SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

OR

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

For the fiscal year ended July 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

Securities registered pursuant to section 12 (b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock

Indicate by check mark whether the registrant (1) 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  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No __.

Indicate by check mark if disclosure of delinquent  filings pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's  knowledge,  in definitive  proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K,  or any  amendment to
this Form 10-K. ( ).

The aggregate market value of 21,089,661 shares of the registrant's Common Stock
held by nonaffiliates  on October 13, 2000 was  approximately  $76,956,172.  For
purposes of this computation all officers, directors and 5% beneficial owners of
the  registrant are deemed to be affiliates.  Such  determination  should not be
deemed an admission that such officers,  directors and beneficial owners are, in
fact, affiliates of the registrant.

At October  13, 2000 there were  24,824,352  shares of the  registrant's  Common
Stock, $.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive  Proxy  Statement to be delivered to  stockholders in
connection with the 2000 Annual Meeting are  incorporated by reference into Part
III.

General

VTEL Corporation (VTEL, we or our) has designed, manufactured, sold and
serviced  videoconferencing systems since its inception in 1985. As a pioneer of
the videoconferencing industry, we led the early innovation of utilizing an open
PC  architecture  for  our  videoconferencing   endpoints.  By  integrating  the
functionality  and  applications of a personal  computer with  videoconferencing
hardware early on, we were one of the first players in the industry to provide a
videoconference solution that included virtually any PC application available as
well  as  simultaneous  access  to the  Internet.  With  our  software  enhanced
innovations,   we   have   manufactured   and   installed   more   than   30,000
videoconferencing  endpoints.  In addition,  we currently  have more than 10,000
endpoints  under service  contracts.  Our  experience  in the  videoconferencing
industry,  however, has taught us that successful visual communication relies as
much on the quality of the network as the endpoint itself.  We have learned that
the  network  has to be  designed  to  support  visual  communications.  This is
becoming  especially  true  with  the  proliferation  of  high-speed   broadband
communication  networks.  We have determined that to be successful in the visual
communications  industry,  we need  to be more  than a  provider  of  innovative
communication  endpoints.  We must provide a network  solution that will support
the vast amount of visual communication  applications that are becoming possible
with increased bandwidth.

In August 2000,  VTEL  announced  its plans to embark on a new business
charter that leverages our service and system  integration  capabilities as well
as  our   experience  in  the   development  of   videoconferencing   endpoints.
Videoconferencing  has never reached the broad-based  market appeal necessary to
support  the  production  of   videoconferencing   endpoints   alone.   This  is
demonstrated  by the  fact  that  most  of  the  videoconferencing  industry  is
struggling to grow and to attain profitability. Our goal is to become the leader
in visually enabled broadband networks and begins with the continued support and
advancement  of our  current  customers.  They  are the  early  adopters  of the
videoconferencing  industry  and  likely  will be the early  adopters  of visual
communications  over  broadband  networks.  Our goal is to  communicate  our new
mission to these  customers  so they will look to VTEL as a partner in  visually
enabling their broadband  networks.  This planned new direction of VTEL does not
remove us from the business of supplying  videoconferencing  endpoints.  We will
simultaneously  embrace  and  integrate  a much  broader  array  of  third-party
technology,   including   other   videoconferencing   endpoint   providers   who
traditionally  have been our  competitors.  The  development  and  production of
innovative  videoconferencing endpoints has been the backbone of our company. We
will continue to market our ESA(TM)  product line, and to market and develop our
flagship  videoconferencing  product,  Galaxy(TM),  as we expand our development
focus toward software, specifically network management software, building on our
current SmartVideoNet  Manager(TM) platform. To facilitative the change, special
attention will be paid to enhancing the  interoperability  of all the components
in a  broadband  video  network,  and expand our  current  test labs to create a
center of excellence  for  standards  testing and  integration.  We will need to
develop  additional  consulting  and  solutions  competencies,   and  ultimately
transform  the  majority  of our  revenue  base from VTEL  endpoint  products to
software and complete solution services.

We  believe  VTEL has the  industry's  best  videoconferencing  network
management  solution on which to build.  As an  innovator  in the  industry,  we
believe  the  future  of  videoconferencing   will  be  in  driven  by  software
applications  over broadband  networks.  We have experience in bringing together
all the pieces to create complete solutions for customers such as Jackson Public
Schools, Kinko's and Citicorp. Under the new business charter, it is our plan to
expand on these  competencies,  build our  business  model around them and drive
visual solutions onto the mainstream  network.  VTEL will become the provider of
choice for software,  consulting services and integration of product peripherals
such as  cameras,  microphones  and  monitors.  We will  continue to support our
existing  product  lines  including  our flagship  Galaxy(TM)  videoconferencing
endpoint as this  transition  continues.  We feel that refocusing our efforts in
this area will provide the greatest  opportunity for long-term  success for VTEL
and its shareholders

Industry Background

Visual    communications    systems    (commonly    referred    to   as
videoconferencing)   enable  users  at  remote   locations  to  meet  and  share
information  face-to-face.  A wide range of business or  professional  meetings,
education and training classes, and technical or medical  consultations make use
of this  innovative  technology  to reduce  operating  costs,  improve  customer
services,   reduce   cycle   times,   and   improve   intra-  or   inter-company
communications.  Videoconferencing  first became available on a commercial basis
in the  early  1980's.  A  single  endpoint  for a  videoconference  includes  a
compression/decompression  (or Codec) device,  monitor,  camera and  microphones
that are housed within movable  furniture  compartment  for ease of portability.
The industry has evolved  around the  production  of the various  Codecs as each

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manufacturer  has developed its own  proprietary  software that  compresses  and
decompresses  the  video and  audio  signal.  Over the  years,  there  have been
relatively  few  manufacturers  of  videoconferencing   endpoints.  The  product
offerings  of the  various  manufacturers  have  been  distinguished  mostly  by
differences in the user interface,  available use of other software applications
during a video  conference call as well as the look and design of the furniture.
VTEL's  products,  in particular,  have been  characterized by the innovation of
placing the Codec within a standard PC using an open  architecture as opposed to
operating the Codec on a proprietary  operating  system in a more appliance type
fashion.  By  incorporating  a PC  into  the  videoconferencing  endpoint,  VTEL
products allow for the inclusion of software applications such as PowerPoint(TM)
presentations, spreadsheets and the ability to use whiteboard annotations during
a videoconference as well as other applications.

The development of endpoints within the videoconferencing  industry has
diverged  into two  distinct  categories.  The  room or group  videoconferencing
products  tailored for targeted markets with specific  application needs and the
set-top  products  for the  individuals  who  require  strictly  video and audio
communication  during a call. The room system products are typically marketed to
institutions  such as  education,  government  and  major  corporations  who use
videoconferencing  in larger  group  setting.  These larger  installations  will
involve several endpoints and often times include such requirements as automatic
camera control,  multiple  cameras and microphones and customized  monitor size.
Set-top  videoconferencing  systems are usually standard  configurations  with a
single  camera and  microphone.  Initially the industry  experienced  demand for
high-end  systems  from the larger  institutions  that could afford the costs of
dedicated  networks and the high cost per endpoint.  In recent years,  while the
demand for  high-end  systems  primarily in the  distance  education  market has
remained  stable,  the growth in the industry has been in the lower cost set-top
products.

Also within the  industry,  a desktop  market has emerged.  The desktop
product is typically an additional  board set that is installed within a PC or a
PC appliance that is plugged into the USB connection. These additional boards or
appliances,  with attached cameras and microphones,  allow for a videoconference
to take place at the desk over a computer.

A  videoconference  entails the transmission of video,  audio and data
signals between two or more locations over a network  connection.  Video,  audio
and data  conferencing  involves  the  processing  of a large  amount of digital
information.  In order to transmit this information over digital  networks,  the
video,  audio  and  data  signals  must  be  digitized  and  compressed  without
substantially    reducing   the   information    content.   In   recent   years,
telecommunications  networks have evolved from circuit-switched technology (like
traditional  telephone lines) to packet-switched  technology  (Internet Protocol
(IP) networks).  More recently,  a major effort has been in place, mostly in the
United States, to install fiber optic networks that utilize wavelengths of light
to transmit IP data at higher speeds that would otherwise be  accomplished  over
traditional  telephone lines. These networks have become increasingly popular as
a means of  transmitting  Internet  related  data such as  electronic  commerce,
distributed  computing,  electronic  mail,  facsimile  transmission,  electronic
transaction  processing,  remote  access  telecommuting  and local and wide area
networking.  Videoconferencing  also utilizes  these  networks as represented by
VTEL's  latest  generation  videoconferencing  product line,  Galaxy(TM),  which
allows  calls  to be  placed  either  over  traditional  phone  lines or over IP
networks  on a  call-by-call  basis.  Because of the large  amount of  bandwidth
required in a videoconference as well as the unprecedented  growth in demand for
IP networks, network management is becoming increasingly important. Providers of
networking  equipment  such as Cisco,  Lucent,  Ciena and others have  developed
networking  solutions that redirect network traffic more efficiently.  We expect
that IP network  traffic will  continue to become more  efficient in the future.
With the increased  availability and efficiency of the IP networks, a wide array
of  products  that  utilize  visual  communications  are  becoming  increasingly
available.  We believe that our  experience in providing  solutions for specific
customer's needs makes VTEL uniquely qualified to take advantage of the business
opportunities  that are being  created by broadband  network  proliferation.  We
believe  that while the growth in the  industry  will  continue  to be  directed
toward demand for set-top  videoconferencing,  technological  developments  will
reduce the endpoint to a software  application with minimal additional  hardware
attached  to the PC. We also  believe  that the key to our success in the visual
communications  industry  will be based on our ability to develop  software  and
offer  services and  solutions  that can be delivered to the end users of visual
communications.

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Corporate Strategy

VTEL  has  long  been a  leader  in the  design,  manufacture  and  sale of
videoconferencing  hardware and software with  thousands of satisfied  customers
around the world.  Our primary focus has been on delivering the high-end  visual
communication  systems  that  provide  superior  functionality  to  customers in
markets such as  education,  government  and health care.  However,  despite our
ongoing  efforts  to expand  the  industry  and make  visual  communications  as
ubiquitous as e-mail or the telephone,  the entire  industry is struggling  with
sales   declining   for   high-end   systems.   Softer   demand   for   high-end
videoconferencing  systems  has caused  prices to decline  as  industry  players
compete for customers on price. Overall, videoconferencing has yet to live up to
its promise as a critical component of business communications.

In recent years,  however, a change is taking place in the industry that we
feel will unlock the promise of visual communications. The expansion of Internet
Protocol (IP) networks that connect large businesses and  organizations  and the
steady growth of fiber optic or "broadband" cable lines to serve these networks,
create a new environment for visual  communications - video over IP. This is the
future area of growth from which VTEL is poised to lead and  benefit.  On August
23,  2000,  we  announced  plans  to  transform  our  business  model  from  the
traditional  manufacture and sale of  videoconferencing  products to one that is
focused on leading the  transition to video over IP. Our new business model will
involve  executing  the  following  strategies:

|X|  developing industry-wide  interoperability to ensure that all video network
hardware and software  are  compatible,  which in turn will drive growth in
the market;

|X|  designing  back-office  software  products that can become the standard for
video over IP;

|X|  designing and developing  entire video networks that integrate  existing IP
enterprise networks;

|X|  serving as an industry consultant and expert on video over IP;

|X|  managing video networks;

|X|  establishing multi-vendor services and support;

|X|  fulfilling   multi-vendor   endpoint   and  network   product  and  service
requirements.

We anticipate  revenue to originate from the sale of product  elements such
as software,  integration,  network consulting services and endpoint and network
equipment  sales and  maintenance.  We will  focus our  solution-oriented  sales
effort in the commercial marketplace, while maintaining our reseller and channel
partner relationships in our existing markets for  videoconferencing  endpoints.
Because we expect continued demand for high-end  videoconferencing  particularly
in the  education  marketplace,  we will  continue  to  support  our  Galaxy(TM)
endpoint videoconferencing systems.

As we transform our core  business  into  becoming a visual  communications
solutions provider, we also are aware that the proliferation of the Internet has
created an urgency for video applications in a web environment. Consequently, we
are investing in  subsidiary  businesses  that are focused in that area,  namely
Onscreen24 and Articulearn. These two initiatives provide VTEL entry points into
the evolving  Internet  domain.  We believe that Internet  applications  such as
education and other visual  communication  tools can grow and become profitable.
These  initiatives  are currently in the development  stage,  but should produce
products and services during fiscal 2001.

Our corporate  strategy in the near term is to manage this  transition  and
generate profitable results from operations as quickly as possible. This process
will include the  restructuring of our operations,  which began during the first
quarter of fiscal 2001. We are also in the process of implementing relationships
with other  vendors  of visual  communication  software  and  hardware  products
whereby VTEL would become a sales and development partner. While there are risks
involved  in such a  strategy,  we  believe  our  years of  expertise,  customer
relationships  and  existing  software  and hardware  product  offerings  can be
leveraged for future financial success.

System Integration and Services

A key  strategy in our  business  plan to become a solutions  provider  for
visually  enabling  broadband  networks  lies  in our  existing  expertise  as a
provider of systems integration and maintenance services.  VTEL Global Services,
based in King of Prussia,  PA,  originated  from an  acquisition in 1995. At the
time of the acquisition, Global Services was operating as a value-added reseller
for VTEL and other industry players providing systems integration,  installation

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and customer support for the various videoconferencing products available within
the industry.  Global Services has consistently provided profitable results as a
division  primarily  focused on the delivery of  integration,  installation  and
services  of VTEL  products.  As part of our new  strategy,  we will once  again
actively market our ability to integrate, install and service a wide offering of
VTEL and  third-party  products,  including  the  products of  traditional  VTEL
competitors.

Within  Global  Service,  our  Integrated  Systems  group has  developed  a
worldwide  reputation as a visual  communications  solutions  provider.  We have
successfully   integrated  systems  into  boardrooms  and  auditoriums  for  our
corporate  customers  as well as  classrooms  in primary  schools,  colleges and
universities.  Our Integrated Systems group has provided solutions for customers
who have required multiple voice activated  cameras,  custom  user-interface and
other customized  requirements.  The experience gained by addressing these needs
is a primary reason why VTEL is ideally positioned to become the focal point and
leader in visually enabling existing and emerging network infrastructures.

Our service and maintenance  group is a global  operation,  supporting VTEL
technicians  located  on five  continents  and a  worldwide  network  of service
subcontractors.  We currently support more than 10,000 endpoint systems that are
under VTEL service  contracts.  These include VTEL products,  legacy products of
our wholly  owned  subsidiary  CLI,  network  products  for which VTEL acts as a
reseller and some service  contracts for our competitors'  products.  As part of
our  new  strategy,   we  intend  to  actively  pursue  additional  support  and
maintenance  contracts for our  competitor's  products as well as other products
that emerge in the broadband  visual  communications  industry.  We believe this
strategy  will  further   position  VTEL  as  the  industry   expert  in  visual
communication solutions.

In addition to our  existing  service and  maintenance  offerings,  we
intend to enhance our network  management  service  capabilities.  In 1997, VTEL
introduced the industry's first  standards-based  management and  administration
platform for distributed visual communication networks. Using the Simple Network
Management Protocol "SNMP" standard, VTEL's SmartVideoNet ManagerTM provides the
ability to centrally control visual communication networks for functions such as
problem determination, problem resolution, call setup and conference statistics.
An  example  of the  application  for this  network  management  product  is the
Kinko's(R) network of  videoconferencing  endpoints.  This nationwide network of
VTEL videoconferencing  endpoints is managed through SmartVideoNet ManagerTM. We
intend to  further  develop  our  networking  product  for use on  broadband  IP
networks and offer network management support on a contract basis.

Products

VTEL differentiates its videoconferencing systems from other systems by
a high level of advanced functionality, such as presentation graphics and access
to PC-based  software  and  hardware  peripherals.  The  software  that runs our
videoconferencing  systems operates on an open architecture  using a standard PC
with  additional  boards  and  ports for the  cameras  and  microphones.  VTEL's
videoconferencing  systems run on a MS Windows  operating  system which makes it
compatible  with other common  software  programs.  This is a primary reason our
products deliver such advanced functionality. Since our products utilize open PC
architecture, many system upgrades are accomplished with software only, enabling
customers to protect their investment in VTEL systems.

