch Time Clock.  This expanded interoperability will increasecustomers’ choices when selecting hardware devices and could potentiallyprovide opportunities for new strategic partnerships with other vendors.  Additionally, Forgent added new functionalityto its Time & Attendance software by giving administrators morecontrol and security options over users’ ability to automatically retrieve lostpasswords.  During the three months endedJanuary 

 

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31, 2009, Forgent also released a few minor versions ofMRM.  These new versions provided generalenhancements to the Microsoft Outlook Plug-in, Web and Interactive LCDinterfaces.

 

Forgent continues to solicit and receive feedback regarding itsproducts and services from its existing and potential customers.  During the remainder of fiscal year 2009, the Company plans to continue investingmodestly in its R&D efforts as necessary, in order to enhance thefunctionality of its software products through new releases and new featuredevelopments and to evaluate opportunities for developing new software.  As the Company designs and furtherimproves its workforce management solutions, management will attempt to maintain R&D expenses at reasonable levelsin terms of percentage of revenue.

 

## **Amortization of intangible assets**

 

Amortizationexpenses for the three months ended January 31,2009 were $0.1 million, a decrease of $6.0 thousand, or 4%, from the $0.1million reported for the three months ended January 31, 2008. Amortizationexpenses for the six months ended January 31,2009 were $0.3 million, an increase of $0.1 million, or 56%, from the $0.2million reported for the six months ended January 31, 2008. Amortizationexpenses as a percentage of revenues were 6% and6% for the three months ended January 31, 2009 and 2008,respectively.  Amortizationexpenses as a percentage of revenues were 6% and4% for the six months ended January 31, 2009 and 2008, respectively.  Upon acquiring theiEmployee business in October 2007, Forgent recorded several intangibleassets, which are being amortized over their appropriate useful lives.  The amortization expenses during the threeand six months ended January 31, 2009 and 2008 relate entirely to theseacquired intangible assets.

 

### **OtherIncome and Expenses**

 

Other income and expenses for the three months ended January 31,2009 were $0.2 million, an increase of $65.0 thousand, or 37%, from the $0.2million reported for the three months ended January 31, 2008. Other incomeand expenses for the six months ended January 31, 2009 were $0.4 million,a decrease of $0.1 million, or 18%, from the $0.5 million reported for the sixmonths ended January 31, 2008. Other income and expenses as a percentage of revenues were 10% and 6% forthe three months ended January 31, 2009 and 2008, respectively.  Other income and expenses as a percentage of revenues were 8% and 11% forthe six months ended January 31, 2009 and 2008, respectively.

 

As a result of the sale of assets to Tandberg TelecomAS (“Tandberg”) in November 2006, $0.3 million was held in escrow for twoyears for indemnity claims.  No suchclaims were made by Tandberg during the two years to reduce the escrowamount.  In November 2008, Forgentreceived the funds from the escrow account in full, thus increasing the Company’sother income for the three months ended January 31, 2009.

 

**Net Loss**

 

Forgentincurred a net loss of $1.5 million, or $0.05****per share, during the three months ended January 31, 2009similar to the net loss of $1.5 million, or $0.05 per share, during the threemonths ended January 31, 2008. Forgent incurred a net loss of $3.1million, or $0.10****per share,during the six months ended January 31, 2009 compared to a net loss of$2.4 million, or $0.08 per share, during the six months ended January 31,2008. Net loss as a percentage of revenues were 64% and 54% for the threemonths ended January 31, 2009 and 2008, respectively. Net loss as apercentage of revenues were 59% and 52% for the six months ended January 31,2009 and 2008, respectively.

 

AlthoughForgent experienced a decrease in revenues during the three months ended January 1,2009, the decrease was offset by the gain from the Tandberg escrow fund,resulting in a relatively similar net loss position as experienced during thethree months ended January 31, 2008. The $0.7 million increase in net loss during the six months ended January 31,2009 is due primarily to the $1.1 million increase in operating expenses,offset by a $0.6 million increase in revenues.

 

Forgent’sprimary goal is to achieve profitability as soon as possible. The Company hasrefined its strategies for growing revenue and decreasing expenses and hasimplemented these strategies.  Suchstrategies include taking the Company private. However, uncertainties and challenges remain, especially during thismacroeconomic environment downturn, and there can be no assurance that theCompany can successfully grow its revenues or achieve profitability during theremainder of fiscal year 2009.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 
| ** **                                         | ** ** | **FOR THE SIX** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **MONTHS ENDED**     | ** ** |
| ** **                                         | ** ** | **JANUARY 31,**      | ** ** |
| ** **                                         | ** ** | **2009**                  | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | **(in thousands)**   | ** ** |
| ** **                                         | ** ** | ** **                | ** ** | ** ** | ** ** |
| Working capital                                    |       | $                         | 7,283      |   | $ | 13,068 |   |
| Cash, cash equivalents and short-term  investments |       | 12,130                    |       | 17,801 |   |
| Cash used in operating activities                  |       | 2,417                     |       | 10,593 |   |
| Cash used in investing activities                  |       | 583                       |       | 9,010 |   |
| Cash used in financing activities                  |       | 13                        |       | 10 |   |
|                                                    |            |                           |            |  |  |  |  |

