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, 1997

Commission file number 0-20008

VTEL CORPORATION

A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696

108 WILD BASIN ROAD
AUSTIN, TEXAS 78746

(512) 314-2700

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 February 27, 1997 the registrant  had  outstanding  14,025,209  shares of its
Common Stock, $0.01 par value.

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET

JANUARY 31,       JULY 31,
1997            1996
(UNAUDITED)
ASSETS
Current assets:

Cash and equivalents                                 $  1,474,000     $  1,973,000
Short-term investments                                 41,213,000       48,307,000
Accounts receivable, net of allowance for doubtful
accounts of  $274,000 and $203,000 at
January 31, 1997 and July 31, 1996                   26,913,000       15,585,000
Inventories                                            10,533,000       15,004,000
Prepaid expenses and other current assets               1,139,000        1,597,000
--------------------------------
Total current assets                               81,272,000       82,466,000

Property and equipment, net                                14,535,000       13,906,000
Intangible assets, net                                     13,248,000       13,730,000
Other assets                                                2,579,000        1,801,000
================================
$111,634,000   $  111,903,000
================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                     $  8,157,000     $  9,831,000
Accrued compensation and benefits                       1,430,000        1,529,000
Accrued warranty expense                                  606,000          697,000
Other accrued liabilities                                 789,000        1,544,000
Research and development advance                          906,000          906,000
Deferred revenue                                        6,535,000        2,980,000
--------------------------------
Total current liabilities                          18,423,000       17,487,000

Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding                                    -                -
Common stock, $.01 par value; 25,000,000 authorized;
14,017,000 and 14,308,000 issued and outstanding at
January 31, 1997 and July 31, 1996                      140,000          143,000
Additional paid-in capital                            124,952,000      124,190,000
Treasury stock                                        (3,351,000)                -
Accumulated deficit                                  (28,411,000)     (30,068,000)
Cumulative translation adjustment                         (6,000)          151,000
Unearned compensation                                   (113,000)                -
--------------------------------
Total stockholders' equity                         93,211,000       94,416,000
--------------------------------
$111,634,000   $  111,903,000
================================
<FN>

The accompanying notes are an integral part of these
condensed consolidated financial statements.
</FN>

2

VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

FOR THE                         FOR THE
THREE MONTHS ENDED              SIX MONTHS ENDED
JANUARY 31,                     JANUARY 31,
1997            1996           1997            1996

REVENUES:

Products                                  $ 21,807,000   $ 15,773,000    $ 42,769,000    $ 34,183,000
Services and other                           7,316,000      8,136,000      14,553,000       9,236,000
---------------------------------------------------------------
29,123,000     23,909,000      57,322,000      43,419,000
---------------------------------------------------------------

COST OF SALES:
Products                                    11,159,000      7,979,000      22,232,000      17,148,000
Services and other                           5,402,000      5,779,000      10,197,000       6,198,000
---------------------------------------------------------------
16,561,000     13,758,000      32,429,000      23,346,000         
---------------------------------------------------------------
Gross margin                                12,562,000     10,151,000      24,893,000      20,073,000
---------------------------------------------------------------

Selling, general and administrative              9,310,000      7,953,000      18,177,000      15,073,000
Research and development                         2,801,000      3,049,000       5,719,000       6,018,000
Amortization of intangible assets                  240,000        160,000         480,000         160,000
---------------------------------------------------------------
Total operating expenses                    12,351,000     11,162,000      24,376,000      21,251,000
---------------------------------------------------------------

Income (loss) from operations                  211,000    (1,011,000)         517,000     (1,178,000)
---------------------------------------------------------------

OTHER INCOME (EXPENSE):
Interest income                                589,000        924,000       1,198,000       1,285,000
Other                                           38,000       (46,000)          96,000        (87,000)
---------------------------------------------------------------
627,000        878,000       1,294,000       1,198,000
---------------------------------------------------------------

Net income (loss) before provision
for income taxes                               838,000      (133,000)       1,811,000          20,000

Provision for income taxes                        (25,000)        (3,000)        (44,000)        (24,000)
===============================================================
Net income (loss)                           $  813,000    $ (136,000)     $ 1,767,000     $   (4,000)
===============================================================

Net income (loss) per share                     $     0.06    $    (0.01)     $      0.12     $    (0.00)
===============================================================

Weighted average shares outstanding             14,606,000     14,109,000      14,595,000      12,739,000
===============================================================
<FN>

