#### **UNITED STATES**

**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 April 30, 2008** |
| ** **                                              | ** ** | ** **                                                                                                  |
| **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 is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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 June 12, 2008, the registrant had outstanding 31,089,318 sharesof its Common Stock, $0.01 par value.

 

 

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# **INDEX TO FINANCIAL STATEMENTS**

 
| ** **                              | ** **                                                            | ** **                                                                                                                  | ** ** | **Page**   |
|-----------------------------------------|-----------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                              | ** **                                                            | ** **                                                                                                                  | ** ** | **Number** |
| **PART I - FINANCIAL INFORMATION** | ** **                                                            | ** **                                                                                                                  |
|                                    |                                                                  |                                                                                                                        |       |       |
|                                    | Item 1 –                                                         | Condensed Consolidated Financial Statements                                                                                 |       |       |
|                                    |                                                                  | Condensed Consolidated Balance Sheets as of April 30, 2008  (unaudited) and July 31, 2007                         |       | 3          |
|                                    |                                                                  | Unaudited Condensed Consolidated Statements of Operations for the  Three and Nine Months Ended April 30, 2008 and 2007 |       | 4          |
|                                    |                                                                  | Unaudited Condensed Consolidated Statements of Cash Flows for the  Nine Months Ended April 30, 2008 and 2007           |       | 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                                                                 |       | 20         |
|                                    | 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 |                                                                                                                        | 27         |
|                                    | Item 3 -  Defaults upon Senior Securities                             |                                                                                                                        | 27         |
|                                    | Item 4 -  Submission of Matters to a Vote of Security Holders         |                                                                                                                        | 27         |
|                                    | Item 5 - Other Information                                            |                                                                                                                        | 27         |
|                                    | Item 6 - Exhibits                                                     |                                                                                                                        | 27         |
|                                    |                                                                  |                                                                                                                        |       |       |
| **Signatures**                          |                                                                  | 28                                                                                                                          |
|                                    |                                                                  |                                                                                                                        |       |       |
| **Index to Exhibits**                   |                                                                  | 29                                                                                                                          |

 

2

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**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Amounts in thousands, except per share data)

 
| ** **                                                                                                                                                                           | ** ** | **APRIL 30,  2008** | ** ** | **JULY 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(UNAUDITED)**          | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                           |       |                     |       |                    |       |
| Current Assets:                                                                                                                                                                      |       |                     |       |                    |       |
| *Cash and  cash equivalents*                                                                                                                                                         |       | $                        | 12,812     |                    | $          | 33,524 |   |
| Short-term investments                                                                                                                                                               |       | 3,310                    |       | 1,538                   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $39 and $21 at April 30, 2008 and July 31,  2007, respectively                                             |       | 1,551                    |       | 1,040                   |       |
| Prepaid expenses and other current assets                                                                                                                                            |       | 213                      |       | 211                     |       |
| Total Current  Assets                                                                                                                                                                | ** ** | **17,886**               | ** ** | **36,313**              | ** ** |
|                                                                                                                                                                                 |       |                     |       |                    |       |
| Property and equipment, net                                                                                                                                                          |       | 1,025                    |       | 767                     |       |
| Goodwill                                                                                                                                                                             |       | 7,106                    |       | —                  |       |
| Intangible  assets, net                                                                                                                                                              |       | 4,923                    |       | —                  |       |
| Other assets                                                                                                                                                                         |       | —                   |       | 212                     |       |
| ** **                                                                                                                                                                           | ** ** | **$**                    | **30,940** | ** **              | **$**      | **37,292** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       |                     |       |                    |       |
| Current Liabilities:                                                                                                                                                                 |       |                     |       |                    |       |
| Accounts payable                                                                                                                                                                     |       | $                        | 3,821      |                    | $          | 10,970 |   |
| Accrued compensation and benefits                                                                                                                                                    |       | 405                      |       | 557                     |       |
| Other accrued liabilities                                                                                                                                                            |       | 742                      |       | 855                     |       |
| Deferred revenue                                                                                                                                                                     |       | 1,469                    |       | 1,076                   |       |
| Total Current Liabilities1                                                                                                                                                           | ** ** | **6,437**                | ** ** | **13,458**              | ** ** |
|                                                                                                                                                                                 |       |                     |       |                    |       |
| Long-Term Liabilities:                                                                                                                                                               |       |                     |       |                    |       |
| Deferred revenue                                                                                                                                                                     |       | 29                       |       | 28                      |       |
| Other long-term obligations                                                                                                                                                          |       | 864                      |       | 1,186                   |       |
| Total Long-Term Liabilities                                                                                                                                                          | ** ** | **893**                  | ** ** | **1,214**               | ** ** |
| ** **                                                                                                                                                                           | ** ** | ** **               | ** ** | ** **              | ** ** |
| Stockholders’ Equity:                                                                                                                                                           |       |                     |       |                    |       |
| Preferred stock, $.01 par value; 10,000  authorized; none issued or outstanding                                                                                                      |       | —                   |       | —                  |       |
| Common stock, $.01 par value; 40,000  authorized; 32,879 and 27,388 shares issued; 31,089 and 25,598 shares  outstanding at April 30, 2008 and July 31, 2007, respectively |       | 325                      |       | 274                     |       |
| Treasury stock at cost, 1,790 issued at  April 30, 2008 and July 31, 2007                                                                                                  |       | (4,815                   | )          | (4,815                  | )          |
| Additional paid-in capital                                                                                                                                                           |       | 270,618                  |       | 265,647                 |       |
| Accumulated deficit                                                                                                                                                                  |       | (242,481                 | )          | (238,506                | )          |
| Accumulated other comprehensive income                                                                                                                                               |       | (37                      | )          | 20                      |       |
| Total Stockholders’ Equity                                                                                                                                                      | ** ** | **23,610**               | ** ** | **22,620**              | ** ** |
| ** **                                                                                                                                                                           | ** ** | **$**                    | **30,940** | ** **              | **$**      | **37,292** | ** ** |

 

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

 

3

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**FORGENTNETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Amounts inthousands, except per share data)

 
| ** **                                              | ** ** | **FOR THE****THREE MONTHS ENDED  APRIL 30,** | ** ** | **FOR THE****NINE MONTHS ENDED  ARIL 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                         | ** ** | **2007**                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | **(UNAUDITED)**                                                  | ** ** | **(UNAUDITED)**                                                | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **REVENUES**                                            |       |                                                             |       |                                                           |       |   |   |   |   |
| Software & Services                            |       | $                                                                | 2,707      |                                                           | $          | 978 |   | $ | 7,316 |   | $ | 2,957 |   |
| Intellectual Property Licensing                         |       | —                                                           |       | 20,000                                                         |       | — |   | 28,612 |   |
| Total Revenue                                           | ** ** | **2,707**                                                        | ** ** | **20,978**                                                     | ** ** | **7,316** | ** ** | **31,119** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **COST OF SALES**                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Software & Services                            |       | 639                                                              |       | 196                                                            |       | 1,598 |   | 698 |   |
| Intellectual Property Licensing                         |       | —                                                           |       | 10,592                                                         |       | — |   | 14,135 |   |
| Total Cost of Sales                                     | ** ** | **639**                                                          | ** ** | **10,788**                                                     | ** ** | **1,598** | ** ** | **14,833** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **GROSS MARGIN**                                        | ** ** | **2,068**                                                        | ** ** | **10,190**                                                     | ** ** | **5,718** | ** ** | **16,286** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **OPERATING EXPENSES:**                                 |       |                                                             |       |                                                           |       |   |   |   |   |
| Selling, general and  administrative                    |       | 2,951                                                            |       | 3,971                                                          |       | 8,353 |   | 9,009 |   |
| Research and development                                |       | 616                                                              |       | 180                                                            |       | 1,547 |   | 429 |   |
| Amortization of intangible assets                       |       | 149                                                              |       | —                                                         |       | 340 |   | 4 |   |
| Total operating expenses                                | ** ** | **3,716**                                                        | ** ** | **4,151**                                                      | ** ** | **10,240** | ** ** | **9,442** | ** ** |
| ** **                                              | ** ** | ** **                                                       | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LOSS FROM OPERATIONS**                                | ** ** | **(1,648**                                                       | **)**      | **6,039**                                                      | ** ** | **(4,522** | **)** | **6,844** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **OTHER INCOME AND (EXPENSES):**                        |       |                                                             |       |                                                           |       |   |   |   |   |
| Interest income                                         |       | 109                                                              |       | 202                                                            |       | 641 |   | 592 |   |
| Gain on sale of assets                                  |       | —                                                           |       | —                                                         |       | — |   | 2,896 |   |
| Interest expense and other                              |       | (20                                                              | )          | (25                                                            | )          | (60 | ) | (68 | ) |
| Total other income and  (expenses)                      | ** ** | **89**                                                           | ** ** | **177**                                                        | ** ** | **581** | ** ** | **3,420** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **(LOSS) INCOME FROM OPERATIONS, BEFORE  INCOME TAXES** | ** ** | **(1,559**                                                       | **)**      | **6,216**                                                      | ** ** | **(3,941** | **)** | **10,264** | ** ** |
| Provision for income taxes                              |       | (14                                                              | )          | (170                                                           | )          | (34 | ) | (170 | ) |
| **NET (LOSS) INCOME**                                   | ** ** | **$**                                                            | **(1,573** | **)**                                                          | **$**      | **6,046** | ** ** | **$** | **(3,975** | **)** | **$** | **10,094** | ** ** |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **BASIC AND DILUTED INCOME  (LOSS) PER SHARE:**         | ** ** | ** **                                                       | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                   |       | $                                                                | (0.05      | )                                                              | $          | 0.24 | ** ** | $ | (0.13 | ) | $ | 0.40 |   |
| Diluted                                                 |       | $                                                                | (0.05      | )                                                              | $          | 0.23 | ** ** | $ | (0.13 | ) | $ | 0.39 |   |
|                                                    |       |                                                             |       |                                                           |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES  OUTSTANDING:**               |       |                                                             |       |                                                           |       |   |   |   |   |
| Basic                                                   |       | 30,995                                                           |       | 25,596                                                         |       | 29,667 |   | 25,488 |   |
| Diluted                                                 |       | 30,995                                                           |       | 26,202                                                         |       | 29,667 |   | 26,022 |   |

