Asure Software
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Asure Software - 10-Q quarterly report FY


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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended January 31, 2000

Commission file number 0-20008

VTEL Corporation

A Delaware Corporation IRS Employer ID No. 74-2415696

108 Wild Basin Road

Austin, Texas 78746
(512) 437-2700

The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.

At March 3, 2000 the registrant had outstanding 24,591,289 shares of its Common
Stock, $0.01 par value.
<TABLE>
<CAPTION>

VTEL CORPORATION

CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except per share data)

- --------------------------------------------------------------------------------



January 31, July 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:

Cash and equivalents $ 9,122 $ 7,805
Short-term investments 1,403 4,308
Accounts receivable, net of allowance for doubtful
accounts of 1,778 and 1,223 at
January 31, 2000 and July 31,1999 28,144 38,291
Inventories 14,119 15,553
Prepaid expenses and other current assets 2,170 2,320
----------------- ------------------
Total current assets 54,958 68,277

Property and equipment, net 27,012 29,704
Intangible assets, net 15,305 15,841
Capitalized software 10,020 7,351
Other assets 2,478 2,918
----------------- ------------------
$ 109,773 $ 124,091
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,987 $ 18,375
Borrowings under revolving line of credit 12,500 -
Accrued compensation and benefits 3,891 4,916
Other accrued liabilities 3,380 3,555
Notes payable, current portion 1,638 2,234
Deferred revenue 10,907 11,062
----------------- ------------------
Total current liabilities 46,303 40,142

Long-term liabilities:
Borrowings under revolving line of credit - 11,200
Notes payable 250 554
Other long-term obligations 4,107 4,176
----------------- ------------------
Total long-term liabilities 4,357 15,930
----------------- ------------------

Commitments and contingencies - -

Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
authorized; none issued or outstanding
Common stock, $.01 par value; 40,000,000
authorized; 24,414,000 and 24,423,000
issued at January 31, 2000 and July 31,
1999 244 244
Additional paid-in capital 260,225 260,057
Accumulated deficit (200,979) (191,665)
Unearned compensation (252) (385)
Stock subscriptions receivable (138) (150)
Accumulated other comprehensive income [loss] 13 (82)
----------------- ------------------
Total stockholders' equity 59,113 68,019
----------------- ------------------
$ 109,773 $ 124,091
================= ==================
</TABLE>


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


2
<TABLE>
<CAPTION>

VTEL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)

- --------------------------------------------------------------------------------

For the For the
Three Months Ended Six Months Ended
January 31, January 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Products $26,133 $26,386 $50,508 $52,274
Services and other 11,129 11,369 21,820 22,421
--------------- -------------- --------------- ----------------
37,262 37,755 72,328 74,695
--------------- -------------- --------------- ----------------
Cost of sales:
Products 15,203 14,483 29,721 27,763
Services and other 7,833 7,485 15,258 14,833
--------------- -------------- --------------- ----------------
23,036 21,968 44,979 42,596
--------------- -------------- --------------- ----------------
Gross margin 14,226 15,787 27,349 32,099
--------------- -------------- --------------- ----------------

Operating expense:
Selling, general and administrative 13,562 15,916 27,587 34,419
Research and development 3,915 4,638 7,682 9,874
Amortization of intangible assets 378 259 742 511
Restructuring expense - 2,915 - 2,915
--------------- -------------- --------------- ----------------
Total operating expenses 17,855 23,728 36,011 47,719
--------------- -------------- --------------- ----------------

Loss from operations (3,629) (7,941) (8,662) (15,620)
--------------- -------------- --------------- ----------------
Other income (expense):
Interest income 130 248 209 536
Interest expense and other (471) (251) (861) (299)
--------------- -------------- --------------- ----------------
(341) (3) (652) 237
--------------- -------------- --------------- ----------------
Net loss before provision
for income taxes (3,970) (7,944) (9,314) (15,383)

Provision for income taxes - - - -
--------------- -------------- --------------- ----------------
Net loss $ (3,970) $ (7,944) $ (9,314) $ (15,383)
=============== ============== =============== ================

Basic and diluted loss per share:
$ (0.16) $ (0.35) $ (0.38) $ (0.67)
=============== ============== =============== ================

Weighted average shares outstanding:
Basic and diluted 24,395 22,987 24,346 23,036
=============== ============== =============== ================
</TABLE>


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

3
<TABLE>
<CAPTION>

VTEL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)

- --------------------------------------------------------------------------------

