##### 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)



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

For the quarterly period ended June 30, 2001

or



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

For the transition period from
                        to

Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of Registrant as specified in its
charter)


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

þ  Yes No
o

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

As of August 3, 2001, there were outstanding
53,421,106 shares of common stock of the registrant.



---






---

TABLE OF CONTENTS



|                                                                                      |                                            |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  |  | 
|Item 1.Consolidated Financial Statements                                             
|                                                                                      | 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                    
|Item 1.Legal Proceedings                                                             
|Item 4.Submission of Matters to a Vote of Security Holders                           
|Item 6.Exhibits and Reports on Form 8-K                                              
|SIGNATURE                                                                            
|FIRST AMENDMENT TO LAON AND SECURITY AGREEMENT                                       



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##### Table of Contents



PICTURETEL CORPORATION

FORM 10-Q

INDEX

|                                             |  |                                                                                                   |  |  |       | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  |  | ----- | 
|                                            
|                                            
|                                            
|                                            
|PART I.  CONSOLIDATED FINANCIAL
	INFORMATION |  |                                                                                                   |  | 
|Item 1.                                      |  | Consolidated Financial Statements:                                                                |  |  |       | 
|                                            
|                                            
|                                            
|                                            
|                                             |  | Consolidated Balance Sheets June 30, 2001 and
	December 31, 2000.                                 |  |  | 2     | 
|                                            
|                                            
|                                            
|                                            
|                                             |  | Consolidated Statements of Operations Three and
	Six Months Ended June 30, 2001 and July 1, 2000. |  |  | 3     | 
|                                            
|                                            
|                                            
|                                            
|                                             |  | Consolidated Statements of Cash Flows Six Months
	Ended June 30, 2001 and July 1, 2000.           |  |  | 4     | 
|                                            
|                                            
|                                            
|                                            
|                                             |  | Notes to Consolidated Financial Statements                                                        |  |  | 5-10  | 
|                                            
|                                            
|                                            
|                                            
|Item 2.                                      |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations            |  |  | 11-21 | 
|                                            
|                                            
|                                            
|                                            
|Item 3.                                      |  | Quantitative and Qualitative Disclosures about
	Market Risk                                       |  |  | 21    | 
|                                            
|                                            
|                                            
|                                            
|PART II. OTHER INFORMATION                   |  |                                                                                                   |  | 
|                                            
|                                            
|                                            
|                                            
|Item 1.                                      |  | Legal Proceedings                                                                                 |  |  | 22    | 
|                                            
|                                            
|                                            
|                                            
|Item 4.                                      |  | Submission of Matters to a Vote of Security
	Holders                                              |  |  | 22    | 
|                                            
|                                            
|                                            
|                                            
|Item 6.                                      |  | Exhibits and Reports on Form 8-K                                                                  |  |  | 22    | 
|                                            
|                                            
|                                            
|                                            
|                                             |  | Signature                                                                                         |  |  | 24    | 

1



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##### Table of Contents



PART I. CONSOLIDATED FINANCIAL
INFORMATION




Item 1.     Consolidated Financial Statements

PICTURETEL CORPORATION






CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except share
data)


