SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended October 31, 1998

Commission file number 0-20008

VTEL Corporation

A Delaware Corporation                IRS Employer ID No. 74-2415696

108 Wild Basin Road
Austin, Texas 78746

(512) 437-2700

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

At December 1, 1998 the  registrant  had  outstanding  22,927,567  shares of its
Common Stock, $0.01 par value.

VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share amounts)

October 31,                  July 31,
1998                       1998
(Unaudited)

ASSETS
Current assets:
Cash and equivalents                                          $      5,363               $    15,191
Short-term investments                                              14,594                    14,484
Accounts receivable, net of allowance for doubtful
accounts of $9,452 and $9,447 at
October 31, 1998 and July 31,1998                                 38,602                    40,527
Inventories                                                         18,189                    12,951
Prepaid expenses and other current assets                            3,539                     2,533
------------               -----------

Total current assets                                       80,287                    85,686

Property and equipment, net                                                  32,289                    28,106
Intangible assets, net                                                       12,285                    11,812
Other assets                                                                  5,738                     3,685
------------               -----------
$    130,599               $   129,289
============               ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                              $     20,726               $    22,600
Accrued merger and other expenses                                    1,604                     1,741
Accrued compensation and benefits                                    4,619                     5,258
Other accrued liabilities                                            6,370                     2,791
Deferred revenue                                                    10,954                    11,793
------------               -----------
Total current liabilities                                  44,273                    44,183

Long-term liabililities:
Borrowings under revolving line of credit                            7,500                         -
Other long-term obligations                                          5,642                     3,848
------------               -----------
Total long-term liabilities                                13,142                     3,848
------------               -----------

Commitments and contingencies                                                     -                         -

Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding                                             -                         -
Common stock, $.01 par value; 40,000,000 authorized;
22,926,000 and 23,227,000 issued and outstanding
at October 31, 1998 and July 31, 1998                                229                       232
Additional paid-in capital                                         256,979                   256,594
Treasury stock, 303,900 outstanding                                 (1,260)                        -
Accumulated deficit                                               (182,423)                 (175,455)
Accumulated other comprehensive loss                                  (341)                     (113)
-----------               ----------- 
Total stockholders' equity                                 73,184                    81,258
-----------               -----------
$   130,599               $   129,289
===========               ===========

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

2

VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)

For the
Three Months Ended
October 31,
1998             1997

Revenues:
Products                                                              $ 24,528          $ 34,312
Services and other                                                      12,407             9,917
--------          --------
36,935            44,229
--------          --------

Cost of sales:
Products                                                                12,227            17,778
Services and other                                                       8,188             6,479
--------          --------
20,415            24,257
--------          --------
Gross margin                                                            16,520            19,972
--------          --------

Selling, general and administrative                                              18,240            14,521
Research and development                                                          5,236             5,126
Amortization of intangible assets                                                   252               240
--------          --------
Total operating expenses                                                23,728            19,887
--------          --------

Income (loss) from operations                                           (7,208)               85
--------          --------

Other income (expense):
Interest income                                                            288               221
Other                                                                      (48)             (174)
--------          --------
240                47
--------          --------

Net income (loss) before provision
for income taxes                                                        (6,968)              132

Provision for income taxes                                                            -               (12)
--------          --------
Net income (loss)                                                     $ (6,968)         $    120
========          ========

Basic and diluted income (loss) per common share                               $  (0.30)         $   0.01
========          ========

Weighted average shares outstanding:
Basic                                                                   23,085            22,895
========          ========
Diluted                                                                 23,085            23,492
========          ========