 

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

 

4

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**FORGENT NETWORKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Amounts in thousands)

 
| ** **                                                                                | ** ** | **FOR THE NINE MONTHS  ENDED APRIL 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **(UNAUDITED)**                                                   | ** ** |
| ** **                                                                                | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |       |                                                              |       |   |   |
| Net (loss) income from continuing operations                                              |       | $                                                                 | (3,975     | ) | $ | 10,094 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operations: |       |                                                              |       |   |   |
| Depreciation and amortization                                                             |       | 808                                                               |       | 423 |   |
| Amortization of leasehold advance and lease  impairment                                   |       | (298                                                              | )          | (319 | ) |
| Provision for doubtful accounts                                                           |       | 15                                                                |       | 19 |   |
| Share-based compensation                                                                  |       | 72                                                                |       | 144 |   |
| Foreign currency translation loss                                                         |       | 1                                                                 |       | 13 |   |
| Changes in operating assets and  liabilities:                                             |       |                                                              |       |   |   |
| Accounts receivable                                                                       |       | 249                                                               |       | (10,104 | ) |
| Prepaid expenses and other current assets                                                 |       | 43                                                                |       | 90 |   |
| Accounts payable                                                                          |       | (8,207                                                            | )          | 9,091 |   |
| Accrued expenses and other long-term  obligations                                         |       | (454                                                              | )          | 1,183 |   |
| Deferred revenues                                                                         |       | (180                                                              | )          | 220 |   |
| Net cash (used in) provided by operating  activities                                      | ** ** | **(11,926**                                                       | **)**      | **10,854** | ** ** |
|                                                                                      |       |                                                              |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |       |                                                              |       |   |   |
| Net (purchases) sales of short-term  investments                                          |       | (1,273                                                            | )          | (1,533 | ) |
| Net purchases of property and equipment                                                   |       | (284                                                              | )          | (445 | ) |
| Change in other assets                                                                    |       | 164                                                               | ** ** | **—** | ** ** |
| Acquisition of iSarla, Inc., net of  cash acquired                                   |       | (7,344                                                            | **)**      | **—** | ** ** |
| Net cash used in investing activities                                                     | ** ** | **(8,737**                                                        | **)**      | **(1,978** | **)** |
|                                                                                      |       |                                                              |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |       |                                                              |       |   |   |
| Net proceeds from issuance of stock                                                       |       | 14                                                                |       | 86 |   |
| Payments on notes payable and capital  leases                                             |       | (1                                                                | )          | (543 | ) |
| Net cash provided by (used in) financing  activities                                      | ** ** | **13**                                                            | ** ** | **(457** | **)** |
|                                                                                      |       |                                                              |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                             |       | (62                                                               | )          | (11 | ) |
|                                                                                      |       |                                                              |       |   |   |
| Net change in cash and cash equivalents                                                   |       | (20,712                                                           | )          | 8,408 |   |
| Cash and cash equivalents at beginning of  period                                         |       | 33,524                                                            |       | 16,206 |   |
| Cash and cash equivalents at end of period                                                | ** ** | **$**                                                             | **12,812** | ** ** | **$** | **24,614** | ** ** |
|                                                                                      |       |                                                              |       |   |   |
| **SUPPLEMENTAL CASH FLOW  INFORMATION:**                                                  |       |                                                              |       |   |   |
| Issuance of stock for  acquisition of iSarla, Inc.                                   |       | $                                                                 | 4,987      |   | $ | — |   |

 

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

 

5

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission and accordingly, do not include allinformation and footnotes required under U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management,these interim financial statements contain all adjustments, consisting ofnormal, recurring adjustments, necessary for a fair presentation of thefinancial position of Forgent Networks, Inc. (“Forgent” or the “Company”)as of April 30, 2008 and July 31, 2007, the results of operations forthe three and nine months ended April 30, 2008 and January 31, 2007, and the cash flows for the nine months ended April 30,2008 and January 31, 2007. 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, 2007.  The results for the interim periods are not necessarily indicative ofresults for a full fiscal year.

 

**NOTE 2 - ACQUISITION**

 

                OnOctober 5, 2007, Forgent acquired all of the outstanding capital stock ofiSarla Inc., a Delaware corporation and application service provider thatoffers on-demand workforce management solutions that help simplify the HumanResource process and improve employee productivity by managing andcommunicating human resources, employee benefits and payroll information.iSarla Inc. conducted its business under the trade name “iEmployee” andprovided hosted application services, including Time & Attendance,Timesheets, Human Resource Benefits, Expenses and other solutions.  iEmployee is a profitable business with ahigh percentage of recurring revenues and delivers its software as a serviceunder the “SaaS” model.  The acquisitionexpanded Forgent’s current target markets, significantly augmented the Company’sproduct and service offerings to customers, and increased revenues from itsoperations considerably.  Due to thesefactors, the Company purchased the iEmployee business at a premium (i.e.goodwill) over the fair value of the net assets acquired.

 

In consideration for the acquisition, Forgent paid approximately$12,661, including $6,602****in cash,5,095 shares of its Common Stock, valued at approximately $4,987 andtransaction cost of approximately $1,072. The shares of Common Stock issued were valued based upon the price of$0.98 when the number of shares to be issued became fixed.  Upon closing, $990 in cash and 764 sharestotaling $748 of the purchase price were held in escrow for representations andwarranties.  The purchase agreement didnot include provisions for any other contingent payments, options or commitments.  As a result of the acquisition,iEmployee’s results of operations since October 5, 2007 have been includedin the Company’s Consolidated Statement of Operations for the three and ninemonths ended April 30, 2008.

 

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.  The Companycontinues to assess and finalize the fair value of the assets acquired and theliabilities assumed.  The following tablesummarizes the estimated preliminary and adjusted fair values of the iEmployeeassets acquired and liabilities assumed:

 

6

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 
| ** **                        | ** ** | **Initial**    | ** ** | ** **      | ** ** | **Updated**    | ** ** |
|-----------------------------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| ** **                        | ** ** | **Allocation** | ** ** | **Adjustments** | ** ** | **Allocation** | ** ** |
| **Assets  Acquired**              |       |           |       |            |       |           |       |
| Cash                              |       | $              | 460        |            |       |           | $          | 460 |   |
| Short-term investments            |       | 526            |       |            |       | 526            |       |
| Accounts receivable, net          |       | 577            |       | (19             | )          | 558            |       |
| Prepaid assets                    |       | 96             |       |            |       | 96             |       |
| Fixed assets                      |       | 416            |       | (77             | )          | 339            |       |
| Goodwill                          |       | 6,993          |       | 145             |       | 7,138          |       |
| Intangible assets                 |       | 5,209          |       |            |       | 5,209          |       |
| Other assets                      |       | 22             |       | (38             | )          | (16            | )          |
| **Total assets acquired**         | ** ** | **14,299**     | ** ** | **11**          | ** ** | **14,310**     | ** ** |
| ** **                        | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** |
| **Liabilities  assumed**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **     | ** ** |
| Accounts payable                  |       | (1,099         | )          | (11             | )          | (1,110         | )          |
| Accrued compensation and benefits |       | (110           | )          |            |       | (110           | )          |
| Accrued other liabilities         |       | (33            | )          |            |       | (33            | )          |
| Deferred revenue                  |       | (396           | )          |            |       | (396           | )          |
| **Total liabilities assumed**     | ** ** | **(1,638**     | **)**      | **(11**         | **)**      | **(1,649**     | **)**      |
|                              |       |           |       |            |       |           |       |
| **Net  assets acquired**          | ** ** | **$**          | **12,661** | ** **      | **$**      | **—**     | ** ** | **$** | **12,661** | ** ** |
|                                   |            |                |            |                 |            |                |            |  |  |  |  |  |

 

Thefollowing summary presents unaudited pro forma consolidated financialinformation for the three months ended April 30, 2007 and the nine monthsended April 30, 2008 and 2007, as if the iEmployee acquisition hadoccurred as of August 1, 2006.  Thepro forma consolidated financial information for the third fiscal quarter of2008 is not presented since the iEmployee acquisition occurred prior to thestart of this fiscal quarter and the combined financial results are reported onthe Company’s condensed consolidated statement of operations for the threemonths ended April 30, 2008.  Thepro forma information does not purport to be indicative of the actual resultswhich would have occurred had the acquisition been completed as of August 1,2006, nor is it necessarily indicative of the results of operations which mayoccur in the future.