|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |          |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                                                                                                                                             |                                                                                                                                                               | June 30,                                                                            |        | December 31,
|                                                                                                                                                                             |                                                                                                                                                               | 2001                                                                                |        | 2000        
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |             
|                                                                                                                                                                             |                                                                                                                                                               | (Unaudited)                                                                         |        |             
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|ASSETS                                                                                                                                                                       |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Current assets:                                                                                                                                                              |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Cash and cash equivalents                                                                                                                                     |                                                                                     | $      | 40,525       |         |  | $      | 43,441   |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Restricted cash                                                                                                                                               |                                                                                     |        | 34,933       |         |  |        | 5,775    |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accounts receivable, less allowances for doubtful
	accounts of $2,336 and $4,100 at June 30, 2001 and
	December 31, 2000, respectively                        |                                                                                     |        | 29,091       |         |  |        | 39,897   |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Inventories                                                                                                                                                   |                                                                                     |        | 26,289       |         |  |        | 27,020   |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Other current assets                                                                                                                                          |                                                                                     |        | 9,932        |         |  |        | 9,716    |        
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total current assets                                                                |        |              | 140,770 |  |        |          | 125,849 | 
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Property and equipment, net                                                                                                                                                  |                                                                                                                                                               |                                                                                     | 15,053 |              |         |  | 18,310 |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Other assets                                                                                                                                                                 |                                                                                                                                                               |                                                                                     | 1,995  |              |         |  | 2,861  |         
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total assets                                                                        |        | $            | 157,818 |  |        | $        | 147,020 | 
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
	STOCK AND STOCKHOLDERS EQUITY                                                                                                |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Current liabilities:                                                                                                                                                         |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Short-term borrowings                                                                                                                                         |                                                                                     | $      | 41,500       |         |  | $      | 1,487    |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accounts payable                                                                                                                                              |                                                                                     |        | 11,879       |         |  |        | 20,575   |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accrued compensation and benefits                                                                                                                             |                                                                                     |        | 5,580        |         |  |        | 7,280    |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accrued expenses                                                                                                                                              |                                                                                     |        | 32,100       |         |  |        | 32,896   |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Deferred revenue                                                                                                                                              |                                                                                     |        | 16,491       |         |  |        | 18,216   |        
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total current liabilities                                                           |        |              | 107,550 |  |        |          | 80,454  | 
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Non-current liabilities                                                                                                                                                      |                                                                                                                                                               |                                                                                     | 2,152  |              |         |  | 2,101  |         
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total liabilities                                                                   |        |              | 109,702 |  |        |          | 82,555  | 
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|Commitments and contingencies:                                                                                                                                               |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Redeemable convertible preferred stock, $.01 par
	value; 13,500,000 shares authorized; 1,138,000 and 9,416,708
	shares outstanding at June 30, 2001 and December  31,
	2000. |                                                                                                                                                               |                                                                                     | 2,845  |              |         |  | 42,845 |         
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|Stockholders equity:                                                                                                                                                        |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|Preferred stock, $.01 par value:                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | 1,500,000 shares authorized; 0 issued and
	outstanding at June 30, 2001 and December 31, 2000                                                                 |                                                                                     |        |              |         |  |        |          |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Common stock, $.01 par value; 80,000,000 shares
	authorized; 53,495,341 and 45,049,032 shares issued and
	outstanding at June 30, 2001 and December 31, 2000. |                                                                                     |        | 535          |         |  |        | 450      |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Additional paid-in capital                                                                                                                                    |                                                                                     |        | 285,841      |         |  |        | 245,399  |        
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accumulated deficit                                                                                                                                           |                                                                                     |        | (238,430     | )       |  |        | (221,751 | )      
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Accumulated other comprehensive loss                                                                                                                          |                                                                                     |        | (2,119       | )       |  |        | (1,922   | )      
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                            
|                                                                                                                                                                             | Treasury stock, 92,065 shares, at cost                                                                                                                        |                                                                                     |        | (556         | )       |  |        | (556     | )      
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total stockholders equity                                                          |        |              | 45,271  |  |        |          | 21,620  | 
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         
|                                                                                                                                                                             |                                                                                                                                                               | Total liabilities, redeemable convertible
	preferred stock and stockholders equity |        | $            | 157,818 |  |        | $        | 147,020 | 
|                                                                                                                                                                             |                                                                                                                                                               |                                                                                     |        |              |         |  |        |         

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

2



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF
OPERATIONS


(Dollars in thousands, except share
data)