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

3

VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

For the
Three Months Ended
October 31,
1998             1997

Cash flows from operating activities:
Net income (loss)                                                     $ (6,968)        $   120
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization                                   2,535           2,192
Provision for doubtful accounts                                    33              22
Amortization of unearned compensation                              39              61
Foreign currency translation (gain) loss                          (33)            119
Decrease in accounts receivable                                 2,693           3,823
Increase in inventories                                        (3,873)           (206)
(Increase) decrease in prepaid expenses and
other current assets                                        (1,006)            464
Decrease in accounts payable                                   (3,340)         (7,627)
Increase (decrease) in accrued expenses                         495          (2,756)
Increase (decrease) in deferred revenues                       (346)            672
--------         ------- 
Net cash used in operating activities                (9,771)         (3,116)
--------         -------

Cash flows from investing activities:
Net short-term investment activity                                        (110)          6,771
Net purchase of property and equipment                                  (3,495)         (2,965)
Decrease in capitalized software                                        (1,241)              -
(Increase)decrease in other assets                                        (772)             678
--------         -------
Net cash (used in) provided by investing activities            (5,618)          4,484
--------         -------

Cash flows from financing activities:
Borrowings under line of credit                                          7,500               -
Net proceeds from issuance of stock                                         21              37
Purchase of treasury stock                                              (2,265)              -
Sale of treasury stock                                                     178               -
--------         -------
Net cash provided by financing activities                       5,434              37
--------         -------

Effect of translation exchange rates on cash                                        127             (64)
--------         -------

Net (decrease) increase in cash and equivalents                                  (9,828)          1,341

Cash and equivalents at beginning of period                                      15,191           4,757
--------         -------
Cash and equivalents at end of period                                          $  5,363         $ 6,098
========         =======

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

4

VTEL Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

VTEL Corporation ("VTEL" or the "Company") designs,  manufactures,  markets
and supports  multi-media digital visual  communication  systems.  The Company's
systems  integrate  traditional  video and audio  conferencing  with  additional
functions,   including  the  sharing  of  PC  software   applications   and  the
transmission of  high-resolution  images and facsimiles.  Through the use of the
Company's  multi-media digital visual communication  systems,  users are able to
replicate more closely the impact and  effectiveness  of face-to-face  meetings,
education and training classes and certain medical consultations.

The Company's  systems are built upon a system  platform  which is based on
industry-standard,  PC-compatible  open hardware and software  architecture.  By
leveraging this open architecture  design, the Company is able to integrate into
the videoconference PC-compatible hardware and software applications which allow
users to customize the systems to meet their unique needs.  The  PC-architecture
also  provides  a natural  pathway  to  connect  the  Company's  digital  visual
communication  systems onto local area  networks  (LANs) and wide area  networks
(WANs) thereby  leveraging the rapidly expanding network  infrastructures  being
deployed in organizations  throughout the world.  Also  complementing  this open
architecture is the Company's  compliance with emerging industry standards.  The
Company's  open  architecture  and compliance  with data and  telecommunications
standards  permit  customers  to  incorporate  new  functions  through  software
upgrades, thereby lowering the cost of ownership by extending the useful life of
the investment.

The  Company   primarily   distributes   its  systems  to  a  domestic  and
international   marketplace   through  third  party  resellers.   The  Company's
headquarters and primary production facilities are in Austin, Texas.

Note 1 - General and Basis of Financial Statements

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange  Commission  and  accordingly,  do  not  include  all  information  and
footnotes required under generally accepted  accounting  principles for complete
financial  statements.  In the opinion of  management,  these interim  financial
statements  contain  all  adjustments,  consisting  of  only  normal,  recurring
adjustments,  necessary for a fair presentation of the financial position of the
Company as of October 31, 1998 and the results of the Company's  operations  and
its cash flows for the three month  period ended  October 31, 1998.  The results
for interim periods are not necessarily  indicative of results for a full fiscal
year.