 
| ** **                           | ** ** | **For the Three Months** | ** ** | **For the Nine Months**  | ** ** | **For the Nine Months**  | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **Ended April 30, 2007** | ** ** | **Ended April 30, 2008** | ** ** | **Ended April 30, 2007** | ** ** |
| ** **                           | ** ** | **As Reported**                    | ** ** | **Pro Forma**                      | ** ** | **As Reported**                    | ** ** | **Pro Forma** | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                                 |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Revenues                             |       | $                                       | 20,978     |                                    | $          | 22,288                                  |       | $ | 7,316 |   | $ | 8,329 |   | $ | 31,119 |   | $ | 35,236 |   |
| Net (loss) income                    |       | 6,046                                   |       | 6,223                                   |       | (3,975                                  | )          | (3,830 | ) | 10,094 |   | 10,676 |   |
|                                 |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Net (loss) income per common share:  |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Basic                                |       | $                                       | 0.24       |                                    | $          | 0.20                                    |       | $ | (0.13 | ) | $ | (0.12 | ) | $ | 0.40 |   | $ | 0.35 |   |
| Diluted                              |       | 0.23                                    |       | 0.20                                    |       | (0.13                                   | )          | (0.12 | ) | 0.39 |   | 0.34 |   |
|                                 |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Weighted average shares outstanding: |       |                                    |       |                                    |       |                                    |       |   |   |   |   |   |   |
| Basic                                |       | 25,596                                  |       | 30,691                                  |       | 29,667                                  |       | 32,776 |   | 25,488 |   | 30,582 |   |
| Diluted                              |       | 26,202                                  |       | 31,297                                  |       | 29,667                                  |       | 32,776 |   | 26,022 |   | 31,117 |   |

 

**NOTE 3 — SALE OF ASSETS**

 

In November 2006, Forgent sold certain patentsand applications associated with videoconferencing and related fields andtechnology, together with related goodwill, rights and documentation, toTandberg Telecom AS for $3,150.  Upon closing, Forgent received $2,900 ofthe purchase price, all of which was recorded as a gain on sale of assets.  The remaining balance of $250 will be held inescrow for two years for indemnity claims.

 

7

----

 

**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**NOTE 4 - COMPREHENSIVE INCOME (LOSS)**

 

In accordance with the disclosure requirements of Statement ofFinancial Accounting Standard No. 130, *“ReportingComprehensive Income,”* the Company’s comprehensive income (loss) iscomprised of net income (loss), foreign currency translation adjustments andunrealized gains and losses on short-term investments held asavailable-for-sale securities. Comprehensiveloss for the three and nine months ended April 30, 2008 was $1,655 and$4,032, respectively. Comprehensive income for the three and nine months ended April 30,2007 was $6,060 and $10,096, respectively.

 

##### **NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS**

#####  

In September 2006,the Financial Accounting Standard Board (“FASB”) issued Statement No. 157,*“Fair Value Measurements.”  *StatementNo. 157 defines fair value, establishes a framework for measuring fairvalue in U.S. generally accepted accounting principles and expands disclosuresabout fair value measurements.  Statement No. 157 is effective forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. Forgent is currently evaluating the effect that theadoption of Statement No. 157 will have on its financial position andresults of operations.

 

In February 2007,the FASB issued Statement No. 159, *“TheFair Value Option for Financial Assets and Financial Liabilities.”*StatementNo. 159 provides companies with an option to report selected financialassets and liabilities at fair value. The standard’s objective is to reduceboth complexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently.  The standard requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of the company’s choice to usefair value on its earnings. It also requires companies to display the fairvalue of those assets and liabilities for which the company has chosen to usefair value on the face of the balance sheet. This new statement does noteliminate disclosure requirements included in other accounting standards,including requirements for disclosures about fair value measurements includedin Statement No. 157, *“Fair ValueMeasurements,”*and Statement No. 107, *“Disclosures about Fair Value of FinancialInstruments.”*Statement No. 159 is effective as of thebeginning of fiscal years beginning after November 15, 2007. Forgent iscurrently evaluating the effect that the adoption of Statement No. 159will have on its financial position and results of operations.

 

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 business combination.  The statement also establishes disclosurerequirements which will enable users to evaluate the nature and financialeffects 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.

 

## **NOTE 6 – SHARE BASED COMPENSATION**

## ** **

Share based compensation for the Company’sstock option, restricted stock and stock purchase plans for the three and ninemonths ended April 30, 2008 was $0and $72, respectively.  Sharebased compensation for the Company’s stock option, restricted stock and stockpurchase plans for the three and nine months ended April 30, 2007 was $14 and $144, respectively.  The Company issued 140 and 396 shares of common stockrelated to its Stock Option, Restricted Stock, and Stock Purchase Plans for thethree and nine months ended April 30, 2008, respectively.  The Company issued 2 and 224 shares of common stock related to its Stock Option,Restricted Stock, and Stock Purchase Plans for the three and nine months ended April 30,2007, respectively.

 

**NOTE 7 – INCOME TAXES**

 

InJune 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109”* (“FIN 48”).  FIN48 clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with Statement No. 109, *“Accounting for Income Taxes.”*

 

8

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

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

 

·   An allocation or a shift of income betweentaxing jurisdictions;

 

·   The characterization of income or a decisionto exclude reporting taxable income in a tax return;

 

·   A decision to classify a transaction, entity,or other position in a tax return as tax exempt.

 

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

 

FIN48 requires the Company to make qualitative and quantitative disclosures,including a discussion of reasonably possible changes that might occur inunrecognized tax benefits over the next twelve months, a description of opentax years by major jurisdictions and a roll-forward of all unrecognized taxbenefits, presented as a reconciliation of the beginning and ending balances ofthe unrecognized tax benefits on an aggregated basis.

 

Forgentand certain of its subsidiaries file income tax returns in the U.S. federaljurisdiction, various state jurisdictions, and certain foreign jurisdictions.Generally, the Company is no longer subject to examinations for U.S. federalincome taxes for years prior to 2003 and for state income taxes for years priorto 2002. Examinations for foreign income taxes for previous years remain open,but tax considerations in those jurisdictions are not material to the Company.

 

Theadoption of FIN 48 did not have a material impact on the Company’s financialstatements or disclosures. As of August 1, 2007 and April 30, 2008,Forgent did not recognize any assets or liabilities for unrecognized taxbenefits relative to uncertain tax positions. Management does not anticipatethat a significant increase or decrease to gross unrecognized tax benefits willbe recorded during the next twelve months. Any interest or penalties resultingfrom examinations will be recognized as a component of the income taxprovision. However, since there are no unrecognized tax benefits as a result oftax positions taken, Forgent has no accrued interest and penalties.

 

**NOTE 8 – RELATED PARTY TRANSACTIONS**

 

As a resultof the iEmployee acquisition, the Company leases approximately 9,000 square feet of officespace in Mumbai, India for sales, marketing, development and supportefforts.  The property is leased from aforeign company that is controlled by stockholders of the Company.  Under the lease agreement, the Company paysmonthly rent of approximately $13 until December 2007 and approximately$10 thereafter.  During the three andnine months ended April 30, 2008, the Company incurred $30 and $79 in rent expenses relatedto this lease, respectively.

 

### **NOTE 9 - SEGMENT INFORMATION**

### ** **

Currently,the Company operates in two distinct segments: software and services andintellectual property licensing.  Forgent’ssoftware and services business provides customers with scheduling software,asset management software, workforce management software as well as software maintenanceand support, installation and training services and hardware devices.  Under Forgent’s intellectual propertylicensing segment, the Company settled with the remaining defendants in thelitigations related to its technologies embodied in U.S. Patent No. 4,698,672and its foreign counterparts, as well as in U.S. Patent No. 6,285,746during fiscal year 2007.  Going forward,Forgent does not anticipate generating additional licensing revenues related tothese patents.  In order to evaluate thesoftware and

 

9

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Amounts in thousands, except per share data unlessotherwise noted)

 

services segment and the intellectual property licensing segment asstand-alone businesses, the Company records all unallocated corporate operatingexpenses in the Corporate segment.

 

The Company evaluates the performance as wellas the financial results of its segments. Included in the segment operatingincome (loss) is an allocation of certain corporate operating expenses. TheCompany does not identify assets or capital expenditures by reportablesegments, and the Company’s Chief Executive Officer and Chief Financial Officerdo not evaluate the segments based on these criteria.

 

The tablebelow presents segment information about revenue from unaffiliated customers,gross margins and operating income (loss) for the three  and nine months ended April 30, 2008 and2007:

 
| ** **                                                 | ** ** | **Software &  Services** | ** ** | **Intellectual  Property  Licensing** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|---------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **For the Three Month Period Ending  April 30, 2008** | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| Revenues from unaffiliated customers                       |       | $                                 | 2,707      |                                  | $          | —        |       | $          | —     |   | $ | 2,707 |   |
| Gross margin                                               |       | 2,068                             |       | —                                |       | —        |       | 2,068      |       |
| Operating income (loss)                                    |       | (512                              | )          | (61                                   | )          | (1,075        | )          | (1,648     | )          |
| ** **                                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **For the Three Month Period Ending  April 30, 2007** |       |                              |       |                                  |       |          |       |       |       |
| Revenues from unaffiliated customers                       |       | $                                 | 978        |                                  | $          | 20,000        |       | $          | —     |   | $ | 20,978 |   |
| Gross margin                                               |       | 782                               |       | 9,408                                 |       | —        |       | 10,190     |       |
| Operating income (loss)                                    |       | (500                              | )          | 7,229                                 |       | (690          | )          | 6,039      |       |
|                                                       |       |                              |       |                                  |       |          |       |       |       |
| **For the Nine Month Period Ending  April 30, 2008**  |       |                              |       |                                  |       |          |       |       |       |
| Revenues from unaffiliated customers                       |       | $                                 | 7,316      |                                  | $          | —        |       | $          | —     |   | $ | 7,316 |   |
| Gross margin                                               |       | 5,718                             |       | —                                |       | —        |       | 5,718      |       |
| Operating income (loss)                                    |       | (1,014                            | )          | (200                                  | )          | (3,308        | )          | (4,522     | )          |
|                                                       |       |                              |       |                                  |       |          |       |       |       |
| **For the Nine Month Period Ending  April 30, 2007**  |       |                              |       |                                  |       |          |       |       |       |
| Revenues from unaffiliated customers                       |       | $                                 | 2,957      |                                  | $          | 28,162        |       | $          | —     |   | $ | 31,119 |   |
| Gross margin                                               |       | 2,259                             |       | 14,027                                |       | —        |       | 16,286     |       |
| Operating income (loss)                                    |       | (941                              | )          | 10,118                                |       | (2,333        | )          | 6,844      |       |

 

**NOTE 10 - 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,Jenkens alleges a breach of contract and is seeking a declaratoryjudgment.  Forgent disputes Jenkens’claims and is seeking relief through the court system.

