##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934

(Mark One)



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

For the quarterly period ended March 31, 2001

or



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

For the transition period from
               to

               .

For the Quarter ended March 31, 2001

Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 04-2835972                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|100 Minuteman Road, Andover, MA                                 |  | 01810                                
|(Address of principal executive offices)                        |  | (Zip Code)                           

978-292-5000

Registrants telephone number


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 last 90 days.

Yes  

     No

Indicate the number of shares outstanding of each of the
issuers classes of common stock as of the latest practical
date.

As of May 4, 2001, there were outstanding 45,098,941 shares
of common stock of the registrant.









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TABLE OF CONTENTS



|                                           |                                                                                               |                                                                   |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- |  |  |  |  |  | 
|PART I. CONSOLIDATED FINANCIAL INFORMATION
|                                           | Item 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                           |                                                                                               | PICTURETEL CORPORATION CONSOLIDATED BALANCE SHEETS               
|                                           |                                                                                               | PICTURETEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                           |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                            
|                                           |                                                                                               | PICTURETEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                           | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                           | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II -- OTHER INFORMATION              
|                                           | Item 1. Legal Proceedings                                                                    
|                                           | Item 6. Exhibits and Reports on Form 8-K                                                     
|                                           | SIGNATURE                                                                                    



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##### Table of Contents



PICTURETEL CORPORATION

FORM 10-Q

INDEX

|                                           |  |                                                                                            |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | --------------
|PART I. CONSOLIDATED FINANCIAL INFORMATION |  |                                                                                           
|Item  1.                                   |  | Consolidated Financial Statements:                                                         |  |               
|                                          
|                                          
|                                          
|                                          
|                                           |  | Consolidated Balance Sheets March 31, 2001 and
	December  31, 2000                         |  | 2             
|                                          
|                                          
|                                          
|                                          
|                                           |  | Consolidated Statements of Operations Three Months Ended
	March 31, 2001 and April 1, 2000 |  | 3             
|                                          
|                                          
|                                          
|                                          
|                                           |  | Consolidated Statements of Cash Flows Three Months Ended
	March 31, 2001 and April 1, 2000 |  | 4             
|                                          
|                                          
|                                          
|                                          
|                                           |  | Notes to Consolidated Financial Statements                                                 |  | 5-8           
|                                          
|                                          
|                                          
|                                          
|Item  2.                                   |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations     |  | 9-16          
|                                          
|                                          
|                                          
|                                          
|Item  3.                                   |  | Quantitative and Qualitative Disclosures about Market Risk                                 |  | 16            
|PART II. OTHER INFORMATION                 |  |                                                                                           
|                                          
|                                          
|                                          
|                                          
|Item  1.                                   |  | Legal Proceedings                                                                          |  | 16            
|                                          
|                                          
|                                          
|                                          
|Item  2.                                   |  | Changes in Securities                                                                      |  | Not Applicable
|                                          
|                                          
|                                          
|                                          
|Item  3.                                   |  | Defaults Upon Senior Securities                                                            |  | Not Applicable
|                                          
|                                          
|                                          
|                                          
|Item  4.                                   |  | Submission of Matters to a Vote of Security Holders                                        |  | Not Applicable
|                                          
|                                          
|                                          
|                                          
|Item  5.                                   |  | Other Information                                                                          |  | Not Applicable
|                                          
|                                          
|                                          
|                                          
|Item  6.                                   |  | Exhibits and Reports on Form 8-K                                                           |  | 16            
|                                          
|                                          
|                                          
|                                          
|Signature                                  |  | 17                                                                                        

1



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##### Table of Contents






PART I.  CONSOLIDATED FINANCIAL INFORMATION






Item 1. CONSOLIDATED FINANCIAL STATEMENTS





PICTURETEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |          |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                                                                                                                                       |                                                                                                                                                               | March 31,                                                                           |        | December 31,
|                                                                                                                                                                       |                                                                                                                                                               | 2001                                                                                |        | 2000        
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |             
|                                                                                                                                                                       |                                                                                                                                                               | (Unaudited)                                                                         |        |             
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|ASSETS                                                                                                                                                                 |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Current assets:                                                                                                                                                        |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Cash and cash equivalents                                                                                                                                     |                                                                                     | $      | 34,302       |         |  | $      | 43,441   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Restricted cash and cash equivalents                                                                                                                          |                                                                                     |        | 8,400        |         |  |        | 5,775    |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accounts receivable, less allowances for doubtful accounts of
	$2,723 and $4,100 at March 31, 2001 and December 31,
	2000, respectively                       |                                                                                     |        | 32,427       |         |  |        | 39,897   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Inventories                                                                                                                                                   |                                                                                     |        | 27,871       |         |  |        | 27,020   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Other current assets                                                                                                                                          |                                                                                     |        | 10,412       |         |  |        | 9,716    |        
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       |                                                                                                                                                               | Total current assets                                                                |        |              | 113,412 |  |        |          | 125,849 | 
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Property and equipment, net                                                                                                                                            |                                                                                                                                                               |                                                                                     | 16,701 |              |         |  | 18,310 |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Other assets                                                                                                                                                           |                                                                                                                                                               |                                                                                     | 1,956  |              |         |  | 2,861  |         
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       |                                                                                                                                                               | Total assets                                                                        |        | $            | 132,069 |  |        | $        | 147,020 | 
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
	STOCKHOLDERS EQUITY                                                                                          |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Current liabilities:                                                                                                                                                   |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Short-term borrowings                                                                                                                                         |                                                                                     | $      | 566          |         |  | $      | 1,487    |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accounts payable                                                                                                                                              |                                                                                     |        | 17,558       |         |  |        | 20,575   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accrued compensation and benefits                                                                                                                             |                                                                                     |        | 5,000        |         |  |        | 7,280    |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accrued expenses                                                                                                                                              |                                                                                     |        | 30,305       |         |  |        | 32,896   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Deferred revenue                                                                                                                                              |                                                                                     |        | 19,202       |         |  |        | 18,216   |        
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       | Total current liabilities                                                                                                                                     |                                                                                     |        | 72,631       |         |  |        | 80,454   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Non-current liabilities                                                                                                                                                |                                                                                                                                                               |                                                                                     | 2,126  |              |         |  | 2,101  |         
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       |                                                                                                                                                               | Total liabilities                                                                   |        |              | 74,757  |  |        |          | 82,555  | 
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|Commitments and contingencies (Notes 5 and 8)                                                                                                                          |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Redeemable convertible preferred stock, $.01 par value
	13,500,000 shares authorized; 9,416,708 shares issued and
	outstanding at March 31, 2001 and December 31, 2000 |                                                                                                                                                               |                                                                                     | 42,845 |              |         |  | 42,845 |         
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|Stockholders equity:                                                                                                                                                  |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Preferred stock, $.01 par value 1,500,000 shares authorized; 0
	issued and outstanding at March 31, 2001 and
	December 31, 2000                               |                                                                                     |        |              |         |  |        |          |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Common stock, $.01 par value; 80,000,000 shares authorized;
	45,191,006 and 45,049,032 shares issued and outstanding at
	March 31, 2001 and December 31, 2000 |                                                                                     |        | 452          |         |  |        | 450      |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Additional paid-in capital                                                                                                                                    |                                                                                     |        | 245,816      |         |  |        | 245,399  |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accumulated deficit                                                                                                                                           |                                                                                     |        | (229,180     | )       |  |        | (221,751 | )      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Accumulated other comprehensive loss                                                                                                                          |                                                                                     |        | (2,065       | )       |  |        | (1,922   | )      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                       | Treasury stock, 92,065 shares, at cost                                                                                                                        |                                                                                     |        | (556         | )       |  |        | (556     | )      
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       |                                                                                                                                                               | Total stockholders equity                                                          |        |              | 14,467  |  |        |          | 21,620  | 
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                       |                                                                                                                                                               | Total liabilities, redeemable convertible preferred stock and
	stockholders equity |        | $            | 132,069 |  |        | $        | 147,020 | 
|                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         