5

Note 2 - Inventories

Inventories consist of the following:

Oct. 31,          July 31,
1998              1998
(Unaudited)
(Dollars in thousands)

Raw materials                              $  6,949          $  5,938
Work in process                               4,317               517
Finished goods                                5,928             5,833
Finished goods held for evaluation
and rental and loan  agreements               995               663
--------          --------
$ 18,189          $ 12,951
========          ========

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

Note 3 - Net Income (Loss) Per Share

Basic Earnings per Share (EPS) is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed by dividing net income (loss) by the weighted  average number of
common shares and common share  equivalents  (if dilutive)  outstanding  for the
period.  Stock options and warrants are the only dilutive  potential shares that
the  Company  has  outstanding  for all  periods  presented.  EPS data for prior
periods  presented  in  this  report  have  been  recalculated  to  reflect  the
provisions of Statement of Financial  Accounting Standards No. 128 "Earnings per
Share".

The  calculation of the number of weighted  average shares  outstanding for
basic and dilutive  earnings (loss) per share for each of the periods  presented
is as follows:

For the
Three Months Ended
October 31,
(Amounts in thousands)
1998     1997

Weighted average shares
outstanding - basic                          23,085    22,895
--------  --------

Effect of dilutive securities:
Stock options                                        -       597
--------  --------
Dilutive potential common shares                  -       597
--------  --------
Weighted average shares
outstanding - diluted                           23,085    23,492
========  ========
Antidilutive securities                            4,173     1,259
========  ========

6

Note 4 - Comprehensive Income

The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
130, "Reporting  Comprehensive Income," during the first fiscal quarter of 1999.
SFAS No.130  establishes  standards for reporting  comprehensive  income and its
components. The Company's comprehensive income (loss) is comprised of net income
(loss),  foreign currency translation and unearned  compensation.  Comprehensive
loss for the quarter  ended  October 31, 1998 of $7.2 million and  comprehensive
income  for  the  quarter  ended  October  31,  1997 of $0.2  million  were  not
materially different from reporting net income (loss) for these periods.

Note 5 - Subsequent Events

Subsequent to October 31, 1998,  the Company  adopted a restructuring  plan
which will result in a reduction in workforce of approximately  14%. The Company
will also reduce  operating  costs by exiting  other  activities  which  involve
excess,  idle or  non-productive  assets or excess  or  non-productive  overhead
costs. As a result of the restructuring, the Company anticipates a restructuring
charge  during the second  fiscal  quarter of 1999 in the range of approximately
$2.5 million to $3.5 million.

As a  result  of the  restructuring  activities  that are in  process,  the
Company  will  generate  a net loss for the second  quarter of fiscal  year 1999
which will likely exceed the maximum  quarterly  loss  allowable by the terms of
the Company's revolving line of credit agreement (Credit Agreement). The Company
is currently  negotiating  with its lenders the execution of an amendment to the
Credit Agreement to eliminate or modify the covenants such that the Company will
be able to avoid noncompliance with the terms of the Credit Agreement.

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

The following review of the Company's  financial position as of October 31,
1998 and 1997 and for the three months ended  October 31, 1998 and 1997,  should
be read in conjunction  with the Company's 1998 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on October 22, 1998.

Results of Operations

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

For the three
months ended
October 31,
1998     1997

Revenues                                   100%     100%
Gross margin                                45       45
Selling, general and administrative         49       33
Research and development                    14       12
Total operating expenses                    64       45
Other income, net                            1        -
Net income (loss)                          (19)%      -%

7

Three Months Ended October 31, 1998 and 1997

Revenues.  Revenues  for the quarter  ended  October 31, 1998  decreased to
$36.9  million  from $44.2  million in the quarter  ended  October 31,  1997,  a
decrease of $7.3  million or 17%.  The  decrease in revenues for the three month
period ended  October 31, 1998 is the result of a decrease in the number of unit
sales of the Company's  large group digital visual  communication  systems,  and
lower  average  selling  prices due to the shift in the  product mix to products
with lower  selling  prices.  The decline in revenues is the result of delays or
shifts in purchasing decisions of customers due to new product  announcements by
the Company and its  competitors,  shifts of capital  spending by customers  and
customers  increasingly  delaying  purchases of large group  systems  while they
evaluate the impact of converting from videoconferencing systems which currently
run on  ISDN  platforms  to  systems  which  run on an  Internet  Protocol  (IP)
platform.  Significantly  lower sales of large group systems in the first fiscal
quarter are attributed to this extension of the purchasing  cycle,  as well as a
further decline in sales in international  markets - particularly Asia and Latin
America.  International sales represented  approximately 18% of product revenues
for the quarter  ended  October 31, 1998  compared to 22% for the quarter  ended
October 31, 1997.