 

After Forgent terminated Jenkens, the Companyentered into a Resolution Agreement with Jenkens in December 2004.  Under the Resolution Agreement, the Companybelieves Jenkens is entitled to $1,400 for contingency fees and expensesrelated to the settlements from the litigation regarding the Company’s DVR patents.  Jenkens interprets the Resolution Agreementon broader terms and believes it is entitled to $3,400, including attorneys’fees and interest.

 

10

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**FORGENT NETWORKS, INC.**

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

 

On March 3, 2008, Forgent and Jenkensappeared before the Court regarding a hearing on the motion for summaryjudgment filed by Jenkens.  On May 20,2008, the Court granted Jenkens’ motion and ordered Forgent to pay Jenkens$2,800 for recoveries related to the ‘746 patent and other amounts includingattorney’s fees and interest.  Forgentdisagrees with the Court’s ruling and is currently pursuing efforts to appealthis Court order.

 

The trial date forthis litigation is currently scheduled for October 6, 2008.  However, managementcurrently cannot predict how long it ultimately will take to resolve theJenkens lawsuit.  Until the Jenkenslitigation is finalized, the related contingency fees and expenses may beadjusted in a future period and could have a material impact to the Company’sconsolidated 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 claims Wild Basin is in breachof contract relating to Forgent’s lease agreement by unreasonably withholdingand delaying its consent to a pending lease assignment.  On October 19, 2007, Forgent amended itspetition to include claims of fraud and breach of fiduciary duty against WildBasin.  On June 2, 2008, Wild Basinfiled a counterclaim seeking a declaratory judgment that it had complied withits obligations under the lease and was seeking the recovery of attorney’sfees.  On June 5, 2008, Forgentamended its petition to request the Court make declaratory judgments on severalissues in the case and to include as a breach of contract claim its claim forwithholding amounts that should have been distributed by Wild Basin in the pastpursuant to the lease.  Forgent isseeking to recover all damages as a result of the delay in closing its pendingassignment and amounts not distributed in the past, among other damages.  The Company anticipates participating inmediation with Wild Basin in July 2008. The trial date for this litigationhas been re-scheduled for July 21, 2008.

 

11

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

 

The following review of Forgent’s financial position as of April 30,2008 and July 31, 2007, and for the three and nine months ended April 30,2008 and 2007, should be read in conjunction with the Company’s 2007 AnnualReport on Form 10-K/A filed with the Securities and ExchangeCommission.  Forgent’s internetwebsite address is http://www.asuresoftware.com.  The Company’s annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934are available through the investor relations page of the Company’sinternet website free of charge as soon as reasonably practicable after theyare electronically filed, or furnished to, the Securities and ExchangeCommission.  Forgent’s internet website and the information containedtherein or connected thereto are not intended to be incorporated into thisQuarterly Report on Form 10-Q.

 

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

 

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements in this Report represent forward-looking statements. Thesestatements involve known and unknown risks, uncertainties and other factorsthat may cause actual results of operations, levels of activity, economicperformance, financial condition or achievements to be materially differentfrom future results of operations, levels of activity, economic performance,financial condition or achievements as expressed or implied by suchforward-looking statements.

 

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

 

**RESULTS OF OPERATIONS**

 

The following table sets forth for the periods indicated the percentageof total revenues represented by certain items in Forgent’s ConsolidatedStatements of Operations:

 
| ** **                               | ** ** | **FOR THE THREE  MONTHS ENDED  APRIL 30,** | ** ** | **FOR THE NINE****MONTHS ENDED****APRIL 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                       | ** ** | **2007**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                                           |       |                                                              |       |   |   |   |   |
| Software & services revenues    |       | 100                                                            | %          | 5                                                                 | %          | 100 | % | 10 | % |
| Intellectual property licensing revenues |       | —                                                         |       | 95                                                                |       | — |   | 90 |   |
| Gross margin                             |       | 76                                                             |       | 49                                                                |       | 78 |   | 52 |   |
| Selling, general and  administrative     |       | 109                                                            |       | 19                                                                |       | 114 |   | 29 |   |
| Research and development                 |       | 23                                                             |       | 1                                                                 |       | 21 |   | 1 |   |
| Amortization of intangible  assets       |       | 6                                                              |       | —                                                            |       | 5 |   | — |   |
| Total operating expenses                 |       | 137                                                            |       | 20                                                                |       | 140 |   | 30 |   |
| Other income, net                        |       | 3                                                              |       | 1                                                                 |       | 8 |   | 11 |   |
| Net income (loss)                        |       | (58                                                            | )%         | 29                                                                | %          | (54 | )% | 32 | % |

 

12

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**THREE AND NINE MONTHS ENDED APRIL 30, 2008AND 2007**

 

### **Revenues**

### ** **

Revenues for the three months ended April 30,2008 were $2.7 million, a decrease of $18.3 million, or 87%, from the $21.0million reported for the three months ended April 30, 2007. Revenues forthe nine months ended April 30, 2008 were $7.3 million, a decrease of$23.8 million, or 76%, from the $31.1 million reported for the nine monthsended April 30, 2007. Consolidated revenues represent the combinedrevenues of the Company and its subsidiaries, including sales of the Company’s scheduling software, asset management software,workforce management software, software maintenance and support services,professional services, installation and training services and hardware devices,as well as royalties and settlements received from licensing the Company’sintellectual property.

 

Forgent did not generateany intellectual property licensing revenues for the three and nine monthsended April 30, 2008, which led to a decrease of $20.0 million for thethree months ended April 30, 2008 and $28.2 million for the nine monthsended April 30, 2008.  In priorfiscal years, the Company’s intellectual property licensing revenues werederived from licensing U.S. Patent No. 4,698,672 (the “ ‘672 patent”) andU.S. Patent No6,285,746 (the “ ‘746 patent”).  However, the ‘672 patent hasexpired and the ‘746 patent will be expiring in May 2011.  Additionally, the litigations related tothese two patents were concluded in fiscal year 2007. Therefore, managementdoes not anticipate any additional licensing revenues from these patents.

 

***Software and Services Business***

 

Revenues for the threemonths ended April 30, 2008 were $2.7 million, an increase of $1.7million, or 177%, from the $1.0 million reported for the three months ended April 30,2007. Revenues for the nine months ended April 30, 2008 were $7.3 million,an increase of $4.3 million, or 147%, from the $3.0 million reported for thenine months ended April 30, 2007.  Software and services revenues as a percentage oftotal revenues were 100% and 5% for the three months ended April 30, 2008and 2007, respectively.  Software andservices revenues as a percentage of total revenues were 100% and 10% for thenine months ended April 30, 2008 and 2007, respectively.  Revenues from this line of business include salesof Forgent’s NetSimplicity scheduling and asset management software, including Meeting Room Manager (“MRM”) and VisualAsset Manager (“VAM”), and sales of the Company’s iEmployee workforcemanagement software, including Time & Attendance, HR &Benefits and Pay Stubs.  Also included in this segment’s revenues are software maintenance andsupport services, professional services, such as add-on softwarecustomization, installation and training, and hardware devices.

 

During the three and nine monthsended April 30, 2008, increases in software subscription revenues,software license revenues and maintenance revenues accounted for approximately88% and 87%, of the $1.7 million and $4.3 million increases in revenues,respectively.  In October 2007, theCompany acquired the iEmployee workforce management software.  The workforce management software, as well asthe Company’s MRM On Demand software, are delivered to customers under the “SaaS”model, which is software as a service on a subscription basis.  The SaaS model allows customers to useForgent’s software without installing or maintaining it on their ownservers.  The acquisition of iEmployeeand the continued growth of MRM On Demand led to a $1.2 million and $2.8million increase in service revenues for the three and nine months ended April 30,2008, respectively.  During the thirdfiscal quarter, Forgent started bundling some of its more popular products tomatch its customers’ buying patterns and simplify its product line.

 

Software license revenuesincreased by $0.2 million and $0.6 million, for the three and nine months endedApril 30, 2008, respectively.  Inaddition to the enhancements to the MRM Outlook® Scheduling interface and MRMActive Directory released during the fourth fiscal quarter of 2007, Forgentfurther enhanced the MRM Outlook® Scheduling functionality by introducing newflexible and customizable fields during the third fiscal quarter of 2008.  These enhanced features continue to attractenterprise companies and Forgent continues to generate increased sales to thismarket segment, which is driving sales with higher average sales prices duringthe three and nine months ended April 30, 2008, as compared to the threeand nine months ended April 30, 2007. Additionally, in January 2008, Forgent released MRM 7.6, which includeda new import capability with the SunGard Higher Education Banner®, a collegiate course scheduling solutionwidely used by higher education institutions which is one of Forgent’s moresignificant vertical markets.  Theseproduct enhancements and Forgent’s expanded sales and marketing workforce havegenerated the increases in software license revenues during fiscal 2008.  Theincreased sales in software license, as well as the continued pursuit ofmaintenance renewals, led to additional sales of 

 

13

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maintenance and supportcontracts, which increased maintenance revenues by $0.1 million and $0.4million for the three and nine months ended April 30, 2008, respectively.