(Unaudited)


|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |        |         |  
|-------------------------------------------------------- | ----------------------------------- | ----------------------- | ------ | ---------------- | ------ | -------- | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                         |                                     |                         |        |                 
|                                                         |                                     | Three Months Ended      |        | Six Months Ended
|                                                         |                                     |                         |        |                 
|                                                         |                                     | June 30,                |        | July 1,          |        | June 30, |         | July 1,
|                                                         |                                     | 2001                    |        | 2000             |        | 2001     |         | 2000   
|                                                         |                                     |                         |        |                  |        |          |         |        
|Revenue                                                  |                                     | $                       | 48,864 |                  |        | $        | 61,565  |         |         | $ | 98,470  |        |         | $ | 126,768 |       
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of revenue                                          |                                     |                         | 33,259 |                  |        |          | 54,988  |         |         |   | 65,086  |        |         |   | 102,472 |       
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Gross margin                                             |                                     |                         | 15,605 |                  |        |          | 6,577   |         |         |   | 33,384  |        |         |   | 24,296  |       
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Operating expense:                                       |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Selling, general and administrative |                         |        | 15,791           |        |          |         | 30,077  |         |   |         | 33,908 |         |   |         | 57,386 |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Research and development            |                         |        | 6,188            |        |          |         | 13,596  |         |   |         | 13,372 |         |   |         | 27,049 |        
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|                                                         |                                     | Total operating expense |        |                  | 21,979 |          |         |         | 43,673  |   |         |        | 47,280  |   |         |        | 84,435  |  
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Loss from operations                                     |                                     |                         | (6,374 | )                |        |          | (37,096 | )       |         |   | (13,896 | )      |         |   | (60,139 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Interest income (expense), net                           |                                     |                         | 386    |                  |        |          | (584    | )       |         |   | 957     |        |         |   | (875    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Other income (expense), net                              |                                     |                         | (2,991 | )                |        |          | 503     |         |         |   | (3,059  | )      |         |   | 829     |       
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Loss before income tax expense                           |                                     |                         | (8,979 | )                |        |          | (37,177 | )       |         |   | (15,998 | )      |         |   | (60,185 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Income tax expense                                       |                                     |                         | 270    |                  |        |          | 796     |         |         |   | 681     |        |         |   | 1,630   |       
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|                                                         |                                     | Net loss                |        | $                | (9,249 | )        |         | $       | (37,973 | ) |         | $      | (16,679 | ) |         | $      | (61,815 | )
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Net loss per common share  basic and diluted            |                                     | $                       | (0.19  | )                |        | $        | (0.93   | )       |         | $ | (0.35   | )      |         | $ | (1.52   | )     
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       
|Weighted average shares outstanding  basic
	and diluted |                                     |                         | 49,563 |                  |        |          | 40,967  |         |         |   | 47,273  |        |         |   | 40,798  |       
|                                                         |                                     |                         |        |                  |        |          |         |         |         |   |         |        |         |   |         |       

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

3



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Dollars in thousands)


(Unaudited)