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

For the three
months ended
October 31,
1998      1997
Large group digital visual
communication systems                        614      751 
Small group digital visual
communication systems                        161      75  
Multipoint control units                        36      16  
----     ----
Total systems                                 811      842 
====     ====

While the Company strives for consistent  revenue  growth,  there can be no
assurance that consistent  revenue growth or profitability can be achieved.  The
Company's  business  model is  characterized  by a very high degree of operating
leverage.  The Company's  expense levels are based, in part, on its expectations
as to future  revenue  levels,  which are difficult to predict partly due to the
Company's  strategy of  distributing  its products  through  resellers.  Because
expense levels are based on the Company's  expectations of future revenues,  the
Company's  expense base is relatively fixed in the short term. If revenue levels
are below  expectations  as was the case for the quarter ended October 31, 1998,
operating  results may be materially  and  adversely  affected and net income is
likely to be adversely affected. In addition, the Company's quarterly and annual
results may fluctuate as a result of many factors,  including price  reductions,
delays in the introduction of new products,  delays in purchase decisions due to
new product  announcements by the Company or its  competitors,  cancellations or
delays of orders, interruptions or delays in supplies of key components, changes
in reseller base,  customer base,  business or product mix and seasonal patterns
and other  shifts of capital  spending by  customers.  There can be no assurance
that the Company will be able to increase or even  maintain its current level of
revenues  on a  quarterly  or  annual  basis  in the  future.  Due to all of the
foregoing  factors,  it is  possible  that in one or more  future  quarters  the
Company's  operating results will be below the expectations of public securities
market  analysts.  In such event,  the price of the Company's Common Stock would
likely be materially adversely affected.

8

Gross margin.  Gross margin as a percentage  of total  revenues was 45%
for the  three  months  ended  October  31,  1998 and  1997.  The  gross  margin
percentage for the quarter ended October 31, 1997 is the result of the sales mix
of VTEL's higher margin  products  blended with sales of the lower margin legacy
products of VTEL's  wholly-owned  subsidiary,  Compression  Labs, Inc, which was
acquired in May 1997. As the Company  transitioned to a single product platform,
the  Enterprise  Series  Architecture(  (ESA)  products,  gross margins began to
increase during fiscal 1998 as the Company replaced sales of lower margin legacy
CLI products with higher margin ESA products.  The gross margin  percentage  for
the quarter ended October 31, 1998 represents a decline from the preceding three
quarters. The decline in the gross margin percentage is the result of a shift in
the sales mix from higher margin large group systems to lower margin small group
systems.

While  customers  are  delaying  the  purchase  of higher  cost large group
systems,  they are shifting to the purchase of lower cost small group systems in
order to maintain  their  digital  visual  communications  networks  with only a
moderate continued  investment until the anticipated  industry  breakout,  which
will be  driven by the  shift to  digital  visual  communication  systems  which
function within an IP network  environment.As such, the Company anticipates that
the gross margin percentage will decline as customers shift their purchases from
higher  margin  large group  systems to lower margin  small group  systems.  The
Company expects that overall price competitiveness in the industry will continue
to become more intense as users of videoconferencing  systems attempt to balance
performance,  functionality  and cost during this time of industry  uncertainty.
This could  significantly  reduce  future  product  average  selling  prices and
subsequently  even further reduce the gross margins  generated from these sales.
The  Company's  gross  margin  is  subject  to  fluctuation  based  on  pricing,
production costs and sales mix.