 

During fiscal 2008, the Company has generated moresales from Fortune 500 companies than during fiscal 2007.  As a result, Forgent generated approximately35% and 35% of the Company’srevenues from the education, governmental, healthcare and legal sectors duringthe three and nine months ended April 30, 2008, respectively, as comparedto 61% and 55% during the three and nine months ended April 30, 2007,respectively.  Forgent will continue totarget small and medium businesses and divisions of enterprises and utilizemarketing programs in certain vertical markets as appropriate.  As the Company finalizes the integration ofthe iEmployee operations, continues the development of its sales force toincrease sales performance, and releases new software updates and enhancements,management believes its revenues will increase.

 

### **Gross Margin**

### ** **

Gross margin for the three months ended April 30, 2008 was $2.1million, a decrease of $8.1 million, or 80%, from the $10.2 million reportedfor the three months ended April 30, 2007. Gross margin for the nine monthsended April 30, 2008 was $5.7 million, a decrease of $10.6 million, or65%, from the $16.3 million reported for the nine months ended April 30,2007. Gross margin as a percentage of totalrevenues were 76% and 49% for the three months ended April 30, 2008 and2007, respectively.  Gross margin as a percentage of total revenues were 78% and52% for the nine months ended April 30, 2008 and 2007, respectively.

 

The$8.1 million decrease in gross margin for the three months ended April 30,2008, as compared to the three months ended April 30, 2007, is dueprimarily to the $9.4 million decrease in gross margin resulting from theintellectual property licensing segment. Similarly, the $10.6 million decrease in gross margin for the ninemonths ended April 30, 2008, as compared to the nine months ended April 30,2007, is due primarily to the $14.0 million decrease in gross margin resultingfrom the intellectual property licensing segment.  Since the litigations related to the ‘672patent and the ‘746 patent were concluded during fiscal year 2007 and norevenues were generated from the intellectual property licensing segment duringfiscal 2008, the decline in intellectual property licensing revenues hasadversely affected the Company’s total gross margin.  However, gross margin as a percentage oftotal revenues has improved significantly from 49% to 76% during the threemonths ended April 30, 2008 and from 52% to 78% during the nine monthsended April 30, 2008, as compared to the respective periods ending April 30,2007.  This improvement is due to thehigher margins achieved by the software and services segment, as compared tothe intellectual property licensing segment.

 

***Software and Services Business***

 

Gross margin for the three months ended April 30, 2008 was $2.1million, an increase of $1.3 million, or 165%, from the $0.8 million reportedfor the three months ended April 30, 2007. Gross margin for the ninemonths ended April 30, 2008 was $5.7 million, an increase of $3.5 million,or 153%, from the $2.2 million reported for the nine months ended April 30,2007. Gross margin as a percentage of totalrevenues were 76% and 4% for the three months ended April 30, 2008 and2007, respectively.  Gross margin as a percentage of total revenues were 78% and 7%for the nine months ended April 30, 2008 and 2007, respectively.

 

The cost of sales for thesoftware and services segment is relatively fixed and results primarily fromcompensation expenses and related overhead expenses and the amortization of theCompany’s purchased intangible assets. These expenses represent approximately 61% and 60% of the total cost ofsales during the three and nine months ended April 30, 2008,respectively.  In October 2007, theCompany acquired the iEmployee workforce management software.  As a result of this acquisition, compensationand related overhead expenses associated with the iEmployee operationsincreased by $0.2 million and $0.6 million, which accounts for 55% and 64% ofthe total increase in cost of sales for the three and nine months ended April 30,2008, respectively.  As part of theiEmployee integration process, management continues to investigate ways tomaximize efficiencies within its company-wide operations in order to minimizethese fixed costs without negatively affecting customer services and support.

 

Despite the overallincrease in cost of sales, the stronger growth in revenues for the software andservices segment caused the gross margin to increase as stated above and thegross margin as a percentage of revenues to increase from 76% for the ninemonths ended April 30, 2007 to 78% for the nine months ended April 30,2008.  Although gross margin increasedfor the three months ended April 30, 2008, gross margin as a percentage ofrevenues decreased from 80% for the three months ended April 30, 2007 to76% for the three months ended April 

 

14

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30, 2008.  This decrease in gross margin as a percentageof revenue is due primarily to the mix in gross margins contributed from theNetSimplicity operations and the newly acquired iEmployee operations.  As management implements strategies tomaximize efficiencies throughout the Company, Forgent expects to improve itsgross margin as a percentage of revenue from its iEmployee operations, whichwill lead to an overall improvement in its gross margin as a percentage ofrevenue.  Additionally, since Forgent expects to generate more sales, management expects gross marginsto improve during the next fiscal quarter, in terms of total dollars, and toremain relatively consistent in terms of percentage of revenues.

 

**Selling,General and Administrative**

 

Selling, general and administrative (“SG&A”) expenses for the threemonths ended April 30, 2008 were $3.0 million, a decrease of $1.0 million,or 26%, from the $4.0 million reported for the three months ended April 30,2007. SG&A expenses for the nine months ended April 30, 2008 were $8.3million, a decrease of $0.7 million, or 7%, from the $9.0 million reported forthe nine months ended April 30, 2007. SG&A expenses as a percentage of total revenues were 109% and19% for the three months ended April 30, 2008 and 2007, respectively.  SG&A expenses as a percentage of total revenues were 114% and29% for the nine months ended April 30, 2008 and 2007, respectively.

 

SG&A expenses during the three months ended April 30, 2008decreased $1.5 million due to the decrease in legal expenses generated from theintellectual property licensing segment. Since the litigations related to the ‘672 patent and the ‘746 patentwere concluded in fiscal year 2007, Forgent incurred minimal legal expensesfrom its intellectual property licensing business during the three months endedApril 30, 2008, as compared to the three months ended April 30,2007.  The decrease in these legalexpenses was offset by a $0.4 million increase in SG&A expenses related tothe iEmployee operations.  Since theiEmployee operations were acquired in October 2007, no SG&A expensesrelated to the iEmployee operations were incurred during the three months endedApril 30, 2007.

 

Similarly,SG&A expenses during the nine months ended April 30, 2008 decreased$2.2 million due to the decrease in legal expenses generated from theintellectual property licensing segment. The decrease in these legal expenses was offset by a $0.9 millionincrease in SG&A expenses related to the acquired iEmployee operations anda $0.7 million increase in compensation expenses related to sales and marketingpersonnel.  During fiscal 2008, Forgenthired additional sales personnel such that each sales representative couldspecialize in the Company’s software and services and focus on certainindustries and/or smaller territories. Forgent’s expanded sales force continues to operate through a low-costdirect web and telesales model.  Additionally,Forgent hired a Director of Marketing and other marketing personnel toconcentrate on creating and expanding market awareness of the Company’ssoftware and services.  In addition tothe appealing features of its software products and services, managementbelieves the additional personnel have contributed to the increase in revenuesduring the three and nine months ended April 30, 2008.  Management anticipates further increases inrevenues as the Company’s expanded sales and marketing workforce achieves itsfull productivity potential in building greater market awareness and generatingincreased sales.

 

Forgent will also continue to evaluate and reduce any unnecessarySG&A expenses that do not directly support the generation of revenues forthe Company.

 

### **Research and Development**

### ** **

Research and development (“R&D”) expenses for the three monthsended April 30, 2008 were $0.6 million, an increase of $0.4 million, or242%, from the $0.2 million reported for the three months ended April 30,2007. R&D expenses for the nine months ended April 30, 2008 were $1.5million, an increase of $1.1 million, or 261%, from the $0.4 million reportedfor the nine months ended April 30, 2007. R&D expenses as a percentage of total revenues were 23% and 1%for the three months ended April 30, 2008 and 2007, respectively.  R&D expenses as a percentage of total revenues were 21% and 1%for the nine months ended April 30, 2008 and 2007, respectively.

 

Approximately 83% of the $0.4 million increase in R&D expensesduring the three months ended April 30, 2008 and approximately 78% of the$1.1 million increase in R&D expenses during the nine months ended April 30,2008 are due to the acquisition of the iEmployee R&D workforce andoperations in October 2007.  As theCompany further integrates the iEmployee R&D workforce into the existingR&D team, management is continuing to explore 

 

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opportunities to create synergies within the group and is investigatingall methods for managing its R&D efforts in the most cost-effective manner.

 

During the three months ended April 30, 2008, Forgent released animproved version of iEmployee’s Time and Attendance product, which added aninterface to iClock Advanced, a web-based punch clock that provides newcapabilities and greater flexibility in order to serve a broader range ofcustomers and meet more complex customer requirements by allowing companies toeasily manage their employees’ schedules. Additionally, Forgent announced the release of a new version of itsiEmployee HR & Benefits offering, which introduced new features tohelp the HR or Benefits administrator exercise better control over the benefitswork flow through an easier interface, broadened capabilities to configurevarious parts of the benefit plans and increased flexibility.   During the third fiscal quarter, Forgentalso released MRM 7.7, which improved the MRM Enterprise Outlook® Schedulingfunctionality by introducing new flexible and customizable fields.  As Forgent continues to develop and improveall of it products and services, managementwill attempt to maintain R&D expenses at reasonable levels in terms ofpercentage of revenue.