Our latest line of videoconference products, Galaxy(TM), was introduced
in October 1999. The software  within the  Galaxy(TM)  line is H.323 capable for
videoconferencing  over  Internet  Protocol  networks  and/or H.320  capable for
videoconferencing  over traditional  circuit switched  networks.  The Galaxy(TM)
product  line  provides  state of the art audio and video  with high  resolution
slide capture and send graphics.  Within this product family there are solutions
that support single or dual monitor configurations, with data rates from 128Kbps
to 1920Kbps  (T1/E1).  With the MiniTower,  introduced in April 2000, we added a
set-top solution to the Galaxy(TM) line of videoconferencing  products. With the
MiniTower our customers have the  affordability  of a set-top  videoconferencing
product  as well as the  ability  to  easily  upgrade  to  high-end  large  room
functionality.  Despite  our  plans to  embark  on a  broader  array  of  visual
communications  products,  we intend to  continue  to develop  the  features  of
Galaxy(TM) in order to support our  customers who have already  invested in this
feature-rich product.

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As stated earlier, we believe the future of  videoconferencing  will be
driven  by  software  applications  over  broadband  networks.   While  software
development has been at the heart of our videoconferencing  philosophy,  we also
offer other visual  communication  tools for the  Internet  such as streaming or
webcasting  products,  network software that remotely manages and  troubleshoots
videoconferencing  networks and network bridging equipment for multi-point calls
manufactured  by third  parties.  In August 2000, we announced our  Multi-Vendor
Solutions  Program (MVP).  This program is designed to identify the state of the
art Internet products for visual communications and allow us to incorporate them
as part of our overall solution for visual communications.

In June of 1999 we introduced our TurboCast(TM) product. TurboCast(TM)
software allows  customers to capture,  store,  distribute,  and view live or in
replay mode media  streams  across the Internet and be accessed by clients using
standard web browsers.  The TurboCast  solution utilizes a Java(R) applet,  that
allows  a media  stream  to play  directly  within  browsers  such as  Microsoft
Internet Explorer(R) and Netscape  Navigator(R)  without downloading  additional
software.  Since  TurboCast  can  be  used  with  any  Java(R)-enabled  browser,
broadcasts  can be viewed on PC and Unix  systems as well as some  Java(R)-based
hand-held  consumer  devices.  We expect to offer  enhancements to the TurboCast
products during fiscal 2001 which is currently  available as either a standalone
product or included within our videoconferencing endpoints.

SmartVideoNet  ManagerTM  software is a network  tool  designed to help
customers  simplify the  administration  of video networks and reduce  operating
costs.  Based on the Windows NT platform and utilizing  the SNMP  communications
protocol,  SmartVideoNet  ManagerTM  leverages the PC-based  architecture of our
systems to allow customers to use their existing Intranet to provide  continuous
monitoring of their video network. SmartVideoNet ManagerTM allows administrators
to remotely control, configure, diagnose and troubleshoot VTEL systems, all from
a PC console.

VTEL offers a variety of third-party manufactured equipment to optimize
connectivity  in a  variety  of  network  environments.  In  order  to  maximize
communication  effectiveness,  many  customers  choose to  purchase  multi-point
control units (MCUs) to link multiple users into a single  meeting.  We identify
the  best  MCUs   available  in  the   marketplace,   test  and  certify   their
interoperability  with the  other  visual  communication  products  we offer and
deliver  them  to  our  customers.  As  with  all  of  our  products,  we  offer
installation and maintenance services on the networks products we sell.

The Multi-Vendor  Solutions Program is part of our new charter designed
to expand our integration and services business. The MVP provides solutions that
visually enable broadband  networks.  One of the first products  included within
our Multi-Vendor Solutions Program is the VBrick(TM).  This product provides the
ability  to  stream  high  quality  video and audio  MPEG  files  over a private
broadband network.  With our new business strategy, we expect to continue to add
to the list of visual communication  products that we offer as we deliver to our
customers the ability to conduct business over the Internet.

Internet Strategy

During the year ended July 31,  2000,  VTEL  established  two  entities
within its combined organizational  structure to pursue business strategies over
the Internet.  With these entities,  we plan to leverage our expertise in visual
communications  as an  extension  to our core  business  strategy of  delivering
products and services.  Onscreen24  focuses on developing  and marketing  visual
communication   tools  for  the  Internet  such  as  video  mail  and  streaming
technologies.  Articulearn will develop the E-Commerce infrastructure to support
the delivery of web-based  training and the user  identification and transaction
capabilities  that  are  needed  to  effectively   deliver  this  service.   The
capabilities  will be available on a ready-made  basis for customers who want to
provide  web based  training  to either  their own  employees,  customers  or an
audience at large.  In addition,  Articulearn  offers  professional  services to
assist  companies  as they  develop  educational  content to be offered over the
Internet.

Distribution Strategy

Traditionally,  VTEL has relied on third-parties  to sell its  videoconferencing
products.  The majority of these sales are through  providers  of networks  that
also subcontract with us for installation and maintenance services.  Part of our
new business strategy is to further develop these relationships and partner with
the  network   providers  to  offer  the  end  user  the  best  possible  visual
communication  solutions  available.  We intend  to  leverage  these  consulting

6

services into long-term service contracts for network management and maintenance
as well as product training revenues.

The VTEL services business primarily delivers its capabilities directly
to  the  end-user  customers.  These  services  will  generally  involve  larger
customers that have sophisticated visual communication networks and require more
involvement to support the sale, installation and maintenance of the network. As
we intend to offer a broader  range of visual  communication  products,  we also
expect to develop a broader  range of direct  customers  especially as broadband
networks become available and affordable to small businesses.

Competition

While there are several  manufacturers of videoconferencing  endpoints,
very few companies are dedicated to developing a sales and  consulting  business
around visual  communications  over  broadband  networks.  While the big network
providers will sell videoconferencing  equipment along with the network they are
installing,  they do not  usually  provide  post-installation  services  such as
network  management  and  product  services  and  training.   Meanwhile,   other
videoconferencing  manufacturers  do  not  usually  provide  network  consulting
services.  Certain of our current smaller niche market customers may potentially
be our  competitors  for  certain  customers.  It is our intent to partner  when
appropriate,  to offer  the  end-user  the best  visual  communication  solution
possible.

While we believe that by embarking on this new business  strategy  that
we are focusing on a niche that is being ignored by the  industry,  there can be
no  assurances  that this  strategy  will be  successful.  Furthermore,  if this
strategy  is  successful  it is likely  that  other  companies  will  attempt to
duplicate this business model.

Patents and Trademarks

VTEL has 22 patents  issued by the United  States  Patent and Trademark
Office and 23 patent applications pending related to our technology.

There can be no  assurance  that the pending  patents will be issued or
that issued patents can be defended  successfully.  However,  we do not consider
patent protection crucial to our success. We believe that, due to the rapid pace
of technological change in the videoconferencing  industry, legal protection for
our  products  are  less  significant  than  factors  such as our use of an open
architecture,  the success of our  distribution  strategy,  the ongoing  product
innovation and the knowledge, ability and experience of our employees.

VTEL has been issued two trademarks and two service marks by the United
States Patent and Trademark Office covering the "VTEL" mark and our logo as well
as  trademarks  and  service  marks  issued by  certain  foreign  countries  and
entities.  Applications for other  trademarks are currently  pending both in the
United States and abroad.

Employees

At July 31, 2000, we employed 592 full-time employees as follows:
Number of
Function                                     Employees

Sales and marketing                              173
Research and development                          91
Service, support and                             163
Systems integration

Manufacturing                                     55
Finance and administration                       110
-------------
Total                                       592
=============

With the  announcement  of the New Charter on August 23, 2000,  we also
announced the restructuring of our organization.  The restructuring will involve
the termination of approximately 200 employees or 34% of our workforce.  Despite
this  reduction,  our  success  will depend on our ability to attract and retain
trained and qualified personnel who are in great demand throughout the industry.
None of our  employees  are  represented  by a labor union.  We believe that our
employee relations are good.

7

VTEL's  development,  management  of its  growth  and other  activities
depend on the efforts of key management and technical employees. Competition for
such personnel is intense. We use incentives, including competitive compensation
and stock option plans, to attract and retain  well-qualified  employees.  There
can be no  assurance,  however,  that we will  continue  to  attract  and retain
personnel with the requisite  capabilities  and  experience.  The loss of one or
more of our key management or technical personnel also could have a material and
adverse affect. VTEL generally does not have employment  agreements with its key
management  personnel  or  technical  employees.  Our  future  success  is  also
dependent upon our ability to effectively attract,  retain,  train, motivate and
manage our employees.  Failure to do so could have a material  adverse effect on
our business and operating results.

Executive Officers

Our executive officers are as follows:

Stephen L. Von Rump,  age 42, was  appointed  President of VTEL in July
1999.  He joined VTEL as Chief  Marketing  Officer in September  1998.  Prior to
joining VTEL, Mr. Von Rump spent thirteen years at MCI Corporation most recently
as Vice President,  Enterprise  Services  Marketing where he was responsible for
their data and Internet  services  strategy.  As one of MCI's top data marketing
executives,  he lead the transition of their enterprise  business offerings from
legacy data  services  into the new era of virtual data and  internet  services.
Prior to MCI,  Mr.  Von Rump was a member  of the  technical  staff at AT&T Bell
Laboratories. He holds a master's degree in electrical engineering, has authored
numerous technical and marketing  publications and served as keynote speaker for
numerous professional conferences in the U.S. and abroad.

Michael  J.  Steigerwald,  age 41,  joined  VTEL  in June  1998 as Vice
President and General Manager of the Professional  Services  division,  based in
King of Prussia,  Pennsylvania.  Mr.  Steigerwald  currently  holds the position
Chief  Operating  Officer.  Prior to  joining  VTEL,  Mr.  Steigerwald  held the
position  of Vice  President  at  Newbridge  Networks,  where he lead the Global
Service and Support  organization  responsible  for their ViVID  Internetworking
Products  business  unit.  For  thirteen  years  prior  to his  experience  with
Newbridge Networks,  Mr. Steigerwald held several services management  positions
at Ungermann-Bass  Networks, an early pioneer in the LAN industry, with his last
position being that of Vice President, Worldwide Customer Care.

Jay C.  Peterson,  age 43, was appointed  Vice President of Finance and
interim  Chief  Financial  officer  in May 2000.  Mr.  Peterson  joined  VTEL in
September  1995 as manager of Corporate  Planning.  Prior to joining  VTEL,  Mr.
Peterson held various financial positions with IBM Corporation.

Steve L. Cox, age 46, joined VTEL in  June of 1996 as  Vice President -
Chief  Information  Officer.  From  1990 to 1996 Mr.  Cox  served  as  Corporate
Director of Information  Systems for NEC North America,  Inc. From 1976 to 1990,
Mr. Cox  served as Manager of  Information  Systems  for  Alumax,  Inc. / Howmet
Aluminum Corporation.

Dennis M. Egan, age 49, joined  VTEL in November 1995 as Vice President
- Service.  From January 1993 to November  1995,  Mr. Egan served as Senior Vice
President of  Peirce-Phelps,  Inc. From June 1985 to January 1993,  Mr. Egan was
Vice  President and General  Manager of the  Integrated  Communications  Systems
Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years serving
in various sales and management positions with Peirce-Phelps.

Bob R. Swem,  age 63, joined VTEL in September 1992 as Vice President -
Manufacturing. From June 1981 to July 1992, Mr. Swem held various positions with
the  Austin  Division  of  Tandem  Computers,  Inc.,  ranging  from  Manager  of
Manufacturing to Director of Operations.

8

Item 2.    Properties

VTEL's  headquarters,  product  development,  and sales  and  marketing
facility leases approximately 139,000 square feet in Austin, Texas under a lease
which  expires in March 2013.  During  fiscal 1999,  we reduced the workforce of
VTEL  (see  Restructuring  Activities  in Item 7.) and as a result  were able to
sublet approximately 15,000 square feet during the later part of fiscal 1999 and
the first  quarter of fiscal  2000.  In fiscal  2001,  we intend to  sublease an
additional  45,000 square feet in order to consolidate  space and take advantage
of a  favorable  real  estate  market in the Austin  area.  We believe  that the
remaining  facilities  are adequate to meet our current  requirements,  and that
suitable  additional space will be available,  as needed, to accommodate further
physical  expansion of corporate and  development  operations and for additional
sales and marketing offices. VTEL occupies approximately 60,000 square feet of a
facility that is situated in a light industrial area in Austin,  Texas where our
manufacturing,  training and spare parts depot are located. VTEL's manufacturing
facilities and equipment are currently utilized generally on a one-shift per day
basis. Should additional  manufacturing capacity be needed during the next year,
we believe that it could provide the necessary  manufacturing  capacity  through
the addition of work shifts or subcontractors and additional warehouse space.

VTEL leases 52,500 square feet in Sunnyvale,  California  under a lease
that  expires in April 2008.  We have a research  and  development  group in our
Sunnyvale location. As a result of its restructuring activities, VTEL has sublet
approximately 5,200 square feet at its Sunnyvale location.  . In fiscal 2001, we
intend  to  sublease  additional  space in order to  consolidate  space and take
advantage  of a  favorable  real estate  market in the  Sunnyvale  area.  VTEL's
Professional  Services group occupies a facility of approximately  41,000 square
feet in the  Philadelphia,  Pennsylvania  vicinity  which is leased through June
2006.

Item 3.    Legal Proceedings

VTEL is the  defendant or plaintiff in various  actions  which 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.

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

None

9

PART II.

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters

Market information

Since  April 7,  1992,  VTEL's  Common  Stock  has been  traded  in the
NASDAQ-National  Market System under the symbol "VTEL". The following table sets
forth the range of high and low closing  prices for each fiscal  quarter of 1999
and 2000:

Fiscal Year Fiscal Year

1999                          2000
High             Low            High         Low

1st Quarter              $  5.875        $  2.875      $    3.750     $  3.063
2nd Quarter              $  4.750        $  2.500      $    5.719     $  2.625
3rd Quarter              $  9.250        $  2.000      $   10.625     $  3.875
4th Quarter              $  6.500        $  4.000      $    4.938     $  3.063

VTEL has not paid cash  dividends  on its  Common  Stock and  presently
intends to  continue a policy of  retaining  earnings  for  reinvestment  in its
business.

On of September  15, 2000,  VTEL's common stock closed at $2.750 on the
NASDAQ. At that date there were approximately  17,791  stockholders of record of
the common stock.

Item 6.    Selected Financial Data

The following table sets forth consolidated  financial data for VTEL as
of the dates and for the periods  indicated.  All such data  reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests. The
consolidated  operations  data for the years ended July 31, 1998,  1999 and 2000
has been  derived from the audited  consolidated  financial  statements  of VTEL
included elsewhere herein. The consolidated operations data for the seven months
ended July 31, 1996 and the year ended July 31, 1997 has been  derived  from the
audited consolidated financial statements of VTEL not included herein.

The  consolidated  balance sheet data as of July 31, 1999 and 2000 have
been derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated  balance sheet data as of July 31, 1996, 1997
and 1998 have been derived from the audited consolidated financial statements of
VTEL not included herein.

The  consolidated  financial data as of July 31, 1995 and for the seven
months then ended have been derived from the  unaudited  consolidated  financial
statements of VTEL not included  herein.  The unaudited  consolidated  financial
data include all adjustments,  consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as of
such dates and the results of operations  and cash flows for such  periods.  The
selected  financial  data should be read in  conjunction  with the  consolidated
financial  statements  of VTEL and  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations."

The restatement of the consolidated  financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for all periods presented.
However,  the two companies operated  independently prior to the Merger that was
consummated in May 1997 and the  historical  changes and trends in the financial
condition  and  results  of  operations  of these two  companies  resulted  from
independent activities.

10

For the
Seven Months                           For the Years
Ended                                 Ended
July 31,                              July 31,
1995(a)     1996(a)      1997(b)      1998(c)     1999(d)      2000(e)
--------------------------------------------------------------------------
Unaudited
In thousands, except per share amounts

Statement of  Operations Data:
Product revenues                        $  89,207   $  74,098    $ 150,791    $ 134,775   $ 105,520     $  89,085
Services and other revenues                 8,872      22,864       40,232       44,909      46,082        45,226
Gross margin                               39,971      35,980       74,702       84,957      67,238        47,279
Net income (loss) from continuing
operations                             (4,335)    (18,507)     (44,271)       2,779     (15,565)        2,297
Net income (loss)                          (3,811)    (18,507)     (52,054)       2,779     (15,565)        2,297
Net income (loss) per share from
continuing  operations                  (0.24)      (0.87)       (2.10)        0.12       (0.66)          .09
Net income (loss) per share                 (0.21)      (0.87)       (2.45)        0.12       (0.66)          .09

Balance Sheet Data:
Working capital                         $  76,023   $  77,091    $  39,528    $  41,503   $  28,135     $  50,307
Total assets                              182,082     175,092      131,135      129,289     124,091       123,533
Long-term liabilities                       1,278           -            -        3,848      15,930         4,665
Stockholders' equity                      126,739     122,238       76,765       81,258      68,019        82,661

<FN>

(a)  Net loss for the seven  months  ended July 31, 1995 and 1996  combines
the pro forma results of VTEL and its  wholly-owned  subsidiary  which
were merged on May 23, 1997.