Selling,    general   and   administrative.    Selling,   general   and
administrative  expenses  increased by $3.7 million,  or 26%, from $14.5 million
for the quarter  ended  October 31, 1997 to $18.2  million for the quarter ended
October 31, 1998. Selling,  general and administrative  expenses as a percentage
of revenues  were 49% and 33% for the three  months  ended  October 31, 1998 and
1997,  respectively.  The Company's  expense  levels are based,  in part, on its
expectations  as to  revenue  levels.  Because  expense  levels are based on the
Company's  expectations  of  future  revenues,  the  Company's  expense  base is
relatively  fixed in the short  term.  As a result of the  decline  in  revenues
during the quarter ended October 31, 1998,  the Company's  selling,  general and
administrative  expenses as a  percentage  of revenues  increased  significantly
during the quarter ended October 31,1998.

Selling,  general and administrative  expenses increased during the quarter
ended October 31, 1998 in comparison  with the quarter ended October 31, 1997 as
a result of investments made by the Company during the quarter ended October 31,
1998 related to marketing and branding campaigns.  These campaigns were designed
to provide brand  awareness  for VTEL's  products and to position VTEL to be the
industry leader in digital visual  communications in anticipation of an industry
breakout.

VTEL has taken steps to  restructure  the  Company's  operations  to reduce
operating  expenses  in order to  sustain  profitability  during  the  perceived
industry  transition  period while continuing to strive to strengthen  essential
areas  of the  business  such as new  technology  and  product  development  and
customer  service and response (see  "Restructuring  Activities").  As such, the
Company's selling,  general and administrative  expenses will decrease in future
periods.

9

Research and development.  Research and development  expenses increased
by $0.1 million, or 2%, from $5.1 million for the quarter ended October 31, 1997
to $5.2 million for the quarter ended October 31, 1998. Research and development
expenses as a percentage of revenues were 14% and 12% for the three months ended
October 31, 1998 and 1997,  respectively.  In addition, $1.2 million of software
development  costs were  capitalized  during the three months ended  October 31,
1998.

Research and development  expenditures  increased  during the quarter ended
October 31, 1998 in  comparison  with the quarter  ended October 31, 1997 due to
the  development of a new user interface  which is designed to be more intuitive
and easy to use, and the activities  related to the development of the Company's
next generation digital visual communications platform which will be designed to
function within an IP network environment.

Although  the  percentage  of  revenues  invested  by the  Company  in
research  and  development  may vary  from  period to  period,  the  Company  is
committed to investing in its research and development programs. Future research
and  development  expenses  are  expected to increase as the Company  strives to
develop leading edge technology.

Other income,  net. Other income, net increased by $150,000,  or 411%, from
$50,000 for the quarter ended October 31, 1997 to $240,000 for the quarter ended
October 31,  1998.  The  increase in Other  income,  net during the three months
ended  October 31, 1998 compared with the three months ended October 31, 1997 is
attributable to changes in foreign currency exchange rates.

Net income  (loss).  The Company  generated a net loss of $7.0 million,  or
$0.30 per share,  during the quarter  ended  October 31, 1998  compared to a net
income of $0.1 million, or $0.01 per share, during the quarter ended October 31,
1997.  The  decline  in  sales  of the  Company's  large  group  digital  visual
communications   systems  without  a  corresponding  decline  in  the  Company's
operating  expenses  resulted in the  significant  loss during the three  months
ended October 31, 1998. The Company has adopted a restructuring  plan during the
second  fiscal  quarter of 1999 and  anticipates a  restructuring  charge in the
range  of  approximately  $2.5  million  to  3.5  million  (see   "Restructuring
Activities").  As a result of the restructuring  activities that are in process,
the Company will not generate a quarterly net income at the anticipated  reduced
revenue levels prior to the third fiscal quarter of 1999.

