##### 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)



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

For the quarterly period ended September 30, 2000

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 September 30, 2000

Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of Registrant as specified in its
charter)


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

Registrants telephone number: 978-292-5000

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.

[X]  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 November 3, 2000, there were outstanding 41,147,797
shares of common stock of the registrant.



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---

TABLE OF CONTENTS



|                                                                                      |                                       |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ------------------------------------- |  |  |  |  |  |  | 
|PART I. CONSOLIDATED FINANCIAL INFORMATION                                           
|                                                                                      | CONSOLIDATED BALANCE SHEETS          
|                                                                                      | CONSOLIDATED STATEMENTS OF OPERATIONS
|                                                                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                           
|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                                                                            
|EXHIBIT INDEX                                                                        
|Ex-10.29 Compensation Agreement Edward Semonite                                      
|Ex-10.30 Compensation Agreement Jonathan Kosheff                                     
|Exhibit 27.1  Financial Data Schedule                                                



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PICTURETEL CORPORATION

FORM 10-Q

INDEX

|                                            |  |                                                                                                           |  |               
|------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | --------------
|PART I.  CONSOLIDATED FINANCIAL INFORMATION |  |                                                                                                          
|                                           
|                                           
|                                           
|                                           
|Item  1.                                    |  | Consolidated Financial Statements: Consolidated Balance Sheets
	September 30, 2000 and December 31, 1999  |  | 3             
|                                           
|                                           
|                                           
|                                           
|                                            |  | Consolidated Statements of Operations Three and Nine Months
	Ended September 30, 2000 and October 3, 1999 |  | 4             
|                                           
|                                           
|                                           
|                                           
|                                            |  | Consolidated Statements of Cash Flows Nine Months Ended
	September 30, 2000 and October 3, 1999           |  | 5             
|                                           
|                                           
|                                           
|                                           
|                                            |  | Notes to Consolidated Financial Statements                                                                |  | 6-11          
|                                           
|                                           
|                                           
|                                           
|Item  2.                                    |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations                    |  | 12-21         
|                                           
|                                           
|                                           
|                                           
|Item  3.                                    |  | Quantitative and Qualitative Disclosures about Market Risk                                                |  | 21            
|PART II.  OTHER INFORMATION                 |  |                                                                                                          
|                                           
|                                           
|                                           
|                                           
|Item  1.                                    |  | Legal Proceedings                                                                                         |  | 21            
|                                           
|                                           
|                                           
|                                           
|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                                                                                         |  | 22            
|                                           
|                                           
|                                           
|                                           
|Item  6.                                    |  | Exhibits and Reports on Form 8-K                                                                          |  | 22            
|                                           
|                                           
|                                           
|                                           
|Signatures                                  |  | 23                                                                                                       

2



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##### Table of Contents






PART I. CONSOLIDATED FINANCIAL INFORMATION

PICTURETEL CORPORATION




CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |          |         | 
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                                  |                                                                                                                                                                   | September 30,                                                           |        | December 31,
|                                                                  |                                                                                                                                                                   | 2000                                                                    |        | 1999        
|                                                                  |                                                                                                                                                                   |                                                                         |        |             
|                                                                  |                                                                                                                                                                   | (Unaudited)                                                             |        |             
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|ASSETS                                                            |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Current assets:                                                   |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Cash and cash equivalents                                                                                                                                         |                                                                         | $      | 18,229       |         |  | $      | 21,915   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Restricted cash and cash equivalents                                                                                                                              |                                                                         |        | 3,150        |         |  |        | 1,200    |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Marketable securities                                                                                                                                             |                                                                         |        |             |         |  |        | 37,787   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accounts receivable, less allowances for doubtful accounts of
	$3,211 and $5,642 at September 30, 2000 and
	December 31, 1999, respectively                       |                                                                         |        | 64,447       |         |  |        | 77,120   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Inventories                                                                                                                                                       |                                                                         |        | 28,647       |         |  |        | 32,930   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Other current assets                                                                                                                                              |                                                                         |        | 9,429        |         |  |        | 12,562   |        
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total current assets                                                    |        |              | 123,902 |  |        |          | 183,514 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Restricted cash                                                   |                                                                                                                                                                   |                                                                         | 15,850 |              |         |  |       |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Property and equipment, net                                       |                                                                                                                                                                   |                                                                         | 38,651 |              |         |  | 86,219 |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Capitalized software costs, net                                   |                                                                                                                                                                   |                                                                         |       |              |         |  | 11,341 |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Goodwill, net                                                     |                                                                                                                                                                   |                                                                         |       |              |         |  | 4,242  |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other assets                                                      |                                                                                                                                                                   |                                                                         | 4,089  |              |         |  | 9,554  |         
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total assets                                                            |        | $            | 182,492 |  |        | $        | 294,870 | 
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND
	STOCKHOLDERS EQUITY |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Current liabilities:                                              |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Short-term borrowings                                                                                                                                             |                                                                         | $      | 1,394        |         |  | $      | 196      |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accounts payable                                                                                                                                                  |                                                                         |        | 19,046       |         |  |        | 21,681   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accrued compensation and benefits                                                                                                                                 |                                                                         |        | 7,598        |         |  |        | 10,517   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accrued expenses                                                                                                                                                  |                                                                         |        | 37,009       |         |  |        | 37,518   |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Current portion of capital lease obligations                                                                                                                      |                                                                         |        | 644          |         |  |        | 1,782    |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Deferred revenue                                                                                                                                                  |                                                                         |        | 24,044       |         |  |        | 28,826   |        
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total current liabilities                                               |        |              | 89,735  |  |        |          | 100,520 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Capital lease obligations, net of current portion                 |                                                                                                                                                                   |                                                                         | 18,637 |              |         |  | 54,584 |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other noncurrent liabilities                                      |                                                                                                                                                                   |                                                                         | 1,407  |              |         |  |       |         
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total liabilities                                                       |        |              | 109,779 |  |        |          | 155,104 | 
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|Commitments and contingencies (Notes 6, 7 and 11)                 |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Redeemable convertible preferred stock, $.01 par value (Note 8)   |                                                                                                                                                                   |                                                                         | 52,134 |              |         |  | 30,500 |         
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|Stockholders equity:                                             |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Preferred stock, $.01 par value; 1,500,000 shares authorized; 0
	issued and outstanding at September 30, 2000 and December 31,
	1999                              |                                                                         |        |             |         |  |        |         |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Common stock, $.01 par value; 80,000,000 shares authorized;
	41,224,537 and 40,617,634 shares issued and outstanding at
	September 30, 2000 and December 31, 1999 |                                                                         |        | 412          |         |  |        | 406      |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Additional paid-in capital                                                                                                                                        |                                                                         |        | 236,087      |         |  |        | 225,513  |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accumulated deficit                                                                                                                                               |                                                                         |        | (213,526     | )       |  |        | (114,780 | )      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Accumulated other comprehensive loss                                                                                                                              |                                                                         |        | (1,838       | )       |  |        | (1,317   | )      
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Treasury stock, 92,065 shares, at cost                                                                                                                            |                                                                         |        | (556         | )       |  |        | (556     | )      
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total stockholders equity                                              |        |              | 20,579  |  |        |          | 109,266 | 
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         
|                                                                  |                                                                                                                                                                   | Total liabilities, redeemable preferred stock and
	stockholders equity |        | $            | 182,492 |  |        | $        | 294,870 | 
|                                                                  |                                                                                                                                                                   |                                                                         |        |              |         |  |        |         

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 OPERATIONS

(Dollars in thousands, except per share amounts)