|                                                     |                                                                              |                                                         |         |         |        |   |         |         |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------- | -
|                                                     |                                                                              |                                                        
|                                                     |                                                                              | Six Months Ended                                       
|                                                     |                                                                              |                                                        
|                                                     |                                                                              | June 30,                                                |         | July 1,
|                                                     |                                                                              | 2001                                                    |         | 2000   
|                                                     |                                                                              |                                                         |         |        
|Cash flows from operating activities:                |                                                                              |                                                         |         |         |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                     |                                                         | $       | (16,679 | )      |   | $       | (61,815 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                         |         |         |        |   |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Depreciation and amortization                           |         |         | 4,199  |   |         |         | 14,523  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Provision for doubtful accounts                         |         |         | 829    |   |         |         | (109    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Provision for inventory obsolescence                    |         |         | 3,548  |   |         |         | 9,710   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Write-down of long-lived assets                         |         |         |       |   |         |         | 9,159   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other non-cash items                                    |         |         | 244    |   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in operating assets and liabilities:                                 |                                                         |         |         |        |   |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts receivable                                     |         |         | 8,964  |   |         |         | 25,905  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Inventories                                             |         |         | (3,117 | ) |         |         | (10,252 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Other current assets                                    |         |         | 88     |   |         |         | 2,199   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accounts payable                                        |         |         | (8,412 | ) |         |         | (589    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Accrued compensation and benefits and accrued
	expenses |         |         | (2,003 | ) |         |         | (2,958  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                              | Deferred revenue                                        |         |         | (1,255 | ) |         |         | (3,113  | )
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Net cash used in operating activities                |                                                                              |                                                         | (13,594 | )       |        |   | (17,340 | )      
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Cash flows from investing activities:                |                                                                              |                                                         |         |         |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of marketable securities                                            |                                                         |         |        |        |   |         | (31,262 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                  |                                                         |         |        |        |   |         | 69,049  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                          |                                                         |         | (1,244  | )      |   |         | (3,456  | )      
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Net cash provided by (used in) investing
	activities |                                                                              |                                                         | (1,244  | )       |        |   | 34,331  |        
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Cash flows from financing activities:                |                                                                              |                                                         |         |         |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Increase in restricted cash and cash equivalents                             |                                                         |         | (29,158 | )      |   |         | (29,866 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds on short-term/long-term borrowings                              |                                                         |         | 40,086  |        |   |         | 9,252   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capital lease obligations                           |                                                         |         |        |        |   |         | (860    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from employee stock purchase plan and
	exercise of stock options    |                                                         |         | 528     |        |   |         | 2,993   |        
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Net cash provided by (used in) financing
	activities |                                                                              |                                                         | 11,456  |         |        |   | (18,481 | )      
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Effect of exchange rate changes on cash              |                                                                              |                                                         | 466     |         |        |   | 608     |        
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Net decrease in cash and cash equivalents            |                                                                              |                                                         | (2,916  | )       |        |   | (882    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                              |                                                         | 43,441  |         |        |   | 21,915  |        
|                                                     |                                                                              |                                                         |         |         |        |   |         |        
|Cash and cash equivalents at end of period           |                                                                              | $                                                       | 40,525  |         |        | $ | 21,033  |        
|                                                     |                                                                              |                                                         |         |         |        |   |         |        

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

4



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##### Table of Contents



PICTURETEL CORPORATION






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Dollars in thousands, except share
data)


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 for the year
ended December 31, 2000, as filed with the Securities and
Exchange Commission on April 17, 2001.

In the opinion of the management of PictureTel
Corporation, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly
the Companys financial position at June 30, 2001 and
December 31, 2000, results of operations for the three and
six months ended June 30, 2001 and July 1, 2000 and
changes in cash flows for the six months ended June 30,
2001 and July 1, 2000.

The results disclosed in the Consolidated Balance
Sheet at June 30, 2001, the Consolidated Statement of
Operations for the three and six months ended June 30, 2001
and the Consolidated Statement of Cash Flows for the six months
ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year.

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

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

In February 2001, the Company received a
report from its independent accountants containing an
explanatory paragraph stating that its recurring losses and
requirement for additional financing raise substantial doubt
about our ability to continue as a going concern.
Managements plans to continue as a going concern as an
independent company rely heavily on forecasted revenue from
products that were released in the third quarter of 2000 and in
April 2001. Management is also continuing to identify and
implement internal actions to improve the Companys
liquidity. Most importantly, the Companys management and
Board of Directors approved an Agreement and Plan of Merger
dated as of May 24, 2001 with Polycom, Inc. and one of its
subsidiaries, providing for an acquisition of the Company by
Polycom. In connection with the merger agreement, the Company
also obtained interim senior convertible note
financing from Polycom in the amount of $49,900, available for
use by the Company subject to specified terms and conditions.
(See Notes 2. and 6.)