(b)  Net loss for the year ended July 31,  1997  includes  merger and other
expenses totaling $29.4 million related to the merger between VTEL and
CLI.

(c)  Net income for the year ended July 31, 1998  includes  the reversal of
$1.5  million  of  merger  and  other  expenses  and  a  gain  from  a
non-recurring real estate transaction of $1.3 million.

(d)  Net  loss for the  year  ended  July 31,  1999  includes  expense  for
restructuring totaling $3.1 million.

(e)  Net income for the year ended July 31, 2000  includes a  non-recurring
gain of $44.5  million and an expense for the  write-down  of impaired
assets of $14.1 million.
</FN>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company

New Charter

On August 23, 2000, VTEL announced a new business  charter and strategy for
transforming our business from that of a developer, manufacturer and distributor
of  videoconferencing  endpoints  to a business  model  whereby we leverage  our
existing sales, services and system integration capabilities.  By executing this
change in  business  strategy,  our goal is to  become  the  industry  leader in
providing visual communication  solutions over broadband networks. We believe we
can  execute  this  change in business  strategy  by doing the  following:

o    In  addition to our current  product  offerings,  we will begin to actively
market other  manufacturers'  products  that deliver  visual  communication
solutions;

o    We will expand our customer service and systems integration capabilities to
cover other visual communication products available within the industry;

o    We will focus our research and  development  efforts to enhance our network
management  software  platform  that will  interoperate  in a  multi-vendor
environment to manage visual communication traffic over IP networks;

o    Building  upon our existing  services and  integration  business',  we will
market and deliver  additional but related  services such as system design,
implementation, management and training.

11

The following  discussion  and analysis  references the term "New Charter",
which is  synonymous  with current or future  operational  activities  that fall
under VTEL's new business  strategy to visually enable  broadband  networks.  In
that  discussion,  any mention or projection of financial  performance  measures
that  we  may  currently   anticipate   should  be  considered   forward-looking
statements,  which may involve risks and  uncertainties  that could cause actual
results to differ  materially  from those  expected or desired  (see  Cautionary
statement regarding risks and uncertainties that may affect future results.)

Result of Operations

The  following  table sets forth for the fiscal  periods  indicated the
percentage of total revenues represented by certain items in VTEL's consolidated
statement of operations:

For the Years Ended
July 31,
1998            1999          2000

Product revenues                             75.0%           69.6%         66.3%
Services and other revenues                  25.0            30.4          33.7
Gross margin                                 47.3            44.4          35.2
Selling, general and administrative          36.1            40.1          41.5
Research and development                     11.1            11.8          12.9
Total operating expenses                     46.8            54.7          66.0
Other income, net                             1.1             0.1          33.0
Net income (loss)                             1.5%          (10.3)%         1.7%

For the Years Ended July 31, 1998, 1999, and 2000.

Revenues

Consolidated  revenue was $179.7 million in fiscal 1998, $151.6 million
in fiscal 1999, and $134.3 million in fiscal 2000. The decline was $28.1 million
from 1998 to 1999 and $17.3 million from 1999 to 2000. This is a decrease of 16%
for 1999 and 11% for 2000.

The decline in overall revenue during the three-year  period is largely
due to the decline in product revenues  whereas services  revenues have remained
relatively  stable  over the same  period.  The  decline in product  revenues is
largely the result of reduced average sales prices as our customers have shifted
their demand from high-end  high-functionality products to lower cost units that
offer the more basic  videoconferencing  functions.  Total unit sales  decreased
from fiscal 1998 to fiscal 1999 but have  remained  relatively  flat from fiscal
1999 to fiscal 2000.

This shift in the product mix is  reflected  within the industry by the
relative  success  of   manufacturers   of  high  volume,   low  margin  set-top
videoconferencing   products.   We  believe   that  the   demand  for   high-end
videoconferencing  endpoints that offer multimedia  software  applications  most
often  used in an  educational  environment  have been and will  continue  to be
stable.  The marketing  costs and cycle times  associated with the sale of these
high-end  systems,  however,  makes it cost  prohibitive to focus on this market
alone. Furthermore,  we expect the margins on set-top videoconferencing products
to continue to decline as IP networks place more emphasis on software  solutions
for videoconferencing.  As a result, in August 2000, VTEL announced its plans to
embark on a new  business  charter  that  leverages  our  services  and  systems
integration  capabilities  as  well  as our  experience  in the  development  of
videoconferencing  endpoints.  We believe  that we can become the company in the
industry  that  leads the  effort to  visually  enable  broadband  communication
networks (see New Charter).  During this  transition we will attempt to maintain
the sales levels of our VTEL designed videoconferencing  endpoints.  However, as
we expect  the visual  communications  industry  to  continue  to shift  towards
software solutions, we also anticipate downward pressure on product revenues.

Service  revenue was $44.9  million in fiscal 1998,  $46.1  million in
fiscal 1999,  and $45.2  million in fiscal  2000.  The increase was $1.2 million
from 1998 to 1999 and the decline was $0.9 million from 1999 to 2000. This is an

12

increase of 3% for 1999 and a decrease of 2% for 2000.  Service  represents 25%,
30% and 34%, of total revenues for the years ended July 31, 1998, 1999 and 2000,
respectively.

Service revenue represents the combined revenues of our Global Services
division which provides  installation and maintenance services as well as custom
videoconferencing  integration  solutions.  While overall service  revenues have
been relatively flat over the three-year reporting period,  service revenue as a
percentage  of total  revenue has  increased  significantly.  The ability of our
Global Services division to maintain consistent revenue streams from service and
maintenance contracts despite declining product revenues reflects the quality of
our service  performance as indicated by customers' renewal of their maintenance
contracts.

Revenue from  integration  solutions was $16.2 million,  $16.4 million
and $18.0 million in fiscal 1998, 1999 and 2000 respectively.  While integration
revenue  has been  relatively  flat over the  three-year  reporting  period,  we
believe,  at least in part,  that this is attributable to a primary focus on the
integration of VTEL products.  With the adoption of our new business  model,  we
plan to market our integrated  solutions  approach using a wider array of visual
communications  products.  We believe that the  integration  business,  which is
currently profitable, can establish further growth.

International sales were $32.7 million in fiscal 1998, $20.1 million in
fiscal 1999 and $23.3 million in fiscal 2000. This  represents  revenue from the
export  sales  of our  domestic  operations  as well as sales  from our  foreign
subsidiaries.  Our wholly owned  subsidiary CLI, which merged with VTEL in 1997,
had developed a strong presence in the Far East and  specifically in the Peoples
Republic  of China.  The  decline  in  international  revenues  during  1999 was
attributable in part to the economic  downturn in the Far East. In addition,  we
have experienced  increased  competition from manufacturers of videoconferencing
equipment within the Peoples Republic of China. During fiscal 2000, we completed
the regulatory  process by which we are approved to  manufacture  and distribute
product and services as a wholly  owned  foreign  enterprise  within the Peoples
Republic of China. We believe that this will further enhance our competitiveness
in the  Chinese  market,  which  is  increasingly  adopting  methods  of  visual
communications.  In 1998 and 1999, we acquired two  subsidiaries  in Europe that
had  previously  been  successful  value-added  resellers  of  videoconferencing
products. We believe our European subsidiaries' strict focus on the VTEL product
line   impaired   their   competitiveness   as  the   demand   in   Europe   for
videoconferencing  products shifted toward the low-end even more rapidly than in
the United  States.  As a result,  we have  substantially  reduced  the scope of
European  operating  activities,  while  increasing  the  emphasis  on sales and
customer service activities beginning in the first quarter of fiscal 2001.

VTEL  primarily  sells its products  through  resellers.  For the years
ended July 31,  1998,  1999 and 2000  reseller  sales  were 77%,  80% and 76% of
product and  integration  sales,  respectively.  We expect  that VTEL  developed
videoconferencing  endpoints  will  continue to  predominately  be sold  through
reseller sales channels.  As we develop our new business  model,  which includes
sales of a broader  range of  third-party  visual  communications  software  and
equipment,  we expect  that a larger  percentage  of our overall  revenues  will
become more direct in nature.

We have made the  decisions  to take the  business  in a new  direction
because we expect that product  revenues will continue to decline.  There can be
no  assurance  that  product  revenues  will  not  decline  faster  than we have
predicted  nor can we be certain  that our  service  revenues  will  increase as
intended.  Our expense  levels are based,  in part,  on our  expectations  as to
future revenue levels,  which are difficult to predict,  and 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.

Gross margin

Consolidated  gross  margins were 47% for fiscal  1998,  44% for fiscal
1999,  and 35% for fiscal  2000.  Gross  margins for service  were 36% in fiscal
1998, 37% in fiscal 1999, and 29% in fiscal 2000.

Over the last few years,  VTEL and the industry overall has experienced
a lower  margin/lower  average sales price trend.  This trend has been driven by
the  introduction  of lower  cost  videoconferencing  appliances.  Nevertheless,
average  sales  prices for  high-end  systems,  where VTEL has focused its sales
efforts,  have  remained  in the $20,000 to $30,000  range for the past  several

13

years.  While  VTEL has  focused on the  high-end/high-margin  videoconferencing
marketplace,  a competitive  trend toward lower average sales prices has reduced
our margin returns.  During our growth phase from 1993 to 1998, we developed the
capability  to deliver  systems  that  incorporated  high-end  videoconferencing
quality.  However,  our existing  manufacturing and channel distribution process
cannot deliver  high-end  products with profitable  margins.  As part of the New
Charter, we plan to develop a more efficient product delivery model.

The gross  margins  generated by our Global  Services  division,  which
provides  maintenance and systems integration  revenues,  have historically been
lower than the gross margins from our product sales.  Whereas  service costs are
relatively fixed, integration margins are subject to product mix shifts based on
the types of integration  solutions we produce.  The decline in service  margins
during  fiscal 2000 was  attributable  to a higher  percentage  of larger custom
integration  projects that generated  higher  revenue's yet lower gross margins.
The integration  business also acts as a conduit to deliver service  maintenance
contracts on the projects we deliver.

We believe that, as part of our new charter, service revenues can grow
as we offer our service  capabilities  to a broader range of third-party  visual
communications products.  Despite apparent lower gross margins, service revenues
do not carry the associated cost of sales that product sales do.  Therefore,  we
believe a  predominately  service-based  business  model  will  provide  greater
overall profitability.

We expect to experience  continued gross margin  pressures due to price
competitiveness  in the industry,  which we believe will continue to become more
intense as users of visual communication systems attempt to balance performance,
functionality and cost.

Selling, general and administrative

Selling,  general and  administrative  expenses  were $64.8  million in
fiscal 1998, $60.9 million in fiscal 1999, and $55.8 million in fiscal 2000. The
decline was $3.9  million  from 1998 to 1999 and $5.1 million from 1999 to 2000.
This  is a  decrease  of 6% for  1999  and 8% for  2000.  Selling,  general  and
administrative  expenses  were 36%,  40% and 42% of revenues for the years ended
July 31, 1998, 1999 and 2000.

Even though we have reduced total selling,  general and  administrative
expenses year over year,  these costs  increased as a percentage of revenue over
the  three-year  reporting  period.  We believe  this trend is the result of our
continued focus on the high-end videoconferencing market during a period of time
when  that  market  has  been  either  flat  or   declining.   As  the  high-end
videoconferencing market has narrowed itself primarily toward the government and
education   sectors,   the  sales  cycle  times  and  the  cost  for   technical
professionals  to complete  these sales have not  declined in the same manner as
the associated product revenues.  To a certain degree, the technical intricacies
involved in the sales cycle indicate the need in the  marketplace  for qualified
turnkey  visual  communications  network  integrators.  These  indications  have
contributed  to our decision to change our business  model and attempt to become
the provider of choice for customers who want to visually enable their broadband
networks.  We feel that knowledge drawn from our product sales experience can be
leveraged into new revenue streams as we reposition ourselves in the industry as
a leader in  evaluating,  designing,  installing,  testing and servicing  visual
communications networks.

Another aspect of our increasing  selling,  general and  administrative
costs as a  percentage  of  revenue  is the  development,  during  our  years of
significant growth, of a sales and marketing infrastructure that was designed to
support a growing  business.  Although we took  measures to reduce  costs during
fiscal 1999 (see  Restructuring  Activities),  we had projected that our revenue
levels would increase and, therefore,  we continued to support certain strategic
efforts in anticipation  of further  growth.  During the first quarter of fiscal
2001, we announced a restructuring  of our operations that is intended to reduce
not  only   manufacturing   costs  but  also  a  large   amount  of  our  global
administrative  infrastructure.  Our  intent  is  to  significantly  reduce  our
administrative  costs as a percent  of  expected  revenues.  We  believe  we can
accomplish this by, among other actions, consolidating our occupied office space
and subleasing  underutilized space in markets where real estate conditions have
moved in our favor. We also have eliminated certain  subsidiaries and reexamined
our overall  staffing  needs.  Despite the cost  reducing  measures  that we are
undertaking,  there can be no assurance that we will be able reduce costs enough
to become profitable in a declining revenue scenario.

14

Research and development

Research and  development  expenses  were $19.9 million in fiscal 1998,
$18.0 million in fiscal 1999,  and $17.4 million in fiscal 2000. The decline was
$1.9 million  from 1998 to 1999 and $0.6  million  from 1999 to 2000.  This is a
decrease of 10% for 1999 and 3% for 2000. Research and development expenses were
11.1%,  11.8% and 12.9% of revenues for the years ended July 31, 1998, 1999, and
2000.

The  decrease  in  research  and  development   expense   reflects  the
capitalization  of software  development  costs and the reduction of expenses to
keep in line with  lower  revenues.  The  capitalization  of  development  costs
totaled  $1.0  million in fiscal  1998,  $6.4  million  in fiscal  1999 and $4.7
million in fiscal  2000.  Software  development  costs are  capitalized  after a
product is  determined to be  technologically  feasible and is in the process of
being developed for market. At the time the product is released, the capitalized
software is amortized over the estimated  economic life of the related projects.
The research and development  projects that were capitalized were related to the
user interface  software  resident in our Galaxy(TM)  product,  and software for
visual  communications  over IP networks.  In October 1999,  the user  interface
software  was  released  with our new  Galaxy(TM)  line of visual  communication
systems.  As of July 31, 2000 we had amortized  $1.4 million of the  capitalized
development cost related to the Galaxy product line.

During the year ended July 31,  2000,  VTEL  created  two  subsidiaries
focused on the  development  and delivery of visual  communication  products and
services  over the  Internet.  In January of 2000, we announced the formation of
OnScreen24  which  is  comprised  primarily  of VTEL  research  and  development
engineers  who  are  developing  and  marketing  visual  communication  delivery
products for use over the Internet . They are developing  products such as video
mail as well as the  further  development  of our web  streaming  product  line,
Turbocast(TM),  which  utilizes the  technology  acquired in our  acquisition of
Vosaic  during  fiscal 1999.  In March of 2000,  we announced  the  formation of
Articulearn which will create and manage custom  e-learning  portals that enable
organizations  to create,  deliver and manage their  learning  content  directly
online. In addition,  ArticuLearn offers various professional services to assist
organizations in the production of their web-based learning content.  Jointly we
refer to  these  two new  business'  within  our  organization  as our  Internet
ventures.  During the year ended July 31, 2000  expenses  totaling  $8.2 million
associated with OnScreen24 were included in research and development expenses.

During the year ended July 31, 1999, research and development expenses
included  a charge  for  in-process  research  and  development  related  to the
acquired  assets of Vosaic  L.L.C.  (see  "Acquisition"  below).  As part of the
valuation  associated  with  Vosaic,  we  recorded  a  charge  to  research  and
development expense of $474,000. The charge is based on our estimate of purchase
price  associated with research and development on projects that were in-process
at the time of  acquisition.  The charge for research and  development  that was
in-process  relates to the next  generation  video  streaming  product  that was
approximately 20% complete at the date of acquisition.

Our ability to  successfully  develop  software  solutions  to visually
enable broadband networks will be a significant factor in VTEL's success.  As we
shift our research and  development  strategy,  we anticipate  additional  costs
associated with the recruiting and retention of engineering  professionals adept
at broadband technologies.  We will also maintain sustaining engineering efforts
on  our  existing  product  lines  including  our  flagship   endpoint  product,
Galaxy(TM).  We will attempt to maintain  research and  development  expenses at
historic levels in terms of percentage of revenue. We believe, however, that our
ultimate  future success is based primarily on our commitment to the new charter
as well as our Internet  ventures.  If revenues decline faster than anticipated,
or  profitability  is not achieved in the near term,  research  and  development
expenses  could be  significantly  higher as a percentage  of revenues than they
have been in the past.