 

Cashused in operating activities was $2.4 million for the six months ended January 31,2009 due primarily to a $3.1 million net loss, which was offset by $0.5 millionin total non-cash depreciation and amortization expenses.  Cash used in operating activities was $10.6million for the six months ended January 31, 2008 due primarily to the$2.4 million in net loss and the $8.1 million decrease in accounts payable.During the three months ended January 31, 2009, Forgent’s average dayssales outstanding was 38 days, a slight increase from 37 days for the threemonths ended January 31, 2008.  Dueto the current macroeconomic environment, Forgent has experienced somecustomers delaying payment.  As a result,Forgent’s reserves for bad debt as a percentage of its trade accountsreceivables increased from 3% as of January 31, 2008 to 6% as of January 31,2009.  However, the Company continues toadhere to its credit policies and diligently collect its trade accountsreceivable.  For the six months ended January 31,2009, trade receivables written-off equal less than 0.1% of the Company’syear-to-date revenues.  Management willcontinue to closely monitor all of its cash sources and uses as it manages itsoperations through the current recession.

 

Cash used in investingactivities was $0.6 million for the six months ended January 31, 2009 dueprimarily to $0.4 million in net purchases of short-term investments.  Cash used in investing activities was $9.0million for the six months ended January 31, 2008 due primarily to $7.3million paid in cash related to the iEmployee acquisition and $1.8 million innet purchases of short-term investments. Forgent manages its investments portfolio in order to fulfill corporateliquidity requirements and maximize investment returns while preserving thequality of the portfolio.  Approximately44% of Forgent’s purchased fixed assets during the six months ended January 31,2009 related to leasehold improvements for one of the Company’s subtenant.  The other purchases were spread across theCompany’s four facilities.  Forgent’s currentoperations are not capital intensive and management does not anticipate any significant capital expendituresduring the last half of fiscal 2009.

 

TheCompany leases office space and equipment under non-cancelable operating leasesthat expire at various dates through 2013. Certain leases obligate Forgent topay property taxes, maintenance and insurance and include escalationclauses.  The total amount of baserentals over the term of the Company’s leases is charged to expense on a straight-linebasis, with the amount of the rental expense in excess of the lease paymentsrecorded as a deferred rent liability.  Despite the additional lease obligationsacquired with the iEmployee operations, approximately $14.0 million, or 97% ofthe Company’s total operating lease obligations, relate to its corporate officefacility at Wild Basin in Austin, Texas. As of January 31, 2009, Forgent had $5.3 million in future minimum lease payments receivable undernon-cancelable sublease arrangements. Additionally, Forgent had a $0.3 million liability related to impairmentcharges for the economic value of the lost sublease rental income related toits Austin property.  Forgent mayperiodically make other commitments and thus become subject to other contractualobligations.

 

Cashused in financing activities was $13 thousand for the six months ended January 31,2009. Cash provided by financing activities was $10 thousand for the six monthsended January 31, 2008.  Management believes it currently has sufficientcash and short-term investments on hand to fund its operations during the nexttwelve months and beyond without needing to obtain long-term financing.  Therefore, the Company does not anticipatethat it will be affected by any credit shortage in the current economicbusiness environment.  Forgent’s stockrepurchase program allows the Company to purchase up to three million shares ofthe Company’s common stock. No shares were repurchased during the six monthsended January 31, 2009 and 2008.  Asof January 31, 2009, 

 

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Forgent had repurchased 1,790,401 shares forapproximately $4.8 million and had the authority to repurchase approximately1.2 million additional shares. Management will periodically assess repurchasing additional shares infiscal year 2009, depending on the Company’s cash position, market conditionsand other factors.

 

As of January 31,2009, Forgent’s principal source of liquidity consisted of $12.1 million incash, cash equivalents and short-term investments.  Management is focused on growing its softwareoperations and thus plans to utilize its cash balances to fund its operationsby making prudent investments as necessary and may possibly repurchaseoutstanding shares.  Although Forgent iscurrently not actively exploring prospects in acquiring a public or privatelyheld technology business or product line, the Company will consider a potentialopportunity if the right opportunity presents itself.