2.     Restricted
Cash

The Company had restricted cash of $34,933 and
$5,775 at June 30, 2001 and December 31, 2000,
respectively. The restricted amount at June 30, 2001
represents $34,900 in proceeds received during the second
quarter of 2001 from the Series B senior convertible note
issued to Polycom, as contemplated by the merger agreement and
note agreement, dated as of June 15, 2001, entered into in
connection with the merger agreement. The restricted amount also
includes interest income earned on the proceeds and is net of
unrealized gains and losses. The funds are held in an account
(the Account) in which the note purchaser (Polycom)
has first priority interest subject to no other liens. The note
agreement permits the Company to

5



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)

(Dollars in thousands, except share data)


withdraw funds from the Account upon meeting
certain withdrawal criteria. As of June 30, 2001, the
Company has not met the withdrawal criteria to draw funds from
the Account. The restricted amount at December 31, 2000
represents a cash collateral requirement for standby letters of
credit issued under a credit agreement with Congress Financial
Corporation (New England). As of June 30, 2001, the
Companys funds were no longer collateralizing the letters
of credit, as the collateral requirement is being met by a third
party, Polycom. (See Note 6.)

3.     Inventories

Inventories consist of the following:

|                |  |          |        |              |  |   |        | 
|--------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                |  | June 30, |        | December 31,
|                |  | 2001     |        | 2000        
|                |  |          |        |             
|Purchased Parts |  | $        | 3,800  |              |  | $ | 4,018  | 
|               
|               
|               
|               
|Work in Process |  |          | 279    |              |  |   | 234    | 
|               
|               
|               
|               
|Finished Goods  |  |          | 22,210 |              |  |   | 22,768 | 
|                |  |          |        |              |  |   |        | 
|                |  | $        | 26,289 |              |  | $ | 27,020 | 
|                |  |          |        |              |  |   |        | 

4.     Loss Per
Share

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

|                                              |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |         |  
|--------------------------------------------- | ------------------------------------------ | ------------------ | ----- | ---------------- | - | -------- | ----- | ------- | - | - | ----- | ------- | - | - | ----- | ------- | -
|                                              |                                            |                    |       |                 
|                                              |                                            | Three Months Ended |       | Six Months Ended
|                                              |                                            |                    |       |                 
|                                              |                                            | June 30,           |       | July 1,          |   | June 30, |       | July 1,
|                                              |                                            | 2001               |       | 2000             |   | 2001     |       | 2000   
|                                              |                                            |                    |       |                  |   |          |       |        
|Basic and Diluted Loss Per Share
	Computation |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        
|                                             
|                                             
|                                             
|                                             
|Numerator:                                    |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        
|                                             
|                                             
|                                             
|                                             
|                                              | Net loss applicable to common shareholders |                    | $     | (9,249           | ) |          | $     | (37,973 | ) |   | $     | (16,679 | ) |   | $     | (61,815 | )
|                                              |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        
|Denominator:                                  |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average common shares outstanding |                    |       | 49,563           |   |          |       | 40,967  |   |   |       | 47,273  |   |   |       | 40,798  |  
|                                              |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        
|Basic and diluted loss per share              |                                            | $                  | (0.19 | )                |   | $        | (0.93 | )       |   | $ | (0.35 | )       |   | $ | (1.52 | )      
|                                              |                                            |                    |       |                  |   |          |       |         |   |   |       |         |   |   |       |        

Options to purchase shares of the Companys
common stock of 5,417,130 and 6,821,164 were outstanding at
June 30, 2001 and July 1, 2000, respectively, but were
not included in the computation of diluted loss per share
because they were antidilutive due to the net losses sustained
in 2001 and in 2000. Warrants for 2,723 shares of the
Companys Common Stock and Redeemable Convertible Preferred
Stock of 1,138,000 and 4,478,708 shares were outstanding at
June 30, 2001 and July 1, 2000, respectively, but were
not included in the computation of diluted loss per share
because they were antidilutive due to the loss sustained in 2001
and 2000.