For the
Six Months Ended
January 31,
2000 1999

Cash flows from operating activities:
<S> <C> <C>
Net loss $ (9,314) $ (15,383)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 5,998 5,833
Provision for doubtful accounts 571 164
Amortization of unearned compensation 133 120
Gain on sale of fixed assets (41) (40)

Foreign currency translation loss 124 19
Decrease in accounts receivable 9,576 5,423
(Increase) decrease in inventories 1,434 (1,948)
Increase (decrease) in prepaid expenses and other current
assets 150 (199)
Decrease in accounts payable (4,386) (6,000)
Increase (decrease) in accrued expenses (1,141) 679
Increase (decrease) in deferred revenues (122) 375
--------------- ---------------
Net cash (used in) provided by operating activities 2,982 (10,973)
--------------- ---------------

Cash flows from investing activities:
Net short-term investment activity 2,905 (1,000)
Net purchase of property and equipment (1,781) (7,912)
Issuance of note receivable (97) -
Increase in capitalized software (3,147) (2,993)
Increase in other assets (36) (973)
--------------- ---------------
Net cash used in investing activities (2,156) (12,878)
--------------- ---------------

Cash flows from financing activities:
Borrowings under line of credit 1,300 15,000
Payments on notes payable (960) (367)
Issuance of notes payable - 3,688
Net proceeds from issuance of stock 157 257
Purchase of treasury stock - (2,265)
Sale of treasury stock 23 402
--------------- ---------------
Net cash provided by financing activities 520 16,715
--------------- ---------------
Effect of translation exchange rates on cash (29) (13)
--------------- ---------------
Net increase (decrease) in cash and equivalents 1,317 (7,149)
Cash and equivalents at beginning of period 7,805 15,191
--------------- ---------------
Cash and equivalents at end of period $ 9,122 $ 8,042
=============== ===============

</TABLE>

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

4
VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)

- --------------------------------------------------------------------------------

Note 1 - General and Basis of Financial Statements

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and accordingly, do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. In the opinion of management,
these interim financial statements contain all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of the
financial position of the Company as of January 31, 2000 and July 31, 1999, the
results of the Company's operations for the three and six month period ended
January 31, 2000 and 1999 and cash flows for the six month period ended January
31, 2000 and 1999. The results for interim periods are not necessarily
indicative of results for a full fiscal year.

Note 2 - Inventories

Inventories consist of the following (amounts in thousands):

January 31, July 31,
2000 1999

Raw materials $ 8,047 $ 8,595
Work in process 1,021 1,504
Finished goods 4,258 4,637
Finished goods held for evaluation
and rental and loan agreements 793 817
--------- --------
$ 14,119 $ 15,553
========= ========

Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes.

Note 3 - Net Income (Loss) Per Share

The Company reports earnings per share under SFAS No. 128, "Earnings
Per Share." Under SFAS No. 128, basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is calculated
by dividing net income available to common stockholders by the weighted average
shares of common stock outstanding during the period. Diluted earnings per share
is calculated by dividing net income available to common stockholders by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive shares outstanding.

5
VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)

- --------------------------------------------------------------------------------

The calculation of the number of weighted average shares outstanding
for basic and dilutive earnings (loss) per share for each of the periods
presented is as follows (amounts in thousands):
<TABLE>
<CAPTION>

For the For the
Three Months Ended Six Months Ended
January 31 January 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding - basic 24,395 22,987 24,346 23,036
------ ------ ------ ------
Effect of dilutive securities:
Stock options - - - -
------ ------ ------ ------
Dilutive potential common shares - - - -
------ ------ ------ ------
Weighted average shares
Outstanding - diluted 24,395 22,987 24,346 23,036
====== ====== ====== ======
Antidilutive securities 4,663 4,512 4,761 4,351
====== ====== ====== ======
</TABLE>

Note 4 - Restructuring Charge

In November 1998, the Company adopted a restructuring plan which
resulted in the reduction of 100 employees (approximately 14%) of the Company.
While terminations were effective immediately for most employees upon
announcement in November 1998, all employees terminated in the restructuring had
left the Company during the third fiscal quarter. The Company also made the
decision to reduce operating costs by exiting other activities and reducing the
related overhead costs. These activities include the closure or consolidation of
certain field sales offices, its Sunnyvale, California spare parts depot and
technical assistance center. As a result of the restructuring, the Company
recorded a restructuring charge of $2.9 million during the second fiscal quarter
of 1999. All restructuring efforts had been completed by the end of the 1999
fiscal year.

Note 5 - Comprehensive Loss

The Company's comprehensive loss is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on marketable
securities held as available-for-sale investments.