Write-down of Impaired Assets

As  a  result  of  the  New  Charter,   we  determined   that
significant  changes were necessary in the manner and extent to which certain of
our  long-lived  assets used  solely in the  manufacturing  operations  would be
deployed.  Pursuant to SFAS 121  "Accounting  for the  Impairment  of Long-Lived

15

Assets  and  for  Long-Lived  Assets  to  be  Disposed  Of",  we  evaluated  the
recoverability of our long-lived assets including property, plant and equipment,
goodwill  and  other  intangibles  and  capitalized  software.   The  evaluation
indicated that the future  undiscounted cash flows related to certain long-lived
assets were below the carrying value of the assets  associated with their future
operations.  Further, the closure of certain foreign offices and the termination
of the software  capitalization  projects resulted in the identification of only
minimal future cash flows. During the fourth quarter of fiscal 2000, we adjusted
the  long-lived  assets  associated  with our  manufacturing  operations and the
long-lived assets related to the foreign operations and capitalized software. We
determined  their  estimated  fair  value  to be $9.4  million,  resulting  in a
non-cash  impairment charge of $14.1 million  (including $6.1 million related to
property,  plant and equipment,  $2.2 million  related to intangible  assets and
$5.8 million related to capitalized software).  The estimated fair value for the
long-lived  assets was based on  anticipated  future cash flows  discounted at a
rate commensurate with the risk involved.  The impairment loss has been recorded
as a loss from the write-down of impaired assets in the  consolidated  statement
of operations.  The remaining  useful lives of certain assets were shortened and
thus, depreciation and amortization will be higher in fiscal 2001.

Merger and other expense

Merger  expense was a credit to expense of $1.5 million in fiscal 1998,
a credit to expense of $0.2 million in fiscal  1999,  and $0.0 million in fiscal
2000.  The decline was $1.3 million from 1998 to 1999 and $0.2 million from 1999
to 2000.  This is a decrease of 87% for 1999 and 100% for 2000.  Merger expenses
were (0.83 %),  (0.13%)  and 0% of revenues  for the years ended July 31,  1998,
1999, and 2000.

Merger  expense  relates  to the  May  23,  1997  merger  of  VTEL  and
Compression Labs Incorporated  "CLI" and resulted in CLI becoming a wholly owned
subsidiary of VTEL.  Based on favorable events that occurred during fiscal 1998,
including  resolution of certain  litigation  and other  matters,  a reversal of
certain  accruals  related to the merger  totaling  $2.6 million was recorded in
fiscal  1998.  Separately,  a charge of $1.0 million was recorded to reflect the
final  write-off and disposal  costs of remaining  discontinued  CLI  inventory,
which had previously been held for sale.  These items resulted in a $1.6 million
credit to expense  in 1998.  During  the year  ended  July 31,  1999,  the final
significant contingent liabilities,  involving CLI as a defendant in litigation,
were either settled or dismissed in court. Merger related payments totaling $1.3
million  were paid during  1999.  In  addition,  we  recorded a note  payable to
Philips  Electronics North America Corporation for $0.3 million as part of terms
of that  settlement  agreement.  Since no  determinable  contingent  liabilities
remained in relation to the  Merger,  the final  balance of accrued  liabilities
totaling $0.2 million were returned as a credit to the Consolidated Statement of
Operations.

Restructuring Activities

With the  announcement  of the New Charter on August 23, 2000,  we also
announced the restructuring of our organization.  The restructuring will involve
the termination of  approximately  200 employees or 34% of our workforce and the
consolidation of leased office space in Austin, Texas and Sunnyvale, California.
We expect to record a  restructuring  charge in the first fiscal quarter of 2001
of approximately $6.0 to $8.0 million.

In November  1998,  management  adopted a  restructuring  plan that was
intended to match the size and complexity of the  organization  with our planned
path and recorded a charge of $3.1 million in fiscal 1999. The plan included the
involuntary   reduction  of  138  employees  from  all  departments,   including
manufacturing, sales, management and finance, and were effective immediately for
most  employees  upon  announcement.  We also made the  decision  to reduce  our
operating costs by exiting other activities and reducing related overhead costs.
These  activities  included the closure of certain  field sales  offices and the
Sunnyvale,  California spare parts depot.  All of the termination  benefits were
paid and closure costs were incurred by October 31, 1999. The following schedule
summarizes  the  components  and  activities  of  the  restructuring   plan  (in
thousands):

Termination and severance benefits                             $           2,311
Facility closure and other (primarily non-cancelable lease
obligations)                                                                769
-----------------
$           3,080
=================
16

Non-Recurring 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 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
paid $2.5 million in cash and  delivered to VTEL 300,800  shares of common stock
of Polycom,  Inc. in settlement of the claims  asserted by VTEL. When the shares
were  received  on March 3,  2000,  the  market  value of the  shares  was $39.1
million.  These  shares  were sold during  fiscal 2000 for $33.7  million net of
settlement  costs.  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 paid a
one time fee 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.

Interest income and expense

Interest income was $1.2 million in fiscal 1998, $0.8 million in fiscal
1999, and $1.2 million in fiscal 2000. The decline was $0.4 million from 1998 to
1999 and the increase was $0.4 million from 1999 to 2000.  This is a decrease of
33% for 1999 and an increase of 50% for 2000.  Interest  income was 0.7 %, 0.5 %
and 0.9% of revenues for the years ended July 31, 1998, 1999, and 2000.

Changes  in  interest  income  are based on  interest  rates  earned on
invested  cash and cash  balances  available  for  investment.  The  decrease in
interest  income  during  fiscal 1999 is the result of the reduced cash balances
primarily due to operating losses. The increase in interest income during fiscal
2000 is the  result  of an  increase  in the cash  balance  due to  income  from
non-recurring events.

Income taxes

Income tax expense of $0.6 million for the year ended July 31, 2000 was
primarily  attributable to alternative  minimum taxes and state taxes applied to
the taxable income related to  non-recurring  events.  As of July 31, 2000, VTEL
had federal net operating  loss  carryforwards  of $95.8  million,  research and
development credit  carryforwards of $5.4 million,  and alternative  minimum tax
credit  carryforwards  of  $0.5  million.  The net  operating  loss  and  credit
carryforwards  will expire in varying  amounts  from 2001 through  2019,  if not
utilized.  Minimum  tax credit  carryforwards  do not  expire and carry  forward
indefinitely.  Net operating losses related to our foreign  subsidiaries of $8.9
million are available to offset future foreign taxable income.

As  a  result  of  various  acquisitions   completed  in  prior  years,
utilization of our net operating losses and credit  carryforwards may be subject
to a substantial  annual limitation due to the "change in ownership"  provisions
of the Internal  Revenue Code of 1986.  The annual  limitation may result in the
expiration  of  net  operating  losses  before  utilization.  Also,  due  to the
uncertainty  surrounding  the timing of realizing  the benefits of its favorable
tax  attributes  in future tax  returns,  we have placed a  valuation  allowance
against our net deferred tax asset.  Accordingly,  no deferred tax benefits have
been  recorded  for the tax  years  ended  July 31,  1998,  1999 and  2000.  The
valuation  allowance  increased by $1.4  million  during the year ended July 31,
2000.

Net income (loss)

Net income was $2.8 million in fiscal 1998,  net loss was $15.6 million
in fiscal 1999,  and net income was $2.3 million in fiscal 2000. The decline was
$ 18.4 million from 1998 to 1999 and the increase was $17.9 million from 1999 to
2000.  Net income  (loss) was 1.6%,  (10.3)% and 1.7% of revenues  for the years
ended July 31, 1998, 1999, and 2000.

17

Net income  during  fiscal  1998 was  largely  attributable  to certain
nonrecurring  events. A gain of approximately $1.3 million (net of expenses) was
realized from a real estate transaction which eliminated the duplicate corporate
headquarter  facilities  created  by  our  merger  with  CLI.  Also,  due to the
favorable resolution of certain Merger-related issues during the year ended July
31, 1998,  we were able to record a net credit to income of  approximately  $1.5
million  due to the  reversal  of certain  Merger and other  accruals  that were
recorded as of July 31, 1997.

The loss generated  during fiscal 1999 was the result of lower revenues
as demand for large group,  high-end  videoconferencing  systems  began to shift
toward the  lower-end  segments  of the  videoconferencing  industry.  Since our
expense  levels  are  based  to  a  large  extent  on  revenue  expectations  we
experienced significant losses during the first and second quarters of the year.
During fiscal 1999, we were able to complete a restructuring  (see Restructuring
Activities) and align more closely our expense levels with projected revenue. As
a result of these actions, we were able to generate results from operations near
breakeven levels during the third and fourth quarters.

During fiscal 2000, unit demand in the  videoconferencing  industry has
continued  to shift  toward  the  low-end  set-top  videoconferencing  appliance
products.  Because our customers  continued to demand VTEL's  high-end  PC-based
systems  coupled with our desire to remain  competitive,  we have been unable to
effectively  reduce our costs to  manufacture,  market and sell our products and
therefore have  continued to incur large  operating  losses.  We hope to reverse
this trend and  return to  profitability  through  our  implementation  of a new
business  strategy  that is intended to leverage  the  strengths of our existing
services,  integration and sales teams to offer visual  communication  solutions
for the emerging  broadband  marketplace.  Net income during fiscal 2000 was the
result  of  favorable   non-recurring   events   totaling   $44.5  million  (see
Non-recurring  events).  In addition to  operating  losses,  we also  recorded a
write-down for impaired  assets  totaling  $14.1 million in connection  with our
announcement  in August 2000 of the New Charter.  While we hope that our efforts
to change the business will be successful,  there can be no assurances that this
business strategy will succeed in generating net operating income in the future.

Other factors affecting results of operations

VTEL's future  results of operations and financial  condition  could be
impacted  by many  factors,  but our  ability to  implement  our new  charter is
critical to our future  success.  Although we expect product  revenues under the
New  Charter  to  initially  decline,  one of the risks we face is that  current
product  revenue may decline faster than expected and that our  integration  and
services revenues will not increase as fast as we anticipate. Other factors that
could  affect  our  success  are other  competitors  entering  the same  market,
technical  problems in delivering video solutions over broadband  networks,  and
slow adoption to videoconferencing over broadband networks.

Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, our past earnings
and stock price have 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 VTEL's  Common  Stock in any given
period.   Also,  we  participate  in  a  highly  dynamic  industry  which  often
contributes to the volatility of VTEL's Common Stock price.

Liquidity and capital resources

Cash provided by operating activities was $19.8 million in fiscal 1998,
cash used in operating  activities  was $10.7  million in fiscal 1999,  and cash
provided by operating  activities  was $43.9 million in fiscal 2000. The decline
was $30.5 million from 1998 to 1999 and the increase was $54.6 million from 1999
to 2000.

At July 31, 2000, we had working  capital of $50.3  million,  including
$46.6 million in cash, cash equivalents and short-term  investments.  Changes in
cash from  operating  activities  are  primarily the result of the net losses or
income  generated  and  changes  in working  capital,  primarily  increases  and
decreases in accounts receivable,  inventories and accounts payable. Included in
net income for fiscal 2000 was the  favorable  settlement of litigation in which
VTEL received $44.5 million in cash and securities. (See Non-recurring events)

18

Cash used in  investing  activities  was $10.6  million in fiscal 1998,
$4.6  million in fiscal 1999 and $33.8  million in fiscal  2000.  During  fiscal
1998, cash used in investing activities was primarily the result of expenditures
related to leasehold improvements in Austin and Sunnyvale, the implementation of
our  Enterprise  Resource  Planning  System,  our  transaction   processing  and
financial accounting system, and purchases of equipment. During fiscal 1999, the
cash  used  in  investing  activities  were  spent  primarily  to  complete  the
acquisition of property and equipment and capitalize the costs  associated  with
the research and  development  of our next  generation  of visual  communication
products. These were partially offset by the net sale and maturity of short-term
investments.  During  fiscal  2000,  the cash used in investing  activities  was
primarily from the investment of cash received from the settlement of litigation
(see Non-recurring  events).  Investments were also made in additional  property
and equipment and capitalized research and development.

Cash  provided by  financing  activities  was $1.5 million for the year
ended July,  31 1998 and $8.0 million for the year ended July 31, 1999.  For the
year ended July 31, 2000,  cash used in financing  activities was $11.0 million.
Cash provided by financing  activities  for the year ended July 31, 1998 relates
to the issuance of stock under VTEL's stock option and stock purchase plans (see
Note 10 to our Consolidated  Financial  Statements).  Cash provided by financing
activities for the year ended July 31, 1999 relates to borrowings under our line
of credit and was offset by the purchase of treasury stock and payments on notes
payable.  Cash used in  financing  activities  for the year ended July 31,  2000
relates to the repayment of cash  borrowed  under the line of credit and payment
on notes payable.

During  fiscal  1999  we  initiated  a  stock  repurchase  program  and
repurchased  526,000  shares  of  VTEL's  Common  Stock  for $2.3  million.  The
repurchased  shares  have been used to fulfill  requirements  for  VTEL's  stock
including stock option  exercises or stock issuances under business  combination
transactions. No additional share repurchases are currently planned, although we
are authorized to repurchase up to 1,474,000 additional shares.

VTEL's principal sources of liquidity at July 31, 2000 consist of $46.6
million of cash, cash equivalents and short-term investments, and the ability to
generate cash from operations. The $46.6 million includes $10.7 million in stock
of Accord Networks (Accord),  a networking  equipment  manufacturer.  Since this
investment was not readily  marketable  prior to its initial public  offering in
June of 2000, we had previously reported this asset at cost in other assets-long
term.  Since Accord now has a readily  available  market price, we have recorded
the unrealized gain of $10.0 million as part of other  comprehensive  income and
included the asset as part of short-term investments on our Consolidated Balance
Sheet at July 31,  2000.  The  shares  of  Accord  are  available  for sale upon
completion  of a  regulatory  holding  period of not less than six  months.  Our
capital budget for fiscal 2001 is $3.4 million,  which will be used  principally
to invest in third-party  demonstration equipment,  interoperability testing lab
equipment, system sustaining equipment and on going operational requirements.

In March 2000, we repaid the outstanding  balance on our line of credit
with a banking syndicate.  At July 31, 2000, we did not have a line of credit in
place but management  expects to obtain an alternative  line of credit in fiscal
2001.

Legal Matters

VTEL is the  defendant or plaintiff in various  actions  which 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.

Recent Accounting Pronouncements

In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments  and  Hedging  Activities."  SFAS  No.  133  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives) and for hedging  activities.  SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. We are required
to adopt this  standard in the first  quarter of fiscal 2001. We expect that the
adoption  of SFAS  No.  133 will not have a  material  impact  on our  financial
position or our results of operations.

19

In December 1999,  the SEC staff  issued Staff Accounting  Bulletin 101
"Revenue Recognition in Financial Statements" which provides guidance on revenue
recognition  issues.  VTEL is required to implement  SAB 101 in fiscal 2001.  We
have not determined the effect of implementing SAB 101 on our financial position
or results of operations.

In March 2000,  the FASB issued  Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation",  which further clarifies APB
Opinion No. 25, "Accounting for Stock Issued to Employees". We believe that this
Interpretation  will not have a material  effect on our results of operations or
financial position.

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.  This risks  include,
without  limitation our ability to execute the business strategy outlined in the
"New  Charter",  changes in  competition,  economic  conditions,  interest rates
fluctuations,  changes in the capital markets,  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  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.

20

Item 7A.   Quantitative and Qualitative Disclosure about Market Risk

We identify our  principal  market risks as foreign  currency  exchange
rate fluctuations,  interest rate risk related to short-term investments and the
market value of our Accord  investment  (see  Liquidity and capital  resources).
Foreign currency exchange rate fluctuations are mostly related to the settlement
of net intercompany receivables due from our foreign subsidiaries. The amount of
risk is mitigated by the practice of requiring  where  possible the repayment of
such receivables in U.S. currency.  In the normal course of business,  we employ
established  policies  and  procedures  to manage  these  risks.  Interest  rate
exposure with regard to our investments is minor due to the short-term nature of
our  investments.   We  previously  invested  in  Accord  Networks  (Accord)  an
Israeli-based  manufacturer  of networking  equipment.  In June of 2000,  Accord
filed an initial public  offering on the NASDAQ stock exchange in which VTEL was
apportioned 1.3 million shares. Since that time, its stock price has ranged from
a low of $7.80 to a high of $12.70. We are not attempting to hedge this position
during the regulatory holding period which will expire in December 2000.