5.     Comprehensive
Loss

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

6



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)

(Dollars in thousands, except share data)


|                                                         |  |                    |        |                  |  |          |         |         |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | -------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                         |  |                    |        |                 
|                                                         |  | Three Months Ended |        | Six Months Ended
|                                                         |  |                    |        |                 
|                                                         |  | June 30,           |        | July 1,          |  | June 30, |         | July 1,
|                                                         |  | 2001               |        | 2000             |  | 2001     |         | 2000   
|                                                         |  |                    |        |                  |  |          |         |        
|Net loss                                                 |  | $                  | (9,249 | )                |  | $        | (37,973 | )       |  | $ | (16,679 | ) |  | $ | (61,815 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Foreign currency translations, net                       |  |                    | (46    | )                |  |          | (43     | )       |  |   | (189    | ) |  |   | (291    | )
|                                                        
|                                                        
|                                                        
|                                                        
|Unrealized gains (losses) on marketable
	securities, net |  |                    | (8     | )                |  |          | 17      |         |  |   | (8      | ) |  |   |        |  
|                                                         |  |                    |        |                  |  |          |         |         |  |   |         |   |  |   |         |  
|Comprehensive loss                                       |  | $                  | (9,303 | )                |  | $        | (37,999 | )       |  | $ | (16,876 | ) |  | $ | (62,106 | )
|                                                         |  |                    |        |                  |  |          |         |         |  |   |         |   |  |   |         |  

6.     Debt

The Company entered into an asset-based secured
revolving credit agreement dated August 21, 2000, which
will expire on August 21, 2003. This credit facility
provides a revolving credit line of up to $35,000 with Congress
Financial Corporation (New England). In connection with the
merger agreement with Polycom, the Company amended the Loan and
Security Agreement on June 15, 2001. The amendment allowed
for the issuance of up to $15,000 of senior convertible notes
 Series A and $34,900 of senior convertible notes
 Series B to Polycom and for the granting of second
position security for the senior convertible notes. In addition
to the consent to the merger, the amendment suspended any
availability for revolving loans that would have been available
otherwise under the line. The Company has $8,000 of outstanding
standby letters of credit issued under this agreement as of
June 30, 2001. Polycom has issued to Congress Financial
Corporation an irrevocable standby letter of credit equal to
105%, or $8,400, to secure the outstanding letters of credits
issued under this agreement. As a result, cash subject to the
cash collateral requirement of $8,400 was released and made
available to the Company to fund ongoing operations. Fees for
letters of credit outstanding against this facility are payable
at 225 basis points per annum of the face amount. The secured
letters of credit expire between September 2001 and
March 2002. This credit agreement also contains certain
financial covenants, including minimum net worth and working
capital requirements.

In connection with the merger agreement, the
Company has entered into a note agreement with Polycom. The
Company issued to Polycom a Series A senior convertible
note having an original principal amount of $6,600 and a
Series B senior convertible note having an original
principal amount of $34,900. The principal amount of the
Series A note is subject to increase from time to time to
the extent of any draws on the backup letter of credit obtained
by Polycom, up to a maximum aggregate principal amount of
$15,000. The face amount of the letter of credit obtained by
Polycom is $8,400 and the face amount declines over time as the
letters of credit it is backing expire, as referenced in the
preceding paragraph. The proceeds of the Series B note,
which are classified as restricted on the Companys balance
sheet at June 30, 2001, are held in an account (the
Account) in which Polycom has first priority
interest, subject to no other liens (See Note 2.). The note
agreement permits the Company to withdraw funds from the Account
upon meeting certain withdrawal criteria. As of June 30,
2001, the Company has not met the withdrawal criteria to draw
funds from the Account. Interest accrues at a rate of 8% per
annum and is payable quarterly under the Series A note. As
of June 30, 2001, the balance under the Series A note,
including accrued interest, was $6,623. Interest on the
Series B note is payable quarterly and accrues at a rate of
8% per annum, except to the extent funds are held in the
Account, interest accrues on the funds at a rate equal to the
interest payable to the Company on the Account. Accrued interest
on the Account amounted to $50 as of June 30, 2001.
Interest on both notes may be paid in cash or in kind by issuing
a note in substantially the form as the Series A note or
the Series B note, as applicable, except that the payment
in kind note is not convertible. Interest on any payment in kind
note accrues at a rate of 8% per annum and is payable in cash or
in kind. The Series A note is due on June 15, 2003 and
to the extent not automatically converted pursuant to the terms
of the note, the principal of the Series B

7



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)

(Dollars in thousands, except share data)


note is payable in four quarterly installments
beginning August 31, 2004, with the final installment due
on May 31, 2005.