 

### **Other Income and Expenses**

### ** **

Other income and expenses for the three months ended April 30,2008 were $0.1 million, a decrease of $0.1 million, or 50%, from the $0.2million reported for the three months ended April 30, 2007. Other incomeand expenses for the nine months ended April 30, 2008 were $0.6 million, adecrease of $2.8 million, or 83%, from the $3.4 million reported for the ninemonths ended April 30, 2007. Other income and expenses as a percentage of total revenues were 3% and 1%for the three months ended April 30, 2008 and 2007, respectively.  Other income and expenses as a percentage of total revenues were 8% and 11%for the nine months ended April 30, 2008 and 2007, respectively.

 

The $2.8 million decrease for the nine months ended April 30,2008 resulted from the sale of assets during the second fiscal quarter of2007.  In November 2006, Forgentsold certain patents and applications associated with videoconferencing andrelated fields and technology, together with related goodwill, rights anddocumentation, to Tandberg Telecom AS for $3.2 million.  Upon closing,Forgent received $2.9 million of the purchase price, all of which was recordedas a gain on sale of assets.  Theremaining balance of $0.3 million is held in escrow for two years for indemnityclaims.

 

**Net (Loss) Income**

 

Forgentincurred a net loss of $1.6 million, or $0.05****per share, during the three months ended April 30, 2008compared to a net income of $6.0 million, or $0.23 per share, during the threemonths ended April 30, 2007. Forgent incurred a net loss of $4.0 million,or $0.14****per share, during thenine months ended April 30, 2008 compared to a net income of $10.1million, or $0.39 per share, during the nine months ended April 30, 2007.Net (loss) income as a percentage of total revenues were (58%) and 29% for thethree months ended April 30, 2008 and 2007, respectively. Net (loss)income as a percentage of total revenues were (54%) and 32% for the nine monthsended April 30, 2008 and 2007, respectively. The $7.6 million decrease inthe Company’s net income during the three months ended April 30, 2008, ascompared to the three months ended April 30, 2007, is primarilyattributable to the $9.4 million decrease in gross margin from the intellectualproperty licensing business.  Similarly,the $14.1 million decrease in the Company’s net income during the nine monthsended April 30, 2008, as compared to the nine months ended April 30,2007, is primarily attributable to the $14.0 million decrease in gross marginfrom the intellectual property licensing business.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 
| ** **                                         | ** ** | **FOR THE NINE** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **MONTHS ENDED**      | ** ** |
| ** **                                         | ** ** | **APRIL 30,**         | ** ** |
| ** **                                         | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(in thousands)**    | ** ** |
| ** **                                         | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Working capital                                    |       | $                          | 11,449     |   | $ | 20,951 |   |
| Cash, cash equivalents and short-term  investments |       | 16,122                     |       | 26,147 |   |
| Cash (used in) provided by operating  activities   |       | (11,926                    | )          | 10,854 |   |
| Cash used in investing activities                  |       | (8,737                     | )          | (1,978 | ) |
| Cash provided by (used in) financing  activities   |       | 13                         |       | (457 | ) |
|                                                    |            |                            |            |  |  |  |  |

 

Cash used in operating activities was $12.0million for the nine months ended April 30, 2008 due primarily to a $4.0million net loss and an $8.2 million decrease in accounts payables. Cashprovided by operating activities was $10.9 million for the nine months ended April 30,2007 due primarily to the $10.1 million in net income and a $9.1 millionincrease in accounts payables, which were offset by a $10.1 million increase inaccounts receivables. During the nine months ended April 30, 2008, Forgentpaid its legal counsel $7.4 million in contingency fees related to its ‘746patent’s settlement and license agreements. The Company will pay the related contingency fees to Jenkens &Gilchrist, P.C. (“Jenkens”) in a future period, once the litigation withJenkens is finalized.  Forgent’s averagedays sales outstanding for its software and services segment was 39 days forthe third fiscal quarter of 2008, an improvement over the 46 days for the thirdfiscal quarter of 2007.

 

Cash used in investingactivities was $8.7 million for the nine months ended April 30, 2008 dueprimarily to $7.3 million paidin cash related to the iEmployee acquisition and $1.3 million purchase ofshort-term investments.  Cash usedin investing activities was $2.0 million for the nine months ended April 30,2007 due primarily to $1.5 million in net purchases of short-term investments.  Forgent manages its investments portfolio inorder to fulfill corporate liquidity requirements and maximize investmentreturns while preserving the quality of the portfolio.  Duringthe nine months ended April 30, 2008, Forgent shifted its investmentportfolio to investments with slightly longer maturities in order to maximizeits interest income.  As a result of thisshift and the increase in the average cash equivalents and short-terminvestment balances during the nine months ended April 30, 2008, Forgentachieved an 8% increase in interest income during the nine months ended April 30,2008, as compared to the nine months ended April 30, 2007.

 

Approximately 44% ofForgent’s purchased fixed assets during the nine months ended April 30,2008 related to leasehold improvements for the Company’s expanded sales forceand for one subtenant.  In addressing all operational and facilitycapital requirements, management continues to evaluate how best to manageoperations without expending significant additional resources and is maximizingits existing office space to facilitate the growth of its softwarebusiness.  Management does not anticipateany significant capital expenditures during the fourth fiscal quarter of 2008.

 

The Company leases office space and equipmentunder non-cancelable operating leases that expire at various dates through2013. Certain leases obligate Forgent to pay property taxes, maintenance andinsurance and include escalation clauses. The totalamount of base rentals over the term of the Company’s leases is charged toexpense on a straight-line basis, with the amount of the rental expense inexcess of the lease payments recorded as a deferred rent liability.  Forgentmay periodically make other commitments and thus become subject to othercontractual obligations.   Forgent’sfuture minimum lease payments under all operating and capital leases as of April 30, 2008 are as follows:

 
| ** **                  | ** ** | **Payments Due By Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **(in thousands)**                   | ** ** |
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3- 5 years** | ** ** | **More than  5 years** | ** ** |
| Operating lease obligations |       | $                                         | 16,933     |   | $ | 3,693 |   | $ | 6,889 |   | $ | 6,351 |   | $ | — |   |
| Capital lease obligations   |       | 60                                        |       | 34 |   | 26 |   | — |   | — |   |
| **Total**                   | ** ** | **$**                                     | **16,993** | ** ** | **$** | **3,727** | ** ** | **$** | **6,915** | ** ** | **$** | **6,351** | ** ** | **$** | **—** | ** ** |

 

17

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Approximately 98% of the Company’s operating leaseobligations relates to its corporate office location at Wild Basin in Austin,Texas.  As of April 30, 2008,Forgent had approximately $5.6****millionin future minimum lease payments receivable under non-cancelable subleasearrangements.  Additionally, Forgent hada $0.5 million liability related to impairment charges for the economic valueof the lost sublease rental income related to its Austin property.

 

Cashprovided by financing activities was $13 thousand for the nine months ended April 30,2008. Cash used in financing activities was $0.5 million for the nine monthsended April 30, 2007 due primarily to the repayment of Forgent’soutstanding notes payable.  Although no debt was outstanding as of April 30,2008, Forgent had $1.0 million available from a credit line from Silicon Valley Bank.  Thiscredit line expired on May 1, 2008. Forgent is currently working with Silicon Valley Bank to renew thissource of financing and management anticipates obtaining similar terms ofinterest at prime plus 0.75% and monthly installments over a three year termfor the future credit line.

 

Forgent’s stock repurchaseprogram allows the Company to purchase up to three million shares of theCompany’s common stock. No shares were repurchased during the nine months endedApril 30, 2008 or 2007.  As of April 30,2008, Forgent had repurchased 1,790,401 shares for approximately $4.8 millionand had the authority to repurchase approximately 1.2 million additionalshares.  Management will periodicallyassess repurchasing additional shares in fiscal year 2008, depending on theCompany’s cash position, market conditions and other factors.

 

As of April 30, 2008, Forgent’s principal source of liquidityconsisted of $16.1 million in cash, cash equivalents and short-terminvestments.  Management currently plansto utilize its cash balances to continue developing its software business bymaking prudent investments when necessary, continue exploring potential opportunitiesin acquiring a growing and profitable public or privately held technologybusiness or product line, and may repurchase outstanding shares.  There is no assurance that the Company will be able to limit its cashconsumption and preserve its cash balances, and it is possible that the Company’sfuture business demands may lead to cash utilization at levels greater thanrecently experienced due to the iEmployee acquisition, potential otheracquisitions and other business factors. Management believes that the Companyhas sufficient capital and liquidity to fund and cultivate the growth of itscurrent and future operations for the next 12 months and thereafter.  However, due to uncertainties related to thetiming and costs of these efforts, Forgent may need to raise additional capitalin the future.  Yet, there is noassurance that the Company will be able to raise additional capital if and whenit is needed.

 

#### **CRITICAL ACCOUNTING 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. The more significant estimates made by managementinclude the valuation allowance for the gross deferred tax asset, contingencyreserves, useful lives of fixed assets, the determination of the fair value ofits long-lived assets, and the fair value of assets acquired andliabilities assumed during the recent acquisition. 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.

 

Management believes the following represent Forgent’s criticalaccounting policies:

 

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**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.

 

Revenue consists of softwarelicense, 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. Revenue from the sale of hardware devices is recognizedupon shipment of the hardware.  Forgentsells multiple elements within a single sale. For software license arrangements, the Company allocates the total feeto the various elements based on the relative fair values of the elementsspecific to the Company.  For softwaresubscription arrangements, the Company recognizes the total contract valueratably over the contract term.