(Unaudited)


|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |         |         | 
|------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ----------------- | ------ | ------------- | ------- | ---------- | ------ | - | -------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                        |                                     |                          |         |                  
|                                                        |                                     | Three Months Ended       |         | Nine Months Ended
|                                                        |                                     |                          |         |                  
|                                                        |                                     | September 30,            |         | October 3,        |        | September 30, |         | October 3,
|                                                        |                                     | 2000                     |         | 1999              |        | 2000          |         | 1999      
|                                                        |                                     |                          |         |                   |        |               |         |           
|Revenue                                                 |                                     | $                        | 69,760  |                   |        | $             | 78,813  |            |        | $ | 196,251  |         |         | $ | 240,969 |        
|                                                       
|                                                       
|                                                       
|                                                       
|Cost of revenue                                         |                                     |                          | 48,931  |                   |        |               | 53,883  |            |        |   | 151,126  |         |         |   | 164,792 |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Gross margin                                            |                                     |                          | 20,829  |                   |        |               | 24,930  |            |        |   | 45,125   |         |         |   | 76,177  |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Operating expenses:                                     |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Selling, general and administrative |                          |         | 44,985            |        |               |         | 28,501     |        |   |          | 102,371 |         |   |         | 100,348 |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Research and development            |                          |         | 11,873            |        |               |         | 15,659     |        |   |          | 38,922  |         |   |         | 51,530  |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|                                                        |                                     | Total operating expenses |         |                   | 56,858 |               |         |            | 44,160 |   |          |         | 141,293 |   |         |         | 151,878 | 
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Loss from operations                                    |                                     |                          | (36,029 | )                 |        |               | (19,230 | )          |        |   | (96,168  | )       |         |   | (75,701 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|Interest income (expense) net                           |                                     |                          | (1,272  | )                 |        |               | 176     |            |        |   | (2,147   | )       |         |   | 12      |        
|                                                       
|                                                       
|                                                       
|                                                       
|Other income, net                                       |                                     |                          | 126     |                   |        |               | 9,128   |            |        |   | 955      |         |         |   | 10,018  |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Loss before income tax expense (benefit)                |                                     |                          | (37,175 | )                 |        |               | (9,926  | )          |        |   | (97,361  | )       |         |   | (65,671 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|Income tax expense (benefit)                            |                                     |                          | (245    | )                 |        |               | 641     |            |        |   | 1,385    |         |         |   | 2,698   |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Net loss                                                |                                     |                          | (36,930 | )                 |        |               | (10,567 | )          |        |   | (98,746  | )       |         |   | (68,369 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|Preferred stock beneficial conversion feature           |                                     |                          | (6,689  | )                 |        |               |        |            |        |   | (6,689   | )       |         |   | (5,612  | )      
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Net loss applicable to common shareholders              |                                     | $                        | (43,619 | )                 |        | $             | (10,567 | )          |        | $ | (105,435 | )       |         | $ | (73,981 | )      
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Net loss per common share  basic and diluted           |                                     | $                        | (1.06   | )                 |        | $             | (0.26   | )          |        | $ | (2.58    | )       |         | $ | (1.83   | )      
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        
|Weighted average shares outstanding  basic and diluted |                                     |                          | 40,999  |                   |        |               | 40,426  |            |        |   | 40,865   |         |         |   | 40,326  |        
|                                                        |                                     |                          |         |                   |        |               |         |            |        |   |          |         |         |   |         |        

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

4



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##### Table of Contents



PICTURETEL CORPORATION




CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


(Unaudited)


|                                                    |                                                                              |                                                        |         |            |        |   |         |          |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------ | ------- | ---------- | ------ | - | ------- | -------- | ------- | -
|                                                    |                                                                              |                                                       
|                                                    |                                                                              | Nine Months Ended                                     
|                                                    |                                                                              |                                                       
|                                                    |                                                                              | September 30,                                          |         | October 3,
|                                                    |                                                                              | 2000                                                   |         | 1999      
|                                                    |                                                                              |                                                        |         |           
|Cash flows from operating activities:               |                                                                              |                                                        |         |            |        |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net loss                                                                     |                                                        | $       | (98,746    | )      |   | $       | (68,369  | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustments to reconcile net loss to net cash used in operating
	activities: |                                                        |         |            |        |   |         |          |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Depreciation and amortization                          |         |            | 19,262 |   |         |          | 26,246  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Provision for doubtful accounts                        |         |            | 473    |   |         |          | 2,333   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Loss on disposal of fixed assets                       |         |            | 5,086  |   |         |          |        |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Provision for inventory obsolescence                   |         |            | 10,501 |   |         |          | 2,851   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Write-down of long-lived assets                        |         |            | 11,188 |   |         |          |        |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Reduction in obligation of terminated capital lease    |         |            | (1,806 | ) |         |          |        |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Gain on sale of securities                             |         |            |       |   |         |          | (8,495  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Operating charge related to preferred stock issuance   |         |            | 6,207  |   |         |          |        |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Other non-cash items                                   |         |            |       |   |         |          | 64      |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Changes in operating assets and liabilities:                                 |                                                        |         |            |        |   |         |          |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Accounts receivable                                    |         |            | 10,936 |   |         |          | 7,151   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Inventories                                            |         |            | (6,847 | ) |         |          | (7,744  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Other current assets                                   |         |            | 5,462  |   |         |          | (4,803  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Accounts payable                                       |         |            | (2,162 | ) |         |          | (12,623 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Accrued compensation and benefits and accrued expenses |         |            | (1,123 | ) |         |          | 2,203   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                              | Deferred revenue                                       |         |            | (4,922 | ) |         |          | 3,699   |  
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Net cash used in operating activities               |                                                                              |                                                        | (46,491 | )          |        |   | (57,487 | )       
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Cash flows from investing activities:               |                                                                              |                                                        |         |            |        |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of marketable securities                                            |                                                        |         | (31,262    | )      |   |         | (107,849 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from sale of marketable securities                                  |                                                        |         | 69,049     |        |   |         | 94,063   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchases of property and equipment                                          |                                                        |         | (4,156     | )      |   |         | (9,756   | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from sale of fixed assets                                           |                                                        |         | 9          |        |   |         | 12       |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from sale of securities                                             |                                                        |         |           |        |   |         | 8,495    |        
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Net cash provided by (used in) investing activities |                                                                              |                                                        | 33,640  |            |        |   | (15,035 | )       
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Cash flows from financing activities:               |                                                                              |                                                        |         |            |        |   |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Increase in restricted cash and cash equivalents                             |                                                        |         | (17,800    | )      |   |         | (2,500   | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds (payments) on short-term/long-term borrowings                       |                                                        |         | 1,217      |        |   |         | (855     | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Principal payments under capital lease obligations                           |                                                        |         | (1,324     | )      |   |         | (3,113   | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of treasury stock                                                   |                                                        |         |           |        |   |         | (556     | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from preferred stock issuance                                       |                                                        |         | 21,845     |        |   |         | 30,500   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from exercise of stock options                                      |                                                        |         | 3,119      |        |   |         | 1,821    |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from employee stock purchase plan                                   |                                                        |         | 1,045      |        |   |         | 790      |        
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Net cash provided by financing activities           |                                                                              |                                                        | 8,102   |            |        |   | 26,087  |         
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Effect of exchange rate changes on cash             |                                                                              |                                                        | 1,063   |            |        |   | 2,463   |         
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Net decrease in cash and cash equivalents           |                                                                              |                                                        | (3,686  | )          |        |   | (43,972 | )       
|                                                   
|                                                   
|                                                   
|                                                   
|Cash and cash equivalents at beginning of period    |                                                                              |                                                        | 21,915  |            |        |   | 62,642  |         
|                                                    |                                                                              |                                                        |         |            |        |   |         |         
|Cash and cash equivalents at end of period          |                                                                              | $                                                      | 18,229  |            |        | $ | 18,670  |         
|                                                    |                                                                              |                                                        |         |            |        |   |         |         

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

5



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##### Table of Contents



PICTURETEL CORPORATION




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)


1.  Basis of Presentation

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/ A for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on
August 14, 2000.

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 September 30, 2000 and
December 31, 1999, results of operations for the three and
nine months ended September 30, 2000 and October 3,
1999 and changes in cash flows for the nine months ended
September 30, 2000 and October 3, 1999.