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

2



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##### Table of Contents






PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)


(Unaudited)


|                                                        |                                     |                         |        |          |        |   |         |        |        | 
|------------------------------------------------------- | ----------------------------------- | ----------------------- | ------ | -------- | ------ | - | ------- | ------ | ------ | 
|                                                        |                                     |                        
|                                                        |                                     | Three Months Ended     
|                                                        |                                     |                        
|                                                        |                                     | March 31,               |        | April 1,
|                                                        |                                     | 2001                    |        | 2000    
|                                                        |                                     |                         |        |         
|Revenue                                                 |                                     | $                       | 49,605 |          |        | $ | 65,203  |       
|                                                       
|                                                       
|                                                       
|                                                       
|Cost of revenue                                         |                                     |                         | 31,827 |          |        |   | 47,484  |       
|                                                        |                                     |                         |        |          |        |   |         |       
|Gross margin                                            |                                     |                         | 17,778 |          |        |   | 17,719  |       
|                                                        |                                     |                         |        |          |        |   |         |       
|Operating expense:                                      |                                     |                         |        |          |        |   |         |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Selling, general and administrative |                         |        | 18,117   |        |   |         | 27,309 |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Research and development            |                         |        | 7,184    |        |   |         | 13,453 |       
|                                                        |                                     |                         |        |          |        |   |         |       
|                                                        |                                     | Total operating expense |        |          | 25,301 |   |         |        | 40,762 | 
|                                                        |                                     |                         |        |          |        |   |         |       
|Loss from operations                                    |                                     |                         | (7,523 | )        |        |   | (23,043 | )     
|                                                       
|                                                       
|                                                       
|                                                       
|Interest income (expense), net                          |                                     |                         | 571    |          |        |   | (292    | )     
|                                                       
|                                                       
|                                                       
|                                                       
|Other income (expense), net                             |                                     |                         | (68    | )        |        |   | 327     |       
|                                                        |                                     |                         |        |          |        |   |         |       
|Loss before income tax expense                          |                                     |                         | (7,020 | )        |        |   | (23,008 | )     
|                                                       
|                                                       
|                                                       
|                                                       
|Income tax expense                                      |                                     |                         | 410    |          |        |   | 834     |       
|                                                        |                                     |                         |        |          |        |   |         |       
|Net loss                                                |                                     | $                       | (7,430 | )        |        | $ | (23,842 | )     
|                                                        |                                     |                         |        |          |        |   |         |       
|Net loss per common share  basic and diluted           |                                     | $                       | (0.17  | )        |        | $ | (0.59   | )     
|                                                        |                                     |                         |        |          |        |   |         |       
|Weighted average shares outstanding  basic and diluted |                                     |                         | 44,984 |          |        |   | 40,630  |       
|                                                        |                                     |                         |        |          |        |   |         |       

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

3



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in thousands)


(Unaudited)


|                                                     |                                                                              |                                                        |        |          |        |   |        |         |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------ | ------ | -------- | ------ | - | ------ | ------- | ------ | -
|                                                     |                                                                              |                                                       
|                                                     |                                                                              | Three Months Ended                                    
|                                                     |                                                                              |                                                       
|                                                     |                                                                              | March 31,                                              |        | April 1,
|                                                     |                                                                              | 2001                                                   |        | 2000    
|                                                     |                                                                              |                                                        |        |         
|Cash flows from operating activities:                |                                                                              |                                                        |        |          |        |   |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                     |                                                        | $      | (7,430   | )      |   | $      | (23,842 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash used in operating
	activities: |                                                        |        |          |        |   |        |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Depreciation and amortization                          |        |          | 2,182  |   |        |         | 6,938  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Provision for doubtful accounts                        |        |          | 404    |   |        |         | 553    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Provision for inventory obsolescence                   |        |          | 456    |   |        |         | 2,649  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other non-cash items                                   |        |          | 130    |   |        |         | (17    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in operating assets and liabilities:                                 |                                                        |        |          |        |   |        |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts receivable                                    |        |          | 6,173  |   |        |         | 16,687 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Inventories                                            |        |          | (1,581 | ) |        |         | (9,419 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other current assets                                   |        |          | (210   | ) |        |         | 4,631  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts payable                                       |        |          | (2,786 | ) |        |         | 237    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accrued compensation and benefits and accrued expenses |        |          | (4,558 | ) |        |         | (6,818 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Deferred revenue                                       |        |          | 1,380  |   |        |         | (950   | )
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Net cash used in operating activities                |                                                                              |                                                        | (5,840 | )        |        |   | (9,351 | )      
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Cash flows from investing activities:                |                                                                              |                                                        |        |          |        |   |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of marketable securities                                            |                                                        |        |         |        |   |        | (23,126 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                  |                                                        |        |         |        |   |        | 33,022  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                          |                                                        |        | (791     | )      |   |        | (2,284  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of fixed assets                                           |                                                        |        | 4        |        |   |        | 10      |       
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Net cash provided by (used in) investing activities  |                                                                              |                                                        | (787   | )        |        |   | 7,622  |        
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Cash flows from financing activities:                |                                                                              |                                                        |        |          |        |   |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Restricted cash and cash equivalents                                         |                                                        |        | (2,625   | )      |   |        | 1,050   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments on short-term/long-term borrowings                                  |                                                        |        | (848     | )      |   |        | (188    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capital lease obligations                           |                                                        |        |         |        |   |        | (433    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from exercise of stock options                                      |                                                        |        |         |        |   |        | 2,460   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from employee stock purchase plan                                   |                                                        |        | 418      |        |   |        | 520     |       
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Net cash provided by (used in) financing activities  |                                                                              |                                                        | (3,055 | )        |        |   | 3,409  |        
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Effect of exchange rate changes on cash              |                                                                              |                                                        | 543    |          |        |   | 229    |        
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                              |                                                        | (9,139 | )        |        |   | 1,909  |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                              |                                                        | 43,441 |          |        |   | 21,915 |        
|                                                     |                                                                              |                                                        |        |          |        |   |        |        
|Cash and cash equivalents at end of period           |                                                                              | $                                                      | 34,302 |          |        | $ | 23,824 |        
|                                                     |                                                                              |                                                        |        |          |        |   |        |        

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

4



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##### Table of Contents






PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)


1.  Managements Representation

As permitted by the rules of the Securities and Exchange
Commission applicable to Quarterly Reports on Form 10-Q,
these notes are condensed and do not contain all the disclosures
required by generally accepted accounting principles. Reference
should be made to the consolidated financial statements and
related notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2000, as
filed with the Securities and Exchange Commission on
April 17, 2001.