The accompanying notes are an integral part of
these condensed consolidated financial statements.
</FN>

3

VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

FOR THE
SIX MONTHS ENDED
JANUARY 31,
1997         1996

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)                                        $   1,767,000 $    (4,000)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization                            3,883,000    2,578,000
Provision for doubtful accounts                             70,000       10,000
Amortization of unearned compensation                       93,000       10,000
Amortization of deferred gain                             (64,000)     (48,000)
Foreign currency translation (gain) loss                  (33,000)      130,000
(Increase) decrease in accounts receivable            (11,398,000)    1,857,000
(Increase) decrease in inventories                       4,471,000  (2,371,000)
(Increase) decrease in prepaid expenses
and other current assets                               458,000      959,000
Increase (decrease) in accounts payable                (1,674,000)      924,000
Increase (decrease) in accrued expenses                  (881,000)      816,000
Increase in deferred revenues                            3,555,000      172,000
--------------------------
Net cash provided by operating activities              247,000    5,033,000
--------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Net short-term investment activity                           7,094,000 (46,174,000)
Net purchase of property and equipment                     (4,030,000)  (4,683,000)
Purchase of ICS                                                      - (10,557,000)
(Increase) in other assets                                   (778,000)    (158,000)
--------------------------
Net cash provided by (used in) investing             2,286,000 (61,572,000)
activities                                        --------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations                   -      (1,000)
Net proceeds from issuance of stock                            833,000   57,746,000
Purchase of treasury stock                                 (3,742,000)            -
--------------------------
Net cash provided by (used in) financing           (2,909,000)   57,745,000
activities                                        --------------------------

Effect of translation exchange rates on cash                     (123,000)    (200,000)
--------------------------

Net increase (decrease) in cash and equivalents                  (499,000)    1,006,000

Cash and equivalents at beginning of period                      1,973,000    2,283,000
==========================
Cash and equivalents at end of period                         $  1,474,000 $  3,289,000
==========================
<FN>

The accompanying notes are an integral part of these
condensed consolidated financial statements.
</FN>

4

VTEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

VTEL  Corporation  ("VTEL" or the  "Company")  designs,  manufactures,  markets,
services and supports integrated,  multi-media  videoconferencing  systems which
operate over private and switched digital  communication  networks.  The Company
distributes  its systems to a domestic  and  international  marketplace  through
third parties.

The Company's  systems integrate  traditional video and audio  conferencing with
additional  functions including the sharing of PC software  applications and the
transmission of  high-resolution  images and facsimiles.  Through the use of the
Company's  multi-media  conferencing  systems,  users are able to replicate more
closely the impact and  effectiveness  of face-to-face  meetings.  The Company's
headquarters and production facilities are in Austin, Texas.

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  only  normal,  recurring
adjustments,  necessary for a fair presentation of the financial position of the
Company as of January 31, 1997 and the results of the Company's  operations  and
its cash flows for the three and six month periods  ended January 31, 1997.  The
results for interim periods are not necessarily indicative of results for a full
fiscal year. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated  financial  statements  (including the
notes thereto)  contained in the Company's 1996  Transition  Report on Form 10-K
filed with the Securities and Exchange Commission on November 13, 1996.

NOTE 2 - AGREEMENT AND PLAN OF  MERGER AND REORGANIZATION

On January 6, 1997,  VTEL,  VTEL-Sub,  Inc., a Delaware  corporation  and direct
wholly-  owned  subsidiary  of  VTEL  ("Merger  Sub"),  and  Compression   Labs,
Incorporated, a Delaware corporation ("CLI"), entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement"),  pursuant to which Merger
Sub will  merge  with and into CLI (the  "Merger"),  with CLI  becoming a direct
wholly-owned  subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's common  stock,  par value $.001 per share ("CLI Common  Stock"),
will be converted into the right to receive 0.46 shares of common stock of VTEL,
par value $.01 per share ("VTEL  Common  Stock"),  per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof),  and (b) the outstanding  shares of CLI Series C Preferred  Stock, par
value $.001 per share ("CLI Preferred Stock"),  will be converted into the right
to receive  3.15 shares of VTEL Common  Stock per share of CLI  Preferred  Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof).  The Merger is  conditioned  upon,  among  other  things,  approval by
holders of a majority of VTEL Common Stock, approval by holders of a majority of
CLI  Common  Stock,  and upon  receipt of certain  regulatory  and  governmental
approvals.  If the  merger is  approved  as  planned,  the  Company  will  issue
approximately  8.4  million  shares  to  the  CLI  shareholders,  who  will  own
approximately  37.7% of the Company's  outstanding  shares following the Merger.
Simultaneously  with their execution and delivery of the Merger Agreement,  VTEL
and CLI entered

5

into a stock option agreement (the "Stock Option  Agreement")  pursuant to which
CLI granted  VTEL the right,  upon the terms and subject to the  conditions  set
forth therein, to purchase up to 3,120,500 shares of CLI Common Stock at a price
of  $4.6575  per  share.  The  Merger  is  intended  to be  accounted  for  as a
"pooling-of-interests" under generally accepted accounting principles.