Foreign Exchange Risk

Our  objective in managing our  exposure to foreign  currency  exchange
rate  fluctuations  is to reduce the impact of adverse  fluctuations in earnings
and  cash  flows  associated  with  foreign  currency   exchange  rate  changes.
Accordingly, we utilize forward contracts to hedge our foreign currency exposure
on firm  commitments.  The principal  currencies  hedged during fiscal year 2000
were the Euro and Australian  dollar.  We monitor our foreign currency  exchange
exposures  to ensure the overall  effectiveness  of our foreign  currency  hedge
positions.  However,  there can be no  assurance  our foreign  currency  hedging
activities  will  offset  the impact of  substantial  fluctuations  in  currency
exchange rates on our results of operations and financial position.

The following are summarized  market risks of forward contracts at July 31, 1999
and 2000 by foreign currencies in which we do business:

1999
(Thousands except contract rates)           Notional           Average          Unrealized
Settlement         Contract             Gain
Functional Currency                     Amount             Rate              (Loss)
-------------------------------         -----------------  ----------------   ---------------

Euros                                      $  2,261             1.07              $  (19)
Australian Dollars                              452             0.65                   1
--------                               ------
$  2,713                               $  (18)
========                               ======

2000
(Thousands except contract rates)           Notional           Average          Unrealized
Settlement         Contract             Gain
Functional Currency                     Amount             Rate
-------------------------------         -----------------  ----------------   ---------------

Euros                                      $  1,868              .94              $   34
Australian Dollars                              825              .58                   4
--------                               ------
$  2,693                               $   38
========                               ======

Since  these  forward  contracts  are  used to hedge  foreign  currency
exposures,  the net cash amounts paid or received on the  contracts  are accrued
and  recognized  as an  adjustment to currency  translation  adjustments  in the
statement of operations.

21

INDEX TO FINANCIAL STATEMENTS

Reports of Independent Auditors and Accountants                               23

Financial Statements:

Consolidated Balance Sheets as of July 31, 1999 and 2000                25

Consolidated Statements of Operations for the years ended
July 31, 1998, 1999 and 2000                                       26

Consolidated Statements of Changes in Stockholders' Equity for the
years ended July 31, 1998, 1999 and 2000                           27

Consolidated Statements of Cash Flows the years ended July 31, 1998,
1999 and 2000                                                      28

Notes to Consolidated Financial Statements                              29

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts                         50

Schedules  other than those listed above have been omitted  since they are
either not  required,  not  applicable  or the  information  is  otherwise
included

22

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of VTEL Corporation

We have audited the  accompanying  consolidated  balance  sheet of VTEL
Corporation  and  its  subsidiaries  as  of  July  31,  2000,  and  the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule as
of and for the  fiscal  year  ended  July 31,  2000  listed in the Index at Item
14(a).  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

In our opinion,  the  financial  statements  referred to above  present
fairly, in all material  respects,  the consolidated  financial position of VTEL
Corporation and subsidiaries at July 31, 2000, and the  consolidated  results of
their operations and their cash flows for the year then ended in conformity with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial statement schedule as of and for the fiscal year
ended  July 31,  2000,  when  considered  in  relation  to the  basic  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

Ernst and Young LLP

Austin, Texas
August 25, 2000

23

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of VTEL Corporation

In our opinion,  the consolidated balance sheet as of July 31, 1999 and
the related consolidated  statements of operations,  of changes in stockholders'
equity and of cash flows for each of the two years in the period  ended July 31,
1999  (listed  in the  accompanying  index)  present  fairly,  in  all  material
respects,  the financial position,  results of operations and cash flows of VTEL
Corporation and its  subsidiaries at July 31, 1999 and for each of the two years
in the period ended July 31, 1999,  in  conformity  with  accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United States of America,  which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable  basis for our opinion.  We have
not audited the  consolidated  financial  statements of VTEL Corporation for any
period subsequent to July 31, 1999.

PricewaterhouseCoopers LLP

Austin, Texas
September 24, 1999

24

VTEL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data
--------------------------------------------------------------------------------

July 31,
1999             2000
---------------- ----------------

ASSETS
Current assets:

Cash and equivalents                                                  $    7,805       $    6,868
Short-term investments                                                     4,308           39,742
Accounts receivable, net of allowance for doubtful
accounts of $1,223 and $888 at July 31, 1999 and
July 31, 2000, respectively                                             38,291           23,368
Inventories                                                               15,553           14,733
Prepaid expenses and other current assets                                  2,320            1,803
----------       ----------
Total current assets                                                  68,277           86,514

Property and equipment, net                                                    29,704           19,275
Intangible assets, net                                                         15,841           11,994
Capitalized software                                                            7,351            4,728
Other assets                                                                    2,918            1,022
----------       ---------- 
$  124,091       $  123,533
==========       ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                      $   18,375       $   14,957
Accrued compensation and benefits                                          4,916            4,773
Other accrued liabilities                                                  3,555            3,981
Notes payable, current portion                                             2,234              610
Deferred revenue                                                          11,062           11,886
----------       ---------- 
Total current liabilities                                             40,142           36,207

Long-term liabilities:
Borrowings under line of credit                                           11,200                -
Notes payable                                                                554                -
Other long-term obligations                                                4,176            4,665
----------       ---------- 
Total long-term liabilities                                           15,930            4,665

Commitments and contingencies                                                       -                -

Stockholders' equity:
Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding                                       -                -
Common stock, $.01 par value; 40,000 authorized; 
24,423 and 24,847 issued at July 31, 1999 
and July 31, 2000, respectively                                            244              248
Additional paid-in capital                                               260,057          261,712
Accumulated deficit                                                     (191,665)        (189,368)
Unearned compensation                                                       (385)              (4)
Stock subscriptions receivable                                              (150)               -
Accumulated other comprehensive income (loss)                                (82)          10,073
----------       ---------- 
Total stockholders' equity                                            68,019           82,661
----------       ---------- 
$  124,091       $  123,533
==========       ========== 

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

25

VTEL CORPORATION

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

For the
Years Ended July 31,
1998              1999              2000
-----------------  ----------------  ----------------

Revenues:

Products                                                          $     134,775     $     105,520      $     89,085
Services and other                                                       44,909            46,082            45,226
-------------     -------------      ------------
Total revenues                                                       179,684           151,602           134,311
-------------     -------------      ------------

Cost of sales:
Products                                                                 65,811            55,167            54,723
Services and other                                                       28,916            29,197            32,309
-------------     -------------      ------------ 
Total cost of sales                                                   94,727            84,364            87,032
-------------     -------------      ------------ 
Gross margin                                                             84,957            67,238            47,279
-------------     -------------      ------------ 

Operating expenses:
Selling, general and administrative                                      64,802            60,855            55,753
Research and development                                                 19,892            17,951            17,357
Write-down of impaired assets                                                 -                 -            14,072
Merger and other                                                         (1,536)             (235)                -
Amortization of intangible assets                                           960             1,271             1,443
Restructuring expense                                                         -             3,800                 -
-------------     -------------      ------------
Total operating expenses                                              84,118            82,922            88,625
-------------     -------------      ------------ 
Income (loss) from operations                                               839           (15,684)          (41,346)
-------------     -------------      ------------ 

Other income (expense):
Interest income                                                           1,242               792             1,186
Non-recurring events                                                          -                 -            44,501
Interest expense and other                                                  735              (723)           (1,431)
-------------     -------------      ------------ 
1,977                69            44,256
-------------     -------------      ------------ 

Income (loss) before income taxes                                           2,816           (15,615)            2,910
Benefit (provision) for income taxes                                          (37)               50              (613)
-------------     -------------      ------------ 
Net income (loss)                                                   $       2,779     $     (15,565)     $      2,297
=============     =============      ============

Basic income (loss) per share                                       $        0.12     $       (0.66)     $       0.09   
=============     =============      ============ 

Diluted income (loss) per share                                     $        0.12     $       (0.66)     $       0.09
=============     =============      ============ 
Weighted average shares outstanding:
Basic                                                                    23,057            23,509            24,530  
=============     =============      ============ 
Diluted                                                                  23,458            23,509            25,044
=============     =============      ============

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

26

VTEL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
--------------------------------------------------------------------------------

Common stock          Additional                                Accumulated       Total
---------------------------                                               Other
Number of                    Paid-in                     Unearned   Comprehensive  Stockholders'
Accumulated                   Income    
Shares        Amount        Capital       Deficit     Compensation    (Loss)         Equity
------------- ------------- -------------- ------------- ------------- ------------  --------------

Balance at July 31, 1997        22,873    $      229   $    254,880  $   (178,234)  $     (115)   $        5     $    76,765
Proceeds from stock
issued under employee
plans                            344             3          1,473             -             -            -           1,476
Common stock
issued for
acquisition                     10             -            153             -             -            -             153
Unearned compensation              -             -             88             -           (88)           -               -
Amortization of
unearned compensation              -             -              -             -           127            -             127
Net income                           -             -              -         2,779             -            -               -
Foreign currency
translation adjustment               -             -              -             -             -          (42)              -
Comprehensive Income               -             -              -             -             -            -           2,737
------------- ------------- -------------- ------------- ------------- ------------  --------------
Balance at July 31, 1998         23,227           232        256,594     (175,455)          (76)         (37)         81,258
Proceeds from stock
issued under employee
plans                              47             1            103            -             -            -             104
Purchase of  treasury 
stock                            (526)            1         (2,265)           -             -            -          (2,265)
Issuance of  treasury
stock under  employee
plans                             357             -          1,438         (645)            -            -             793 
Treasury stock issued
for acquisition                   169             -            826            -             -            -             826
Common stock
issued for acquisition          1,149            11          2,596            -             -            -           2,607
Warrants issued in
legal settlement (Note 13)          -             -             52            -             -            -              52
Stock subscriptions receivable      -             -            150            -          (150)           -               -
Unearned compensation               -             -            563            -          (563)           -               -
Amortization of unearned
compensation                        -             -              -            -           254            -             254
Net loss                              -             -              -      (15,565)            -            -               -
Foreign currency translation
adjustment                          -             -              -            -             -          (45)              -
Comprehensive Loss                  -             -              -            -             -            -         (15,610)
------------- ------------- -------------- ------------- ------------- ------------  --------------
Balance at July 31, 1999         24,423           244        260,057     (191,665)         (535)         (82)         68,019
Proceeds from stock
issued under employee
plans                             592             6          2,234                                                   2,240
Receipts from stock
subscriptions receivable                                                                  150                          150
Forfeiture of stock
held in escrow                   (150)           (2)          (324)                                                   (326)
Amortization of
unearned compensation                                                                     126                          126
Forfeiture of unearned
compensation                      (18)                        (255)                       255                            -
Net income                                                                  2,297                                          -
Unrealized gain on
available-for-sale
securities                                                                                          10,003               -   
Foreign currency
translation aadjustment                                                                                152               -
Comprehensive Income                                                                                                12,452
------------- ------------- -------------- ------------- ------------- ------------  --------------
Balance at July 31, 2000         24,847           248        261,712     (189,368)           (4)      10,073          82,661
============= ============= ============== ============= ============= ============  ==============

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

27

VTEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
--------------------------------------------------------------------------------

For the Years Ended July 31,
1998           1999           2000

Cash flows from operating activities:
Net income (loss)                                                $     2,779   $  (15,565)    $   2,297
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization                                       8,870       11,797        12,580
Impairment of long-lived assets                                                               14,072
Provision for doubtful accounts and returns                          (119)         436           474
Amortization of unearned compensation                                 127          254           126
Foreign currency translation gain                                     112           88           267
(Gain) loss on sale of fixed assets                                     -         (132)          271
Changes in operating assets and liabilities:
Accounts receivable                                              3,299        2,206        14,449
Inventories                                                     10,758       (1,294)          820
Prepaid expenses and other current assets                          358          220           410
Accounts payable                                                (3,099)      (5,539)       (3,418)
Accrued expenses and other long term obligations                (5,505)      (2,967)          551
Deferred revenue                                                 2,172         (178)        1,045
------------  -------------  ----------
Net cash provided by (used in) operating activities             19,752      (10,674)       43,944

Cash flows from investing activities:
Purchases of short-term investments                                 (247,223)    (150,828)     (199,748)
Sales and maturities of short-term investments                       253,038      161,004       175,048
Purchases of property and equipment                                  (15,835)      (8,778)       (4,568)
Sales of property and equipment                                          260        1,441             -
Cash paid for acquired assets                                              -         (231)            -
(Issuance) collection of notes receivable                                  -         (750)           84
Increase in capitalized software                                        (984)      (6,367)       (4,726)
(Increase) decrease in other assets                                      104          (67)          132
------------  -------------  ----------
Net cash used in investing activities                          (10,640)      (4,576)      (33,778)

Cash flows from financing activities:
Net proceeds from issuance of stock                                    1,476          104         2,240
Purchase of treasury stock                                                 -       (2,265)            -
Proceeds from the sale of treasury stock                                   -          793             -
Borrowings under line of credit agreements                                 -       11,200             -
Payments on line of credit agreements                                      -            -       (11,200)
Payments on notes payable                                                  -       (1,835)       (2,178)
Receipts from stock subscription receivable                                -            -           150
------------  -------------  ----------
Net cash provided by (used in) financing activities              1,476        7,997       (10,988)

Effect of translation exchange rates on cash                                (154)        (133)         (115)
------------  -------------  ----------
Net increase (decrease) in cash and equivalents                           10,434       (7,386)         (937)

Cash and equivalents at beginning of period                                4,757       15,191         7,805
------------  -------------  ----------
Cash and equivalents at end of period                                $    15,191   $    7,805     $   6,868
============  =============  ==========

Supplemental Cash Flow Information:

Interest paid                                                        $         -   $      775     $     954
Income taxes paid                                                              -            -           434
Non-cash transactions
Stock issued for acquired assets                                             153        3,433             -
Notes payable issued for acquired asset                                      837        4,373             -
Issuance of stock warrants and note in legal settlement                        -          302             -
Issuance of restricted stock to employees                                      -          563             -

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

28

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

1.       THE COMPANY

VTEL  Corporation  ("VTEL"  or the  "Company")  designs,  manufactures,
markets,  services and supports  integrated,  multi-media  visual  communication
systems that operate over private and switched digital  communication  networks.
VTEL distributes its systems to a domestic and international marketplace through
a reseller network and directly to end customers.

On August 23,  2000,  VTEL  announced a new  business  charter  that is
intended  to  shift  its  core   business   model  from  the   manufacturer   of
videoconferencing  endpoints to a provider of premier  enterprise  solutions and
services for visually enabling broadband networks.  While the Company expects to
continue to support its installed customer base of videoconferencing  endpoints,
it intends to seek a third party to manufacture VTEL designed  videoconferencing
endpoints.  The new  business  charter  is  intended  to return  the  Company to
profitability  by focusing the existing sales,  service and systems  integration
capabilities  on a broader  range of  visual  communications  products  that are
becoming available within the emerging broadband communications marketplace.

As a  result  of the  announced  new  business  charter  and  resulting
organizational  restructuring,   VTEL  will  change  the  manner  in  which  its
long-lived  assets are  utilized.  Therefore,  management  analyzed the economic
recoverability of these assets based on their future  utilization (see Note 13).
Since the  announcement of the new business  charter was made subsequent to July
31, 2000,  certain  restructuring  charges in connection with this  announcement
will be recorded in fiscal 2001 (see Note 17).

2.       SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated  financial statements have been prepared in accordance
with accounting  principles  generally accepted in the United States and include
the accounts of VTEL's wholly owned subsidiaries.  All significant  intercompany
transactions and balances have been eliminated in consolidation.  Preparation of
the consolidated  financial statements in conformity with accounting  principles
generally  accepted in the United States  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. The more significant  estimates made by management include the
provision  for  doubtful   accounts   receivable,   inventory   write-downs  for
potentially  excess or obsolete  inventory,  warranty  reserves,  the  valuation
allowance for the gross deferred tax asset, contingency reserves, lives of fixed
assets,  the amortization  period for intangible assets and the determination of
the fair value of its  long-lived  assets.  Actual amounts could differ from the
estimates  made.  Management   periodically  evaluates  estimates  used  in  the
preparation   of  the  financial   statements   for  continued   reasonableness.
Appropriate  adjustments,  if any, to the estimates used are made  prospectively
based upon such periodic evaluation.