In the opinion of the management of PictureTel Corporation, the
accompanying unaudited consolidated financial statements contain
all adjustments necessary to present fairly the Companys
financial position at March 31, 2001 and December 31,
2000, results of operations for the three months ended
March 31, 2001 and April 1, 2000 and changes in cash
flow for the three months ended March 31, 2001 and
April 1, 2000.

The results disclosed in the Consolidated Balance Sheet at
March 31, 2001, the Consolidated Statement of Operations
for the three months ended March 31, 2001 and the
Consolidated Statement of Cash Flows for the three months ended
March 31, 2001 are not necessarily indicative of the
results to be expected for the full year.

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These estimates affect the
reported amounts of assets and liabilities, 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 financial statements include
significant estimates of the net realizable value of accounts
receivable, inventory and the amount of certain contingent
liabilities. Actual results could differ from those estimates.

The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
The Company has incurred recurring losses from operations and
requires additional financing. These factors raise substantial
doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Managements plans to continue as a going concern rely
heavily on forecasted revenue from products which were released
in the third quarter of 2000 and in April 2001. In
addition, management is currently seeking additional financing.
Management is also continuing to identify and implement internal
actions to improve the Companys liquidity. While there can
be no assurances that these plans will be successful, management
believes these actions will provide sufficient financial
resources for the next twelve months.

2.  Inventories

Inventories consist of the following:

|                |  |           |        |              |  |   |        | 
|--------------- |  | --------- | ------ | ------------ |  | - | ------ | 
|                |  | March 31, |        | December 31,
|                |  | 2001      |        | 2000        
|                |  |           |        |             
|Purchased Parts |  | $         | 3,706  |              |  | $ | 4,018  | 
|               
|               
|               
|               
|Work in Process |  |           | 140    |              |  |   | 234    | 
|               
|               
|               
|               
|Finished Goods  |  |           | 24,025 |              |  |   | 22,768 | 
|                |  |           |        |              |  |   |        | 
|                |  | $         | 27,871 |              |  | $ | 27,020 | 
|                |  |           |        |              |  |   |        | 

5



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

3.  Earnings Per Share

The following table reconciles the numerator and the denominator
of the basic and diluted EPS computations shown on the
Consolidated Statements of Operations:

|                                  |                                            |                    |       |          |   |   |       |         |  
|--------------------------------- | ------------------------------------------ | ------------------ | ----- | -------- | - | - | ----- | ------- | -
|                                  |                                            |                   
|                                  |                                            | Three Months Ended
|                                  |                                            |                   
|                                  |                                            | March 31,          |       | April 1,
|                                  |                                            | 2001               |       | 2000    
|                                  |                                            |                    |       |         
|Basic and Diluted EPS Computation |                                            |                    |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|Numerator:                        |                                            |                    |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Net loss                                   |                    | $     | (7,430   | ) |   | $     | (23,842 | )
|                                  |                                            |                    |       |          |   |   |       |        
|Denominator:                      |                                            |                    |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Weighted average common shares outstanding |                    |       | 44,984   |   |   |       | 40,630  |  
|                                  |                                            |                    |       |          |   |   |       |        
|Basic and diluted EPS             |                                            | $                  | (0.17 | )        |   | $ | (0.59 | )      
|                                  |                                            |                    |       |          |   |   |       |        

Options to purchase shares of the Companys common stock of
5,839,952 and 7,007,732 were outstanding at March 31, 2001
and April 1, 2000, respectively, but were not included in
the computation of diluted EPS because they were antidilutive
due to the net losses sustained in 2001 and in 2000. Warrants
for 2,723 shares of the Companys Common Stock and
Convertible Redeemable Preferred Stock of 9,416,708 shares were
outstanding at March 31, 2001, but were not included in the
computation of diluted EPS because they were antidilutive due to
the loss sustained in 2001.

4.  Comprehensive Loss

The Company adopted SFAS No. 130, Reporting
Comprehensive Income, in fiscal year 1998. The calculation
of comprehensive income includes the loss as reported in the
Consolidated Statements of Operations, the gains and losses on
foreign currency translation adjustments and unrealized gains
and losses on marketable securities.

|                                                |  |                    |        |          |  |   |         |  
|----------------------------------------------- |  | ------------------ | ------ | -------- |  | - | ------- | -
|                                                |  |                   
|                                                |  | Three Months Ended
|                                                |  |                   
|                                                |  | March 31,          |        | April 1,
|                                                |  | 2001               |        | 2000    
|                                                |  |                    |        |         
|Net loss                                        |  | $                  | (7,430 | )        |  | $ | (23,842 | )
|                                               
|                                               
|                                               
|                                               
|Foreign currency translations, net              |  |                    | (143   | )        |  |   | (248    | )
|                                               
|                                               
|                                               
|                                               
|Unrealized losses on marketable securities, net |  |                    |       |          |  |   | (17     | )
|                                                |  |                    |        |          |  |   |         |  
|Comprehensive loss                              |  | $                  | (7,573 | )        |  | $ | (24,107 | )
|                                                |  |                    |        |          |  |   |         |  

5.  Debt

The Company entered into an asset-based secured revolving credit
agreement dated August 21, 2000, which will expire on
August 21, 2003. This credit facility provides a revolving
credit line of up to $35,000 with Congress Financial Corporation
(New England) (the Lender). The availability for
borrowings under this credit facility are variable based on
eligible receivables and is subject to a $10,000 minimum
reserve, which is available at the Lenders discretion. The
Company is required to maintain cash collateral equal to 105% in
an account held at the Lender of the outstanding obligations or
an equal dollar amount of eligible receivables. At
March 31, 2001, availability based on receivables and net
of the $10,000 discretionary reserve, was $3,328. Interest for
loans under this facility is payable at 1% above the
Lenders prime rate. There were no borrowings outstanding
against the availability at March 31, 2001. The Company has
$8,000 of outstanding standby letters of credit issued under
this agreement as of March 31, 2001. The letters of credit
have been collateralized 105% and are in an account held at the
Lender. Cash subject to the cash collateral requirement

6



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

amounts to $8,400 and is classified as current on the
Companys balance sheet at March 31, 2001. Fees for
letters of credit outstanding against this facility are payable
at 225 basis points per annum of the face amount. The
secured letters of credit expire between September 2001 and
December 2001. This credit agreement also contains certain
financial covenants, including minimum net worth and working
capital requirements.