NOTE 3 - INVENTORIES

Inventories consist of the following:

JANUARY 31,              JULY 31,
1997                   1996

Raw materials                                                        $  5,920,000          $   8,959,000
Work in process                                                           422,000                920,000
Finished goods                                                          3,536,000              4,508,000
Finished goods held for evaluation                                        655,000                617,000
-----------           ------------
$10,533,000           $ 15,004,000
===========           ============

Finished   goods  held  for   evaluation   consists  of  completed   multi-media
communication systems used for demonstration and evaluation purposes,  which are
generally sold during the next 12 months.

NOTE 4 - NET INCOME (LOSS) PER SHARE

Net income  (loss) per share is computed by  dividing  net income  (loss) by the
weighted   average  number  of  common  shares  and  common  share   equivalents
outstanding (if dilutive) during each period.

NOTE 5 - TREASURY STOCK

During the  fiscal  period  ended July 31,  1996,  the  Company  adopted a share
repurchase  program  whereby the Company could  repurchase  shares of its Common
Stock in the open  market  provided  that the  aggregate  purchase  price of the
shares  repurchased did not exceed $8.4 million and the repurchase price for any
shares did not exceed $12 per share. The repurchased  shares will be issued from
time to time to fulfill  requirements  for the Company's  Common Stock under its
employee stock plans. The Company repurchased 455,200 shares of its Common Stock
for $3,742,000 under the repurchase  program.  On February 28, 1997, the Company
terminated  the  stock  repurchase  program  in order to be in  compliance  with
pooling of  interests  requirements  for the pending  merger of VTEL and CLI. At
January 31, 1997, the Company had 294,445 shares of treasury stock.  The Company
applies the cost method of accounting for its treasury stock.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The  following  review  of the  Company's  financial  position  and  results  of
operations  for the three and six month  periods ended January 31, 1997 and 1996
should be read in conjunction with the Company's 1996 Transition  Report on Form
10-K filed with the Securities and Exchange Commission on November 13, 1996.

6

In May 1996,  the Company  changed its fiscal year end from  December 31 to July
31. As such, the quarter ended January 31, 1997 represents the second quarter of
the Company's  1997 fiscal year.  The  comparative  information  for the quarter
ended January 31, 1996 has been restated from the information presented in prior
Quarterly  Reports on Form 10-Q to conform to the Company's newly adopted fiscal
quarters.

RESULTS OF OPERATIONS

The following  table sets forth for the fiscal periods  indicated the percentage
of revenues represented by certain items in the Company's Condensed Consolidated
Statement of Operations:

FOR THE THREE                      FOR THE SIX
MONTHS ENDED                      MONTHS ENDED
JANUARY 31,                       JANUARY 31,
1997              1996             1997            1996

Revenues                                         100%             100%             100%             100%
Gross margin                                     43                42               43              46
Selling, general and administrative              32                33               32              35
Research and development                         10                13               10              14
Total operating expenses                         42                47               43              49
Other income, net                                 2                 4                2                3
Net income (loss)                                 3%               (1)%              3%               0%

THREE AND SIX MONTHS ENDED JANUARY 31, 1997 AND 1996

Revenues.  Revenues  for the three months  ended  January 31, 1997  increased to
$29,123,000  from  $23,909,000  for the three months ended  January 31, 1996, an
increase of  $5,214,000  or 22%.  Revenues for the six months ended  January 31,
1997 increased to $57,322,000  from $43,419,000 for the six months ended January
31, 1996, an increase of  $13,903,000 or 32%. The increase in revenues is due to
an increase  in the number of units sold  during the three and six months  ended
January 31, 1997 and  additional  videoconferencing-related  revenues  generated
during the three and six months ended January 31, 1997 by the Company's  systems
integration and service operations which were acquired in November 1995.