Comprehensive loss for the three and six months ended January 31, 2000
was $4.0 million and $9.3 million, respectively, and comprehensive loss for the
three and six months ended January 31, was $7.9 million and $15.4 million,
respectively, including the impact of other accumulated comprehensive loss.

6
VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)

- --------------------------------------------------------------------------------

Note 6 - Line of Credit

Amounts outstanding under the credit agreement are secured by substantially
all of the Company's assets. The Company has issued a letter of credit totaling
$1.2 million under the line of credit as a lease deposit on one of its
facilities. At January 31, 2000, the Company had drawn $12.5 million under the
credit line. The line of credit agreement is subject to loan covenants that
require the maintenance of certain financial ratios. As the Company was not in
compliance with several of the Financial Covenants, a loan modification and
forbearance agreement was completed between the company and its lenders in
December 1999. This agreement provided for a revised facility amount of $15.2
million, a maturity date of March 15, 2000 and provided for the lenders to
forbear through February 15, 2000. As of March 10, 2000, the Company had repaid
all amounts drawn on the line. The Company expects to obtain an alternative line
of credit in the near term.


7
VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)

- --------------------------------------------------------------------------------

Note 7-Segment Information

In 1999, the Company adopted SFAS 131 "Disclosure about Segments of an
Enterprise and Related Information". The Company manages its business primarily
on a products and services basis. The Company's reportable segments are Products
and Services/Other. The Products segment provides multi-media visual
communication (commonly referred to as video teleconferencing) products to
customers primarily through a network of resellers, and to a lesser extent
directly to end-users. The Services/Other segment provides custom integrated
systems, installations and product support services to customers. The accounting
policies of the segments are the same as those of the Company.

The Company evaluates the performance of its segments and allocates
resources to them based on revenue and operating income; however, there is a
charge to allocate certain corporate operating expenses to the segments. The
prior year's segment information has been restated to present the Company's
reportable segments.

The table below presents segment information about revenue from
unaffiliated customers, depreciation and operating income for the three and six
month periods ended January 31, 2000 and 1999:

<TABLE>
<CAPTION>

Services/ Corporate/
Products Other Other Total
------------- ------------- -------------- --------------

<S> <C> <C> <C> <C>
For the three-month period ending
January 31, 2000
Revenues from unaffiliated customers $ 26,133 $ 11,129 $ - $ 37,262
Depreciation and amortization 135 291 2,801 3,227

Operating income (loss) 10,930 3,296 (17,855) (3,629)

For the three-month period ending
January 31, 1999
Revenues from unaffiliated customers $ 26,386 $ 11,369 $ - $ 37,755
Depreciation and amortization 45 347 2,684 3,076

Operating income (loss) 11,903 3,884 (23,728) (7,941)

For the six-month period ending
January 31, 2000
Revenues from unaffiliated customers $ 50,508 $ 21,820 $ - $ 72,328
Depreciation and amortization 169 601 5,228 5,998

Operating income (loss) 20,787 6,562 (36,011) (8,662)

For the six-month period ending
January 31, 1999
Revenues from unaffiliated customers $ 52,274 $ 22,421 $ - $ 74,695
Depreciation and amortization 92 694 5,047 5,833

Operating income (loss) 24,511 7,588 (47,719) (15,620)


</TABLE>

8
VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)

- --------------------------------------------------------------------------------

Note 8 - Subsequent Events

On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial
District Court in Travis County, Texas which VTEL had previously initiated
against five former employees who left the Company in September 1996 to form Via
Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by
Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL
have paid $2.5 million in cash and have delivered to VTEL 300,800 shares of
common stock of Polycom, Inc., having a market value $39,104,000 as of March 3,
2000, in settlement of the claims asserted by VTEL. The parties have agreed to
dismissal of all claims and counterclaims and third party claims in the lawsuit,
ending the litigation. Separately, VTEL voluntarily dismissed Polycom, Inc. and
Via Video from the case without consideration.

On March 3, 2000, VTEL granted non-exclusive licenses to Polycom,
Inc.("Polycom") to use three of its patented technologies, and Polycom has
agreed to a one time payment to VTEL of $8.3 million as a fully paid up royalty
in exchange for such license. In turn and without any payments by VTEL, Polycom
also has granted VTEL a non-exclusive sublicense to its rights under its license
agreement with Brown University pertaining to its single camera tracking
technology. Through this technology exchange, the parties will have access to
specified distinctive technologies of the other for use in their product
offerings.


9
Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

The following review of VTEL's financial position as of January 31,
2000 and 1999 and for the three months and six months ended January 31, 2000 and
1999 should be read in conjunction with our 1999 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on November 5, 1999.