 

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. Management believes that the Company has sufficientcapital and liquidity to fund and cultivate the growth of its current andfuture 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.  Additionally, sinceForgent is currently pursuing voluntary delisting its common stock from theNasdaq Capital Market Exchange and anticipates that its common stock may tradesubsequently via Pink Sheets® on the Over the Counter Market, the Company willbe limited in its ability to raise capital in the future, if needed.  Trading opportunities in the PinkSheets® will be dependent upon whether any broker-dealers commit to make amarket for the Company’s common stock, and the Company cannot guarantee oranticipate whether its common stock will be quoted in the Pink Sheets®.

 

#### **CRITICAL ACCOUNTING POLICIES**

 

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. These estimates are subjective in natureand involve judgments that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at fiscalquarter end and the reported amounts of revenues and expenses during the fiscalquarter.  The more significant estimates made by management include the valuationallowance for the gross deferred tax asset, contingency legal reserves, leaseimpairment, useful lives of fixed assets, the determination of the fair valueof its long-lived assets, and the fair value of assets acquired andliabilities assumed during the iEmployee acquisition. The Company bases its estimates on historical experience andon various other assumptions that are believed to be reasonable under the givencircumstances.  These estimates could be materially different under differentconditions and assumptions. Additionally, the actual amounts could differ from the estimates made.Management periodically evaluates estimates used in the preparation of thefinancial statements for continued reasonableness. Appropriate adjustments, ifany, to the estimates used are made prospectively based upon such periodicevaluation.

 

Managementbelieves the following represent Forgent’s critical accounting policies:

 

**Revenue Recognition**

 

The Company recognizes revenue when persuasive evidence of anarrangement exists, delivery has occurred, the fee is fixed or determinable andcollectibility is probable.   The Companyrecognizes software license revenue in accordance with Statement of Position (“SOP”)97-2, *“Software Revenue Recognition,”*asamended by SOP 98-4, “*Deferral of the Effective Dateof a Provision of SOP 97-2,”* and SOP 98-9, “*Modificationof SOP 97-2 With Respect to Certain Transactions,”*Securities and Exchange Commission Staff Accounting Bulletin 104, *“Revenue Recognition”*and Emerging IssuesTask Force Issue No. 00-21, *“RevenueArrangements with Multiple Deliverables.”* The Company recognizessoftware subscription revenue in accordance with EITF Issue No. 00-3, *“Application of AICPA Statement of Position 97-2 toArrangements That Include the Right to Use Software Stored on Another Entity’sHardware”*and EITF Issue No. 00-21.

 

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Revenueconsists of software license, software subscription and service fees.  Revenue from the software element is earnedthrough the licensing or right to use the Company’s software and from the saleof specific software products.  Servicefee income is earned through the sale of maintenance and technical support,training and installation. Revenuefrom the sale of hardware devices is recognized upon shipment of thehardware.  Forgent sells multipleelements within a single sale.  Forsoftware license arrangements, the Company allocates the total fee to thevarious elements based on the relative fair values of the elements specific tothe Company.  For software subscriptionarrangements, the Company recognizes the total contract value ratably over thecontract term, beginning when the customer is able to utilize the software.

 

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 the Company’s products assuch services 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.

 

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.

 

Deferred revenue includes amounts received from customers in excess ofrevenue recognized, 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 required to be amortized underFinancial Accounting Standard Board (“FASB”) Statement No. 142, *“Goodwill and Other Intangible Assets,”*andaccordingly, 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 its assets for impairment. If the carrying amount ofthe goodwill or asset exceeds its implied fair value, an impairment loss isrecognized in an amount equal to the excess during that fiscal period.  Intangible assets that are not deemed to haveindefinite lives are amortized over their useful lives and are tested forimpairment in accordance with FASB Statement No. 144, *“Accounting for the Impairment or Disposal ofLong-Lived Assets.”*

 

In accordance with Statement No. 144, Forgent reviews andevaluates its long-lived assets for impairment whenever events or changes incircumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, including those noted above,the Company compares the assets’ carrying amounts against the estimatedundiscounted cash flows to be generated by those assets over their estimateduseful lives.  If the carrying amounts are greater than the undiscountedcash flows, the fair values of those assets are estimated by discounting theprojected cash flows.  Any excess of thecarrying amounts over the fair values are recorded as impairments in thatfiscal period.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

TheCompany is a smaller reporting company as defined by Rule 12b-2 under theExchange Act and is not required to provide the information required under thisitem.