The following table summarizes the Company's group system unit sales activity:

FOR THE THREE                   FOR THE SIX
MONTHS ENDED                    MONTHS ENDED
JANUARY 31,                     JANUARY 31,
1997             1996           1997           1996

Large group conferencing systems                       612             320          1,131            908
Small group conferencing systems                        53              62            122            133
Multipoint control units                                28              23             59             52
-------------------------------------------------
Total units                                     693             405          1,312          1,093
=================================================

7

The increase in sales of the Company's large group  conferencing  systems during
the three and six months ended January 31, 1997 in comparison with the three and
six  months  ended  January  31,  1996  is  due  to  the   introduction  of  the
MediaMax(TM)-based  Leadership Conferencing(TM) systems in December 1995 and the
Enterprise Series Architecture  (ESA(TM))-based Team Conferencing(TM) systems in
February 1996.  Sales of these new products  represented  more than 90% of large
group conferencing revenues for the three and six months ended January 31, 1997.
The  Company  has  experienced  an  increase  in unit  sales of its small  group
ESA(TM)-based Team Conferencing(TM)  Model 1000 system since its introduction in
July 1996 and a decrease in unit sales of its small group S-Max(TM) products due
to the  discontinuance of this product line,  resulting in a net decline in unit
sales of small group conferencing  systems during the three and six months ended
January 31, 1997 in  comparison  with the three and six months ended January 31,
1996.

The average  selling price for a group system sold during the three months ended
January 31,  1997 was  approximately  $30,000  compared to $36,000 for the three
months ended  January 31, 1996.  The  decrease in the average  selling  price is
attributable  to the transition  from  shipments of the Company's  higher margin
MediaMax(TM)-based  products  during the three months ended  January 31, 1996 to
shipments of the ESA(TM)-based  Team  Conferencing(TM)  systems during the three
months ended January 31, 1997,  which  generally  carry a lower average  selling
price than the MediaMax(TM)-based products.

In  February  1996,  the  Company   introduced  its  Personal   Collaborator(TM)
videoconferencing  kits as part of its  desktop  system  product  line.  Desktop
system products  represented 3% of product revenues for the three and six months
ended  January 31, 1997 and 3% and 2%,  respectively,  of product  sales for the
three and six months ended January 31, 1996.

International  sales  contributed  approximately 24% of product revenues for the
three and  six months  ended  January  31, 1997  as  compared  to 21%  and  18%,
respectively, for the three and six months ended January 31, 1996.

While  the  Company  strives  for  consistent  revenue  growth,  there can be no
assurance  that  consistent  revenue  growth or  profitability  can be achieved.
Consistent  with  many  companies  in the  technology  industry,  the  Company's
business model is characterized by a very high degree of operating leverage. The
Company's  expense levels are based,  in part, on its  expectations as to future
revenue  levels,  which are  difficult  to predict  partly due to the  Company's
strategy of distributing its products through resellers.  Because expense levels
are based on the Company's  expectations  as to future  revenues,  the Company's
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,  the
Company's  quarterly  and  annual  results  may  fluctuate  as a result  of many
factors, including price reductions, delays in the introduction of new products,
delays in purchase decisions due to new product  announcements by the Company 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 the Company will be able to increase
or even maintain its current level of revenues on a quarterly or annual basis in
the future. Due to all of the foregoing  factors,  it is possible that in one or
more  future  quarters  the  Company's  operating  results  will  be  below  the
expectations of public securities  market analysts.  In such event, the price of
the Company's Common Stock would likely be materially adversely affected.

8

Gross  margin.  Gross  margin as a  percentage  of total  revenues for the three
months  ended  January  31, 1997 was 43%, a slight  increase  from the 42% gross
margin generated for the three months ended January 31, 1996. The consistency in
the gross  margin  percentage  despite  lower  average  selling  prices  for the
Company's products is the result of lower costs per unit for the Company's newer
product  lines and higher unit volumes  sold,  which  results in an  incremental
decrease in the cost per unit of the Company's  products as fixed  manufacturing
costs are spread over a larger number of units produced.

Gross margin as a percentage of total  revenues for the six months ended January
31, 1997 was 43%, a decrease  from the 46% gross  margin  generated  for the six
months ended January 31, 1996. The change in the gross margin percentage relates
to the incremental  revenues generated by the Company's systems  integration and
service  operations,  which were  acquired in November  1995.  Revenues from the
Company's  systems  integration and service  operations  generally carry a lower
gross margin than product  revenues  resulting in a lower overall  blended gross
margin.