The results disclosed in the Consolidated Balance Sheet at
September 30, 2000, the Consolidated Statement of
Operations for the three and nine months ended
September 30, 2000 and the Consolidated Statement of Cash
Flows for the nine months ended September 30, 2000 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 revenue and expenses
during the reporting period. The financial statements include
significant estimates of the net realizable value of accounts
receivable, inventory and capitalized software 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
required additional financing. These factors raise substantial
doubt about its ability to continue as a going concern.
Managements plans to continue as a going concern rely
heavily on forecasted revenue from new products, which were
released in the third quarter of 2000. In addition to the
revenue plan, management has obtained an asset-based secured
revolving line of credit from Congress Financial Corporation and
has obtained an additional $21,845 in convertible Series B
Preferred Stock which has been classified as mezzanine financing
on the Companys balance sheet. Management is continuing to
identify and implement other actions to improve the
Companys liquidity, including the sale of non-core
business assets. While there can be no assurances that these
plans will be successful, management believes these actions, if
successful, will provide sufficient financial resources for the
next twelve months and beyond. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.

2. Inventories

Inventories consist of the following:

|                |  |               |        |              |  |   |        | 
|--------------- |  | ------------- | ------ | ------------ |  | - | ------ | 
|                |  | September 30, |        | December 31,
|                |  | 2000          |        | 1999        
|                |  |               |        |             
|Purchased Parts |  | $             | 3,934  |              |  | $ | 3,184  | 
|               
|               
|               
|               
|Work in Process |  |               | 2,058  |              |  |   | 1,157  | 
|               
|               
|               
|               
|Finished Goods  |  |               | 22,655 |              |  |   | 28,589 | 
|                |  |               |        |              |  |   |        | 
|                |  | $             | 28,647 |              |  | $ | 32,930 | 
|                |  |               |        |              |  |   |        | 

6



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(Dollars in thousands, except per share amounts)


During the first nine months of 2000, the Company recorded a
$4,721 charge to reduce inventory to its net realizable value.
The charge primarily reflects a reduction in the carrying value
of the inventory to its estimated fair market value, based on
estimated selling prices, less costs to sell. The inventory
write-down is associated with lower than expected sales of
PC-based videoconferencing systems, exacerbated by the
Companys transition to its next generation product line,
PictureTel Series 900.

3.  Impairment of Long-lived Assets

Based on continuing operating losses and a change in product
strategy for a division of the Companys videoconferencing
products segment, the Company performed a review of its
intangible assets including purchased software, tradename,
assembled workforce and goodwill. In connection with this
review, the Company determined that the carrying value of the
goodwill and other intangible assets exceeded its fair value
based on Company projections of the discounted future net cash
flows from use together with the residual value of these assets.
Accordingly, the Company recorded an impairment charge of
$11,188 during the first nine months of 2000 ($9,159 and $2,029
during the second and third quarters of 2000, respectively), of
which $6,905 is included in cost of revenue and $4,283 is
included in selling, general and administrative expense in the
Companys Consolidated Statements of Operations, all of
which impacted the Companys videoconferencing products
segment.

4.  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 |       | Nine Months Ended
|                                  |                                               |                    |       |                  
|                                  |                                               | September 30,      |       | October 3,        |   | September 30, |       | October 3,
|                                  |                                               | 2000               |       | 1999              |   | 2000          |       | 1999      
|                                  |                                               |                    |       |                   |   |               |       |           
|Basic and Diluted EPS Computation |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|Numerator:                        |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Net loss                                      |                    | $     | (36,930           | ) |               | $     | (10,567    | ) |   |       | (98,746  | ) |   | $     | (68,369 | )
|                                 
|                                 
|                                 
|                                 
|                                  | Preferred stock beneficial conversion feature |                    |       | (6,689            | ) |               |       |           |   |   |       | (6,689   | ) |   |       | (5,612  | )
|                                  |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|                                  | Total                                         |                    | $     | (43,619           | ) |               | $     | (10,567    | ) |   | $     | (105,435 | ) |   | $     | (73,981 | )
|                                  |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|Denominator:                      |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Weighted average common shares Outstanding    |                    |       | 40,999            |   |               |       | 40,426     |   |   |       | 40,865   |   |   |       | 40,326  |  
|                                  |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        
|Basic and diluted EPS             |                                               | $                  | (1.06 | )                 |   | $             | (0.26 | )          |   | $ | (2.58 | )        |   | $ | (1.83 | )      
|                                  |                                               |                    |       |                   |   |               |       |            |   |   |       |          |   |   |       |        

Options to purchase shares of the Companys common stock of
6,521,296 and 7,535,141 were outstanding at September 30,
2000 and October 3, 1999, respectively, but were not
included in the computation of diluted EPS because they were
antidilutive due to the net losses sustained in 2000 and in
1999. Warrants for 2,723 shares of the Companys Common
Stock, Series A Convertible Preferred Stock of 4,478,708
shares and Series B Convertible Preferred Stock of
8,738,000 shares were outstanding at September 30, 2000,
but were not included in the computation of diluted EPS because
they were antidilutive due to the loss sustained in 2000 and
1999.

7



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(Dollars in thousands, except per share amounts)


5.  Comprehensive Loss

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 |         | Nine Months Ended
|                                                    |                                                                     |                    |         |                  
|                                                    |                                                                     | September 30,      |         | October 3,        |  | September 30, |         | October 3,
|                                                    |                                                                     | 2000               |         | 1999              |  | 2000          |         | 1999      
|                                                    |                                                                     |                    |         |                   |  |               |         |           
|Net loss                                            |                                                                     | $                  | (36,930 | )                 |  | $             | (10,567 | )          |   | $ | (98,746 | ) |  | $ | (68,369 | )  
|                                                   
|                                                   
|                                                   
|                                                   
|Foreign currency translations, net                  |                                                                     |                    | (230    | )                 |  |               | 2,198   |            |   |   | (520    | ) |  |   | 2,260   |    
|                                                   
|                                                   
|                                                   
|                                                   
|Unrealized gains (losses) on marketable securities: |                                                                     |                    |         |                   |  |               |         |            |   |   |         |   |  |   |         |    
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Unrealized losses arising during the period                         |                    |         |                  |  |               |         | (12        | ) |   |         |  |  |   |         | (45 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Less: reclassification adjustment for gains included in net
	income |                    |         |                  |  |               |         | (9,606     | ) |   |         |  |  |   |         |    |  
|                                                    |                                                                     |                    |         |                   |  |               |         |            |   |   |         |   |  |   |         |    
|Comprehensive loss                                  |                                                                     | $                  | (37,160 | )                 |  | $             | (17,987 | )          |   | $ | (99,266 | ) |  | $ | (66,154 | )  
|                                                    |                                                                     |                    |         |                   |  |               |         |            |   |   |         |   |  |   |         |    

6.  Debt

The Company entered into a new asset-based secured revolving
credit agreement dated August 21, 2000, which will expire
on August 21, 2003. The new credit facility provides a
revolving credit line of $35,000 with Congress Financial
Corporation (New England) (the Lender). The Company
has $18,095 of outstanding standby letters of credit issued
under this agreement as of September 30, 2000. Fees for
letters of credit outstanding against this facility are payable
at 225 basis points per annum of the face amount. Interest for
loans under this facility is payable at 1% above the
Lenders prime rate. The credit agreement is collateralized
by all assets of the parent Company and subsidiary borrowers and
certain stock of its guarantor subsidiaries. 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. Cash subject to the cash
collateral requirement amounts to $19,000 as of
September 30, 2000. Of this $19,000 in restricted cash,
$3,150 is classified as current on the Companys balance
sheet. The secured letters of credit expire between
April 2001 and June 2001. The credit agreement also
contains certain financial covenants, including minimum net
worth and working capital requirements. This new credit facility
replaces the amended facility entered into in May 2000. A
term loan provided by the amended credit facility in the amount
$8,500 was paid in full in July 2000 from a portion of the
proceeds of the Series B Preferred Stock issued in the third
quarter of 2000. (See also Note 8.)