 

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**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 andExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.  Suchcontrols include 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 January 31, 2009.  Based on their evaluation, they haveconcluded, to the best of their knowledge and belief, that the disclosurecontrols and procedures are effective. No changes were made in the Company’s internal controls over financialreporting during the quarter ended January 31, 2009, that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.  Inmaking this assessment, management used the criteria set forth in *Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

**PART II— OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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.**

 

OnJuly 16, 2007, Jenkens & Gilchrist, P.C. (“Jenkens”), Forgent’sformer legal counsel, filed a complaint against Forgent and Compressions Labs, Inc.,in the District Court of Dallas County, Texas. In its complaint, Jenkens alleges a breach of contract and is seeking adeclaratory judgment.  Forgent disputesJenkens’ claims and is seeking relief through the court system.

 

AfterForgent terminated Jenkens, the Company entered into a Resolution Agreementwith Jenkens in December 2004. Under the Resolution Agreement, the Company believes Jenkens is entitledto no more than $1.4 million pursuant to the Resolution Agreement as a resultof the amounts received by Forgent in the past litigation.  Jenkens interprets the Resolution Agreement onbroader terms and believes it is entitled to $3.4 million, including attorneys’fees and interest.

 

OnMarch 3, 2008, Forgent and Jenkens appeared before the Court regarding ahearing on a motion for summary judgment filed by Jenkens.  On May 20, 2008, the Court grantedJenkens’ motion and ordered Forgent to pay Jenkens $2.8 million for pastrecoveries and other amounts including attorney’s fees and interest.  Forgent asked the Court to reconsider itsorder and, on September 3, 2008, the Court granted Forgent’s Motion toReconsider Order.

 

Althoughthe trial date for this litigation wasscheduled to commence on April 27, 2009, the judge assigned to the casewill be retiring prior to the trial date. Forgent and Jenkens have jointly agreed to file a motion to request theCourt to extend the trial setting to a date no sooner than July 6,2009.  Managementcurrently cannot predict how long it ultimately will take to resolve theJenkens lawsuit.  Until the Jenkenslitigation is finalized, the related amounts charged by Jenkens pursuant to theResolution Agreement may be adjusted in a future period and could have amaterial 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 claimed Wild Basin was in breach of contract relating toForgent’s lease agreement by unreasonably withholding and delaying its consentto Forgent’s lease assignment to a

 

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third party. Forgent sought to recover all damages as a result of the delay inclosing its pending assignment and amounts not distributed in the past, amongother damages.

 

The trial for this litigation commenced on September 22,2008.  Prior to the conclusion of thetrial, Forgent and Wild Basin reached a settlement agreement, effective September 25,2008.  This settlement agreementrequires, among other terms, that Wild Basin consent to Forgent’s leaseassignment.  In return, Forgent paid WildBasin $75 thousand in November 2008. Both parties agreed to mutually release claims against each other.

 

AfterForgent and Wild Basin participated in mediation on November 11, 2008 tofinalize the terms of the settlement agreement, Wild Basin consented to Forgent’slease assignment and the documents were submitted to Wild Basin’s lender forfinal approval.  Although the lendergranted its final approval on February 11, 2009, the third party lessee iscurrently having difficulties obtaining the required financing due to thetightened capital markets, so there is no assurance that Forgent will finalizea lease agreement with the third party. Therefore, Forgent is now also offering a lease assignment to otherinterested parties.

 

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

##### ** **

TheCompany is a smaller reporting company as defined by Rule 12b-2 of theExchange Act and is not required to provide the information required under thisitem.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

### **ITEM 6. 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. (incorporated by reference to Exhibit 2.2 to the Company’squarterly report on Form 10-Q for the three months ended October 31,2007).

 

3.1           Restated Certificate of Incorporation(incorporated by reference to Exhibit 3.1 to the Company’s quarterlyreport on Form 10-Q for the three months ended October 31, 2004).

 

3.2           Restated Bylaws (incorporated by reference to Exhibit 3.2to 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 RegistrationStatement 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, $0.01par value, the form of Rights Certificate, and the Summary of Rights (incorporated by reference to Exhibit 4.1to the Company’s Current Report on Form 8-K dated December 19, 2005).

 

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31.1*       Certification pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

 

31.2*       Certification pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

 

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

 

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

 

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* Filed herewith

 

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#### **Table of Contents**

 

#### **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. |
|---------------------------|------------------------|
|                      |                   |
|                      |                   |
| Date: March 13, 2009 | By:                    | /s/ RICHARD N. SNYDER |
|                      |                   | Richard N. Snyder |
|                      |                   | Chief Executive Officer |
|                      |                   |   |
| Date: March 13, 2009 | By:                    | /s/ JAY C. PETERSON |
|                      |                   | Jay C. Peterson |
|                      |                   | Chief Financial Officer |

 

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**INDEX TO EXHIBITS**

 
| **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.  (incorporated by reference to Exhibit 2.2 to the Company’s quarterly  report on Form 10-Q for the three months ended October 31, 2007).                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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, $0.01 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). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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                                                                                                                                                                                                                                                                                              |

 

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