Results of Operations

The following table provides the percentage of revenues represented by
certain items in VTEL's Condensed Consolidated Statement of Operations:

<TABLE>
<CAPTION>

For the Three For the Six
Months Ended Months Ended
January 31, January 31,

2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 38 42 38 43
Selling, general and administrative 36 42 38 46
Research and development 11 12 11 13
Restructuring expense 0 8 0 4
Total operating expenses 48 63 50 64
Net income (loss) (11) (21) (13) (21)

</TABLE>

Three and Six Months Ended January 31, 2000 and 1999

Revenues. Revenue for the quarters ended January 31, 2000 decreased by $0.5
million, or 1%, to $37.3 million from $37.8 million for the quarter ended
January 31, 1999. Revenues for the six months ended January 31, 2000 decreased
to $72.3 million from $74.7 million for the six months ended January 31, 1999, a
decrease of $2.4 million or 3%. The decline over the comparable six month
periods ended January 31, 2000 and 1999 can be attributed to a delay in the
purchase decision of our customers as a result of the introduction of VTEL's new
product line, Galaxy(TM), which was introduced near the end of the first fiscal
quarter of 2000.

Unit sales of our core products Galaxy(TM) and ESA(TM) (Enterprise Series
Architecture, our prior generation flagship product line) increased 6% and 9%
for the three and six months ended January 31, 2000 as compared to the same
periods in fiscal 1999. The declining revenue levels over these same periods
reflect the shift in product mix to units with lower average sales prices. Our
market analysis indicates that the demand for high end video conferencing
solutions is focused on relatively narrow market sectors such as education and
state and federal government, while the corporate video conferencing market has
migrated toward appliance type products. We continue to excel in the primary and
secondary education and government sectors where we are perceived to be gaining
market share. We believe that the desk top videoconferencing solution currently
addressed by appliance type products by our competitors will ultimately be
replaced with Internet solutions using videoconferencing software. This will be
accomplished with the proliferation of

10
high speed,  broad band internet protocol (IP) networks that are currently being
deployed within the United States and abroad. We expect to continue our focus on
bringing videoconferencing solutions to our targeted markets while we develop
videoconferencing solutions for the Internet.

Total sales of the combined product lines of Galaxy(TM) and ESA(TM) during
the quarter ended January 31, 2000 were similar to total sales of the ESA
product line in previous quarters. We expect the transition to the Galaxy(TM)
product line to continue for several quarters due to the size of the install
base of the ESA product line and the desire by our customers to install
additional endpoints that are familiar . Approximately 75% of our product sales
are from existing customers. A new, more innovative user interface software
(Vtouch(TM)) and the additional functionality of H.323 IP (Internet Protocol)
networking capability distinguish the Galaxy product line.

For the three and six month periods ended January 31, 2000 and 1999,
service revenue as a percent of total revenues was 30%. Less than 10% of service
revenue relates to installation of our products and the balance of service
revenue relates to maintenance contracts on videoconferencing units previously
sold. Service and other revenue declined by $0.2 million and $0.6 million in the
three and six months ended January 31, 2000 compared to the three and six months
ended January 31, 1999. This decline reflects, in part, the decline in product
sales over the past year.

International sales represented approximately 25% and 22% respectively, of
product revenues for the three months and six months ended January 31, 2000
compared to 28% and 22% respectively, for the three months and six months ended
January 31, 1999. These revenue percentages represent export sales from our
domestic operations, as well as sales from our foreign subsidiaries that are
installed in foreign locations.

VTEL primarily sells its products through resellers. For the three months
and six months ended January 31, 2000 reseller sales were 81% and 78% of product
sales, respectively. For the three months and six months ended January 31, 1999
reseller sales were 82% and 83% respectively. All other sales of our products
are made directly to the end user customer.

One of VTEL's initiatives is to grow revenues from non-U.S. markets.
Non-U.S. operations are subject to certain risks inherent in conducting business
abroad including price and currency exchange fluctuations and restrictive
government actions. We believe our foreign currency exposure to be relatively
low as foreign sales are predominantly settled in U.S. dollars. We use
currency-hedging programs that utilize foreign currency forward contracts on a
limited basis and review the credit worthiness of our customers to mitigate
foreign currency exchange and credit risk. There can be no assurance that our
foreign currency-hedging program will effectively hedge foreign currency
exchange risk.