Local lines of credit are available for short-term advances of
up to $1,394 to certain of the Companys foreign
subsidiaries. The agreements require interest payable up to one
and three-quarter percent, per annum. Borrowings totaling $1,394
were outstanding against these local lines of credit at
September 30, 2000.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease MultiLinks
former facility at 6 Riverside Drive in Andover,
Massachusetts in May 1999, as part of its space
consolidation efforts. As of September 30, 2000, the
remaining obligation under this operating lease was $7,381.
After giving effect to expected sublease income, this obligation
is $4,834. 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 the capital lease was $16,694 at
September 30, 2000.

8



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(Dollars in thousands, except per share amounts)


Pursuant to an option agreement with the landlord of its
facility located at 200 Minuteman Road in Andover,
Massachusetts, the Company vacated certain space in the
200 Minuteman facility during the third quarter in exchange
for termination of the lease. Under the terms of this agreement,
termination charges amounted to $15,142, net of a $1,806 gain on
the elimination of the capitalized lease and related liability
of $35,760 and $37,566, respectively. The $15,142 net charges
included a $3,756 loss on leasehold improvements, $340 real
estate commission, $1,419 incremental rent charge, cash payment
of $11,433, and the above mentioned $1,806 gain. The Company has
also entered into an option agreement, exercisable only by the
landlord, with respect to other properties in the Minuteman Park
on Minuteman Road in Andover, Massachusetts, whereby letters of
credit would be drawn down. As a result, it is anticipated that
charges of approximately $9,000 will be incurred and $6,850 in
previously restricted cash will be returned to the Company.

7.  Commitments

In conjunction with a joint development agreement with Sharp
Corporation, the Company has agreed to pay up to a maximum
amount of $900 for tooling costs at some time in the future and
has outstanding commitments as of September 30, 2000 to
purchase approximately $20,000 of inventory over the next five
quarters.

8.  Redeemable Convertible Preferred Stock

Preferred Stock

The Companys preferred stock is comprised of the following:

|                                        |           |                                                                                                                         |                                              |              |        |        |  |   |        |        | 
|--------------------------------------- | --------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                        |           | September 30,                                                                                                           |                                              | December 31,
|                                        |           | 2000                                                                                                                    |                                              | 1999        
|                                        |           |                                                                                                                         |                                              |             
|                                        |           | (unaudited)                                                                                                             |                                              |             
|                                       
|                                       
|                                       
|                                       
|Redeemable Convertible Preferred Stock: |           |                                                                                                                         |                                              |              |        |        |  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Series A: |                                                                                                                         |                                              |              |        |        |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        |           | 4,500,000 shares authorized, 4,478,708 shares, issued and
	outstanding at September 30, 2000 and December 31, 1999      |                                              | $            | 30,500 |        |  | $ | 30,500 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Series B: |                                                                                                                         |                                              |              |        |        |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        |           | 9,000,000 shares authorized, 8,783,000 and 0 shares issued and
	outstanding at September 30, 2000 and December 31, 1999 |                                              |              | 21,634 |        |  |   |       |       
|                                        |           |                                                                                                                         |                                              |              |        |        |  |  
|                                        |           |                                                                                                                         | Total Redeemable Convertible Preferred Stock |              | $      | 52,134 |  |   | $      | 30,500 | 
|                                        |           |                                                                                                                         |                                              |              |        |        |  |  

On July 13, 2000 the Company announced it had agreements with
investors to purchase $21,845 (8,738,000 shares at $2.50 per
share) of new convertible shares of Series B Preferred Stock. In
conjunction with the purchase of convertible Series B Preferred
Stock, each investor also received a specified small minority
interest in the Companys subsidiary, 1414c, Inc. The
Company determined that the fair value of shares received in the
Companys subsidiary, 1414c, by the investors was
insignificant. In addition, in accordance with the convertible
Series B Preferred Stock agreement, the Company also entered
into a joint venture and hosting agreement with one of the
investors. These transactions were completed and the funds
became available on July 24, 2000.

The convertible Series B Preferred Stock is non-voting and
preferred with respect to dividend rights and liquidation
preference to the Companys Common Stock. When issued, each
share of Series B Preferred Stock, was convertible into one
share of common stock, which represents a discount from the fair
value of common stock on the date of issuance of $1.50 per
share. The value attributable to this conversion right
represents an incremental yield, or a beneficial conversion
feature. For investors that have a purely financial relationship
with the Company, the discount resulting from the allocation of
proceeds to the beneficial conversion feature is accreted, using
the interest method, from the date of issuance through the date
the Series B Preferred Stock is first convertible which is
October 13, 2000. The Company has recorded accretion of

9



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(Dollars in thousands, except per share amounts)


$6,689 for the three months ended September 30, 2000. This
accretion represents a non-cash charge in determination of net
loss attributable to common shareholders.

The investor that entered into a joint venture and hosting
agreement with the Company as well as investors that are also
employees or directors of the Company are considered to have a
business relationship with the Company beyond that of a
financial investor. As a result, their investments are
considered to involve elements of compensation for goods or
services. Therefore, the Company determined the fair value of
the beneficial conversion feature associated with these shares
to be $6,207, which has been recorded as selling, general and
administrative expense for the three months ended
September 30, 2000.

The terms of the convertible Preferred Stock are set forth in
the Amendment to the Certificate of Incorporation filed as
Exhibit 2 to Report on Form 8-K dated July 31, 2000.

9.  Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This
statement was originally effective for all fiscal years
beginning after June 15, 1999. In June 1999, the FASB
issued Statement 137, which delayed the effective date of
Statement 133 by one year. Statement 133 will be
effective for PictureTels fiscal year beginning
January 1, 2001. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
The Company is currently evaluating the effects of this change
but anticipates that the adoption of SFAS 133 will not have
a significant effect on the Companys financial position or
results of operations.

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements,
(SAB 101) as amended by SAB 101B, which is
effective no later than the year ending December 31, 2000.
SAB 101 clarifies the Securities and Exchange Commissions
views regarding recognition of revenue. The Company will adopt
SAB 101 in the fourth quarter of 2000 and is currently
evaluating the effects of this pronouncement.

10.  Segment Information

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

|                                       |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------ | ----- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                       |  | Video-       |         | Video-       |  |              |        |       |  |      
|                                       |  | conferencing |         | conferencing |  | Audio-       |        |       |  |      
|                                       |  | Products     |         | Services     |  | conferencing |        | Other |  | Total
|                                       |  |              |         |              |  |              |        |       |  |      
|Three months ended September 30, 2000: |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                      
|                                      
|                                      
|                                      
|Revenue from external customers        |  | $            | 45,942  |              |  | $            | 17,746 |       |  | $     | 6,072  |   |  |   |        |   |  | $ | 69,760  |  
|                                      
|                                      
|                                      
|                                      
|Operating income (loss)                |  | $            | (12,842 | )            |  | $            | 2,849  |       |  | $     | 738    |   |  | $ | (26,774 | ) |  | $ | (36,029 | )
|                                      
|                                      
|                                      
|                                      
|Three months ended October 3, 1999:    |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                      
|                                      
|                                      
|                                      
|Revenue from external customers        |  | $            | 56,095  |              |  | $            | 18,769 |       |  | $     | 3,949  |   |  |   |        |   |  | $ | 78,813  |  
|                                      
|                                      
|                                      
|                                      
|Operating income (loss)                |  | $            | (13,956 | )            |  | $            | 1,644  |       |  | $     | (450   | ) |  | $ | (6,468  | ) |  | $ | (19,230 | )
|                                      
|                                      
|                                      
|                                      
|Nine months ended September 30, 2000:  |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                      
|                                      
|                                      
|                                      
|Revenue from external customers        |  | $            | 126,704 |              |  | $            | 54,152 |       |  | $     | 15,395 |   |  |   |        |   |  | $ | 196,251 |  
|                                      
|                                      
|                                      
|                                      
|Operating income (loss)                |  | $            | (62,812 | )            |  | $            | 7,058  |       |  | $     | (2,007 | ) |  | $ | (38,407 | ) |  | $ | (96,168 | )
|                                      
|                                      
|                                      
|                                      
|Nine months ended October 3, 1999:     |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                      
|                                      
|                                      
|                                      
|Revenue from external customers        |  | $            | 175,771 |              |  | $            | 51,658 |       |  | $     | 13,540 |   |  |   |        |   |  | $ | 240,969 |  
|                                      
|                                      
|                                      
|                                      
|Operating income (loss)                |  | $            | (55,866 | )            |  | $            | 2,935  |       |  | $     | (3,486 | ) |  | $ | (19,284 | ) |  | $ | (75,701 | )

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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

(Dollars in thousands, except per share amounts)


The classification Other consists of corporate
administrative functions, which are excluded from the
videoconferencing products, videoconferencing services and
audioconferencing 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.