Local lines of credit of up to $1,374 are available to certain
of the Companys foreign subsidiaries for short-term
advances. The agreements require interest payable up to one and
three-quarter percent per annum. Borrowings totaling $566 were
outstanding against these local lines of credit at
March 31, 2001.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease its former MultiLink
subsidiarys facility at 6 Riverside Drive in Andover,
Massachusetts in May 1999, as part of its space
consolidation efforts. As of March 31, 2001, the remaining
obligation under this operating lease was $6,868. After giving
effect to expected sublease income, this obligation is $4,659.
In addition, in June 1998, the Company subleased its
property at 50 Minuteman Road for a ten-year term. After giving
effect to expected sublease income, the remaining obligation
under this operating lease was $1,198 at March 31, 2001.

6.  Commitments

In conjunction with a joint development agreement with Sharp
Corporation, the Company has outstanding commitments as of
March 31, 2001 to purchase approximately $20,000 of
inventory over a twelve month period, scheduled to begin with
the release of the new products being jointly developed. The
first products were released in April 2001.

7.  Segment Information

The Company has determined that its reportable segments are
videoconferencing products and videoconferencing services. The
videoconferencing products segment develops, manufactures and
markets visual communications systems and collaboration
software. The videoconferencing services segment provides
services for videoconferencing products.

|                                |  |              |         |              |  |       |        |       |  |   |        |   |  |   |         |  
|------------------------------- |  | ------------ | ------- | ------------ |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------- | -
|                                |  | Video-       |         | Video-       |  |       |        |      
|                                |  | conferencing |         | conferencing |  |       |        |      
|                                |  | Products     |         | Services     |  | Other |        | Total
|                                |  |              |         |              |  |       |        |      
|Quarter ended March 31, 2001:   |  |              |         |              |  |       |        |       |  |   |        |   |  |   |         |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 33,856  |              |  | $     | 15,708 |       |  | $ | 41     |   |  | $ | 49,605  |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (6,468  | )            |  | $     | 3,979  |       |  | $ | (5,034 | ) |  | $ | (7,523  | )
|                               
|                               
|                               
|                               
|Quarter ended April 1, 2000:    |  |              |         |              |  |       |        |       |  |   |        |   |  |   |         |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 44,775  |              |  | $     | 18,198 |       |  | $ | 2,230  |   |  | $ | 65,203  |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (15,662 | )            |  | $     | 1,461  |       |  | $ | (8,842 | ) |  | $ | (23,043 | )

The classification Other consists of non-core
business revenue and expense and corporate administrative
functions, which are excluded from the videoconferencing
products and videoconferencing services segments for management
decision making.

The Company evaluates the performance of its segments based upon
operating income. There is no material intersegment revenue.
Transfers of videoconferencing products to the videoconferencing
services segment are recorded at standard cost and are not
tracked for management reporting purposes. Asset information by
reportable segment has not been disclosed since the Company does
not produce such information internally.

7



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Geographic Data

In addition to its direct and indirect sales channels in the
United States, the Company has subsidiaries in various foreign
countries which, through direct and indirect sales channels,
sell and service the Companys products in their respective
geographic area. Revenue from external customers represent sales
made from those countries. The Companys revenue and
long-lived asset financial information is detailed as follows:

|                                   |  |               |         |         |  |       |        |           |  |       |       |  |  |   |       |  |  |   |         | 
|---------------------------------- |  | ------------- | ------- | ------- |  | ----- | ------ | --------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------- | 
|                                   |  |               |         | United  |  |       |        |           |  |      
|                                   |  | United States |         | Kingdom |  | Japan |        | All Other |  | Total
|                                   |  |               |         |         |  |       |        |           |  |      
|Three months ended March 31, 2001: |  |               |         |         |  |       |        |           |  |       |       |  |  |   |       |  |  |   |         | 
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $             | 31,261  |         |  | $     | 10,467 |           |  | $     | 4,301 |  |  | $ | 3,576 |  |  | $ | 49,605  | 
|                                  
|                                  
|                                  
|                                  
|Long-lived assets                  |  | $             | 15,527  |         |  | $     | 2,097  |           |  | $     | 853   |  |  | $ | 180   |  |  | $ | 18,657  | 
|                                  
|                                  
|                                  
|                                  
|Three months ended April 1, 2000:  |  |               |         |         |  |       |        |           |  |       |       |  |  |   |       |  |  |   |         | 
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $             | 36,827  |         |  | $     | 16,677 |           |  | $     | 7,249 |  |  | $ | 4,450 |  |  | $ | 65,203  | 
|                                  
|                                  
|                                  
|                                  
|Long-lived assets                  |  | $             | 101,039 |         |  | $     | 3,577  |           |  | $     | 2,079 |  |  | $ | 231   |  |  | $ | 106,926 | 

8.  Litigation

SEC Investigation

In May 1999, the Company was informed that the Securities
and Exchange Commission (SEC) had initiated a formal
investigation of matters related to the Companys 1997
restatement of its earnings. The Company has been cooperating
with the SEC and will continue to do so. The Company expresses
no opinion as to the likely outcome. While no assurances can be
provided, the Company does not believe that the investigation
will have a material adverse affect to its business, financial
condition, results of operations or cash flows.

In addition to the above, the Company has also been and is from
time to time subject to claims, such as potential patent
infringements, and suits incidental to the conduct of business.
There can be no assurance that the Companys insurance will
be adequate to cover all liabilities that may arise out of such
claims. Further, although the Company intends to defend itself
vigorously against all such claims, the ultimate outcome of the
claims cannot be accurately predicted. The Company does not
believe that any claim of which it is aware, other than the
claims listed above, could result in an outcome that will have a
material adverse effect to its business, financial condition,
results of operations or cash flows.

8



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##### Table of Contents








|        |                                                                                                                                           
|------- | ------------------------------------------------------------------------------------------------------------------------------------------
|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands,
	unless otherwise indicated)

Forward-Looking Statements

This document includes forward-looking statements about the
Companys business, revenues and expenses, effective tax
rate, operating and capital requirements, liquidity and
managements plans to introduce new products and seek
additional financing. Forward-looking statements made or
incorporated by reference herein are not guarantees of future
performance. In addition, forward-looking statements may be
included in various other documents to be issued in the future
and in various oral statements by PictureTel representatives to
security analysts and investors from time to time. Any
forward-looking statements are subject to risks that could cause
the actual results to vary materially. Such risks are discussed
in Risk Factors Which May Affect Future Results and
in other related portions of this document.