Although the Company  expects gross margins to improve  during fiscal year 1997,
it continues to 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.  The Company expects that overall
price  competitiveness  in the industry  will continue to become more intense as
users of videoconferencing systems attempt to balance performance, functionality
and cost. The Company's gross margin is subject to fluctuation based on pricing,
production costs and sales mix.

Selling,  general  and  administrative.   Selling,  general  and  administrative
expenses  increased by $1,357,000,  or 17%, from $7,953,000 for the three months
ended  January 31, 1996 to  $9,310,000  for the three months  ended  January 31,
1997. Selling,  general and administrative expenses increased by $3,104,000,  or
21%, from  $15,073,000  for the six months ended January 31, 1996 to $18,177,000
for the six months ended January 31, 1997.

Selling,  general and  administrative  expenses as a percentage of revenues were
32% for the three and six months  ended  January  31, 1997 and were 33% and 35%,
respectively,  for the three and six months  ended  January 31,  1996.  Selling,
general and  administrative  expenses have  remained a consistent  percentage of
revenues as the Company has managed its growth to ensure that  selling,  general
and administrative expenses do not grow faster than the growth in revenues.

Selling,  general and  administrative  expenses as a percentage of revenues have
declined during the six months ended January 31, 1997 in comparison with the six
months ended January 31, 1996 as the Company's sales and marketing programs have
caused revenues to increase at a faster rate than the Company's selling, general
and administrative expenses have during these periods.

Research  and  development.  Research  and  development  expenses  decreased  by
$248,000,  or 8%, from $3,049,000 for the three months ended January 31, 1996 to
$2,801,000 for the three months ended January 31, 1997. Research and development
expenses decreased by $299,000,  or 5%, from $6,018,000 for the six months ended
January 31,  1996 to  $5,719,000  for the six months  ended  January  31,  1997.
Research and development expenses have remained substantially  consistent during
these periods as the Company has focused its research and development  resources
and  effort  under the  Customer  Business  Unit  organization  allowing  a more
efficient and productive use of research and development resources.

9

Research and  development  expenses as a percentage of revenues were 10% for the
three and six months ended January 31, 1997 and were 13% and 14%,  respectively,
for the three and six months ended  January 31, 1996.  Research and  development
expenses  decreased  as a percentage  of revenues  from the three and six months
ended January 31, 1996 to the three and six months ended January 31, 1997 due to
the incremental systems integration and service revenues generated subsequent to
the acquisition of the systems  integration  and service  operations in November
1995, which do not carry any related research and development costs.

Although  the  percentage  of revenues  invested by the Company in research  and
development  may vary  from  period to  period,  the  Company  is  committed  to
investing  in  its  research  and  development  programs.  Future  research  and
development  expenses are anticipated to increase as revenues  increase.  All of
the Company's  research and development costs and internal software  development
costs have been expensed as incurred.

Other  income,  net.  Other  income,  net  decreased by $251,000,  or 29%,  from
$878,000 for the three  months ended  January 31, 1996 to $627,000 for the three
months ended January 31, 1997.  Other income,  net increased by $96,000,  or 8%,
from  $1,198,000 for the six months ended January 31, 1996 to $1,294,000 for the
six months ended January 31, 1997.  The decrease in other  income,  net from the
three months ended  January 31, 1996 to the three months ended  January 31, 1997
is due to the decrease in interest  income  earned as a result of lower cash and
investment  balances  maintained  by the Company  during the three  months ended
January 31, 1997.  The increase in other  income,  net from the six months ended
January 31, 1996 to the six months ended  January 31, 1997 is due to the Company
generating  foreign currency  exchange gains during the six months ended Janaury
31, 1997 compared with foreign currency  exchange losses incurred during the six
months ended January 31, 1996, slightly offset by less interest income earned on
lower cash and investment balances during the six months ended January 31, 1997.

Net income  (loss).  The Company  generated net income of $813,000,  or $.06 per
share,  during the three months ended January 31, 1997 compared to a net loss of
$136,000,  or $.01 per share,  for the three months ended January 31, 1996.  The
Company  generated net income of $1,767,000,  or $.12 per share,  during the six
months  ended  January  31, 1997  compared to a net loss of $4,000,  or $.00 per
share, for the six months ended January 31, 1996.

The increase in net income for the three and six months  ended  January 31, 1997
compared  to the three and six months  ended  January 31, 1996 was the result of
revenues increasing at a faster rate than operating expenses.