Restructuring Activities

The  Company's  business  model is  characterized  by a very high degree of
operating  leverage.  The Company's  expense  levels are based,  in part, on its
expectations as to future revenue levels,  which are difficult to predict partly
due to the Company's  strategy of distributing its products  through  resellers.
Because  expense  levels are based on the  Company's  expectations  as to future
revenues,  the  Company's  expense base is  relatively  fixed in the short term.
Revenues  for the  quarter  ended  October  31,  1998 were  significantly  below
expectations;  as a result,  operating  results were adversely  affected and the
Company  generated a net loss of $7.0 million  during the quarter  ended October
31, 1998. VTEL has taken steps to restructure the Company's operations to reduce
operating  expenses  in order to  sustain  profitability  during  the  perceived
industry  transition  period while continuing to strive to strengthen  essential
areas  of the  business  such as new  technology  and  product  development  and
customer  service and  response.  Subsequent  to October 31,  1998,  the Company
adopted a  restructuring  plan which will result in a reduction  in workforce of
approximately 14%. The Company will also reduce

10

operating  costs by exiting  other  activities  which  involve  excess,  idle or
non-productive assets or excess or non-productive overhead costs. As a result of
the  restructuring,  the Company anticipates a  restructuring  charge during the
second fiscal quarter of 1999 in the range of approximately $2.5 million to $3.5
million.

There can be no assurance  that the  restructuring  activities  will reduce
operating expenses  sufficiently to maintain profitable operations at current or
lower revenue levels.  Additionally,  there can be no assurance that the Company
will be able to maintain its current  level of revenues or even a lower level of
revenues at which the Company can operate  profitably  on a quarterly  or annual
basis in the future.  As a result of the  restructuring  activities  that are in
process, the Company will not generate a quarterly net income at the anticipated
reduced  revenue levels prior to the third fiscal quarter of 1999. Due to all of
the foregoing  factors,  it is possible that in one or more future  quarters the
Company's  operating results will be below the expectations of public securities
market  analysts.  In such event,  the price of the Company's Common Stock would
likely be materially adversely affected.

Year 2000 Evaluation

Many computer systems  experience  problems  handling dates beyond the year
1999.  Therefore,  some computer  hardware and software will need to be modified
prior to the Year 2000 in order to remain functional.  The Company believes that
its  products  are  Year  2000  compliant  with  minor  exceptions  due  to  the
incorporation  of third party  software such as Microsoft  Windows which is year
2000 compliant with minor  exceptions.  While the Company is not currently aware
of any Year 2000 compliance issues with its products,  no assurances can be made
that  problems  will not arise such as  customer  problems  with other  software
programs, operating systems or hardware that disrupt their use of the Company's

products.  There can be no assurances that such disruption  would not negatively
impact costs and revenues in future  years.  The Company has been assured by the
vendor of its Enterprise  Resource  Planning System that the system is Year 2000
compliant. The Company began assessing Year 2000 issues and Year 2000 testing of
its significant management information systems during fiscal 1998.

The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated  that there will be a  significant  increase in costs as much of the
Year 2000 activities  will be a continuation of the on-going  process to improve
all the Company's systems. The Company has not estimated the total costs of Year
2000  compliance  and  related  contingency  planning  as Year  2000  compliance
assessments are still in process.  However, the company does not anticipate that
Year 2000 issues will result in material  incremental costs to the Company.  The
Company plans to complete the Year 2000 project during fiscal 1999.  However, if
such  modifications  and  conversions  are not made,  or are not  completed in a
timely  manner,  the  Year  2000  issue  could  have a  material  impact  on the
operations of the Company.  Specific  factors that might cause a material impact
include,  but are not limited to,  availability and cost of personnel trained in
this area,  the  ability to locate and  correct  all  relevant  computer  codes,
failure  by  third  parties  to  timely  convert  their  systems,   and  similar
uncertainties. The Company will be developing contingency plans as its Year 2000
evaluation progresses and the results of its testing are known.