Business Developments

In early 2000, the Company adopted and is now pursuing a
three-pronged approach to meeting the anticipated needs of the
developing multimedia collaboration marketplace. First, in
conjunction with Intel Corporation, it developed its new
generation endpoint conferencing products for video, voice and
data collaboration. Second, it is expanding its enterprise-wide
solutions services beyond management of multipoint
videoconferences to include streaming video services, custom
integration, and outsourced management of enterprise
conferencing. The last prong is the development of
Internet-based, multimedia application services built around a
network-neutral collaboration hub. As part of this approach,
PictureTel entered into a distribution and joint product
development agreement with Intel, Inc. PictureTel and Intel
agreed to jointly develop videoconferencing and collaboration
products based on a common PC-based technology platform. These
joint development efforts resulted in the new iPower
architecture. Use of this single architecture improves ease of
use and functionality, while reducing both product and
associated support costs. The Company has focused its
development and engineering resources on new products evolving
around the iPower architecture. The first products
developed, the PictureTel 900 Series, were introduced in
August 2000. Additional new product series are planned for
introduction in 2001. On April 30, 2001, the Company began
shipping the first of these new products, the PictureTel
600 Series. The PictureTel 600 Series is the
worlds first PC-based videoconferencing solution in a
compact package. This solution is the second product series in
the iPower family.

In addition to meeting marketplace needs, the Company has
focused its business plan on improving liquidity, disposition of
non-core business assets, consolidation opportunities and
process improvement.

Results of Operations

The following table sets forth, for the periods indicated, the
percentage of revenue for certain items in the Companys
Statement of Operations for each period:

|                                    |  |                    |       |          |  |  |       |  
|----------------------------------- |  | ------------------ | ----- | -------- |  |  | ----- | -
|                                    |  |                   
|                                    |  | Three Months Ended
|                                    |  |                   
|                                    |  | March 31,          |       | April 1,
|                                    |  | 2001               |       | 2000    
|                                    |  |                    |       |         
|Revenue                             |  |                    | 100.0 | %        |  |  | 100.0 | %
|                                   
|                                   
|                                   
|                                   
|Cost of revenue                     |  |                    | 64.2  |          |  |  | 72.8  |  
|                                   
|                                   
|                                   
|                                   
|Gross margin                        |  |                    | 35.8  |          |  |  | 27.2  |  
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                    | 36.5  |          |  |  | 42.0  |  
|                                   
|                                   
|                                   
|                                   
|Research and development            |  |                    | 14.5  |          |  |  | 20.6  |  
|                                   
|                                   
|                                   
|                                   
|Total operating expense             |  |                    | 51.0  |          |  |  | 62.6  |  
|                                   
|                                   
|                                   
|                                   
|Loss from operations                |  |                    | (15.2 | )        |  |  | (35.4 | )
|                                   
|                                   
|                                   
|                                   
|Interest income (expense), net      |  |                    | 1.2   |          |  |  | (0.4  | )
|                                   
|                                   
|                                   
|                                   
|Other income (expense), net         |  |                    | (0.2  | )        |  |  | 0.5   |  
|                                   
|                                   
|                                   
|                                   
|Loss before income tax expense      |  |                    | (14.2 | )        |  |  | (35.3 | )
|                                   
|                                   
|                                   
|                                   
|Income tax expense                  |  |                    | 0.8   |          |  |  | 1.3   |  
|                                   
|                                   
|                                   
|                                   
|Net loss                            |  |                    | (15.0 | )        |  |  | (36.6 | )

9



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##### Table of Contents



Three Months Ended March 31, 2001 Compared
to Three Months Ended April 1, 2000

Revenue. The Company reported revenue of $49,605 for the
three months ended March 31, 2001 compared to $65,203 for
the first three months of the prior year ended April 1,
2000, representing a decrease of $15,598, or 24%. The decrease
in revenue is primarily attributed to a decrease in unit sales
of legacy systems, which was not offset by an increase in new
system product sales. In addition, revenue for the first quarter
of 2000 includes $2,248 of revenue from MultiLink, the
Companys audioconferencing subsidiary, and the
Companys Starlight division, which were sold in the fourth
quarter of 2000.

Gross Margin. Overall gross margin for the first quarter
of 2001 was relatively flat at $17,778 compared to $17,719 for
the first quarter of 2000. However, as a percentage of revenue,
gross margin was 36% for the first quarter of 2001 compared to
27% for the first quarter of 2000. The increase in gross margin
percentage is attributable to sales of products with higher
margin percentages, along with the elimination of lower margins
generated by the Companys audioconferencing segment,
MultiLink, Inc., which was sold in the fourth quarter of 2000.

Operating Expense. First quarter 2001 operating expense
of $25,301 declined $15,461, or 38%, from comparable prior year
levels of $40,762. As a percent of revenue, first quarter 2001
operating expense represented 51% of revenue while first quarter
2000 operating expense represented 63% of revenue. Selling,
general and administrative expense decreased $9,192, or 34%, to
$18,117 for the first quarter of 2001 compared to $27,309 for
the first quarter of 2000. Research and development decreased
$6,269, or 47%, to $7,184 for the first quarter of 2001 compared
to $13,453 for the first quarter of 2000. The decline in
operating expense is the result of on-going efforts, including
headcount reductions, to reduce operating expense, along with
the elimination of expenses associated with the Companys
Starlight division and audioconferencing segment, MultiLink,
Inc., which were sold in the fourth quarter of 2000.

Videoconferencing Products. The videoconferencing
products segment develops, manufactures, and markets a full
range of videoconferencing and advanced collaboration solutions.
Videoconferencing products scale from personal/ desktop systems
to large conference room solutions. Additionally, the segment
markets a wide range of network infrastructure products and
peripheral devices. Videoconferencing product revenue was
$33,856 for the first three months of 2001. This represents a
decrease of $10,919, or 24%, compared with the first three
months of 2000, but represents a $1,946, or 6%, increase versus
the fourth quarter of 2000. Despite difficult economic
conditions, including the freezing of telecommunications capital
spending by many large companies, PictureTel was able to record
sequential quarterly product sales growth. The revenue decrease
from the first quarter of 2000 is due primarily to decreases in
legacy product sales not entirely offset by sales of
PictureTels new 900 Series product offerings.

Videoconferencing system units sold during the first quarter of
2001 were 47% less than the comparable quarter in the prior
year. However, units sold of larger group systems increased by
78% from the prior year first quarter primarily due to sales of
the new PictureTel 900 Series units. Total Group system volume
decreased by 17 due to lower compact system sales, while
lower-end desktop/ personal system volume decreased by 68%. The
large decrease in desktop/ personal systems was primarily the
result of the Intel ProShare end of life, offset in part by
increased PictureTel 550 sales. PictureTel 900 Series
unit sales increased 14% versus the fourth quarter of 2000,
continuing sequential quarterly growth since its introduction in
August 2000.