The Series A and Series B notes are
convertible by the holder into common stock, at any time after
the termination of the merger agreement and prior to the
repayment in full of the principal amount of the note. The
conversion rate is 222.22 shares of common stock for each $1,000
in principal amount of the note (or $4.50 per share), except
that if the transactions contemplated by the merger agreement
are not completed for certain reasons, the conversion rate is
164.74 shares of common stock for each $1,000 in principal
amount (or $6.07 per share).

Both notes are subject to redemption at the
election of the Company, in whole or in part, upon not less than
30 or more than 60 days notice at a redemption price equal
to 100% of the principal amount plus accrued interest. In
addition, the holder of the notes may require the Company to
repurchase them upon a change in control or other repurchase
events described in the notes. The repurchase events arise from
the termination of the merger agreement under specified
circumstances. The notes also contain certain events of default
and covenants.

The Company has granted a security interest in
favor of Polycom on substantially all of its assets to secure
its obligations under the notes. The Companys obligations
to Polycom under the notes are subordinated to the obligations
of the Company to Congress Financial Corporation (New England)
under the Loan and Security Agreement dated August 21, 2000.

Local lines of credit of up to $1,364 are
available to certain of the Companys foreign subsidiaries
for short-term advances. The agreements require interest payable
up to one and three-quarter percent per annum. There were no
borrowings outstanding against these local lines of credit at
June 30, 2001.

7.     Recently
Issued Accounting Pronouncements

In July 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141,
Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142
requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwills impairment and that
intangible assets other than goodwill be amortized over their
useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all
business combinations accounted for by the purchase method for
which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, in fiscal year 2002. The
Company has not completed its evaluation, but anticipates that
the adoption of these pronouncements will not have an impact on
the Companys financial statements.

8.     Commitments

In conjunction with a joint development agreement
with Sharp Corporation, the Company has outstanding commitments
as of June 30, 2001 to purchase approximately $16,400 of
inventory over the next nine months.

9.     Segment
Information

The Company has determined that its reportable
segments are videoconferencing products and videoconferencing
services. The videoconferencing products segment develops,
manufactures and markets visual

8



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)

(Dollars in thousands, except share data)


communications systems and collaboration
software. The videoconferencing services segment provides
services for the videoconferencing products.

|                                   |  |              |         |              |  |       |        |       |  |   |         |   |  |   |         |  
|---------------------------------- |  | ------------ | ------- | ------------ |  | ----- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                   |  | Video-       |         | Video-       |  |       |        |      
|                                   |  | conferencing |         | conferencing |  |       |        |      
|                                   |  | Products     |         | Services     |  | Other |        | Total
|                                   |  |              |         |              |  |       |        |      
|Three months ended June 30,
	2001: |  |              |         |              |  |       |        |       |  |   |         |   |  |   |         |  
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $            | 31,683  |              |  | $     | 16,987 |       |  | $ | 194     |   |  | $ | 48,864  |  
|                                  
|                                  
|                                  
|                                  
|Operating income (loss)            |  | $            | (8,577  | )            |  | $     | 6,283  |       |  | $ | (4,080  | ) |  | $ | (6,374  | )
|                                  
|                                  
|                                  
|                                  
|Three months ended July 1,
	2000:  |  |              |         |              |  |       |        |       |  |   |         |   |  |   |         |  
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $            | 36,264  |              |  | $     | 18,208 |       |  | $ | 7,093   |   |  | $ | 61,565  |  
|                                  
|                                  
|                                  
|                                  
|Operating income (loss)            |  | $            | (34,308 | )            |  | $     | 2,748  |       |  | $ | (5,536  | ) |  | $ | (37,096 | )
|                                  
|                                  
|                                  
|                                  
|Six months ended June 30, 2001:    |  |              |         |              |  |       |        |       |  |   |         |   |  |   |         |  
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $            | 65,539  |              |  | $     | 32,695 |       |  |   | 236     |   |  | $ | 98,470  |  
|                                  
|                                  
|                                  
|                                  
|Operating income (loss)            |  | $            | (15,045 | )            |  | $     | 10,262 |       |  | $ | (9,113  | ) |  | $ | (13,896 | )
|                                  
|                                  
|                                  
|                                  
|Six months ended July 1, 2000:     |  |              |         |              |  |       |        |       |  |   |         |   |  |   |         |  
|                                  
|                                  
|                                  
|                                  
|Revenue from external customers    |  | $            | 81,039  |              |  | $     | 36,406 |       |  | $ | 9,323   |   |  | $ | 126,768 |  
|                                  
|                                  
|                                  
|                                  
|Operating income (loss)            |  | $            | (49,970 | )            |  | $     | 4,209  |       |  | $ | (14,378 | ) |  | $ | (60,139 | )