 

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

 

Forinstances in which VSOE cannot be determined for undelivered elements, andthese undelivered elements do not provide significant customization or modificationof its software product, Forgent recognizes the entire contract amount ratablyover the period during which the services are expected to be performed.

 

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 the serviceis completed and over the terms of the arrangements, primarily ranging from oneto three years.

 

## **Impairment of Goodwill, Intangible Assets andLong-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, theCompany compares the assets’ carrying amounts against the estimatedundiscounted cash flows to be generated by those assets over their estimateduseful lives.  If 

 

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the carrying amounts are greater than the undiscounted cash flows, thefair values of those assets are estimated by discounting the projected cashflows.  Any excess of the carryingamounts over the fair values are recorded as impairments in that fiscal period.

 

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

 

The Company’sprimary market risk exposure relates to interest rate risk. Forgent’s interestincome is sensitive to changes in U.S. interest rates.  However, due to the relatively short-termnature of the Company’s investments, Forgent does not consider these risks tobe significant.  For additionalQuantitative and Qualitative Disclosures about Market Risk, reference is madeto Part II, Item 7A, Quantitative and Qualitative Disclosures about MarketRisk, in the Company’s Annual Report on Form 10-K/A for the year ended July 31,2007.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company.  The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports it files under the Securities 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 April 30, 2008.  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 April 30, 2008, 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.

 

Due to the acquisition of iEmployee in October 2007, Forgent isrequired to implement internal controls related to those operations. As of April 30,2008, the Company has not tested the operating effectiveness of the internalcontrols related to iEmployee or the integration of iEmployee. In compliancewith the Public Company Accounting Oversight Board’s and the Securities andExchange Commission’s regulations and guidance, Forgent will not report on theeffectiveness of iEmployee’s internal controls over financial reporting underthe Sarbanes-Oxley Act of 2002 until its Annual Report on Form 10-K forfiscal 2008.

 

**PART II— OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Forgent is the defendant or plaintiff invarious actions that arose in the normal course of business. With the exception of the proceedingsdescribed below, none of the pending legal proceedings to which the Company isa party are material to the Company.

 

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

 

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

 

After Forgent terminated Jenkens, the Companyentered into a Resolution Agreement with Jenkens in December 2004.  Under the Resolution Agreement, the Companybelieves Jenkens is entitled to $1.4 million for contingency fees and expensesrelated to the settlements from the litigation regarding the Company’s DVRpatents.  Jenkens interprets theResolution Agreement on broader terms and believes it is entitled to $3.4million, including attorneys’ fees and interest.

 

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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 $2.8million for recoveries related to the ‘746 patent and other amounts includingattorney’s fees and interest.  Forgentdisagrees with the Court’s ruling and is currently pursuing efforts to appealthis Court order.

 

The trial date forthis litigation is currently scheduled for October 6, 2008.  However, managementcurrently cannot predict how long it ultimately will take to resolve theJenkens lawsuit.  Until the Jenkenslitigation is finalized, the related contingency fees and expenses may beadjusted in a future period and could have a material impact to the Company’sconsolidated 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 claims Wild Basin is in breachof contract relating to Forgent’s lease agreement by unreasonably withholdingand delaying its consent to a pending lease assignment.  On October 19, 2007, Forgent amended itspetition to include claims of fraud and breach of fiduciary duty against WildBasin.  On June 2, 2008, Wild Basinfiled a counterclaim seeking a declaratory judgment that it had complied withits obligations under the lease and was seeking the recovery of attorney’sfees.  On June 5, 2008, Forgentamended its petition to request the Court make declaratory judgments on severalissues in the case and to include as a breach of contract claim its claim forwithholding amounts that should have been distributed by Wild Basin in the pastpursuant to the lease.  Forgent isseeking to recover all damages as a result of the delay in closing its pendingassignment and amounts not distributed in the past, among other damages.  The Company anticipates participating inmediation with Wild Basin in July 2008. The trial date for this litigationhas been re-scheduled for July 21, 2008.

 

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

## ** **

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

 

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

 

OnJanuary 31, 2006, the USPTO granted a petition to re-examine the Company’sU.S. Patent No. 4,698,672 (the “ ‘672 patent”) and subsequently issued itsfirst office action on May 25, 2006. Forgent responded to this first office action, which confirmed 27 of the46 claims in the ‘672 patent.  On March 26,2007, the USPTO issued its final office action, which affirmed its first officeaction.  Forgent responded to the USPTOon May 11, 2007.  On January 11,2008, the Company received the USPTO’s notice of intent to issue an Ex-ParteReexamination Certificate.  On April 15,2008 Forgent received the USPTO’s Ex-Parte Reexamination Certificate, whichaffirmed its previous office actions. The Company currently has no plans to pursue this matter further.

 

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

##### ** **

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

 

#### **SOFTWARE AND SERVICES BUSINESS**

#### ** **

**The Company may encounter problems related toits acquisition of iEmployee, which could create business difficulties andadversely affect operations.**

 

The Company may have difficulties fully integrating the services,technologies, personnel and operations of iEmployee into the Company’s existingsoftware business. These difficulties could disrupt Forgent’s ongoing business,distract management and other personnel, increase expenses and adversely affectoperating results.  If 

 

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Forgent is unable to fully integrate iEmployee with its existing operations,the Company may not achieve all the intended benefits of the acquisition.

 

**If Forgent is unable to successfully market and sell its softwareproducts and services, future revenues will decline.**

 

The future success of the Company is dependenton its ability to generate demand for its scheduling, asset management, and workforce management softwareproducts and services. To this end, Forgent’s marketing and sales operationsmust increase market awareness of the Company’s products and services to generateincreased revenue. All new hires within the sales and marketing departmentswill require training and may take time to achieve full productivity. Forgentcannot be certain that its new hires will become as productive as necessary.  The Company also cannot be certain that itwill be able to hire enough qualified individuals or retain existing employeesin the future, and therefore, cannot be certain that it will be successful inits efforts to market and sell its products and services.  If Forgent is not successful in buildinggreater market awareness and generating increased sales, future revenues willdecline.

 

**Lack of new customers or additional salesfrom current customers could negatively affect the Company’s ability to growrevenues.**

 

Forgent’s future success and business model depends significantly onits ability to expand the use of its software and services.  The Company must execute on its growthobjectives by increasing its market share, maintaining and increasing recurringrevenues from new and existing customers, and selling additional products andservices to new and existing customers. If the Company fails to grow its customer base or generate repeat andexpanded business from its current customers, Forgent’s revenues could beadversely affected.

 

Since NetSimplicity’s maintenance and other service fees depend largelyon the size and number of licenses that are sold, any downturn in NetSimplicity’ssoftware license revenue would negatively impact the Company’s deploymentservices revenue and future maintenance revenue. Additionally, if customerselect not to renew their maintenance agreements, NetSimplicity’s maintenancerevenue could be adversely affected.

 

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

 

The Company may encounter new entrants orcompetition from vendors in some or all aspects of its software business. TheCompany currently competes on the basis of price, technology, availability,performance, quality, reliability, service and support. However, there can beno assurance that the Company will be able to maintain a competitive advantagewith respect to any of these factors. Some of Forgent’s competitors, bothcurrent and future, may have greater financial, technical and marketingresources than the Company and, therefore, may be able to respond quicker tonew or emerging technologies and changes in customer requirements.  As a result, they may compete moreeffectively on price and other terms. Additionally, these competitors may devote greater resources indeveloping products or in promoting and selling their products to achievegreater market acceptance.  Suchcompetition could adversely affect the Company’s operating results.

 

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

 

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

 

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

 

Forgent’s workforce management software, aswell as the Company’s MRM On Demand software, are delivered to customers underthe “SaaS” model, which is software as a service on a subscription basis.  These hosting services, whichare supported by hardware, infrastructure, ongoing maintenance and back-upservices, must be operated reliably on a 24 hours per day, seven days per weekbasis without interruption or data loss. If Forgent cannot protect its infrastructure, equipment and customerdata files against damage from human error, power loss or telecommunicationfailures, intentional acts of vandalism, or any other catastrophic occurrences,services to its customers may be interrupted. If services are interrupted,

 

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·                  Customers maynot be able to retrieve their data;

·                  The Companycould incur significant expenses to replace existing equipment or purchaseservices from an alternative data center;

·                  Customers maynot renew their services or cancel their contracts;

·                  Customers mayseek reimbursement for losses that they incur; and/or

·                  The Company’sreputation may be impaired, making it difficult to attract new customers.

 

Although disaster recovery plans and strategies are in place, Forgentmay not be successful in mitigating the effects of any systems failure or otherservice interruptions. Such failures or interruptions could significantlyimpair the Company’s operations and adversely affect the Company’s financialresults.

 

**If Forgent’s business, systems and/or ITsecurity is breached, the Company’s businesses may be adversely affected.**

 

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

 

**Claims of intellectual property infringement by third partiesmay adversely affect Forgent’s business.**

 

TheCompany may become subjected to claims ofintellectual property infringement by third parties as the number ofcompetitors and available software products continue to grow and thefunctionality of such products increasingly overlaps. Any infringement claims,with or without merit, could be time-consuming, result in costly litigation,divert management’s attention and financial resources, cause the loss ordeferral of sales or require the Company to enter into royalty or licenseagreements. In the event of a successful claim of intellectual propertyinfringement against Forgent, the Company’s business, operating results andfinancial condition could be materially adversely affected, unless the Companyis able to either license the technology or similar technology or develop analternative technology on a timely basis. Even if Forgent is able to license the technology, such royalty orlicense agreements may not be available on terms acceptable to the Company.