The videoconferencing products segment generated an operating
loss of $6,468 in the first quarter of 2001 compared to a
$15,662 operating loss during the first quarter of 2000. Despite
lower gross margin, the decrease in operating loss is in part
attributed to lower engineering costs resulting from completion
of the iPower architecture development. In addition, a reduction
in selling, general and administrative expense, resulting from
on-going efforts to reduce expenses on a worldwide basis, along
with the elimination of operating expense related to the
Companys Starlight division sold in the fourth quarter of
2000, also contributed to the decrease in operating loss.

Videoconferencing Services. The videoconferencing
services segment provides maintenance as well as professional
consulting and management services for videoconferencing
products sold by the Company and its competitors. Segment
revenue decreased 14% from $18,198 in the first quarter of 2000
to $15,708 in the first

10



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##### Table of Contents





Operating profits were $3,979 in the first quarter of 2001,
which represent a 172% increase from the prior year of $1,461.
The increase is largely due to decreased costs in all areas.

Income Taxes. The Companys effective income tax
rate was 6% in the first quarter of 2001 compared to 4% in the
first quarter of 2000. The tax rate in both periods relates to
state and/or foreign taxes.

Comparison of First Quarter 2001 with
Fourth Quarter 2000.

First quarter 2001 revenue of $49,605 represented an increase of
$1,253, or 3%, when compared with $48,352 revenue for the fourth
quarter of 2000. Net loss from operations for first quarter 2001
was $7,523 compared to $15,604 (normalized, after removing a
$7,654 one-time special charge for lease termination) for fourth
quarter 2000, an improvement of $8,081 at the operating line.
Resulting gross margin for first quarter 2001 improved by 11.3
percentage points over gross margin for fourth quarter 2000.

Liquidity and Capital Resources

At April 1, 2001, the Company had $34,302 in cash and cash
equivalents. Operating activities used $5,840 of cash during the
first quarter of 2001 compared with a $9,351 use in the
comparable 2000 quarter. The primary operating use of cash
during both quarters was to fund operating losses in excess of
non-cash expense. The Company generated a $1,582 usage of cash
from working capital during 2001s first quarter compared
to generating $4,368 of cash for working capital in the first
quarter of 2000. The Company paid $627 of accrued severance and
restructuring charges during the first quarter of 2001 and had a
remaining accrual in the amount of $922 for such items as of
April 1, 2001 that will be paid over the next nine months.

Investing activities used $787 of cash in the first quarter of
2001 compared with $7,622 provided in the first quarter of 2000.
The usage in the first quarter of 2001 is principally
attributable to the purchase of property and equipment. This
usage is approximately 65% less than the comparable 2000 figure,
as the Company has sharply curtailed spending on property and
equipment. Changes in marketable securities balances were the
principal source of cash provided by investing activities in the
first quarter of 2000. During the first quarter of 2001, the
Company held no marketable securities.

Financing activities used $3,055 of cash in the first quarter of
2001 compared with $3,409 provided in the first quarter of 2000.
The usage in the first quarter of 2001 was primarily the result
of an increase in restricted cash balances. Cash provided by
financing activities in the first quarter of 2000 was
principally the result of employee stock option exercises and a
reduction in restricted cash balances.

Liquidity is a major priority for the Company. The Company
entered into an asset-based secured revolving credit agreement
dated August 21, 2000, which will expire on August 21,
2003. This credit facility provides a revolving credit line of
up to $35,000 with Congress Financial Corporation (New England)
(the Lender). The availability for borrowings under
this credit facility are variable based on eligible receivables
and is subject to a $10,000 minimum reserve, which is available
at the Lenders discretion. The Company is required to
maintain cash collateral equal to 105% in an account held at the
Lender of the outstanding obligations or an equal dollar amount
of eligible receivables. At March 31, 2001, availability
based on receivables and net of the $10,000 discretionary
reserve, was $3,328. Interest for loans under this facility is
payable at 1% above the Lenders prime rate. There were no
borrowings outstanding against the availability at
March 31, 2001. The Company has $8,000 of outstanding
standby letters of credit issued under this agreement as of
March 31, 2001. The letters of credit have been
collateralized 105% and are in an account held at the Lender.
Cash subject to the cash collateral requirement amounts to
$8,400 and is classified as current on the Companys
balance sheet at March 31, 2001. Fees for letters of credit
outstanding against this facility are payable at 225 basis
points per annum of the face amount. The secured letters of
credit expire between September 2001 and December 2001. This
credit agreement also contains certain financial covenants,
including minimum net worth and working capital requirements.

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Local lines of credit of up to $1,374 are available to certain
of the Companys foreign subsidiaries for short-term
advances. The agreements require interest payable up to one and
three-quarter percent per annum. Borrowings totaling $566 were
outstanding against these local lines of credit at
March 31, 2001.

In 2000, management disposed of non-core assets, raised equity
and implemented expense reductions which are expected to reduce
2001 quarterly operating expenses substantially compared to the
amounts incurred in 2000. Margins are expected to improve from
levels experienced in 2000, since significant charges related to
asset impairment and necessary provisions for inventory losses
are not expected to recur in 2001. Additionally, along with
on-going efforts to reduce operating expense, management
implemented a headcount reduction plan in April 2001. Management
anticipates an approximate $1,200 quarterly reduction in
operating expense, as a result of this plan.

Working capital management is expected to improve due to the
hiring of a new credit manager during the fourth quarter of 2000
and strengthening of procedures with respect to sales and
collections. Management is in the process of challenging terms
with vendors to more closely align those terms with other
working capital measures.

Management introduced its next product line series in April
2001. These products rely on the same iPowerTM
architecture as the PictureTel 900 Series which was introduced
in 2000. Reliance on this architecture reduces development time
and cost, as well as the technological risk associated with a
new product introduction. Further, the expected price points
will be competitive and features are expected to exceed
offerings in the industry.

The Company has engaged Robertson Stephens, an investment
banking firm, to advise management with respect to enhancing
shareholders value under various types of alternatives.

In February 2001, the Company received a report from its
independent accountants containing an explanatory paragraph
stating that its recurring losses and requirement for additional
financing raise substantial doubt about our ability to continue
as a going concern. Managements plans to continue as a
going concern rely heavily on forecasted revenue from new
products being jointly developed with Sharp and Intel
Corporation, including recently introduced new products
utilizing the new iPower architecture, new multi-media
applications services, and enhanced compact videoconferencing
systems and on continued implementation of cost reductions.
There can be no guarantee that either such revenue increase will
occur or, if it does occur, will be sufficient to meet the
Companys needs or that cost reduction measures will be
sufficient to maintain liquidity.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease its former MultiLink
subsidiarys facility at 6 Riverside Drive in Andover,
Massachusetts in May 1999 as part of its space consolidation
efforts. As of March 31, 2001, the remaining obligation
under this operating lease was $6,868. After giving effect to
expected sublease income, this obligation is $4,659. In
addition, in June 1998, the Company subleased its property at
50 Minuteman Road for a ten-year term. After giving effect
to expected sublease income, the remaining obligation under this
operating lease was $1,198 at March 31, 2001.