Improvement  in the  Company's  financial  performance  during the  remainder of
fiscal  year  1997  will  depend  on  the  Company's   ability  to  continue  to
significantly  increase  revenues  through growth in the Company's  distribution
channels  and the  successful  introduction  of its new  products,  to  generate
improving gross margins and to control the growth of operating  expenses.  There
can be no  assurances  that the Company will be  successful  in achieving  these
objectives during the remainder of fiscal year 1997.

10

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 1997, the Company had working capital of  $62,849,000,  including
$42,687,000 in cash, cash  equivalents and short-term  investments.  The primary
uses of cash during the six months  ended  January  31, 1997 were to  repurchase
shares of the Company's Common Stock under a stock repurchase  program (see Note
5 to the Condensed Consolidated Financial Statements),  to purchase property and
equipment and leasehold  improvements and to fund working capital needs required
to support the Company's growth.  The primary uses of cash during the six months
ended January 31, 1996 were to purchase the  Integrated  Communications  Systems
(ICS) group from  Peirce-Phelps,  Inc.,  to purchase  property and equipment and
leasehold  improvements,  to fund working  capital needs required to support the
Company's  growth  and to invest  the  proceeds  from the sale of the  Company's
Common Stock in a secondary offering completed in October 1995.

Cash  provided by  operating  activities  was  $247,000 for the six months ended
January 31, 1997,  as a result of a decrease in  inventories  and an increase in
deferred revenues,  offset by an increase in accounts  receivable and a decrease
in accounts  payable.  Cash provided by operating  activities was $5,033,000 for
the six months  ended  January 31,  1996,  as a result of a decrease in accounts
receivable  and prepaid  expenses  and other  current  assets and an increase in
accounts payable, accrued expenses and deferred revenues,  offset by an increase
in inventories.

Cash flows from  investing  activities  during the six months ended  January 31,
1997 were  primarily the result of capital  expenditures  of $4,030,000  and net
investment redemption activity of short-term  investments which provided cash of
$7,094,000.  The Company periodically utilizes cash from short-term  investments
to  provide  cash  needed to  support  the  Company's  growth.  Cash  flows from
investing activities during the six months ended January 31, 1996 were primarily
the result of the investment of the proceeds of the Company's secondary offering
which netted approximately  $57,000,000 to the Company,  capital expenditures of
$4,683,000 and the purchase of the ICS group from Peirce-Phelps,  Inc. requiring
the payment of approximately $10,557,000 in cash.

Cash flows used in financing  activities during the six months ended January 31,
1997 relate to the  repurchase of 455,200  shares of the Company's  Common Stock
for  $3,742,000  under a share  repurchase  program (see Note 5 to the Condensed
Consolidated Financial Statements).  Cash flows provided by financing activities
for the six months  ended  January  31,  1996  relate to the  completion  by the
Company  of a  secondary  offering  whereby  the  Company  netted  approximately
$57,000,000 from the sale of 3,000,000 shares of its Common Stock.

At January 31,  1997,  the Company had a  $10,000,000  revolving  line of credit
available  with a  financial  institution.  No  amounts  have been  drawn or are
outstanding  under  the line of  credit.  The  Company's  principal  sources  of
liquidity at January 31, 1997 consist of $42,687,000 of cash,  cash  equivalents
and short-term  investments and amounts available under the Company's  revolving
line of credit.  The Company  believes that  existing  cash and cash  equivalent
balances,  short-term  investments,  cash  generated  from product sales and its
revolving  line of credit  will be  sufficient  to meet the  Company's  cash and
capital requirements for at least the next 12 months.