11.  Litigation

A.  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.

B.  RevNet, Inc.

On June 2, 1998, the Company was served with a complaint
from a former distribution channel customer, RevNet, Inc., which
has ceased operations. (RevNet, Inc., v. PictureTel
Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The
complaint alleged that the Company breached an oral contract.
RevNet was seeking $200,000 in damages. In addition, after
limited discovery under the above named suit, the Company on
September 13, 1999 filed a related action in the Circuit
Court for Baltimore City, Maryland against RevNet, Inc., Vuecom,
Inc. (an entity related to RevNet, Inc.), George Harris IV,
George Sandmann and Lou Brown, (PictureTel Corporation v.
RevNet, Inc., et al. Civil Action 24-C99-004406) alleging
among other things Breach of Contract, Fraudulent Inducement and
Securities Fraud. On October 30, 2000 the parties agreed to
a settlement of this matter. Under the terms of the settlement,
the Company will pay to the RevNet group an immaterial amount
over the course of the next twelve months. In return all parties
will dismiss all claims and will release the others from all
related causes of actions.

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 affect to its business, financial condition,
results of operations or cash flows.

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##### Table of Contents






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, revenue and expenses, effective tax
rate, and operating and capital requirements. 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 PictureTel 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

During the third quarter of 2000, the Company has continued to
develop and execute its business plan, focusing on improving
liquidity, disposition of non-core business assets,
consolidation opportunities and process improvement.

On July 24, 2000, the Company consummated a preferred stock
transaction resulting in funding of $21,845 through the issuance
of Series B convertible preferred shares, which is
classified in the mezzanine section of the Companys
balance sheet. In conjunction with the purchase of convertible
Series B Preferred Stock, each investor also received a
specified small minority interest in a subsidiary of the
Company, 1414c, Inc. Additionally, in accordance with the
convertible Series B Preferred Stock agreement, the Company
entered into a joint venture and hosting agreement with one of
the investors. The Company also obtained an asset-based secured
revolving line of credit in August 2000, with a limit of
$35,000.

The Company received a letter of intent on July 31, 2000
from a third party to acquire the Companys Starlight
division and related non-core business assets and completed the
sale on October 12, 2000. Under the terms of the sales
agreement, the buyer has agreed to pay the Company $300 on or
before April 9, 2001 and an amount, up to $3,500, based on
50% of the buyers net profit over the next two years. In
addition, the Company has been granted warrants to purchase up
to 2% of the buyers outstanding common stock at any time
prior to December 31, 2002. The exercise price of the warrants
will be set by formula in the future. The Company anticipates
that sale of the Starlight assets will reduce its ongoing
expenses by approximately $1,800 per quarter. In addition, the
Company expects to incur a charge of approximately $1,000
related to this transaction, which will consist primarily of
certain retention and lease payments that the Company remains
obligated to make. Also, on October 25, 2000, the Company
announced the signing of a letter of intent to sell its
audioconferencing segment and expects to close the transaction
in the fourth quarter of 2000.

The Company has continued to seek out consolidation
opportunities. During the third quarter of 2000, the Company
consummated an option agreement with the landlord of its
facility located at 200 Minuteman Road in Andover,
Massachusetts, whereby the Company vacated certain space in the
200 Minuteman facility during the third quarter in exchange for
termination of the lease on that facility. As a result of this
agreement, lease termination charges amounted to $15,142 and
restricted cash and deposits amounting to approximately $4,000
were returned to the Company as available funds. The Company
anticipates an annual reduction of approximately $4,500 in rent
and related costs will result from this consolidation.

The third quarter 2000 net loss of $36,930 includes $25,500 of
charges, which consists of an impairment charge of $2,029, lease
termination costs of $15,142, a write-down of capitalized costs
related to Web-site development of $1,205, severance charges of
$917 and $6,207 in costs associated with the beneficial
conversion feature of the Series B preferred stock
issuance. Without these charges, the net loss would have
decreased $17,384 to $11,430 as compared to prior quarter loss
of $28,814, which excludes an asset impairment charge of $9,159
taken during the second quarter of 2000. The Company continues
to pursue opportunities focusing on consolidation and process
improvements.

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The Company previously announced the formation of 1414c, Inc. a
wholly-owned subsidiary established to provide application
service providers (ASPs) access to a broad range of IP-based
interactive communication solutions. These solutions will enable
ASPs to provide rapid Web access to streaming,
videoconferencing, Voice-over-IP, and other Web-enabled
interactive solutions such as call scheduling and launching. The
Company is currently exploring joint venture and other financing
opportunities to develop this activity.

Results of Operations

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

|                                              |  |                    |       |                   |  |               |       |            |  |  |       |   |  |  |       |  
|--------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ------------- | ----- | ---------- |  |  | ----- | - |  |  | ----- | -
|                                              |  |                    |       |                  
|                                              |  | Three Months Ended |       | Nine Months Ended
|                                              |  |                    |       |                  
|                                              |  | September 30,      |       | October 3,        |  | September 30, |       | October 3,
|                                              |  | 2000               |       | 1999              |  | 2000          |       | 1999      
|                                              |  |                    |       |                   |  |               |       |           
|Revenue                                       |  |                    | 100   | %                 |  |               | 100   | %          |  |  | 100   | % |  |  | 100   | %
|                                             
|                                             
|                                             
|                                             
|Cost of revenue                               |  |                    | 70.2  |                   |  |               | 68.4  |            |  |  | 77.0  |   |  |  | 68.4  |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |                    | 29.8  |                   |  |               | 31.6  |            |  |  | 23.0  |   |  |  | 31.6  |  
|                                             
|                                             
|                                             
|                                             
|Selling, general and administrative           |  |                    | 64.5  |                   |  |               | 36.2  |            |  |  | 52.2  |   |  |  | 41.6  |  
|                                             
|                                             
|                                             
|                                             
|Research and development                      |  |                    | 17.0  |                   |  |               | 19.8  |            |  |  | 19.8  |   |  |  | 21.4  |  
|                                             
|                                             
|                                             
|                                             
|Total operating expenses                      |  |                    | 81.5  |                   |  |               | 56.0  |            |  |  | 72.0  |   |  |  | 63.0  |  
|                                             
|                                             
|                                             
|                                             
|Loss from operations                          |  |                    | (51.7 | )                 |  |               | (24.4 | )          |  |  | (49.0 | ) |  |  | (31.4 | )
|                                             
|                                             
|                                             
|                                             
|Interest expense, net                         |  |                    | (1.8  | )                 |  |               | 0.2   |            |  |  | (1.1  | ) |  |  |      |  
|                                             
|                                             
|                                             
|                                             
|Other income, net                             |  |                    | 0.2   |                   |  |               | 11.6  |            |  |  | 0.5   |   |  |  | 4.1   |  
|                                             
|                                             
|                                             
|                                             
|Loss before income tax expense (benefit)      |  |                    | (53.3 | )                 |  |               | (12.6 | )          |  |  | (49.6 | ) |  |  | (27.3 | )
|                                             
|                                             
|                                             
|                                             
|Income tax expense (benefit)                  |  |                    | (0.4  | )                 |  |               | 0.8   |            |  |  | 0.7   |   |  |  | 1.1   |  
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  |                    | (52.9 | )                 |  |               | (13.4 | )          |  |  | (50.3 | ) |  |  | (28.4 | )
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |  |                    | (9.6  | )                 |  |               |      |            |  |  | (3.4  | ) |  |  | (2.3  | )
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |                    | (62.5 | )                 |  |               | (13.4 | )          |  |  | (53.7 | ) |  |  | (30.7 | )