While we strive for revenue growth, there can be no assurance that revenue
growth or profitability can be achieved. Most recently VTEL has experienced
neither revenue growth or profitability. Consistent with many companies in the
technology industry, our business model is characterized by a very high degree
of operating leverage. Our expense levels are based, in part, on our
expectations as to future revenue levels, which are difficult to predict partly
due to VTEL's strategy of distributing its products primarily through resellers.
Because expense levels are based on our expectations as to future revenues, our
expense base is relatively fixed in the short term. If revenue levels are below
expectations, operating results may be materially and adversely affected and net
income is likely to be disproportionately adversely affected. In addition, our
quarterly and annual results may fluctuate as a result of many factors,
including price reductions, delays in the introduction of new products,

11
delays in purchase  decisions  due to new product  announcements  by VTEL or its
competitors, cancellations or delays of orders, interruptions or delays in
supplies of key components, changes in reseller base, customer base, business or
product mix and seasonal patterns and other shifts of capital spending by
customers. There can be no assurance that we will be able to increase or even
maintain our current level of revenues on a quarterly or annual basis in the
future.

Gross margin. Gross margin as a percentage of total revenues was 38% for
the three and six months ended January 31, 2000, a decrease from the gross
margin as a percentage for revenues of 42% and 43%, for the three and six months
ended January 31, 1999. The decrease in gross margin percentage for the three
and six month periods ended January 31, 2000 was the result of a shift by our
customers towards the purchase of lower margin products. Additionally, product
margins were affected unfavorably by inventory write-downs taken on non-core
product lines in the three and six months ended January 31, 2000 that were $0.7
million greater than the comparable periods.

We believe the shift to smaller group systems will reflect continued
transition to visual communications systems that function within an IP network
environment. As such, we anticipate that lower gross margins will be offset by
stronger unit sales once IP networks proliferate. We expect gross margin
pressures due to price competitiveness in the industry, shifts in the product
sales mix and anticipated offerings of new products, which may carry a lower
gross margin. We expect that overall price competitiveness in the industry will
continue to become more intense as users of visual communication systems attempt
to balance performance, functionality and cost. Our gross margin is subject to
fluctuation based on pricing, production costs and sales mix.


12
Selling,    general   and   administrative.    Selling,   general   and
administrative expenses decreased by $2.4 million, or 15%, to $13.6 million for
the quarter ended January 31, 2000 from $15.9 million for the quarter ended
January 31, 1999. Selling, general and administrative expenses decreased by $6.8
million, or 20%, to $27.6 million for the six months ended January 31, 2000 from
$34.4 million for the six months ended January 31, 1999. Selling, general and
administrative expenses as a percentage of revenues were 36% and 42% for the
three months ended January 31, 2000 and 1999, respectively, and were 38% and 46%
for the six months ended January 31, 2000 and 1999, respectively. The overall
decline reflects the higher expense levels present during the three and six
months ended January 31, 1999, prior to the restructuring efforts. As a result
of the restructuring activities, selling, general and administrative expenses
were reduced which is reflected in a comparison of the periods ended January 31,
2000 and 1999. However, VTEL believes that it must continue to reduce our
selling, general and administrative expenses as a percent of revenues in order
to become profitable.

Research and development. Research and development expenses decreased
by $0.7 million, or 16%, to $3.9 million for the quarter ended January 31, 2000
from $4.6 million for the quarter ended January 31, 1999. Research and
development expenses decreased by $2.2 million, or 22%, to $7.7 million for the
six months ended January 31, 2000 from $9.9 million for the six months ended
January 31, 1999. Research and development expenses as a percentage of revenues
were 11% and 12% for the three months ended January 31, 2000 and 1999,
respectively, and were 11% and 13%, respectively, for the six months ended
January 31, 2000 and 1999. Capitalized software development costs totaled $1.4
million and $1.8 million for the three months ended January 31, 2000 and 1999
respectively, and $3.1 and 3.0 million for the six months ended January 31, 2000
and 1999 respectively.

Overall research and development expenditures (including capitalized
costs) decreased during the three and six months ended January 31, 2000 in
comparison with the three and six months ended January 31, 1999. This reduction
reflects in part the completion of the development of our new product line,
Galaxy(TM), but it also reflects planned reductions in research and development
spending in order to maintain a spending level that is consistent with our cash
flow expectations. The effort to reduce spending levels was initiated as part of
the restructuring activities that took place in the second quarter of fiscal
1999.

New products are generally characterized by increased functionality and
better picture quality at lower bandwidths and often at reduced prices. The
introduction of products, by either VTEL or its competitors, embodying new
technology and the emergence of new industry standards may render existing
products obsolete and unmarketable. Our ability to successfully develop and
introduce on a timely basis new and enhanced products that embody new
technology, anticipate and incorporate evolving industry standards and achieve
levels of functionality and prices acceptable to the market will be a
significant factor in VTEL's ability to grow and to remain competitive. Although
the percentage of revenues invested in research and development may vary from
period to period, VTEL is committed to investing in its research and development
programs.