 

**If Forgent cannotprevent piracy of its software products, revenues may decline.**

 

Although the Company is unable to determinethe extent to which piracy of its software products occurs, software piracycould be a problem.  Since Forgent hasinternational resellers and customers, piracy may occur in foreign countrieswhere laws do not protect proprietary rights to the same extent as the laws inthe United States. Piracy may cause the Company’s revenues to decline.  Forgent seeks to protect its assets through acombination of patent and trademark laws as well as confidentiality proceduresand contractual provisions. These legal protections afford only limitedprotection and enforcement of these rights may be time consuming andexpensive.  Furthermore, competitors mayalso independently develop similar, but not infringing, technology or designaround the Company’s products.

 

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

 

Inaddition to its software products, Forgent currently sells hardware devicesfrom partnered vendors to its customers. The effective implementation of the Company’s software products dependsupon the successful operation of these third-party hardware products. Anyundetected defects in these third-party products could prevent theimplementation of or impair the functionality of the Company’s software orblemish Forgent’s reputation.

 

**If customers cease using Microsoft Outlook©or if Microsoft changes its Outlook application significantly, revenues maydecline and/or the Company may incur significant expenses to update its MRMEnterprise software.**

 

TheCompany’s MRM Enterprise software is designed to operate with MicrosoftOutlook©.  Although management believesthat Microsoft Outlook© is currently and widely utilized by businesses in theCompany’s target markets, there are no assurances that businesses will continueto use Microsoft Outlook© as anticipated, will 

 

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migrate from older versions to newer versions of Microsoft Outlook©, orwill not adopt alternative technologies that are incompatible with MRMEnterprise.  Forgent may not be timely inupdating its MRM Enterprise software to be compatible with MicrosoftOutlook©.  As a result, software revenuesmay decline.  Additionally, the Companymay incur significant expenses updating its MRM Enterprise software to becompatible with changes in Microsoft Outlook©.

 

**If Forgent fails to introduce new versionsand releases of functional and scalable software products in a cost-effectiveand timely manner, customers may license competing products and Forgent’srevenues will decline.**

 

The technology industry is characterized bycontinuing improvements in technology, resulting in the frequent introductionof new products, short product life cycles, changes in customer needs andcontinual improvement in product performance characteristics.  Forgent expects that its future financialperformance will depend, in part, on revenue generated from future softwareproducts and enhancements as well as other software related products that theCompany plans to develop and/or acquire. To be successful, Forgent must becost-effective and timely in enhancing its existing software applications,developing new software technology and solutions that address the increasinglysophisticated and varied needs of its existing and prospective clients, andanticipating technological advances and evolving industry standards andpractices.

 

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

 

**Errors or defects in Forgent’s software couldreduce demand for its software and result in decreased revenues, decreasedmarket acceptance and injury to the Company’s reputation.**

 

Errors or defects in the Company’s software, sometimes called “bugs,”may be found from time-to-time, particularly when new versions or enhancementsare released. Any significant software errors or defects may result in loss ofsales, decreased revenues, delay in market acceptance and injury to the Company’sreputation. Despite extensive product testing during development, new versionsor enhancements of Forgent’s software may still have errors after commercialshipments begin.  Forgent corrects the “bugs”and delivers the corrections in subsequent maintenance releases, patches andon-going service.  However, errors ordefects could put the Company at a competitive disadvantage and can be costlyand time-consuming to correct.

 

**If Forgent is unable to develop or maintainstrategic relationships with its resellers and vendor partners who market andsell the Company’s products, revenues may decline.**

 

Forgent supplements its direct sales force bycontracting with resellers and vendor partners to generate additionalsales.  Forgent’s revenue growth willdepend, in part, on adding new resellers and partners to expand the Company’ssales channels, as well as leveraging the Company’s relationships with existingresellers and partners. If Forgent is unable to enter into successful newstrategic relationships in the future or if the Company’s current relationshipswith its resellers and partners deteriorate or terminate, Forgent may losesales and revenues may decline.

 

#### **OTHER**

#### ** **

****Forgent’s stock may be de-listed from NASDAQ,which may adversely affect its stockholders’ ability to sell their shares andthe Company’s ability to raise capital.****

 

On February 4, 2008, Forgent received a ****Nasdaq****deficiency letter indicating that, for 30 consecutive business days, the bidprice per share of the Company’s common stock closed below the minimum $1.00per share requirement.  Therefore, itscommon stock is subject to potential delisting from the ****Nasdaq****Global Market Exchange pursuant to Nasdaq Marketplace Rule 4450(a)(5). TheCompany was provided 180 calendar days, or until August 4, 2008,****to regain compliance by maintaining ashare price in excess of $1.00 for ten consecutive business days. If theCompany cannot achieve compliance with the minimum share price requirement by August 4,2008, Nasdaq will provide written notification that the Company’s securitieswill be de-listed from the Global Market Exchange.

 

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The Company may pursue trading on the Nasdaq Capital Market.  If NASDAQ approves, Forgent would be providedan additional 180 calendar days to regain compliance with the minimum $1.00share price requirement while trading on the Nasdaq Capital Market. If NASDAQdoes not approve the Company to trade on the Capital Market and the Companycannot achieve compliance by any other means, Forgent’s common stock will bede-listed from NASDAQ.

 

IfForgent’s common stock is de-listed from NASDAQ, the market liquidity ofCompany’s common stock will be significantly limited, which would reducestockholders’ ability to sell their Company securities in the secondarymarket.   Additionally, any suchde-listing would harm Forgent’s ability to raise capital through alternativefinancing sources on acceptable terms, if at all, and may result in the loss ofconfidence in the Company’s financial stability by suppliers, customers andemployees. Forgent cannot give investors in its common stock any assurance thatthe Company will be able to regain and maintain compliance with the $1.00 pershare minimum price requirement for continued listing on NASDAQ or that itsstock will not be de-listed by NASDAQ in the future.

 

**Forgent may face problems in connection withfuture acquisitions, which could create business difficulties and adverselyaffect operations.**

 

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

 

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

 

AlthoughForgent generated net income for the year ended July 31, 2007, the Companyincurred losses during the prior fiscal years and during the nine months ended April 30,2008.  The net income during fiscal year2007 was due to the income generated from the intellectual property licensingsegment, which is no longer generating revenue. Additionally as of April 30, 2008, Forgent had anaccumulated deficit of $242.4****millionand may incur additional losses in the future. Continued losses may cause existing and new customers to question theCompany’s viability and be reluctant to purchase from the Company.  If Forgent is unable to increase its salesdue to such concerns, revenues will decline, which would further adverselyaffect the Company’s operating results. Therefore, there are no assurances thatthe Company can achieve or generate sufficient revenues to realizeprofitability.

 

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

 

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

 

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

 

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

 

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**Forgent may experience fluctuations in itsquarterly results and if the Company’s future results are below expectations,the price for the Company’s common stock may decline.**

 

Inthe past, the Company’s revenues and operating results have variedsignificantly from quarter to quarter due to the various events primarilyexperienced by the intellectual property licensing segment.  Although management expects that revenues andoperating results may fluctuate less from quarter to quarter in the future, anyfluctuation from Forgent’s operations may lead to reduced prices for theCompany’s common stock.  Several factorsmay cause the quarterly results to fluctuate, including:

 

·                  market demand for the Company’s software products and services;

·                  timing of customers’ budget cycles;

·                  timing of customer orders and deployment of the Company’s softwareproducts and services;

·                  mix of software license and services revenues;

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

·                  new product releases or pricingpolicies by Forgent’s competitors;

·                  seasonal fluctuations in capital spending;

·                  changes in the rapidly evolving market for web-based applications;

·                  management’s ability to manage operating costs, a large portion of whichare relatively fixed in advance of any particular quarter;

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

·                  costs of attracting, retaining and training skilled personnel;

·                  management’s ability to manage future growth;

·                  changes in U.S. generally acceptedaccounting principles; and

·                  general economic climate.

 

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

 

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

 

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

 

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

 

In December 2005, the Company’sBoard of Directors approved and executed a shareholder rights plan (“RightsPlan”) whereby one preferred share purchase right was distributed for eachoutstanding share of the Company’s common stock for all stockholders of recordon December 31, 2005.  The RightsPlan, which was not adopted in response to any threat to the Company, wasdesigned to guard against any proposed takeover, partial tender offers, openmarket accumulations and other tactics designed to gain control of the Company.Under the Rights Plan, the preferred share purchase rights become exercisableif a person or group thereafter acquires 15% or more of the Company’s commonstock or announces a tender offer for 15% or more of the Company’s commonstock. Such events, or if the Company is acquired in a merger or other businesscombination transaction after a person or group acquires 15% or more of itscommon stock, would entitle the right holder to purchase, at an exercise priceof $13.00 per share, a number of shares of common stock having a market valueat that time equal to twice the right’s exercise price. The Rights Plan mayhave the effect of discouraging, delaying or preventing unsolicited acquisitionproposals, but there are no assurances a change of control will not occur.

 

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

 

**ITEM 2. UNREGISTERED SALES OF 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’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.                                                                                                                                                                                                                                                                                             |
|           |        |                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |

 

----

* Filed herewith

 

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#### ** **

#### **SIGNATURES**

#### ** **

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

 
|                                | FORGENT NETWORKS, INC. |
|-------------------------------------|------------------------|
|                                |                   |
|                                |                   |
| Date:  June 16, 2008 | By:                    |   | /s/ RICHARD N. SNYDER |
|                                |                   |   | Richard N. Snyder |
|                                |                   |   | Chief Executive Officer |
|                                |                   |
| Date:  June 16, 2008 | 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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