Liquidity and Capital Resources

At October 31, 1998, the Company had working  capital of $36.0 million,
including  $20.0 million in cash, cash  equivalents and short-term  investments.
Cash used by operating  activities  was $9.8 million for the three months ended
October 31, 1998 and  primarily  results from the net operating  loss  incurred.
Increases in  inventories,  prepaid  expenses and decrease in accounts  payable
were  partially  offset by a decrease  in  accounts  receivable.  Cash used in
operating  activities  was $3.1 million for the three  months ended  October 31,
1997 and  primarily  related to the  decreases  in accounts  payable and accrued
liabilities  offset by a decrease  in  accounts  receivable.  The  reduction  in
accrued  liabilities  included the payment of Merger and other-related  expenses
which were accrued at July 31, 1997.

Net cash used in investing activities during the three months ended October
31,  1998 was $5.6  million  and  primarily  resulted  from an  increase  in net
property and equipment of $3.5 million and an increase in  capitalized  software
development  costs.  Cash generated by investing  activities of $4.5 million for
the three months ended October 31, 1997  resulted  from net  investing  activity
from  short-term  investments  which  generated  cash of $6.8 million  offset by
capital expenditures of $3.0 million.

Cash flows  provided by  financing  activities  during the three months
ended  October 31, 1998 were $5.4 million and resulted  from $7.5 million  being
drawn on the  Company's  revolving  line of credit  offset by the  repurchase of
approximately  525,000  shares of its own stock for $2.3  million as part of its
planned stock repurchase  program.  Cash flows provided by financing  activities
during the quarter  ended  October  31,  1997 were $0.04  million and related to
sales of stock under the Company's employee stock plans.

11

At October 31, 1998,  the Company's  principal  source of liquidity was its
cash,  cash  equivalents,  short-term  investments  totaling  $20.0  million and
amounts  available under its revolving line of credit with a banking  syndicate.
The Company believes that existing cash and cash equivalent balances, short-term
investments,  cash  generated  from  sales  of  products  and  services  and its
revolving  lines of credit will be  sufficient  to meet the  Company's  cash and
capital requirements for at least the next 12 months.

As a  result  of the  restructuring  activities  that are in  process,  the
Company  will  generate  a net loss for the second  quarter of fiscal  year 1999
which will likely exceed the maximum  quarterly  loss  allowable by the terms of
the Company's revolving line of credit agreement (Credit Agreement). The Company
is currently  negotiating  with its lenders the execution of an amendment to the
Credit Agreement to eliminate or modify the covenants such that the Company will
be able to avoid noncompliance with the terms of the Credit Agreement.

General

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

The  Company's  future  results of operations  and financial  condition
could  be  impacted  by the  following  factors,  among  others:  trends  in the
videoconferencing market, introduction of new products by competitors, increased
competition  due to the entrance of other  companies into the  videoconferencing
market - especially more established companies with greater resources than those
of the Company, delay in the introduction of higher performance products, market
acceptance  of new  products  introduced  by  the  Company,  price  competition,
interruption of the supply of low-cost products from third-party  manufacturers,
changes in general  economic  conditions  in any of the  countries  in which the
Company does business,  adverse legal disputes and delays in purchases  relating
to federal government procurement.

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

12

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

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings

CLI, the Company's  wholly owned  subsidiary,  is currently  engaged in
several legal proceedings relating to matters arising prior to the Merger. There
can be no assurance that CLI's legal  proceedings  can be resolved  favorably to
CLI or VTEL.  Such legal  proceedings,  if continued  for an extended  period of
time,  could have an adverse  effect  upon the  Company's  working  capital  and
management's ability to concentrate on its business. The Company had recorded an
estimate of the costs to defend and  discharge  the claims  prior to the quarter
ended October 31, 1998 and such contingent  liabilities are reflected as accrued
expenses at October 31, 1998. In the opinion of management, such reserves should
be sufficient  to discharge  the  liabilities,  if any.  However,  an unexpected
outcome  in any one or  several  such  legal  proceedings  could have a material
adverse effect on CLI and hence, VTEL.