13
Net loss.  VTEL  generated  a net loss  of $4.0  million,  or $0.16 per
share, during the quarter ended January 31, 2000 compared to net loss of $7.9
million or $0.35 per share, during the quarter ended January 31, 1999. VTEL
generated a net loss of $9.3 million, or $0.38 per share during the six months
ended January 31, 2000 compared to net loss of $15.4 million, or $0.67 per share
during the six months ended January 31, 1999. The decreased losses for the three
and six month periods ended January 31, 2000 reflect in part the restructuring
plan adopted during the quarter ended January 31, 1999 which included a
restructuring charge of $2.9 million (see "Restructuring Activities"). The
restructuring activities reduced operating expenses to a level more consistent
with expected revenue levels. The higher losses for the three and six months
ended January 31, 1999 reflect the higher expense levels prior to the
restructuring activities. Although we continue to sustain losses in fiscal 2000,
a large portion of the total loss is made up of VTEL's continued investment in
our Internet businesses. That investment is a key element in our strategy to
provide the foundation for future growth and additional value for our
shareholders.

There can be no assurance that we will generate net income at lower
revenue levels. Current operational planning for the interim has been to incur
losses to the extent we maintained positive cash flow. If revenues decline by
more than we expect or if the product mix shifts to lower margin products then
we could incur further substantial losses in the future and may have to consider
additional restructuring measures in future quarters which may have a material
adverse affect on VTEL's financial position and results of operations.

Restructuring Activities

In November 1998, the VTEL adopted a restructuring plan which resulted
in the reduction of 100 employees (approximately 14%). While terminations were
effective immediately for most employees upon announcement in November 1998, all
employees terminated in the restructuring had left VTEL during the third fiscal
quarter. We also made the decision to reduce operating costs by exiting other
activities and reducing the related overhead costs. These activities include the
closure or consolidation of certain field sales offices and our Sunnyvale,
California spare parts depot and technical assistance center. As a result of the
restructuring, we recorded a restructuring charge of $2.9 million during the
second fiscal quarter of 1999. All restructuring efforts had been completed by
the end of the 1999 fiscal year.

Introduction of New Product Lines and Services

VTEL continually strives to introduce the latest technology in digital
visual communications. During the three months ended October 31, 1999, we
introduced our new product line of Galaxy(TM) visual communication systems. The
enhanced software included in the Galaxy(TM) line can accommodate and support
customer migration to Internet Protocol networks easily because these endpoints
can operate on either type network and move from one network architecture to
another on a call by call basis through simple software commands. For many
customers that previously purchased VTEL products, the migration to Internet
Protocol network functionally can be accomplished through software upgrades to
existing products.

On January 24, 2000, we announced the formation of Onscreen24(TM), a
business unit established by VTEL to focus exclusively on delivering
high-impact, visual communications products and services for the World Wide Web.
Onscreen24's strategy is to leverage new products, partnerships and acquisitions
with existing VTEL assets - technical innovations, software and customer base -


14
that will enable Web-based  service  providers and portals to deploy  media-rich
solutions for high-impact communication experiences. Initially focused on
business-to-business commerce, Onscreen24 will visually enable communications
applications and platforms, making them more unique and enjoyable for the user
and thereby more productive and profitable for businesses engaging in
E-commerce. Through this strategy, Onscreen24 expects to introduce Video
Commerce(R) to Internet customers. Onscreen24's initial objective will focus on
market penetration and acceptance of its products in two key areas - Internet
infrastructure providers and early adopters of media-rich solutions,
specifically online advertising, E-learning and customer relationship
management.

Quarterly Revenue Cycle

Historically, a significant percentage of our sales occur in the last
few weeks of the quarter. By compressing most of our shipments into a short
period of time at the end of each quarter, we will incur overtime costs, sharply
increase our inventory levels in anticipation of this demand and deplete or
exhaust our backlog of customer orders. Our sales cycle is difficult to predict
and manage. It is possible that management's estimates of product demand will be
inaccurate and as a result we could experience a rise in inventory levels and a
decline in expected revenue levels in any given quarter. Management's estimates
of future product revenue are derived from our analysis of market conditions and
reports from our sales force of customer leads and prospective interest. Backlog
of customer product orders cannot be relied upon to forecast future revenue
levels. Because of the short cycle time between customer order and shipment, it
is also possible that unanticipated delays from our vendors can disrupt
shipments and adversely affect the results in a given quarter. This is
especially an issue due to our reliance on a limited number of highly
specialized suppliers. The above factors represent uncertainties that can have a
material adverse effect on our financial position and results of operations.