11

AGREEMENT AND PLAN OF  MERGER AND REORGANIZATION

On January 6, 1997, VTEL Corporation, VTEL-Sub, Inc., a Delaware corporation and
direct wholly- owned  subsidiary of VTEL ("Merger Sub"),  and Compression  Labs,
Incorporated, a Delaware corporation ("CLI"), entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement"),  pursuant to which Merger
Sub will  merge  with and into CLI (the  "Merger"),  with CLI  becoming a direct
wholly-owned  subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's common  stock,  par value $.001 per share ("CLI Common  Stock"),
will be converted into the right to receive 0.46 shares of common stock of VTEL,
par value $.01 per share ("VTEL  Common  Stock"),  per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof),  and (b) the outstanding  shares of CLI Series C Preferred  Stock, par
value $.001 per share ("CLI Preferred Stock"),  will be converted into the right
to receive  3.15 shares of VTEL Common  Stock per share of CLI  Preferred  Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof).  The Merger is  conditioned  upon,  among  other  things,  approval by
holders of a majority of VTEL Common Stock, approval by holders of a majority of
CLI  Common  Stock,  and upon  receipt of certain  regulatory  and  governmental
approvals.  If the  merger is  approved  as  planned,  the  Company  will  issue
approximately  8.4  million  shares  to  the  CLI  shareholders,  who  will  own
approximately  37.7% of the Company's  outstanding  shares following the Merger.
Simultaneously  with their execution and delivery of the Merger Agreement,  VTEL
and CLI entered into a stock option  agreement  (the "Stock  Option  Agreement")
pursuant to which CLI granted VTEL the right,  upon the terms and subject to the
conditions set forth therein,  to purchase up to 3,120,500  shares of CLI Common
Stock at a price of $4.6575 per share.  The Merger is  intended to be  accounted
for as a "pooling-of-interests" under generally accepted accounting principles.

GENERAL

The markets for the Company's 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 the Company attempts 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.

The Company'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 those of the
Company,  delay in the  introduction  of  higher  performance  products,  market
acceptance  of new  products  introduced  by  the  Company,  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 the
Company does business,  adverse legal disputes and delays in purchases  relating
to federal government procurement.

12

The  integration of operations  following the Merger will require the dedication
of management  resources  which will  temporarily  detract from attention to the
day-to-day business of the combined company. The difficulties of integration may
be increased by the necessity of integrating  personnel with disparate  business
backgrounds  and  combining  two  different  corporate  cultures.  Following the
Merger,  VTEL  intends  to  seek  to  reduce  expenses  by  the  elimination  of
duplicative or unnecessary facilities,  employees,  marketing programs and other
expenses.  Subsequent to such reductions, VTEL intends to reinvest much of these
cost savings in programs aligned with its current strategic  initiatives.  There
can be no assurance  that VTEL will be able to reduce  expenses in this fashion,
that there will not be high costs  associated  with such  activities,  that such
reductions  will not result in a decrease  in revenues or that there will not be
other material adverse effects of such activities. Such effects could materially
reduce the earnings of the combined  company.  Following  the Merger,  VTEL also
intends to seek to sell to CLI  customers  VTEL  products that have higher gross
profit  margins  than  the  CLI  products  currently  being  purchased  by  such
customers.  There can be no assurance that this effort at product  transition or
that the  integration  of the product lines of the two  companies  will not have
material  adverse  effects on results of  operations.  Subsequent to the Merger,
VTEL expects to incur a charge in the quarter  ending July 31,  1997,  currently
estimated  to be in the range of $15  million to $25  million,  to  reflect  the
combination  of the  two  companies,  including  the  elimination  of  duplicate
facilities,  severance costs relating to employee terminations, the write-off of
certain  intangibles,  property  and  equipment,  receivables  and  inventories,
discharge of  contingent  liabilities  and payment of  transaction  costs.  This
amount is a  preliminary  estimate only and is therefore  subject to change.  In
addition,  there can be no assurance that VTEL will not incur additional charges
in subsequent quarters to reflect costs associated with the Merger.

There can be no assurance  that the present and potential  customers of VTEL and
CLI will continue  their current buying  patterns  without regard to the Merger,
and any significant delay or reduction in orders could have an adverse effect on
the near-term business and results of operations of the combined company.

As a result of the Merger, it is anticipated that VTEL will issue  approximately
8.4 million VTEL Common Shares. In general, these shares will be freely tradable
following the Merger,  subject to certain resale  restrictions for affiliates of
CLI or VTEL pursuant to Rules 144 or 145 under the Securities  Act. An aggregate
of  approximately  1.1  million  of the  shares  issued  in the  Merger  will be
beneficially  owned  by  affiliates  of CLI and  therefore,  subject  to  resale
restrictions. However, VTEL has agreed to provide certain registration rights to
the holders of such shares.  The sale of a  significant  number of the foregoing
shares may cause  substantial  fluctuations  in the price of VTEL Common  Shares
over short time periods.

Due to the factors  noted above and  elsewhere in  Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operations,  the Company'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  affect on the trading price of the Company's
Common Stock in any given period.  Also,  the Company  participates  in a highly
dynamic  industry  which often  contributes  to the  volatility of the Company's
Common Stock price.