Revenue Recognition

Product revenues, recorded net of discounts, are recognized at the time
a  product  is  shipped  or  services  are  performed  and  the  Company  has no
significant  further  obligations  to the  customer.  Customer  prepayments  are
deferred until product  shipment has occurred or services have been rendered and
there are no significant further  obligations to the customer.  Service revenues
are  recognized  at the time the  services  are  rendered and the Company has no
significant further obligations to the customer.  Revenues for extended warranty
contracts  are  recorded  over the  contract  period.  The  Company  records  an
allowance  to reduce  sales  revenue by an amount  which  reflects  management's
estimate of potential future sales returns, exchanges,  customer stock rotations
or price protection discounts.

29

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

Warranty Costs

The Company  generally  warrants its products  against hardware defects
for one year from the date of installation but not to exceed fifteen months from
date of shipment.  A warranty is provided  for software  defects for ninety days
from the date of installation.  The Company provides currently for the estimated
costs which may be incurred in the future under the warranty program.

Software Development Costs

Costs incurred in connection with the development of software  products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS")  No. 86,  "Accounting  for the Costs of  Computer  Software to Be Sold,
Leased or Otherwise  Marketed."  Costs  incurred prior to the  establishment  of
technological  feasibility  are charged to  research  and  development  expense.
Amortization  of  capitalized  software  begins upon initial  product  shipment.
Software  development  costs are amortized  (a) over the  estimated  life of the
related product (generally thirty months), using the straight-line method or (b)
based on the  ratio of  current  revenues  from the  related  products  to total
estimated revenues for such products, whichever is greater.

The Company  capitalized  internal software  development costs of $984,
$6,367  and  $4,726  for  the  years  ended  July  31,  1998,   1999  and  2000,
respectively. Amortization of such costs was $50, zero, and $1,564 for the years
ended July 31, 1998, 1999 and 2000, respectively.  In addition,  during the year
ended  July  31,  2000  management  made the  decision  to  discontinue  further
development efforts and abandon projects previously  capitalized.  The resulting
charge of $5,785 was included in the  write-down  of impaired  assets during the
year ended July 31, 2000 (see Note 13).

Cash and Equivalents

Cash and  equivalents  include cash and  investments  in highly  liquid
investments with an original maturity of three months or less when purchased.

Short-term Investments

Short-term   investments  are  carried  at  market  value.   Short-term
investments  consist of funds primarily invested in  mortgage-backed  securities
guaranteed by the U.S. government,  government securities, commercial paper, and
equity securities.  The carrying amount of the Company's short-term  investments
at July 31, 1999 and 2000 is as follows:

1999                           2000
Cost    Market Value         Cost        Market Value

Corporate obligations                    $  2,887     $  2,887           $ 27,719      $ 27,719
U.S. government obligations                 1,370        1,370                  -             -
Equity securities                               -            -                731        10,734
Other                                          51           51              1,289         1,289
--------     --------           --------      --------
$  4,308     $  4,308           $ 29,739      $ 39,742
========     ========           ========      ========

The Company  accounts  for  investment  securities  under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity,  trading or
available-for-sale  based  on the  characteristics  of the  securities  and  the
activity in the investment portfolio.  At July 31, 1999 and 2000, all investment
securities  are  classified as  available-for-sale.  Gross  unrealized  gains on
available-for-sale  securities  at July 31,  2000 were  $10,003.  There  were no
unrealized  gains or losses at July 31,  1999.  Also the Company did not realize
any gains or losses in fiscal 1998, 1999 or 2000.

30

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

Inventories

Inventories  are  stated at the lower of cost  (weighted  average  cost
which approximates the first-in,  first-out method) or market. Cost includes the
acquisition  of  purchased  components,  parts  and  sub-assemblies,  labor  and
overhead.

Property and Equipment

Property and equipment is recorded at cost.  Internal support equipment
is video  teleconferencing  equipment used internally for purposes such as sales
and  marketing  demonstrations,   Company  meetings,  testing,   troubleshooting
customer  problems,  and  engineering,  and is  recorded at  manufactured  cost.
Depreciation and amortization are provided using the  straight-line  method over
the estimated  economic lives of the assets,  ranging from two to ten years,  or
over the lease term or life of the  improvement  of the  respective  assets,  as
applicable.  Repair and maintenance costs are expensed as incurred.  The Company
periodically  reviews the estimated economic lives of property and equipment and
will make adjustments according to the latest information available.

Intangible Assets

Intangible  assets  include the  goodwill  that  resulted  from various
acquisitions of the Company (see Note 4) as well as other intangibles, including
acquired technology.  Amortization  periods for the intangibles  associated with
these acquisitions range from 8 to 15 years. The Company periodically  evaluates
the  amortization  period  associated  with these  intangible  assets based upon
anticipated  periods of future benefit.  The Company  evaluates  factors such as
loss of employees with key or unique skills,  the Company's  ability to continue
to successfully  utilize the specialized  knowledge  acquired and other relevant
factors that could require revision of the estimate of the  amortization  period
(see Note 13). Appropriate adjustments,  if any, to the amortization period will
be  made  prospectively  based  upon  such  periodic   evaluation.   Accumulated
amortization  of  intangibles  was $3,817 and $5,159 at July 31,  1999 and 2000,
respectively.

Foreign Currency Translation

The  financial  statements of the Company's  foreign  subsidiaries  are
measured  using the local  currency  as the  functional  currency.  Accordingly,
assets and  liabilities of the  subsidiaries  are translated at current rates of
exchange  at the  balance  sheet  date.  The  resultant  gains  or  losses  from
translation are included in a separate component of stockholders' equity. Income
and expense from the  subsidiaries are translated using monthly average exchange
rates.

In order to manage the Company's  exposure to foreign currency exchange
rate  fluctuations  related  to the  European  Euro and the  Australian  Dollar,
management  utilizes forward currency  exchange  contracts.  Since these forward
contracts are used to hedge  foreign  currency  exposures,  the net cash amounts
paid or received on the contracts are accrued and recognized as an adjustment to
currency translation adjustments in the statement of operations.

Income Taxes

The Company  accounts for income taxes under SFAS No. 109,  "Accounting
for Income Taxes," which requires the liability  method of accounting for income
taxes.  Under the liability  method,  deferred taxes are determined based on the
difference  between  the  financial  statement  and  tax  bases  of  assets  and
liabilities  using  enacted  tax  rates in  effect  in the  years  in which  the
differences are expected to reverse.

Concentration of Credit Risk

The Company  sells its  products to various  companies  across  several
industries, including third-party resellers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The  Company  requires  advanced  payments or secured  transactions  when deemed
necessary.

31

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

Fair Value of Financial Instruments

The carrying amount of the Company's financial  instruments,  including
cash and equivalents,  short-term  investments and short-term trade receivables,
payables  and debt,  approximates  fair value.  The fair value of the  Company's
foreign currency forward contracts is determined at July 31, 1999 and 2000 based
on  quoted  market  rates.   The  carrying  amount  of  short-term   investments
approximates  fair  value  because  of the short  maturity  and  nature of these
instruments.  The  Company  places  its  cash in  investment  quality  financial
instruments and limits the amount invested in any one institution or in any type
of instrument.  The Company has not experienced  any  significant  losses on its
investments.

Long-lived Assets

The Company  evaluates its long-lived  assets and intangibles  based on
guidance provided by SFAS No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed of." SFAS No. 121  established
accounting   standards  for  the  impairment  of  long-lived   assets,   certain
identifiable  intangibles,  and goodwill  related to those assets to be held and
used for long-lived assets and certain  identifiable  intangibles to be disposed
of (see Note 13).

Employee Stock Plans

The Company determines the fair value of grants of stock, stock options
and other equity  instruments  issued to employees in  accordance  with SFAS No.
123,  "Accounting  and  Disclosure of  Stock-Based  Compensation."  SFAS No. 123
encourages,  but does not require,  companies to recognize  compensation expense
for grants of stock,  stock options,  and other equity  instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to continue to apply the existing  accounting  rules  contained in APB No.
25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no
effect on the Company's financial position or results of operations.

The Company records unearned compensation related to stock options that
are  issued at  exercise  prices  which are below the fair  market  value of the
underlying  stock  on  the  measurement  date.  Such  unearned  compensation  is
amortized ratably over the vesting period of the related stock options.

Recent Accounting Pronouncements

In June 1998,  Financial  Accounting Standards Board (FASB) issued SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS
No.  133   establishes   accounting  and  reporting   standards  for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts  (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the  recognition  of all  derivatives  as either assets or
liabilities in the statement of financial  position and the measurement of those
instruments at fair value. The Company is required to adopt this standard in the
first quarter of fiscal 2001. The Company  expects that the adoption of SFAS No.
133 will not have a material  impact on it financial  position or its results of
operations.

In December  1999, the SEC staff issued Staff  Accounting  Bulletin 101
"Revenue Recognition in Financial Statements" which provides guidance on revenue
recognition  issues.  VTEL is required to implement SAB 101 in fiscal 2001.  The
Company has not determined the effect of  implementing  SAB 101 on its financial
position or its results of operations.

In March 2000,  the FASB issued  Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation",  which further clarifies APB
Opinion No. 25, "Accounting for Stock Issued to Employees".  This Interpretation
did not have a material effect on VTEL's financial  position  or its  results of
operations.

32

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

3.       NON-RECURRING 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 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
paid $2,500 in cash and delivered to VTEL 301 shares of common stock of Polycom,
Inc. in settlement of the claims asserted by VTEL. When the shares were received
on March 3, 2000, the market value of the shares was $39,100.  These shares were
sold during  fiscal 2000 for $33,681 net of settlement  costs.  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 paid a
one time fee to VTEL of $8,320 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.

4.       ACQUISITIONS

The Company consummated the acquisition of certain of the assets of the
videoconferencing  division  of one of its German  resellers  effective  July 1,
1998.  The  consideration  paid by the Company  consisted of  restricted  stock,
warrants,  a note  payable,  and the  assumption  of certain  payables and other
liabilities for total consideration of approximately $1,871. During fiscal 1999,
the Company  completed the acquisition of one of its French resellers  primarily
through the issuance of restricted stock for approximately $826.

On  March  9,  1999,   the  Company   completed  the   acquisition   of
substantially  all of the assets of Vosaic LLC, an Internet  video  software and
technology  company for $3,200 in cash, stock and warrants.  The transaction has
been  accounted  for as a  purchase  of assets.  The  acquisition  involved  the
issuance of 1,149 shares  (equivalent  to  approximately  5% of the  outstanding
shares of the  Company's  stock as of March 9,  1999).  The common  shares  were
registered  with the  Securities  Exchange  Commission on May 14, 1999. Of these
shares,  200 were to be held in escrow and an  additional,  350 warrants were to
remain unearned pending the completion of certain obligations by Vosaic.  During
fiscal 2000,  150 of the escrow  shares and all of the warrants are deemed to be
forfeited since management believes Vosaic's obligations were not achieved.

5.       INVENTORIES

Inventories consist of the following:

July 31,

1999            2000

Raw materials                               $  8,595        $  8,394
Work-in-process                                1,504             669
Finished goods                                 4,637           4,480
Finished goods held for
evaluation and rental agreements               817           1,190
--------        --------
$ 15,553        $ 14,733
========        ========

Finished goods held for evaluation and under rental agreements consists
of completed visual communication  systems used for demonstration and evaluation
purposes, which are generally sold during the next year.

33

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

6.       PROPERTY AND EQUIPMENT

Property and equipment and related  depreciable life is composed of the
following:

July 31,
1999            2000

Furniture, machinery and equipment, 2-10 years           $ 24,241        $ 23,849
Internal support equipment, 2-4 years                       9,043           7,914
Customer service assets , 4-8 years                        15,520           9,578
Leasehold improvements, lease term or
life of the improvement                                    8,893           7,742
--------        --------
57,697          49,083
Less accumulated depreciation                             (27,993)        (29,808)
--------        --------
$ 29,704        $ 19,275
========        ========

Depreciation  and   amortization   expense  relating  to  property  and
equipment was approximately  $7,910,  $9,964 and $8,919 for the years ended July
31, 1998, 1999 and 2000, respectively.

7.       RESTRUCTURING ACTIVITIES

On August 23,  2000,  the  Company  announced  a  restructuring  of its
operations (see Note 17).

In November  1998,  management  adopted a  restructuring  plan that was
intended to match the size and complexity of the  organization  with the planned
path of the Company  and  recorded a charge of $3,080 in fiscal  1999.  The plan
included  the  involuntary  reduction  of 138  employees  from all  departments,
including  manufacturing,  sales, management and finance,  effective immediately
for most  employees  upon  announcement.  The Company  also made the decision to
reduce operating costs by exiting other activities and reducing related overhead
costs. These activities  included the closure of certain field sales offices and
the Sunnyvale,  California  spare parts depot.  All of the termination  benefits
were paid and closure  costs were  incurred by October 31, 1999.  The  following
schedule summarizes the components and activities of the restructuring plan:

Termination and severance benefits                                   $    2,311
Facility closure and other (primarily non-cancelable lease
obligations)                                                               769
----------
$    3,080
==========

8.       NOTES PAYABLE

Notes payable at July 31,1999 and 2000 consist of the following:

1999         2000

Notes payable to the vendor of the Company's
Enterprise Resource Planning System
in quarterly and annual installments
through October 2000, bearing interest
at rates ranging from 7.22% to 8.50%               $   2,538       $   304
Other                                                         250           306
-----------     ---------
2,788           610

Less:      current maturities                              (2,234)         (610)
-----------     ---------
Long-term notes payable                                $      551       $     -
===========     =========

34

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

9.       LINE OF CREDIT

In March 2000, the Company repaid the  outstanding  balance on its line
of credit with a banking syndicate. At July 31, 2000, the Company did not have a
line of credit in place but management expects to obtain a new line of credit in
fiscal 2001.

10.      STOCKHOLDERS' EQUITY

Share Repurchase Program

During fiscal 1999, the Company  initiated a stock  repurchase  program
and  repurchased  526 shares of its Common  Stock for  $2,265.  The  repurchased
shares have been used to fulfill  requirements  for stock  option  exercises  or
stock issuances under business combination transactions. Although the Company is
authorized to  repurchase up to 1,474  additional  shares,  no additional  share
repurchases are currently planned.

Stock Subscriptions Receivable

During fiscal 1999, the Company loaned certain employees of the Company
amounts to either  purchase  shares of the  Company's  stock on the open market,
exercise  options  or  participate  in  the  employee  stock  purchase  program.
Receivables  with recourse  totaling $150 related to the exercise of options and
the  participation  of the employee stock purchase  program were classified as a
reduction of additional  paid-in capital at July 31, 1999 and were repaid during
the year ended July 31, 2000.

Stock and Stock Option Plans

VTEL has three  stock  option  plans,  the 1989 Stock  Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock  Option  Plan  (the  "1992  Plan").  The 1989  Plan and the 1996 Plan both
provide  for the  issuance  of  non-qualified  and  incentive  stock  options to
employees and consultants of the Company. Stock options are generally granted at
the fair  market  value at the time of grant,  and the  options  generally  vest
ratably over 48 months and are  exercisable  for a period of ten years beginning
with date of grant.  Effective  June 1999,  the 1989 Plan  expired  whereby  the
Company can no longer grant options under the Plan, however,  options previously
granted  remain  outstanding.  The 1992 Plan  provides for the issuance of stock
options to nonemployee  directors at the fair market value at the time of grant.
Such options vest ratably over 36 months and are exercisable for a period of ten
years beginning with the date of the grant.

The  Company  applies  APB  No.  25  and  related   interpretations  in
accounting for its stock option plans for grants to employees.  Accordingly,  no
compensation  cost is recognized  for its stock option plans unless  options are
issued at  exercise  prices that are below the market  price on the  measurement
date. Had compensation cost for the Company's stock option plans been determined
based on the fair market  value at the grant dates for awards  under those plans
consistent  with the method  provided by SFAS No. 123, the  Company's net income
(loss) per share would have been  reflected by the  following  pro forma amounts
for the years ended July 31, 1998, 1999 and 2000:

1998          1999           2000
Net income (loss)  As reported     $    2,779   $   (15,565)   $     2,297
Pro forma       $   (1,589)  $   (20,023)   $    (1,930)

Basic and diluted
net income (loss)
per common share   As reported     $     0.12   $     (0.66)   $      0.09
Pro forma       $    (0.07)  $     (0.85)   $     (0.08)

The pro forma  effect on net income  (loss) for 2000,  1999 and 1998 is
not  representative of the pro forma effect on net income (loss) in future years
because  it does not take  into  consideration  pro forma  compensation  expense
related to grants issued prior to 1996.

35

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants the years ended July 31, 1998, 1999 and 2000:

1998            1999             2000
Dividend yield                   -                -                -
Expected volatility          63.12%           67.67%           70.86%
Risk-free rate of return      5.52%            6.14%            6.13%
Expected life                 5.65 years       6.26 years       7.36 years

The following table summarizes  activity  under all Plans for the years
ended July 31, 1998, 1999 and 2000.