Liquidity and Capital Resources

At January 31, 2000, VTEL had working capital of $8.7 million,
including $10.5 million in cash, cash equivalents and short-term investments.
Cash provided by operating activities was $3.0 million for the six months ended
January 31, 2000 and primarily resulted from a decrease in accounts receivable
and inventory, which was partially offset by the net operating loss incurred and
a decrease in accounts payable. Cash used in operating activities was $11.0
million for the six months ended January 31, 1999 and primarily resulted from
the net operating loss, an increase in inventories and the decrease in accounts
payable. This was partially offset by the decrease in accounts receivable.

Net cash used in investing activities during the six months ended
January 31, 2000 was $2.2 million and primarily resulted from an increase in net
property and equipment and an increase in capitalized software development
costs. Net cash used in investing activities during the six months ended January
31, 1999 was $12.9 million and primarily resulted from increases in net property
and equipment and an increase in capitalized software.

Cash flows provided by financing activities during the six months ended
January 31, 2000 were $0.5 million and resulted from $1.3 million being drawn on
our revolving line of credit, and was partially offset by payments on notes
payable. Cash flows provided by financing activities during the six months ended
January 31, 1999 were $16.7 million and related primarily to $15.0 million drawn
on our revolving line of credit.


15
VTEL has a $20.0 million revolving line of credit with a banking syndicate.
We have issued a letter of credit totaling $1.2 million under our revolving line
of credit as a lease deposit on one of our facilities. At January 31, 2000 we
have drawn $12.5 million under the syndicated line of credit. The line of credit
is subject to loan covenants that require the maintenance of certain financial
ratios. At January 31, 2000, we were not in compliance with several of the
financial covenants. In December 1999, a loan modification and forbearance
agreement was completed between VTEL and its lenders. This agreement provided
for a revised facility amount of $15.2 million, a maturity date of March 15,
2000 and provided for the lender to forbear through February 15, 2000. As of
March 10, 2000, we had repaid all amounts drawn on the line. We expect to obtain
an alternative line of credit in the near term.

VTEL's principal sources of liquidity at January 31, 2000 consisted of
$10.5 million of cash, cash equivalents and short-term investments and the
ability to generate cash from operations. In addition, VTEL may be able to
monazite certain assets that have significant potential value or secure
additional equity infusions in the private marketplace. On March 3, 2000 VTEL
announced certain Subsequent Events as noted below that allowed VTEL to realize
an immediate increase in cash of $10.8 million and an increase in marketable
securities valued at $39.1 million.

Subsequent Events

On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial
District Court in Travis County, Texas which VTEL had previously initiated
against five former employees who left the VTEL in September 1996 to form Via
Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by
Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL
have paid $2.5 million in cash and have delivered to VTEL 300,800 shares of
common stock of Polycom, Inc., having a market value $39,104,000 as of March 3,
2000, in settlement of the claims asserted by VTEL. The parties have agreed to
dismissal of all claims and counterclaims and third party claims in the lawsuit,
ending the litigation. Separately, VTEL voluntarily dismissed Polycom, Inc. and
Via Video from the case without consideration.

On March 3, 2000, VTEL granted non-exclusive licenses to Polycom,
Inc.("Polycom") to use three of its patented technologies, and Polycom has
agreed to a one time payment to VTEL of $8.3 million as a fully paid up royalty
in exchange for such license. In turn and without any payments by VTEL, Polycom
also has granted VTEL a non-exclusive sublicense to its rights under its license
agreement with Brown University pertaining to its single camera tracking
technology. Through this technology exchange, the parties will have access to
specified distinctive technologies of the other for use in their product
offerings.

Legal Matters

VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.

General

The markets for our products are characterized by a highly competitive
and rapidly changing environment in which operating results are subject to the
effects of frequent product introductions, manufacturing technology innovations
and rapid fluctuations in product demand. While we attempt to identify and
respond to these changes as soon as possible, prediction of and reaction to such
events will be an ongoing challenge and may result in revenue shortfalls during
certain periods of time.


16
VTEL's future  results of operations and financial  condition  could be
impacted by the following factors, among others: trends in the videoconferencing
market, introduction of new products by competitors, increased competition due
to the entrance of other companies into the videoconferencing market, especially
more established companies with greater resources than ours, delay in the
introduction of higher performance products, market acceptance of new products
we introduce, price competition, interruption of the supply of low-cost products
from third-party manufacturers, changes in general economic conditions in any of
the countries in which we do business, adverse legal disputes and delays in
purchases relating to federal government procurement. In addition,
notwithstanding the internal control procedures instituted by VTEL, there can be
no guarantee that accounting errors will not occur.

Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, VTEL's past
earnings and stock price has been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of our common
stock in any given period. Also, we participate in a highly dynamic industry,
which often contributes to the volatility of our common stock price.

Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results

Certain portions of this report contain forward-looking statements
about the business, financial condition and prospects of VTEL. Our actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, without
limitation, changes in demand for our products and services, changes in
competition, economic conditions, interest rates fluctuations, changes in the
capital markets, changes in tax and other laws and governmental rules and
regulations applicable to our business, and other risks indicated in our filings
with the Securities and Exchange Commission. These risks and uncertainties are
beyond the ability of our control, and in many cases, we cannot predict all of
the risks and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements. When used in
this report, the words "believes," "estimates," "plans," "expects,"
"anticipates" and similar expressions as they relate to VTEL or its management
are intended to identify forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We believe our foreign currency exposure to be relatively low as
foreign sales are predominantly in U.S. dollars. We use currency hedging
programs that utilize foreign currency forward contracts on a limited basis and
review the credit worthiness of our customers to mitigate foreign currency
exchange and credit risk. For additional Quantitative and Qualitative
Disclosures about Market Risk reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report
on Form 10-K for the year ended July 31, 1999.

17
PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.

On March 6, 2000 VTEL filed a Current Report on Form 8K reporting the
termination of a pending legal proceeding. Reference is made to such report and
to Note 7 - Subsequent Events in the unaudited financial statements contained
herein, for information relating to the disposition of the pending claim.

Item 2.

None

Item 3. Defaults Upon Senior Securities

At January 31, 2000 VTEL was not in compliance with certain covenants
as stipulated in the line of credit agreement in place with our lenders and
therefore was in technical default. As of March 13, 2000, advances drawn on the
line of credit had been repaid. Reference is made to Note 6 - Line of Credit of
the unaudited financial statements contained herein, for additional information
related to the technical default.

Item 4. Submission of Matters to a Vote of Security Holders

On December 16, 1999, an annual meeting of the stockholders was held
whereby shareholders voted on the following proposals:

1. Proposal for the election of seven directors to hold office until the next
annual meeting of stockholders or until their respective successors are
duly elected and qualified. The stockholders voted to approve the proposal
by the following vote:


Nominee For Withheld Broker Non-votes
F.H. (Dick) Moeller 20,376,228 522,134 -
Stephen L. Von Rump 20,379,086 519,276 -
Gordon H. Matthews 20,379,444 518,918 -
T. Gary Trimm 20,379,244 519,118 -
Richard Snyder 20,379,444 518,918 -
Kathleen A. Cote 20,379,183 519,179 -
James H. Wells 20,379,329 519,033 -



18
2.   Proposal to approve an amendment to the Company's  Employee  Stock Purchase
Plan ("ESPP") to increase the number of shares of the Company's Common
Stock issuable under the ESPP upon the exercise of stock options granted
pursuant to the ESPP from 950,000 shares to 1,450,000 shares. Details of
this plan are incorporated by reference to the Company's proxy statement of
December 16, 1999. The stockholders voted to approve the proposal by the
following vote:


For Against Abstain Broker Non-votes
18,950,085 1,106,570 189,647 -


3. Proposal to approve an amendment of the Company's 1992 Director Stock
Option Plan (the "Director Plan") to increase the number of shares of the
Company's Common Stock issuable under the Director Plan upon the exercise
of stock options granted pursuant to the Director Plan from 150,000 to
250,000 shares and to modify the formula pursuant to which options are
granted thereunder. Details of this plan are incorporated by reference to
the Company's proxy statement of December 16, 1999. The stockholders voted
to approve the proposal by the following vote:

For Against Abstain Broker Non-votes
18,521,967 1,526,975 189,647 -

4. Proposal to ratify the Board of Directors' appointment of
PricewaterhouseCoopers LLP, independent accountants, as the Company's
independent auditors for the year ending July 31, 2000. The stockholders
voted to approve the proposal by the following vote:

For Against Abstain Broker Non-votes
20,603,376 203,336 91,650 -

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits:

10.1 Change-in Control Agreements with members of senior management of
the Company:

(a) Brian C. Sullivan;

(b) Stephen Cox; and

(c) Stephen Von Rump.

(B) Reports on Form 8-K:

Incorporated by reference to two Forms 8-K filed on March 6, 2000

* * *


19
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

VTEL CORPORATION



March 15, 2000 By: /s/ Mark E. Lang
---------------------------------
Mark E. Lang
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)