Three Months Ended September 30, 2000 Compared to
Three Months Ended October 3, 1999

Revenue.Consolidated third quarter 2000 revenue of
$69,760 decreased $9,053, or 12%, from third quarter 1999
revenue. Videoconferencing products revenue included revenue
from the PictureTel 900 series, which began shipping on
August 14, 2000, while revenue from legacy products
declined during the quarter. Service revenue decreased during
the third quarter as compared to 1999, primarily due to lower
sales of spare parts and customer integration services. An
increase in the audioconferencing segments
(MultiLinks) revenue was the result of new product sales
related to the segments new high-capacity audio bridge.
Revenue from sales to foreign markets was approximately 36% and
41% of total revenue during the third quarters of 2000 and 1999,
respectively.

Gross Margin.Overall third quarter 2000 gross margin of
$20,829 declined $4,101, or 17%, from prior year levels and
represented 30% of revenue versus 32% in the third quarter of
1999. Lower unit sales, lower average selling prices for
videoconferencing products, and an impairment charge of $1,885
to write-down purchased software were primarily responsible for
the decreased margin percentage.

Operating Expenses.Third quarter 2000 operating expenses
of $56,858 increased $12,698, or 29%, from comparable prior year
levels. Special charges totaling $23,615 were included in
operating expenses for the third quarter of 2000. These charges
included $15,142 in lease termination costs associated with the
Companys 200 Minuteman facility, a $1,205 write-off of
capitalized costs related to Web development, $917 of severance
charges, $6,207 for costs associated with the beneficial
conversion feature of the preferred stock issuance and $144 of
impairment charges related to the write-down of tradename and
assembled workforce for a division of the Companys
videoconferencing products segment. Without these charges,
operating expenses declined $10,917, or 25% as compared to third
quarter of 1999 due to cost reduction initiatives taken by the
Company.

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Income Taxes.The Companys effective income tax
rate was (0.7)% in the third quarter of 2000 compared to 6.5% in
the third quarter of 1999. The tax rate in both periods relates
to state and foreign taxes.

Videoconferencing Products,
Videoconferencing Services and Audioconferencing Segments

Videoconferencing Products.Third quarter 2000 revenue
for this segment, which develops, manufactures, and markets
visual communications systems and collaboration software,
totaled $45,942. This represents a $10,153, or 18%, decrease
from third quarter 1999 levels. Videoconferencing system units
sold during the third quarter were 44% lower than the prior
year. However, units sold of larger group systems increased by
60% from the prior year third quarter, primarily due to sales of
the PictureTel 900 Series units, which began shipping
August 14, 2000. Total group system volume decreased by 11%
due to lower compact system sales. Lower-end desktop/personal
system volume decreased by 65% due primarily to end of life with
respect to certain products.

The videoconferencing products segment generated a $12,842
operating loss during the third quarter of 2000 compared to a
$13,956 operating loss in the third quarter of 1999.

Videoconferencing Services.The videoconferencing
services segment provides maintenance as well as professional
consulting, integration and management services for
videoconferencing products sold by the Company and its
competitors. Third quarter revenue decreased from $18,769 in
1999 to $17,746 in 2000, a decrease of 6%. Lower sales of spare
parts and custom integration services accounted for the majority
of the revenue decrease. Maintenance revenue decreased 7% from
prior year levels.

Segment operating income was $2,849 during the third quarter of
2000 compared with operating income of $1,644 in the comparable
prior year period, as a result of cost reduction initiatives
implemented during 2000.

Audioconferencing (MultiLink).The audioconferencing
segment develops, manufactures, markets and services multipoint
audioconferencing control units. Segment revenue for the third
quarter of 2000 totaled $6,072 compared with revenue of $3,949
during the third quarter of 1999. Sales of the new System 700
audio bridge, which was introduced in December of 1999,
contributed to the increased revenue.

Operating income increased from a loss of $450 in 1999s
third quarter to an operating income of $738 in the third
quarter of 2000. The increase in operating income is due to both
an increase in revenue and a decrease in operating expenses.

Nine Months Ended September 30, 2000 Compared to Nine
Months Ended October 3, 1999

Revenue.Total revenue of $196,251 decreased $44,718, or
19%, in the nine months ended September 30, 2000 compared
to the comparable nine months of 1999. Earlier in 2000,
videoconferencing products revenue was impacted by customer
deferrals of orders, while awaiting the introduction of new
products in the third quarter of 2000. The PictureTel 900 Series
began shipping on August 14, 2000. Service revenue
continued to grow during the first nine months of 2000, as the
result of increased sales of spare parts, customer integration
services and hosting of multipoint videoconference calls.
Audioconferencing (MultiLink) segment revenue during the first
nine months of 2000 grew as compared to the first nine months of
1999 as a result of sales from the new System 700, which was
introduced in December of 1999. Revenue from sales to foreign
markets decreased 4% during the nine months ended
September 30, 2000 as compared to the same period in 1999,
and represented 43% of total sales.

Gross Margin.Overall gross margin declined $31,052 to
$45,125 in the nine months ended September 3, 2000 compared
to the comparable period in 1999. Gross margin as a percentage
of revenue declined to 23% from 32% for the period ended
September 30, 2000 as compared to the comparable period in
1999. Lower unit sales and lower average selling prices for
videoconferencing products, together with charges of $6,006
necessary to reduce inventory to net realizable value and an
impairment charge of $6,905 to write-down purchased software,
were primarily responsible for the decreased margin percentage.

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Operating Expenses.Operating expenses for the first nine
months of 2000 totaled $141,293, representing a decline of
$10,585, or 7%, compared to the first nine months of 1999. Based
on continuing operating losses and a change in product strategy
for a division of the Companys videoconferencing products
segment, impairment charges of $4,283 related to the write-down
of goodwill, tradename and assembled workforce are included in
operating expenses during the nine-month period in 2000. Also
included in operating expenses for the first nine months of 2000
were special charges totaling $23,471 including $15,142 in lease
termination costs associated the Companys 200 Minuteman
facility, a $1,205 write-off of capitalized costs related to Web
development, $917 of severance charges and $6,207 for costs
associated with the beneficial conversion feature of the
preferred stock issuance. Included in the comparable nine-month
period in 1999 were $6,976 of special charges related to
headcount reductions and real estate consolidation actions.
Without these charges, operating expenses declined $31,363, or
22%, during the nine-month period in 2000 compared to the
comparable period in 1999 due to cost reduction initiatives
taken by the Company.

Income Taxes.The Companys effective income tax
rate for the nine months ended September 30, 2000 was 1.4%
as compared with 4.1% for the comparable period in 1999. The
effective tax rate in both years relates to foreign and state
taxes.

Videoconferencing Products,
Videoconferencing Services and Audioconferencing Segments

Videoconferencing Products.Videoconferencing product
revenue totaled $126,704 for the first nine months of 2000,
which represents a $49,068, or 28%, decrease from the first nine
months of 1999. Segment revenue for the nine-month period of
2000 was impacted by customer deferrals of orders, while
awaiting the introduction of new products in the third quarter
of 2000.