1998                    1999                   2000
Weighted                 Weighted              Weighted
Average                 Average               Average
Shares      Exercise      Shares     Exercise    Shares    Exercise
(000's)       Price      (000's)      Price     (000's)     Price

Outstanding at the
beginning of the year     3,648         $9.42       3,938       $8.65     4,548       $7.11

Granted                   896          6.43       1,818        3.40     1,436        4.47
Exercised                (186)         4.00        (134)       2.34      (437)       4.40
Canceled                 (420)         7.55      (1,074)       7.05    (1,548)       9.89
-----         -----      ------       -----    ------       -----
Outstanding at the
end of the year          3,938         $8.65       4,548       $7.11     3,999       $5.39
=====                    ======                ======
Options exercisable at
year end                  3,710         $8.42       4,457       $7.04     3,945       $5.41
=====                    ======                ======
Weighted average
fair value of
options granted
during the year                           $4.12                   $2.48                 $3.28

Options Outstanding                         Options Exercisable
Number      Weighted-average   Weighted-average    Number
Range of exercise      outstandint at       remaining        exercise     exercisable at    Weighted-average
prices             July 31, 2000   contractual life      price        July 31, 2000     exercise price

$ 0.30  - $  3.16             852            8.50  years       $  2.80            853              $  2.80
3.17  -    4.70           1,206            8.84                 4.33          1,154                 4.36
4.70  -    6.13           1,223            7.48                 5.80          1,223                 5.80
6.19  -   19.88             706            6.13                 9.36            703                 9.37
20.56  -   20.56              12            5.31                20.56             12                20.56
--------------------    ----------------                                  ------------------
$ 0.30  - $ 42.66           3,999                              $  5.39          3,945              $  5.41
====================    ================                                  ==================

Generally,  options are exercisable  immediately  upon grant.  However,
stock  issued upon  exercise of a stock option is subject to  repurchase  by the
Company at the exercise price until the option  vesting  period has elapsed.  At
July 31, 2000,  options to purchase 1,817 shares were vested.  At July 31, 2000,
no unvested options had been exercised.

Employee Stock Purchase Plan

On April 29,  1993,  VTEL  adopted  an  Employee  Stock  Purchase  Plan
("Employee  Plan") which  enables all  employees to acquire VTEL stock under the
plan.  The Employee Plan  authorizes  the issuance of up to 950 shares of VTEL's
Common Stock.  The Employee Plan allows  participants  to purchase shares of the
Company's  Common  Stock at a price  equal to the  lesser of (a) 85% of the fair

36

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

market  value of the Common  Stock on the date of the grant of the option or (b)
85% of the fair market value of the Common Stock at the time of exercise. Common
Stock  issued under the Employee  Plan totaled 158 shares,  203 shares,  and 155
shares respectively, for the years ended July 31, 1998, 1999 and 2000.

Restricted Stock Plan

On December 17, 1998, the Company adopted a restricted  stock plan (the
"1998 Plan").  The 1998 Plan  authorizes  the issuance of up to  1,000shares  of
VTEL's Common Stock to be used to reward, incent and retain employees. Shares of
restricted  stock issued under the 1998 Plan were 80 for the year ended July 31,
1999. No shares were issued under the 1998 Plan in fiscal 1998 or 2000.

11.      DEFINED CONTRIBUTION PLAN

The  Company  sponsors  a  defined  contribution  401(k)  plan  that is
available to substantially all employees.  The plan may be amended or terminated
at any time by the Board of  Directors.  The Company,  although not required to,
has provided matching  contributions to the plan for a portion of the year ended
July 31,  2000 of $176 which has been  recorded  as expense in the  consolidated
statement of operations.  No matching  contributions were made in fiscal 1998 or
1999.

12.      EARNINGS (LOSS) PER SHARE

The  following  table sets forth the  computation  of basic and diluted
earnings  (loss) per common  share for the years ended July 31,  1998,  1999 and
2000:

1998          1999          2000
Weighted average shares
outstanding - basic                      23,057        23,509        24,530

Effect of dilutive stock options               401             -           514

----------    ----------    ----------
Weighted average shares
Outstanding - diluted                   23,458        23,509        25,044
==========    ==========    ==========

Antidilutive securities                      1,764         4,457         2,576
==========    ==========    ==========
Basic and dilutive earnings (loss) per
share                                  $   0.12      $  (0.66)     $   0.09

13.         WRITE-DOWN of IMPAIRED ASSETS

As discussed in Note 1, on August 23, 2000, the Company announced a new
business  charter  that is  intended to shift its core  business  model from the
manufacture of  videoconferencing  endpoints to a provider of premier enterprise
solutions and services for visually enabling broadband networks.  As a result of
this new charter, the Company determined that significant changes were necessary
in the manner and extent to which certain of its  long-lived  assets used solely
in the manufacturing operations would be deployed.  Further, the adoption of the
new  charter  resulted  in the  closure  of  certain  foreign  offices  and  the
termination of several software projects under development.

Pursuant  to SFAS 121  "Accounting  for the  Impairment  of  Long-Lived
Assets and for Long-Lived  Assets to be Disposed Of", the Company  evaluated the
recoverability of its long-lived assets including property, plant and equipment,
goodwill  and  other  intangibles  and  capitalized  software.   The  evaluation
indicated that the future  undiscounted cash flows related to certain long-lived
assets  were  below the  carrying  value of the  assets  associated  with  those
operations.  Further,  the closure of the foreign offices and the termination of
the software  capitalization  projects  resulted in the  identification  of only
minimal  future cash  flows.  Accordingly,  during the fourth  quarter of fiscal
2000,  the  Company   adjusted  the  long-lived   assets   associated  with  the
manufacturing  operations  and the  long-lived  assets  related  to the  foreign
operations and capitalized software. The Company determined their estimated fair
value to be  $9,446,  resulting  in a  non-cash  impairment  charge  of  $14,072
(including  $6,047 related to property,  plant and equipment,  $2,240 related to
intangible  assets and $5,785  related to capitalized  software).  The estimated
fair value for the long-lived assets was based on anticipated  future cash flows

37

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

discounted at a rate  commensurate  with the risk involved.  The impairment loss
has been  recorded  as a loss  from the  write-down  of  impaired  assets in the
consolidated  statement of  operations.  The  remaining  useful lives of certain
assets were shortened and thus,  depreciation and amortization will be higher in
fiscal 2001.

14.      FEDERAL INCOME TAXES

The  components of the  provision  (benefit)  for income taxes  attributable  to
continuing operations are as follows for the years ended July 31, 1998, 1999 and
2000:
1998              1999               2000

Current:
Federal          $   -             $   -              $  416
State               37               (50)                197
-----             -----              ------
Total current       37               (50)                613

Deferred:
Federal              -                 -                   -
State                -                 -                   -
-----             -----              ------
Total deferred       -                 -                   -
-----             -----              ------
$  37             $ (50)             $  613
=====             =====              ======

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes at July 31, 1999 and 2000 are as follows:

1999              2000

Deferred tax assets:
Net operating loss carryforwards                           $  38,742          $ 35,447
Research and development credit carryforwards                  4,379             5,403
Minimum tax credit carryforwards                                 110               525
Inventory and warranty provisions                              1,921             1,359
Charitable contributions                                          40                52
Compensation accruals                                            306               309
Deferred revenue                                                 713               882
Allowance for receivables                                        292               191
Impaired assets                                                    -             4,378
Other                                                            545               400
---------          --------
47,048            48,946
---------          --------

Deferred tax liabilities:
Capitalized software                                            (220)             (199)
Accumulated depreciation                                        (453)             (974)
---------          --------
(673)           (1,173)
---------          --------

Net deferred tax assets                                            46,375            47,773
Valuation allowance                                               (46,375)          (47,773)
---------          --------
$       -          $      -
=========          ========

38

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

At  July  31,  2000,   the  Company  had  federal  net  operating  loss
carryforwards  of $95,804,  research and  development  credit  carryforwards  of
$5,403,  and  alternative  minimum  tax credit  carryforwards  of $525.  The net
operating loss and credit carryforwards will expire in varying amounts from 2001
through 2019, if not utilized.  Minimum tax credit  carryforwards  do not expire
and carry forward  indefinitely.  Net operating  losses related to the Company's
foreign  subsidiaries  of $8,897 are available to offset future foreign  taxable
income.

As a result of various  acquisitions  performed by the Company in prior
years,  utilization of the net operating losses and credit  carryforwards may be
subject to a  substantial  annual  limitation  due to the "change in  ownership"
provisions  of the Internal  Revenue  Code of 1986.  The annual  limitation  may
result in the expiration of net operating losses before  utilization.  Also, due
to the  uncertainty  surrounding  the timing of  realizing  the  benefits of its
favorable  tax  attributes  in future  tax  returns,  the  Company  has placed a
valuation allowance against its net deferred tax asset. Accordingly, no deferred
tax benefits have been recorded for the tax years ended July 31, 1998,  1999 and
2000. The valuation allowance increased by $1,398 during the year ended July 31,
2000.

The Company's provision (benefit) for income taxes differs from the expected tax
expense  (benefit) amount computed by applying the statutory  federal income tax
rate of 34% for the years  ended July 31,  1998,  1999 and 2000  primarily  as a
result of the following:

1998             1999             2000

Computed at statutory rate          957          $ (5,309)      $     989
State taxes, net of federal
benefit                         37               (50)            130
Foreign losses not benefited       (125)            1,072           2,298
Permanent items                     166               158             134
R&D credit generated                (82)             (921)         (1,023)
Change in state tax rate              -                 -          (3,313)
Change in valuation allowance      (916)            5,050           1,398
------           -------        --------
37           $   (50)       $    613
======           =======        ========

15.      COMMITMENTS AND CONTINGENCIES

Lease Commitments

VTEL leases  furniture  and  equipment,  manufacturing  facilities  and
office space under  noncancelable  leases which expire at various  dates through
2013. Certain leases obligate VTEL to pay property taxes, maintenance and repair
costs.

Future minimum lease payments under all operating leases as of July 31, 2000
were as follows: Fiscal year ending:

2001                     $ 8,186
2002                       7,603
2003                       6,706
2004                       6,268
2005                       5,857
Thereafter                29,956
-----------
$64,576
===========

Total rent expense under all operating  leases for the years ended July
31, 1998, 1999 and 2000 was $6,506, $6,858, and $7,983 respectively.  During the
year ended  July 31,  2000,  the  Company  received  $785 in rent  income  under
sub-leasing  arrangements.  These amounts  offset  against rental expense in the
consolidated  statement of operations.  No rental income was received during the
years  ended July 31,  1998 or 1999.  At July 31,  2000,  future  minimum  lease
payments receivable under non-cancelable  sub-lease arrangements totaled $ 2,028
for all future years.

39

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

During the year ended July 31, 1998, the Company  completed the planned
elimination  of duplicate  headquarter  facilities by  terminating a lease.  The
landlord  paid the Company a $1,800  termination  fee which is recorded  (net of
termination  expenses)  as  Other  Income  in  the  accompanying   Statement  of
Operations.

In  connection  with the  acquisition  of  certain of the assets of the
videoconferencing  division  of one of its German  resellers,  (see Note 4), the
Company  entered  into a five year  licensing  agreement  pursuant  to which the
Company  will pay a license  fee equal to 4% of the  revenues  generated  by the
acquired  assets with a minimum  annual fee of $281 to $393 and a maximum annual
fee of $786.

Contingencies

The Company is the  defendant  or plaintiff  in various  actions  which
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
the Company's financial condition, results of operation or cash flows.

16.      SEGMENT INFORMATION

The Company manages its business primarily on a products,  services and
Internet  ventures  basis and these are the  reportable  segments.  The Products
segment  provides  multi-media  visual  communication  (commonly  referred to as
videoteleconferencing)  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 Internet  Ventures are business units established to
focus on delivering  visual  communications  products and services for the World
Wide  Web.  The  accounting  policies  of the  segments  are the  same as  those
described in Note 2.

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  corporate  operating  expenses to the  segments.  The prior
year's segment information has been restated to present the Company's reportable
segments.

40

VTEL CORPORATION

NOTES TO THE CONSOLLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------

The  table  below  presents  segment  information  about  revenue  from
unaffiliated customers,  depreciation and operating income for each of the three
years in the period ended July 31, 2000:

Services/         Internet
Products           Other           Ventures             Total
-------------     -------------    --------------     --------------

For the year ending July 31, 2000
Revenues from unaffiliated customers         $  89,085         $  45,226          $      -         $  134,311
Gross margin                                    34,362            12,917                 -             47,279
Depreciation and amortization                    8,343             3,573               664             12,580
Operating income (loss)                        (27,085)            1,614           (15,875)           (41,346)

Capital expenditures                             2,166             1,649               753              4,568
Total assets                                    78,398            39,801             5,334            123,533

For the year ending July 31, 1999
Revenues from unaffiliated customers           105,520            46,082                 -            151,602
Gross margin                                    50,353            16,885                 -             67,238
Depreciation and amortization                    7,455             4,342                 -             11,797
Operating income (loss)                        (20,824)            5,140                 -            (15,684)

Capital expenditures                             6,110             2,668                 -              8,778
Total assets                                    88,371            35,720                 -            124,091

For the year ending July 31, 1998
Revenues from unaffiliated customers           134,775            44,909                 -            179,684
Gross margin                                    68,964            15,993                 -             84,957
Depreciation and amortization                    6,601             2,269                 -              8,870
Operating income (loss)                         (9,297)           10,136                 -                839

Capital expenditures                            11,877             3,958                 -             15,835
Total assets                                    96,975            32,314                 -            129,289

Revenue  and  long-lived  assets  related to  operations  in the United
States  and  foreign  countries  for the three  years  ended  July 31,  2000 are
presented below.  Revenues generated between foreign  geographic  locations have
historically been insignificant.

For the Years Ended July 31,
1998              1999              2000
---------------    -------------     --------------

Revenue from unaffiliated customers:
United States                        $ 146,993         $131,494          $ 111,007
Foreign                                 32,691           20,108             23,304

Long-lived assets at the end of year:
United States                        $  42,116         $ 52,556          $  36,348
Foreign                                  1,487            3,258                671
------------------------------------------------------------------------------------------------

41

17.      SUBSEQUENT EVENT

On August 23,  2000,  VTEL  announced  a new  business  charter and the
restructuring  of  its  organization.   The   restructuring   will  involve  the
termination of approximately 200 employees or 34% of the Company's workforce and
the  consolidation  of leased  office  space in  Austin,  Texas  and  Sunnyvale,
California.  The Company expects to record a  restructuring  charge in the first
fiscal quarter of 2001 of approximately $6,000 to $8,000.

18.      QUARTERLY INFORMATION (unaudited)

The following tables contain selected unaudited  consolidated statement
of  operations  and earnings per share data for each quarter of fiscal year 1999
and 2000.

For the Three Months Ended
Oct. 31,       Jan 31,    April 30,      July 31,
1998          1999         1999          1999

Total revenues                                          $36,940      $ 37,755     $ 36,116       $ 40,791
-----------   -----------  -----------   ------------
Gross margin                                             16,312        15,787       17,717         17,422
-----------   -----------  -----------   ------------
Net income (loss)                                    $   (7,439)     $ (7,944)    $   (574)      $    392
===========   ===========  ===========   ============
Basic and diluted income (loss) per share            $    (0.32)     $  (0.35)    $  (0.02)      $   0.02 
===========   ===========  ===========   ============

For the Three Months Ended
Oct. 31,      Jan 31,     April 30,      July 31,
1999          2000         2000          2000

Total revenues                                       $   35,066        37,262       31,440         30,543
-----------   -----------  -----------   ------------

Gross margin                                             13,124        14,226       10,369          9,560
-----------   -----------  -----------   ------------

Net income (loss)                                    $   (5,343)     $ (3,970)    $ 35,141      $ (23,531)
===========   ===========  ===========   ============

Basic income (loss) per share                        $    (0.22)     $  (0.16)    $   1.43      $   (0.95)
===========   ===========  ===========   ============

Diluted income (loss) per share                      $    (0.22)     $  (0.16)    $   1.36      $   (0.95)
===========   ===========  ===========   ============

42

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosures

Form  8-K  dated   April  6,  2000   reporting   the   resignation   of
PricewaterhouseCoopers  LLP as the  Company's  independent  auditors  is  hereby
incorporated by reference.

PART III.

Item 10.   Directors and Executive Officers

In accordance  with paragraph G(3) of the General  Instructions  to the
Annual  Report on Form  10-K,  the  information  contained  under  the  captions
"Election  of  Directors"  will be filed  with the  Company's  Definitive  Proxy
Statement pursuant to Regulation 14A on or before November 24, 2000.