In October 1998, the Board of Directors authorized a plan to
repurchase up to 1,000,000 shares of the Companys Common
Stock in open market, privately negotiated or other
transactions. The Company repurchased 70,000 shares during the
first quarter of 1999 at a cost of $556 (approximately $7.94 per
share). In addition, 22,065 shares were returned to the Company
from shares held in escrow related to the MultiLink acquisition.
There are no definitive plans to repurchase the additional
shares under the plan.

Risk Factors Which May Affect Future Results

The following risk factors relating to the business of
PictureTel and certain forward-looking statements contained
herein should be considered by current and prospective investors
of PictureTel stock. These factors should be considered in
conjunction with other information contained in this document.

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New Products, Cost Reductions, Technological Change, and
Evolving Markets. The Company is engaged in an industry that
is still emerging as a result of extensive research and
development efforts and which continues to bring to market new,
more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications
market is in a heightened competitive state due to deregulation
throughout the world. In order to maintain its market share in
this fast-paced emerging market, the Company must continue to
introduce, through internal development or by acquisition, joint
venture or other collaborative arrangements, significant
innovative, technologically leading and cost-competitive
products. There can be no assurance that such new products will
be introduced by the Company, or if introduced, will be accepted
by the market and its customers. In January 1999, the Company
entered into a distribution and joint product development
agreement with Intel Corporation. The Company announced that it
begun shipping the resulting product (known as the PictureTel
900 Series) in mid August 2000. Also in August 2000,
the Company entered into a joint design and manufacturing
partnership with Sharp to develop iPowerTM -based
visual and audio collaboration tools. The new products will be
based on the PictureTel iPower architecture, which was jointly
developed by PictureTel and Intel. Additional new product series
are planned for introduction in 2001. On April 30, 2001,
the Company began shipping the first of these new products, the
PictureTel 600 Series. The PictureTel 600 Series is
the worlds first PC-based videoconferencing solution in a
compact package. This solution is the second product series in
the iPower family. There can, however, be no assurance that the
products produced by this partnership will be accretive to the
Companys results of operations and financial condition or,
if accretive, will by themselves return the Company to
profitability. In addition, to offering products that operate in
an integrated service digital network (ISDN) environment, the
Company and its competitors are exploring new technologies and
networks, such as the Internet and corporate intranets or LANs,
for delivering videoconferencing and data collaboration
services. The industry standards for such new technologies and
networks, however, are still in the early stages of development,
which the Company believes has led to customer uncertainty and,
accordingly, a slowdown in the growth of the general market for
videoconferencing products. As a result of customer preferences,
the Company continues to experience a shift in its sales model
to videoconferencing systems with lower average selling prices.
There can be no assurance that the Company will be successful in
implementing cost reductions for all of its products or in
developing and marketing suitable new products and related
services with attractive margins for these new technologies and
networks. The possible transition, migration and/or convergence
of technologies is difficult to predict and could have profound
implications for the industry and the business of the Company.
Further, there is significant risk that existing products could
be rendered obsolete due to changing technology. The
Companys failure to develop and market new products on a
timely basis or to enhance its existing products or to respond
effectively to technological changes, new industry standards or
product announcements by competitors could have a material
adverse effect on the Companys business, financial
condition and results of operations. The Company announced on
May 8, 2001, its intention to license its PurePoint
technology, which is owned by its 1414c subsidiary, to First
Virtual Communications (FVC). In return, the Company will
receive a technology license, which is anticipated to allow the
Company to broaden its endpoint product line, and warrants in
FVC. There can be no assurance that the transaction will close,
that the technology from FVC will be accretive to PictureTel or
that the warrants will have any value.

Competition. The increased competition resulting from
partnerships and acquisitions by and with our competitors,
together with mergers among competitors and a slowdown in the
growth of the general market for visual collaboration products,
has led and may continue to lead to increases in the defection
or dilution of PictureTels distribution channel partners
to competitors, decreases in average selling prices and margins
in both group and desktop visual collaboration systems, and a
lower segment market share by PictureTel for products and
services in the emerging area of network-based visual
collaboration. In some cases, PictureTel competes with its
channel partners for various services, which increases the
complexity of channel management. In addition, competitors may
offer network-based visual collaboration software solutions or
incorporate standard algorithms into processor chips free of
additional charge, which may reduce the value PictureTel
technology provides to the market, especially in its lower end
visual collaboration products. In addition, the prices which
PictureTel is able to charge for its visual collaboration
products and services may further decrease from historical
levels as a result of new product introductions by competitors,
price competition,

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Manufacturing.Certain key subassemblies and products are
currently available only from one vendor and several vendors are
smaller corporations with limited financial resources that could
prove to be inadequate. In some cases components are sourced
from only one vendor, even where multiple sources are available,
to maintain quality control and enhance the working relationship
with the vendor. In addition, the Company from time to time
enters into development arrangements with third parties to
develop and incorporate new features and functions into the
Companys products. Failure of these third parties to
fulfill their respective obligations under these development
arrangements could have a material adverse effect on the
Companys business, financial condition and results of
operations. The Companys business could also be adversely
affected by delays or interruptions in delivery, and poor
quality of supplies, subassemblies or products from key vendors.
In addition, the Company designs and procures certain circuits,
components and subassemblies from non-videoconferencing
divisions of its competitors, such as Sharp, Sony and Panasonic
Corporation. The failure to obtain adequate supplies or the
requirement to redesign and source supplies from another
manufacturer may take substantial time and result in significant
expense, each of which could adversely impact product shipments
and materially and adversely affect the Companys business,
financial condition or results of operations.

Recent History of Losses and Liquidity Risks.While
revenue for the first quarter of 2001 was above fourth quarter
2000, the Company reported a 24% decrease in revenue for the
first quarter of 2001 as compared to the first quarter of 2000.
Losses from operations were $7,523 and $23,043 for the first
quarter of 2001 and 2000, respectively, representing a 67%
decrease in losses from operations.

The Companys revenue decreased 24% during fiscal year 2000
as compared to fiscal year 1999 and decreased 20% between fiscal
year 1999 and fiscal year 1998. Losses from operations were
$119,426, $90,284 and $23,650 in 2000, 1999 and 1998,
respectively. Liquidity is a major priority for the Company. The
Companys negative operating results have adversely
impacted the Companys relationship with customers, vendors
and employees, as well as its liquidity. Further negative
operating results could affect the Companys ability to
remain in compliance with covenants under its revolving credit
agreement and further diminish its liquidity. In
February 2001, the Company received a report from its
independent accountants for the year ended December 31,
2000 containing an explanatory paragraph stating that our
recurring losses and requirement for additional financing raise
substantial doubt about our ability to continue as a going
concern. Managements plans to continue as a going concern
rely heavily on forecasted revenue from new products being
jointly developed with Sharp and Intel Corporation, including
recently introduced new products utilizing the new iPower
architecture, new multi-media applications services, and
enhanced compact videoconferencing systems and on continued
implementation of cost reductions. There can be no guarantee
that such revenue increase will occur or, if it does occur, will
be sufficient to meet the Companys needs or that cost
reduction measures will be sufficient to maintain liquidity.