Total videoconferencing system units sold during the first nine
months of 2000 were down 12% versus the prior year. Performance
system volume decreased by 31%, while desktop/personal system
volume was flat. Units sold of larger group systems declined
47%, due to lower Concorde and Venue sales, offset in part by
System 900 sales during the latter half of the third quarter.
Compact system sales decreased by 28%.

The videoconferencing products segment operating loss increased
to $62,812 during the first nine months of 2000 compared to
$55,866 operating loss during the first nine months of 1999.
Declining revenue, on a year-to-year basis, combined with
special charges related to inventory and intangible asset
write-downs in the first half of 2000, contributed to the
increased operating loss.

Videoconferencing Services.Videoconferencing service
revenue grew from $51,658 during the first nine months of 1999
to $54,152 during the first nine months of 2000, a 5% increase.
The revenue growth resulted from increased sales of spare parts,
custom integration services, and hosting of multipoint
videoconference calls for customers. Maintenance service revenue
declined slightly during the first nine months of 2000 compared
to the same period in the prior year due to lower product sales.

Segment operating income for the first nine months of 2000 was
$7,058 compared with $2,935 in the same prior year period, an
increase of $4,123, or 140%, as a result of cost reduction
initiatives implemented during 2000.

Audioconferencing (MultiLink).Revenue for the first nine
months of 2000 increased to $15,395 compared to $13,540 during
the first nine months of 1999. The launch of the System 700 is
responsible for the increase.

Operating income improved to a loss of $2,007 for the first nine
months of 2000 from an operating loss of $3,486 for the first
nine months of 1999, representing a 42% decrease. Sales of the
new System 700 audio bridge, which was introduced in December of
1999, along with cost reductions contributed to the loss
improvement.

Liquidity and Capital Resources

At September 30, 2000, the Company had $18,229 in cash and
cash equivalents. Operating activities used $46,491 of cash
during the first nine months of 2000 compared with a $57,487
usage in the comparable period

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##### Table of Contents





Investing activities provided $33,640 of cash in the first nine
months of 2000 compared with a $15,035 usage in the comparable
prior year period. Changes in marketable securities balances is
the principal reason for both results. In addition, capital
expenditures of $4,156 for the first nine months of 2000 were
less than 50% of the comparable 1999 figure of $9,756, as the
Company has sharply curtailed spending.

Financing activities provided $8,102 of cash in the first nine
months of 2000 as compared to $26,087 in the prior year
comparable period, primarily due to an increase in restricted
cash balances.

Cash utilization continues to be a major concern for the
Company. During the nine months ended September 30, 2000,
net cash decreased $3,686 compared to a net cash decrease of
$43,972 for the comparable period in 1999. During 2000, the
Company completed additional debt financing on August 21,
2000 and received additional funding from a preferred stock
issuance, which closed on July 24, 2000.

The Company entered into a new asset-based secured revolving
credit agreement dated August 21, 2000, which will expire
on August 21, 2003. The new credit facility provides a
revolving credit line of $35,000 with Congress Financial
Corporation (New England). The Company has $18,095 of
outstanding standby letters of credit issued under this
agreement as of September 30, 2000. Fees for letters of
credit outstanding against this facility are payable at 225
basis points per annum of the face amount. Interest for loans
under this facility are payable at 1% above the banks prime
rate. The credit agreement is collateralized by all assets of
the parent Company and subsidiary borrowers and certain stock of
its guarantor subsidiaries. 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. Cash subject to the cash collateral
requirement amounts to $19,000 as of September 30, 2000. Of
this $19,000 in restricted cash, $3,150 is classified as current
on the Companys balance sheet. The secured letters of
credit expire between April 2001 and June 2001. The
credit agreement also contains certain financial covenants,
including minimum net worth and working capital requirements.
This new credit facility replaces the amended facility entered
into in May 2000. A term loan provided by the amended
credit facility in the amount $8,500 was paid in full in
July 2000.

In addition, on July 13, 2000 the Company announced it had
agreements with investors to purchase $21,845 (8,738,000 shares
at $2.50 per share) of new convertible shares of Series B
Preferred Stock. In conjunction with the purchase of convertible
Series B Preferred Stock, each investor also received a
specified small minority interest in the Companys
subsidiary, 1414c, Inc. In addition, in accordance with the
convertible Series B Preferred Stock agreement, the Company
also entered into a joint venture and hosting agreement with one
of the investors. These transactions were completed and the
funds became available on July 24, 2000. The Company used
$8,500 of the proceeds of this stock sale to pay off its $8,500
term loan and expects to use the balance of the proceeds for
working capital and necessary operational expenses.

Local lines of credit are available for short-term advances of
up to $1,394 to certain of the Companys foreign
subsidiaries. The agreements require interest payable up to one
and three-quarter percent, per annum. Borrowings totaling $1,394
were outstanding against these local lines of credit at
September 30, 2000.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease MultiLinks
former facility at 6 Riverside Drive in Andover, Massachusetts
in May 1999 as part of its space consolidation efforts. As
of September 30, 2000, the remaining obligation under this
operating lease was $7,381. After giving effect to expected
sublease income, this obligation is $4,834. 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 the
capital lease was $16,694 at September 30, 2000.

Pursuant to an option agreement with the landlord of its
facility located at 200 Minuteman Road in Andover,
Massachusetts, the Company vacated certain space in the 200
Minuteman facility during the third

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The Company received a report from its independent accountants
for the year ended December 31, 1999 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. Moreover,
managements plans to continue as a going concern rely
heavily on forecasted revenue from new products being jointly
developed with Intel Corporation, new multi-media applications
services, and enhanced compact videoconferencing systems. The
Companys new PictureTel Series 900 system began shipping
on August 14, 2000. Under generally accepted auditing
standards, the Companys auditors had concluded that they
were unable to rely on future revenue from these new products
and services in evaluating the achievability of
managements plan to continue as a going concern. In
addition to the revenue plan, management has obtained an
asset-based secured revolving line of credit from Congress
Financial Corporation, as discussed above, and has obtained an
additional $21,845 in convertible Series B Preferred Stock
which has been classified as mezzanine financing on the
Companys balance sheet. Management is continuing to
identify and implement other actions to improve the
Companys liquidity, including the sale of non-core
business assets. While there can be no assurances that these
plans will be successful, management believes these actions, if
successful, will provide sufficient financial resources for the
next twelve months and beyond.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This
statement was originally effective for all fiscal years
beginning after June 15, 1999. In June 1999, the FASB
issued Statement 137, which delayed the effective date of
Statement 133 by one year. Statement 133 will be effective for
PictureTels fiscal year beginning January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company is currently evaluating
the effects of this change but anticipates that the adoption of
SFAS 133 will not have a significant effect on the
Companys financial position or results of operations.

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements,
(SAB 101) as amended by SAB 101B, which is
effective no later than the year ending December 31, 2000.
SAB 101 clarifies the Securities and Exchange Commissions
views regarding recognition of revenue. The Company will adopt
SAB 101 in the fourth quarter of 2000 and is currently
evaluating the effects of this pronouncement.

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.

New Products, Cost Reductions, Technological Change, and
Evolving Markets. The Company is engaged in an industry that
continues to innovate as a result of extensive research and
development efforts and which brings 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

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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, technological advances, or otherwise. Any of
these factors could have a material adverse effect on
PictureTels business, financial condition and results of
operations.

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

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Recent History of Losses.Losses from operations were
$36,029 and $19,230 for the third quarter of 2000 and 1999,
respectively, representing an 87% increase in losses from
operations. For the first nine months of 2000, the Company
reported a 19% decrease in revenue as compared to the first nine
months of 1999. Losses from operations for the first nine months
of 2000 were $96,168 as compared with $75,701 for the first nine
months of 1999.

The Companys revenue decreased 20% during fiscal year 1999
as compared to fiscal year 1998 and decreased 13% between fiscal
year 1998 and fiscal year 1997. Losses from operations were
$90,284, $23,650 and $56,850 in 1999, 1998 and 1997,
respectively.