Further, this report on Form 10-Q contains forward-looking statements within the
meaning of the Private  Securities  Litigation  Reform Act of 1995 that involves
risks and  uncertainties  that could cause actual  results to differ  materially
from those reflected in those  forward-looking  statements,  including the risks
discussed above under "General" and elsewhere herein.

13

PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On January 22, 1997,  Datapoint  Corporation  ("Datapoint")  initiated a lawsuit
against VTEL and CLI in the Supreme  Court for the County of New York  alleging,
among other things,  that on December 30, 1996 CLI agreed to settle  Datapoint's
patent  infringement  action pending  against CLI in the United States  District
Court for the Northern District of Texas in exchange for a payment and a license
of Datapoint  patented  technology to CLI.  Although no settlement  agreement or
license  agreement  was entered into and CLI denies it ever agreed to settle the
pending patent infringement  action,  Datapoint maintains it reasonably expected
that a settlement agreement and license agreement would be entered into with CLI
and maintains that VTEL has willfully and intentionally interfered and prevented
Datapoint  from  obtaining the  settlement  and license that  Datapoint  sought.
Datapoint  also  asserts  that  VTEL's  actions  amounted to a prima facie tort.
Datapoint  seeks  from VTEL an amount  equal to the  benefit  that it would have
recieved from CLI under the alleged  settlement and license and punitive damages
of at least $3 million.

Datapoint  also has  asserted a cause of action  against  CLI for fraud based on
allegations that it was deceived by misrepresentations made by CLI in connection
with the alleged settlement and license  negotiations.  Specifically,  Datapoint
maintains  that it would not have  agreed to the  terms of the  alleged  license
agreement  covering its patented  technology  had it known of the Merger,  since
VTEL's license from Datapoint of the same  technology  would preclude  Datapoint
from  obtaining  future  royalties  from CLI on sales of products that allegedly
infringed Datapoint's patent. Datapoint seeks unspecified money damages from CLI
based on the alleged fraud and additional punitive damages of $3 million.

CLI maintains that it never agreed to settle the pending infringement action and
therefore, there was not any agreement.  Because no agreements were ever entered
into, VTEL maintains that it cannot be liable for allegedly  interfering  with a
non-existent  agreement,  or in any case agreements whose existence were unknown
to VTEL.  Because no agreements  were ever entered into,  CLI maintains  that it
cannot be liable  for  defrauding  Datapoint  in  entering  into a  non-existent
license  agreement.  VTEL and CLI have  removed the action to the United  States
District  Court for the Southern  District of New York and intend to  vigorously
defend the claims.

ITEM 5.  OTHER INFORMATION

None

14

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

2.1   -  Agreement  and Plan of Merger and  Reorganization  dated as of
January  6,  1997  by and  among  VTEL,  VTEL-Sub,  Inc.  and CLI
(incorporated  by reference to the Exhibit 1 of VTEL's  Report on
Form 8-K dated January 6, 1997).

27.1 - Financial Data Schedule (filed electronically only).

(b)   Reports on Form 8-K

The following Reports on Form 8-K have been filed:

EVENT REPORTED                                          DATE OF REPORT

Agreement and Plan of Merger and Reorganization         January 6, 1997

* * *

15

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 12, 1996              By: /s/Rodney S. Bond
-------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)

16

<ARTICLE>                     5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VTEL 
CORPORATION'S BALANCE SHEET & INCOME STATEMENT FOR THE THREE MONTHS ENDED 
1/31/97, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 1/31/97 
10-Q FILING.
</LEGEND>
<CIK>                         0000884144
<NAME>                        VTEL CORPORATION
<MULTIPLIER>                                   1
<CURRENCY>                                     US DOLLARS

<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                              JUL-31-1997
<PERIOD-START>                                 NOV-01-1996
<PERIOD-END>                                   JAN-31-1997
<EXCHANGE-RATE>                                1
<CASH>                                         1,474,000
<SECURITIES>                                   41,213,000
<RECEIVABLES>                                  27,187,000
<ALLOWANCES>                                   (274,000)
<INVENTORY>                                    10,533,000
<CURRENT-ASSETS>                               81,272,000
<PP                                         25,824,000
<DEPRECIATION>                                 (11,289,000)
<TOTAL-ASSETS>                                 111,634,000
<CURRENT-LIABILITIES>                          18,423,000
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<OTHER-SE>                                     (31,881,000)
<TOTAL-LIABILITY-AND-EQUITY>                   111,634,000
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<CGS>                                          (16,561,000)
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