Product Protection and Intellectual Property.The
Companys success depends in part on its proprietary
technology. The Company attempts to protect its proprietary
technology through patents, copyrights, trademarks, trade
secrets and license agreements. In absence of broad patent
protection, which is not likely, and despite the Companys
reliance upon its proprietary confidential information,
competitors of the Company have been able to use algorithms, or
other features similar to those used by the Company, to design
and manufacture products that are directly competitive with the
Companys products. The Company believes that due to the
rapid pace of technological change in the visual collaboration
industry, legal protection for its products is less significant
than factors such as the Companys use, implementation and
enhancement of standards-based open architecture and the
Companys ongoing efforts in product innovation.

Although the Company does not believe that its products infringe
the proprietary rights of any third parties, third parties have
asserted infringement and other claims against the Company from
time to time. There can be no assurance that third parties will
not assert such claims against the Company in the future or that
such claims will not be successful. The Company could incur
substantial costs and diversion of

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Potential Fluctuations of Quarterly Operating Results.The majority of the Companys revenue in each quarter
result from orders booked in that quarter, and a substantial
portion of the Companys orders and shipments typically
occur during the last weeks of each quarter such that
forecasting of revenue and product mix is both complex and
difficult. Unanticipated variations in the timing of receipt of
customer orders in any quarter may produce significant
fluctuations in quarterly revenues. As a result, a shortfall in
revenue compared to internal expectations may not evidence
itself until late in the quarter and any resulting impact on
earnings may not be determinable until several weeks after the
end of the quarter. The Companys ability to maintain or
increase net revenue depends upon its ability to increase unit
volume sales. There can be no assurance that the Company will be
able to increase or to maintain the current level of unit volume
sales. Other factors which may cause period-to-period
fluctuations in operational results include the timing of new
product announcements and introductions by the Company and its
competitors, market acceptance of new or enhanced versions of
the Companys products, changes in the product mix of
sales, changes in the relative proportions of sales among
distribution channels or among customers within each
distribution channel, changes in manufacturing costs, and
general economic factors such as currency fluctuations.

International Operations.Revenue related to
international operations of the Company totaled approximately
46% and 53% of total revenue for the periods ended
March 31, 2001 and April 1, 2000, respectively.
Management of the Company expects international revenue to
continue to constitute a significant portion of total revenue in
future periods. However, there can be no assurance that the
Company will be able to maintain or increase international
market demand for its products and, to the extent the Company is
unable to do so, its business, financial condition, results of
operations or cash flows could be materially adversely affected.
The Companys sales to international distributors are
denominated in U.S. dollars in order to minimize risks
associated with fluctuating foreign currency rates. An increase
in the value of the U.S. dollar relative to other currencies,
however, could make the Companys product more expensive
and, therefore, potentially less competitive in foreign markets.
Sales by the Companys foreign subsidiaries are generally
made in the foreign subsidiarys local currency, in which
case fluctuations in the value of the U.S. dollar relative to
such other currencies could have a material adverse effect on
the operating results of the Company. Currently, the Company
employs various currency hedging strategies to reduce these
risks. In addition, a significant portion of the Companys
revenue is derived from Asian markets. Given the current general
weakness in the Asian markets, there can be no assurance that
the Company will be able to sustain current revenue levels or
growth in such markets. There can be no assurance that the above
factors will not have a material adverse effect on the
Companys future international sales and, consequently, on
its business, financial condition, results of operations or cash
flows.

Volatility of Stock Price.As is frequently the case with
the stocks of high technology corporations, the market price of
PictureTel Common Stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of
operations, increased competition, the introduction of new
products by the Company and by its competitors, changes in the
mix of products and sales channels, the timing of significant
customer orders, and macroeconomic conditions generally, may
have a significant adverse effect on the market price of the
Companys stock in any given period. In addition, the stock
market has, from time to time, experienced extreme price and
volume fluctuations, which have particularly affected the market
price for many high technology corporations and which, on
occasion, have appeared to be unrelated to the operating
performance of such corporations. Past financial performance
should not be considered a reliable indicator of future
performance and investors should not use 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 adverse effect
on the market price of PictureTel Common Stock in any given
period.

Dependence on Key Personnel.On August 31, 1999, the
Company announced that Dr. Norman Gaut had succeeded Bruce
R. Bond as Chairman of the Board, CEO and President of the
Company. In February 1998, Mr. Bond succeeded
Dr. Gaut as Chief Executive Officer and President, and had
been elected Chairman of the Board in June 1998. At that
time, Dr. Gaut had retired as an active employee while

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Item 3.  Quantitative and Qualitative
Disclosures about Market Risk

There were no material changes in the Companys exposure to
market risk from December 31, 2000.




PART II  OTHER INFORMATION




Item 1.  Legal Proceedings

SEC Investigation

In May 1999, the Company was informed that the Securities
and Exchange Commission (SEC) had initiated a formal
investigation of matters related to the Companys 1997
restatement of its earnings. The Company has been cooperating
with the SEC and will continue to do so. The Company expresses
no opinion as to the likely outcome. While no assurances can be
provided, the Company does not believe that the investigation
will have a material adverse affect on its business, financial
condition, results of operations or cash flows.

In addition to the above, the Company has also been and is from
time to time subject to claims, such as potential patent
infringements, and suits incidental to the conduct of business.
There can be no assurance that the Companys insurance will
be adequate to cover all liabilities that may arise out of such
claims. Further, although the Company intends to defend itself
vigorously against all such claims, the ultimate outcome of the
claims cannot be accurately predicted. The Company does not
believe that any claim of which it is aware, other than the
claims listed above, could result in an outcome that will have a
material adverse effect to its business, financial condition,
results of operations or cash flows.




Item 6.  Exhibits and Reports on
Form 8-K

(a)  Exhibits

None

(b)  Reports on Form 8-K

On February 7, 2001, the Company filed a report on
Form 8-K to announce the hiring of Dalton Edgecomb as the
Companys Chief Financial Officer.

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SIGNATURE

Pursuant to the Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.



| |                       
| | ----------------------
| | PICTURETEL CORPORATION
|
| | /s/DALTON EDGECOMB    

| |  | 
| |  | 
| |  | 

| |                                             
| | --------------------------------------------
| | Dalton Edgecomb                             
| | Chief Financial Officer,                    
| | (Principal Financial and Accounting Officer)
| | May 15, 2001                                

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