Continued negative operating results could adversely impact the
Companys relationship with customers, vendors and
employees, as well as its liquidity and ability to remain in
compliance with covenants under its revolving credit agreement.
The Company received a report from its independent accountants
for the year ended December 31, 1999 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 which have been
jointly developed with Intel Corporation, new multi-media
applications services, and enhanced compact videoconferencing
systems. On August 14, 2000, the Company began shipping its new
900 Series products, which are the first products resulting from
the joint development effort with Intel Corporation. However,
there can be no guarantee that such revenue increase will occur
or will be sufficient to meet the Companys needs. In
addition to the revenue plan, on July 24, 2000, the Company
raised additional funding by selling $21,845 of Convertible
Series B Preferred Stock to Intel Corporation, State of
Wisconsin Investors Board, Halpern Denny Fund II, L.P. and 12
directors and senior managers of the Company. Of the proceeds,
$8,500 was used to pay off an $8,500 term loan. On
August 21, 2000, the Company entered into a credit
agreement with Congress Financial Corporation to provide the
Company with an asset-based secured revolving credit line with a
limit of $35,000, which would provide the Company with an
additional $26,500 in borrowing capacity. However, there is no
guarantee that either of these two recent efforts (and other
actions the Company may take to improve the Companys
liquidity, including the sale of non-core business assets) will
be sufficient to meet the Companys needs.

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 management resources with
respect to the defense of any claims relating to proprietary
rights, which in turn could have a material adverse effect on
the Companys business, financial condition and result of
operations.

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

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International Operations.Revenue related to
international operations of the Company totaled approximately
36% and 41% of total revenue for the third quarters of 2000 and
1999, respectively. Revenue related to international operations
of the Company totaled approximately 43% and 47% of total
revenue for the nine-month period ended September 30, 2000
and October 3, 1999, 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, has and could
continue to 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. 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 had earlier
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 remaining a member of the Board of
Directors. Dr. Gaut accepted this 1999 position at a
difficult time for the Company. On June 19, 2000,
Mr. Lewis Jaffe became President and Chief Operating
Officer of the Company, while Dr. Gaut remained Chairman
and Chief Executive Officer. The Company appointed
Mr. Ralph Takala, a principal of Altman and Associates as
its interim Chief Financial Officer on June 15, 2000
following the resignation of its previous Chief Financial
Officer. The Company depends on a limited

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Year 2000 Compliance.In prior years, the Company
discussed the nature and progress of its plans to become Year
2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no disruptions
in mission critical information technology and non-information
technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company is not aware
of any material problems resulting from Year 2000 issues, either
with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor
its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed
promptly.




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, 1999.




Part II  OTHER INFORMATION




Item 1.  Legal Proceedings

A. 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.

B. RevNet, Inc.

On June 2, 1998, the Company was served with a complaint
from a former distribution channel customer, RevNet, Inc., which
has ceased operations. (RevNet, Inc., v. PictureTel
Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The
complaint alleged that the Company breached an oral contract.
RevNet was seeking $200 million in damages. In addition,
after limited discovery under the above named suit, the Company
on September 13, 1999 filed a related action in the Circuit
Court for Baltimore City, Maryland against RevNet, Inc., Vuecom,
Inc. (an entity related to RevNet, Inc.), George Harris IV,
George Sandmann and Lou Brown, (PictureTel Corporation v.
RevNet, Inc., et al. Civil Action 24-C99-004406) alleging
among other things Breach of Contract, Fraudulent Inducement and
Securities Fraud. On October 30, 2000 the parties agreed to
a settlement of this matter. Under the terms of the settlement,
the Company will pay to the RevNet group an immaterial amount
over the course of the next twelve months. In return all parties
will dismiss all claims and will release the others of all
related causes of actions.

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

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Item 5.  Other Information

Loan and Security
Agreement

On August 22, 2000 the Company entered into a $35 million Loan
and Security with Congress Financial Corporation (New England),
as more fully described in Note 6 (Debt) to the Consolidated
Financial Statements in Part I of this report, which is
hereby incorporated by reference.




Item 6.  Exhibits and Reports on
Form 8-K

(a)  Exhibits

|        |  |                                                                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.1   |  | Certificate of Designation, Preferences and Other Rights of the
	Series B Preference Stock of PictureTel Corporation,
	consisting of an Amendment to the Certificate of Incorporation
	filed as Exhibit 2 to Report on Form 8-K, dated
	July 31, 2000 and hereby incorporated by reference.                      
|4.2.4   |  | Stock Purchase and Investors Rights Agreement dated as of
	July 13, 2000 as amended by Amendment dated as of
	July 24, 2000, filed as Exhibit 1 to Report on
	Form 8-K, dated July 31, 2000 and hereby incorporated
	by reference.                                                                               
|10.19.3 |  | $35 million Loan and Security Agreement dated August 22,
	2000, by and between Congress Financial Corporation (New
	England), PictureTel Corporation and certain subsidiaries of
	PictureTel Corporation, filed as Exhibit 1 to report on
	Form 8-K, dated August 30, 2000 and hereby
	incorporated by reference.
|10.29   |  | Employment agreement between PictureTel Corporation and Edward
	Semonite dated September 15, 2000, filed herewith.                                                                                                                                                                                               
|10.30   |  | Employment agreement between PictureTel Corporation and Jonathan
	Kosheff dated September 15, 2000, filed herewith.                                                                                                                                                                                              
|27.1    |  | Financial Data Schedule for the period ended September 30,
	2000 as required by Item 601(c) of Regulation S-K.                                                                                                                                                                                                   

(b)  Reports on Form 8-K

The Company filed a Report on Form 8-K dated July 14,
2000, relating to the signing of the Stock Purchase and
Investors Rights Agreement dated as of July 13, 2000
as amended as of July 24, 2000.

The Company filed a Report on Form 8-K dated July 31,
2000, relating to the issuance and sale of $21.8 million of
Series B Preference Stock (8,738,000 shares) pursuant to
the previously announced Stock Purchase and Investors Rights
Agreement and relating to an amendment of the PictureTel Rights
Agreement, in order to permit the equity transaction.

The Company filed a Report on Form 8-K dated
August 30, 2000 relating to entering into of a
$35 million Loan and Security Agreement dated
August 22, 2000, by and between Congress Financial
Corporation (New England), PictureTel Corporation and certain
subsidiaries of PictureTel Corporation.

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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/ RALPH J. TAKALA                         
| |                                             
| | Ralph J. Takala                             
| | Chief Financial Officer                     
| | (Principal Financial and Accounting Officer)
| | November 14, 2000                           

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.1   |  | Certificate of Designation, Preferences and Other Rights of the
	Series B Preference Stock of PictureTel Corporation,
	consisting of an Amendment to the Certificate of Incorporation
	filed as Exhibit 2 to Report on Form 8-K, dated
	July 31, 2000 and hereby incorporated by reference.                      
|4.2.4   |  | Stock Purchase and Investors Rights Agreement dated as of
	July 13, 2000 as amended by Amendment dated as of
	July 24, 2000, filed as Exhibit 1 to Report on
	Form 8-K, dated July 31, 2000 and hereby incorporated
	by reference.                                                                               
|10.19.3 |  | $35 million Loan and Security Agreement dated August 22,
	2000, by and between Congress Financial Corporation (New
	England), PictureTel Corporation and certain subsidiaries of
	PictureTel Corporation, filed as Exhibit 1 to report on
	Form 8-K, dated August 30, 2000 and hereby
	incorporated by reference.
|10.29   |  | Employment agreement between PictureTel Corporation and Edward
	Semonite, dated September 15, 2000, filed herewith.                                                                                                                                                                                              
|10.30   |  | Employment agreement between PictureTel Corporation and Jonathan
	Kosheff, dated September 15, 2000, filed herewith.                                                                                                                                                                                             
|27.1    |  | Financial Data Schedule for the period ended September 30,
	2000 as required by Item 601(c) of Regulation S-K.                                                                                                                                                                                                   

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