In June 1997, Keytech,  S.A.  ("Keytech") filed suit against CLI in the
United States  District  Court in Tampa,  Florida.  Keytech was a distributor of
satellite  encoder and decoder products  manufactured by a division of CLI which
CLI  sold in June  1996.  Keytech  has  asserted  that  the  equipment  sold was
defective and did not conform to contract specifications and express and implied
warranties.  Keytech has asserted  damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI has filed
an answer denying  liability and has asserted  cross-claims  against Keytech for
amounts due and  unpaid for  equipment  sold by CLI  to  Keytech.  Phillips  and
Platinum.  

Philips Electronics North America  Corporation  ("Philips") filed a lawsuit
against  Compression  Laboratories,  Incorporated  ("CLI") on  November 6, 1998,
alleging damages owed by CLI to Philips based on a series of agreements  between
Philips and CLI  purported  to have been entered into for the purpose of jointly
developing, manufacturing and marketing consumer premises equipment. Philips has
alleged that CLI has breached its  obligations to Philips under these  purported
agreements  and has refused to pay Philips more than $4.4 million in development
costs and other amounts alleged to be owed by CLI under the parties' agreements.
Based on such  allegations,  Philips has asserted causes of action for breach of
contract,  breach of a covenant  of good faith and fair  dealing  and a claim of
unfair trade  practices under the California  Unfair  Competition  Act.  Philips
seeks an award of damages for CLI's alleged breach of the purported  agreements,
including  general,  consequential  and incidental or special  damages and other
damages. Because the lawsuit was only recently filed, we are not able to comment
on the anticipated ultimate outcome.

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

None

Item 5.  Other Information

None

13

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

None

(b) Reports on Form 8-K:

None

***

14

SIGNATURES

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

VTEL CORPORATION

December 15, 1998          By:      /s/      Rodney S. Bond
---------------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)

15

<ARTICLE>                     5
<LEGEND>
This Schedule contains summary financial information extracted from Vtel
Corporation's Balance Sheet & Income Statement for the three months ended
October 31, 1998, and is qualified in its entirety by reference to such
quarterly report on Form 10-Q filing.
</LEGEND>
<CIK>                         0000884144
<NAME>                        VTEL Corporation
<MULTIPLIER>                     1,000
<CURRENCY>                       U.S. Dollars

<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>               OCT-31-1998
<PERIOD-START>                  AUG-01-1998
<PERIOD-END>                    OCT-31-1998
<EXCHANGE-RATE>                 1
<CASH>                          5,363
<SECURITIES>                    14,594
<RECEIVABLES>                   48,054
<ALLOWANCES>                    (9,452)
<INVENTORY>                     18,189
<CURRENT-ASSETS>                81,149
<PP                          70,997
<DEPRECIATION>                  (38,688)
<TOTAL-ASSETS>                  130,599
<CURRENT-LIABILITIES>           44,273
<BONDS>                         0
<PREFERRED-MANDATORY>           0
<PREFERRED>                     0
<COMMON>                        257,289
<OTHER-SE>                      (184,105)
<TOTAL-LIABILITY-AND-EQUITY>    130,599
<SALES>                         36,935
<TOTAL-REVENUES>                36,935
<CGS>                           (20,415)
<TOTAL-COSTS>                   (23,728)
<OTHER-EXPENSES>                160
<LOSS-PROVISION>                0
<INTEREST-EXPENSE>              (80)
<INCOME-PRETAX>                 (6,968)
<INCOME-TAX>                    0
<INCOME-CONTINUING>             0
<DISCONTINUED>                  0
<EXTRAORDINARY>                 0
<CHANGES>                       0
<NET-INCOME>                    (6,968)
<EPS-PRIMARY>                   (.30)
<EPS-DILUTED>                   (.30)