Item 11.   Executive Compensation

In accordance  with paragraph G(3) of the General  Instructions  to the
Annual  Report  on Form  10-K,  the  information  contained  under  the  caption
"Executive  Compensation"  will be filed  with the  Company's  Definitive  Proxy
Statement pursuant to Regulation 14A on or before November 24, 2000.

Item 12.   Security Ownership of Certain Beneficial Owners and Management

In accordance  with paragraph G(3) of the General  Instructions  to the
Annual  Report  on Form  10-K,  the  information  contained  under  the  caption
"Security  Ownership of Certain  Beneficial Owners and Management" will be filed
with the Company's  Definitive Proxy Statement  pursuant to Regulation 14A on or
before November 24, 2000.

Item 13.   Certain Relationships and Related Transactions

In accordance  with paragraph G(3) of the General  Instructions  to the
Annual Report on Form 10-K, the information contained under the caption "Certain
Relationships  and  Transactions"  will be filed with the  Company's  Definitive
Proxy Statement pursuant to the regulation 14A on or before November 24, 2000.

43

PART IV.

Item 14. Exhibits,  Financial  Statements,  Financial Statement  Schedules,  and
Reports on Form 8-K

Exhibit
Number                         Document Description
-------                        --------------------

(a)(1)   The financial  statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements and Financial  Statement
Schedules on page 24 of this Report.

(a)(2)   The  financial  statement  schedule  filed as part of this Report at
Item 8 is listed in the Index to Financial Statements and  Financial
Statement Schedules on page 24 of this Report.

(a)(3)   The following exhibits are filed with this Annual Report on Form
10-K:

44

Exhibit
Number                       Document Description
-------                      --------------------   

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  99.1 of  VTEL's  Report  on Form 8-K dated
January 6, 1997).

3.1  Fourth Amended Restated Certificate of Incorporation  (incorporated by
reference the Exhibit 3.1 to the Company's  quarterly report form 10-Q
for the period ended June 30, 1993.)

3.2  Amendment to Fourth Amended and Restated Certificate of Incorporation,
as  filed on May 27,  1997  with the  Secretary  of State of  Delaware
(incorporated  by reference  the Exhibit 3.1 to the  Company's  Annual
Report on form 10-K for the period ended July 31, 1997.)

3.3  Bylaws of the  Company  as adopted  by the Board of  Directors  of the
Company  effective as of June 11, 1989  (incorporated  by reference to
Exhibit 3.3 to the Company's  Registration Statement on Form S-1, File
No. 33-45876, as amended).

3.4  Amendment  to  Bylaws  of the  Company  as  adopted  by the  Board  of
Directors of the Company effective as of April 28, 1992  (incorporated
by reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1992).

3.5  Amendment  to the  Bylaws of the  Company  as  adopted by the Board of
Directors of the Company  effective as of July 10, 1996  (incorporated
by reference to Exhibit 4.5 to the  Company's  Current  Report on Form
8-K dated July 10, 1996).

4.1  Specimen  Certificate for the Common Stock  (incorporated by reference
to Exhibit 4.1 to the  Company's  Registration  Statement on Form S-1,
File No. 33-45876, as amended).

4.2  Rights  Agreement  dated as of July 10, 1996 between VTEL  Corporation
and  First  National  Bank  of  Boston,  which  includes  the  form of
Certificate of Designations for Designating  Series A Preferred Stock,
$.01 par value,  the form of Rights  Certificate,  and the  Summary of
Rights to Purchase Series A Preferred Stock (incorporated by reference
to Exhibit 4.1 to the Company's  Current Report on Form 8-K dated July
10, 1996).

10.1 License Agreement, dated as of November 7, 1990, between Universite de
Sherbrooke, as Licenser, and the Company, as Licensee (incorporated by
reference to Exhibit 10.5 to the Company's  Registration  Statement on
Form S-1, File No. 33-45876, as amended).

45

Exhibit
Number                              Document Description
-------                             --------------------

10.2 VideoTelecom Corp. 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 4.1 to the  Company's  Registration  on Form S-8,
File No. 33-51822).

10.3 Form  of  VideoTelecom  Corp.   Nonqualified  Stock  Option  Agreement
(incorporated   by  reference  to  Exhibit   10.16  to  the  Company's
Registration Statement on Form S-1, File No. 33-45876, as amended).

10.4 Form  of  VideoTelecom   Corp.   Incentive   Stock  Option   Agreement
(incorporated   by  reference  to  Exhibit   10.17  to  the  Company's
Registration Statement on Form S-1, File No. 33-45876, as amended).

10.5 Distributor   Agreement  dated  January  8,  1990,   between  US  WEST
Communications   Services,  Inc.  and  the  Company  (incorporated  by
reference to Exhibit 10.18 to the Company's  Registration Statement on
Form S-1, File No. 33-45876, as amended).

10.6 Purchase  Agreement  effective  October 1, 1990,  between  GTE Service
Corporation and the Company,  as amended July 1, 1991 (incorporated by
reference to Exhibit 10.19 to the Company's  Registration Statement on
Form S-1, File No. 33-45876, as amended).

10.7 Distribution Agreement, made and entered into November 1, 1991, by and
between  Microsoft   Corporation  and  the  Company  (incorporated  by
reference to Exhibit 10.22 to the Company's  Registration Statement on
Form S-1, File No. 33-45876, as amended).

10.8 VideoTelecom  Corp. 1992 Director Stock Option Plan  (incorporated  by
reference to Exhibit 4.1 to the  Company's  Registration  on Form S-8,
File No. 33-51822).

10.9 VideoTelecom  Corp.  Employee  Stock  Purchase Plan  (incorporated  by
reference to Exhibit 4.1 to the  Company's  Registration  on Form S-8,
File No. 33-51822).

10.10 Lease  agreement,  executed by Waterford HP, Ltd. on June 14, 1994, as
Landlord, and the Company, as Tenant, together with First Amendment of
Lease  Agreement  between  Waterford  HP, Ltd.,  as Landlord,  and the
Company, as Tenant,  dated November 2, 1994, Second Amendment of Lease
Agreement between Waterford HP, Ltd., as Landlord, and the Company, as
Tenant,  dated February 1, 1995, and Net Profits  Agreement,  executed
between   Waterford  HP,  Ltd.  on  June  14,  1994  and  the  Company
(incorporated  by reference  to Exhibit  10.17 to the  Company's  1994
Annual Report on Form 10-K).

10.11 Subscription  Agreement  dated  June  14,  1995  by and  between  VTEL
Corporation,  Accord  Video  Telecommunications,  Ltd.,  Nizanim  Fund
(1993) Ltd.,  the "Star  Entities",  Manakin  Investments  BV, Messrs.
Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval  (incorporated by
reference to Exhibit 10.19 to the Company's 1995 Annual Report on Form
10-K. The schedules referred to in the agreement have been omitted but
will be  furnished to the  Securities  and  Exchange  Commission  upon
request).

46

Exhibit
Number                          Document Description
-------                         --------------------

10.12 Amendment  to the  VideoTelecom  Corp.  1989 Stock Option Plan and the
1992 Director  Stock Option Plan (the terms of which are  incorporated
by reference to the Company's 1996 Definitive Proxy Statement).

10.13 The VTEL  Corporation  1996 Stock  Option Plan (the terms of which are
incorporated  by  reference to the  Company's  1995  Definitive  Proxy
Statement).

10.14 Amendment  to the VTEL  Corporation  1996 Stock Option Plan (the terms
of which are  incorporated  by reference to the Company's  Joint Proxy
Statement filed on April 24, 1997).

10.15 Compression  Labs,  Incorporated 1980 Stock Option Plan - the ISO Plan
(incorporated  by  reference  to the  Annual  Report  on Form  10-K of
Compression Labs, Inc. for the year ended December 31, 1994).

10.16 Revised  forms of  Incentive  Stock  Option and Early  Exercise  Stock
Purchase  Agreement used in connection  with the issuance and exercise
of  options  under  the ISO Plan  (incorporated  by  reference  to the
Registration  Statement on Form S-8 of Compression Labs, Inc. filed on
June 6, 1994).

10.17 Consulting  and  separation   agreement   between   Compression  Labs,
Incorporated  and John E. Tyson dated February 16, 1996  (incorporated
by reference to the Annual  Report on Form 10-K of  Compression  Labs,
Inc. for the year ended December 31, 1995).

10.18 Lease  Agreement,  dated  January 30, 1998,  between 2800  Industrial,
Inc., Lessor and VTEL Corporation,  Lessee  (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
three months ended April 30, 1998).

10.19 First  Amendment,  dated  March 11,  1998,  to Lease  Agreement  dated
January 30,  1998,  between  2800  Industrial,  Inc.,  Lessor and VTEL
Corporation,  Lessee (incorporated by reference to Exhibit 10.2 to the
Company's  Quarterly  Report on Form 10-Q for the three  months  ended
April 30, 1998).

10.20 The VTEL  Corporation  1998 Restricted  Stock Plan (the terms of which
are  incorporated by reference to the Company's 1998 Definitive  Proxy
Statement)

10.21 Loan and  Security  Agreement,  dated  May 5,  1999,  between  Silicon
Valley Bank and Comerica Bank-Texas, as Creditors, and the Company, as
Borrower (incorporated by  reference to Exhibit 10.21 to the Company's
Annual Report filed on Form 10-K for the year ended July 31, 1999.)

47

Exhibit
Number                          Document Description
-------                         --------------------

10.22 Change-in-Control  Agreements with members of senior management of the
Company  (incorporated  by reference to exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1998)

10.22 (a)   Stephen L. Von Rump
10.22 (b)   Rodney S. Bond
10.22 (c)   Dennis M. Egan
10.22 (d)   Vinay Goel
10.22 (e)   Steve F. Keilen
10.22 (f)   F.H. (Dick) Moeller
10.22 (g)   Ly-Huong T. Pham
10.22 (h)   Michael J. Steigerwald
10.22 (i)   Bob R. Swem
10.22 (j)   Judy A. Wallace

10.23 Change-in Control  Agreements with members of senior management of the
Company  (incorporated  by reference to exhibit 10.1 to the  Company's
Annual Report on Form 10-Q for the quarter ended January 31, 2000)

10.23(a)    Brian C. Sullivan,
10.23(b)    Stephen Cox
10.23(c)    Stephen Von Rump (amended)

21.1  List of Subsidiaries

23.1  Consent of Ernst & Young LLP.

23.2  Consent of PricewaterhouseCoopers LLP.

27.1  Financial Data Schedule (filed  electronically  only)

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

(b)  Reports on Form 8-K:

None have been filed during the quarter ended July 31, 2000

(c)  See subitem 14(a)(3) above.

(d)  See subitem 14(a)(2) above.

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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

By   /s/  Jay C. Peterson
--------------------------------
Jay C. Peterson
interim Chief Financial Officer,
Vice President-Finance and
Treasurer

48

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and in the
capacities and on the date indicated.

Signature                                       Title                              Date
---------                                       -----                              ----

/s/                  Stephen L. Von Rump          Chief Executive Officer and President         October 30, 2000
------------------------------------------------  (Principal Executive Officer)              ------------------------
Stephen L. Von Rump 

/s/                  Jay C. Peterson             interim Chief Financial Officer,               October 30, 2000
------------------------------------------------ Vice President - Finance and Treasurer     ------------------------
Jay C. Peterson             (Principal Financial Officer and Principal
Accounting Officer) 

/s/                  Kathleen A. Cote            Director                                       October 30, 2000
------------------------------------------------                                             ------------------------
Kathleen A. Cote

/s                   Gordon H. Matthews          Director                                       October 30, 2000
------------------------------------------------                                             ------------------------
Gordon H. Matthews

/s/                  F.H. (Dick) Moeller         Director                                       October 30, 2000
------------------------------------------------                                             ------------------------
F.H. (Dick) Moeller

/s/                  Dick  Snyder                Chairman of the Board                          October 30, 2000
------------------------------------------------                                             ------------------------
Dick Snyder

/s/                  T. Gary Trimm               Director                                       October 30, 2000
------------------------------------------------                                             ------------------------
T. Gary Trimm

/s/                  James H. Wells              Director                                       October 30, 2000
------------------------------------------------                                             ------------------------
James H. Wells

49

VTEL Corporation

VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
-------------------------------------------------------------------------------------------------------------------

Provision for    Write-off of
Balance at       doubtful      uncollectible    Balance at
Beginning       Accounts        Accounts         end of
of Period      Receivable      Receivable         Year
(In thousands)

Accounts receivable -
Allowances for
Doubtful accounts

Year ended July 31, 1998                   $  10,722        $   (119)        $ (1,156)      $  9,447

Year ended July 31, 1999                       9,447             278           (8,502)         1,223

Year ended July 31, 2000                       1,223             474             (809)           888

50

EXHIBIT 21.1

VTEL Corporation
List of Subsidiaries

Exhibit 21.1

Subsidiary                                      Location of Incorporation

Compression Labs, Incorporated                  Delaware
VTEL-ICS, Incorporated                          Delaware
VTEL Australia Ltd. Pty.                        Australia
CLI Belgium                                     Belgium
CLI Europe Ltd.                                 United Kingdom
VTEL Europe Ltd.                                United Kingdom
VTEL Germany GmbH                               Germany
VTEL France S.A.                                France
VTEL Brazil LTDA                                Brazil
VTEL Telecommunication Equipment (China) Co.    Peoples Republic of China
Ltd

EXHIBIT 23.1

Consent Of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos.  333-77733)  pertaining to the VTEL  Corporation  1998 Restricted Stock
Plan, the Registration Statement (Form S-8 No. 333-44533) pertaining to the VTEL
Corporation  401(k) Plan, the  Registration  Statement (Form S-8 No.  333-48885)
pertaining  to the  VTEL  Corporation  1992  Director  Stock  Option  Plan,  the
Registration   Statement  (Form  S-8  No.  333-28499)  pertaining  to  the  VTEL
Corporation 1996 Stock Option Plan and the Registration  Statement (Form S-8 No.
33-51822)  pertaining  to the VTEL  Corporation  1989 Stock Option Plan,  of our
report  dated  August  25,  2000,  with  respect to the  consolidated  financial
statements and schedule of VTEL Corporation  included in the Annual Report (Form
10-K) for the year ended July 31, 2000.

/s/Ernst & Young LLP
--------------------

Austin, Texas
October 24, 2000

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 (Nos.33-65472,  33-51822,  33-65464,  33-65478,  33-95754,
333-28499, 333-44533, 333-48885 and 333-77733) of VTEL Corporation of our report
dated September 24, 1999 appearing in this Annual Report on Form 10-K.

PRICEWATERHOUSECOOPERS LLP

Austin, Texas
October 24, 2000

<ARTICLE>                     5
<LEGEND>
This schedule contains summary financial information extracted from VTEL
Corporation's Balance Sheet as of July 31, 2000 and Income Statement for the
year then ended and is qualified in its entirety by reference to the company's
Annual Report on Form 10-K for the Fiscal Period ending July 31, 2000.
</LEGEND>
<CIK>                         0000884144
<NAME>                        VTEL Coporation
<MULTIPLIER>                  1
<CURRENCY>                    U.S. Dollars

<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>               JUL-31-2000
<PERIOD-START>                  AUG-01-1999
<PERIOD-END>                    JUL-31-2000
<EXCHANGE-RATE>                 1
<CASH>                          6,868,000
<SECURITIES>                    39,742,000
<RECEIVABLES>                   24,256,000
<ALLOWANCES>                    (888,000)
<INVENTORY>                     14,733,000
<CURRENT-ASSETS>                86,514,000
<PP                          49,083,000
<DEPRECIATION>                  (29,808,000)
<TOTAL-ASSETS>                  123,533,000
<CURRENT-LIABILITIES>           36,207,000
<BONDS>                         0
<PREFERRED-MANDATORY>           0
<PREFERRED>                     0
<COMMON>                        261,960,000
<OTHER-SE>                      (179,299,000)
<TOTAL-LIABILITY-AND-EQUITY>    123,533,000
<SALES>                         134,311,000
<TOTAL-REVENUES>                134,311,000
<CGS>                           (87,032,000)
<TOTAL-COSTS>                   (88,625,000)
<OTHER-EXPENSES>                (547,000)
<LOSS-PROVISION>                0
<INTEREST-EXPENSE>              (884,000)
<INCOME-PRETAX>                 2,910,000
<INCOME-TAX>                    (613,000)
<INCOME-CONTINUING>             2,297,000
<DISCONTINUED>                  0
<EXTRAORDINARY>                 0
<CHANGES>                       0
<NET-INCOME>                    2,297,000
<EPS-BASIC>                     .09
<EPS-DILUTED>                   .09