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

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

Geographic
Data

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

|                                 |  |               |        |         |  |       |        |           |  |       |        |  |  |   |       |  |  |   |         | 
|-------------------------------- |  | ------------- | ------ | ------- |  | ----- | ------ | --------- |  | ----- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                 |  |               |        | United  |  |       |        |           |  |      
|                                 |  | United States |        | Kingdom |  | Japan |        | All Other |  | Total
|                                 |  |               |        |         |  |       |        |           |  |      
|Revenue from external customers: |  |               |        |         |  |       |        |           |  |       |        |  |  |   |       |  |  |   |         | 
|                                
|                                
|                                
|                                
|Three months ended June 30, 2001 |  | $             | 32,220 |         |  | $     | 9,839  |           |  | $     | 2,551  |  |  | $ | 4,254 |  |  | $ | 48,864  | 
|                                
|                                
|                                
|                                
|Three months ended July 1, 2000  |  | $             | 40,866 |         |  | $     | 12,124 |           |  | $     | 4,446  |  |  | $ | 4,129 |  |  | $ | 61,565  | 
|                                
|                                
|                                
|                                
|Six months ended June  30, 2001. |  | $             | 63,483 |         |  | $     | 20,306 |           |  | $     | 6,852  |  |  | $ | 7,829 |  |  | $ | 98,470  | 
|                                
|                                
|                                
|                                
|Six months ended July 1, 2000.   |  | $             | 77,693 |         |  | $     | 28,801 |           |  | $     | 11,695 |  |  | $ | 8,579 |  |  | $ | 126,768 | 
|                                
|                                
|                                
|                                
|Long-lived assets:               |  |               |        |         |  |       |        |           |  |       |        |  |  |   |       |  |  |   |         | 
|                                
|                                
|                                
|                                
|As of June 30, 2001.             |  | $             | 14,088 |         |  | $     | 1,915  |           |  | $     | 887    |  |  | $ | 158   |  |  | $ | 17,048  | 
|                                
|                                
|                                
|                                
|As of July 1, 2000.              |  | $             | 85,736 |         |  | $     | 3,125  |           |  | $     | 2,039  |  |  | $ | 297   |  |  | $ | 91,197  | 

9



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)

(Dollars in thousands, except share data)


10.     Other
Charges

During the quarter ended June 30, 2001, the
Company incurred an approximate $1,400 charge related to
headcount reduction of which approximately $700 was paid during
the quarter, with a remaining accrual of approximately $700 as
of June 30, 2001. The headcount reduction charge is
included in the loss from operations for the second quarter of
2001. It is anticipated that this reduction will reduce future
quarterly operating expense by approximately $1,750.

Also during the second quarter of 2001, the
Company incurred an approximate $2,800 in professional fees
related to acquisition activities. The Company paid
approximately $400 of these costs during the second quarter,
with an approximate accrual of $2,400 as of June 30, 2001.
The approximate $2,800 charge for acquisition costs is included
in other income (expense), net for the second quarter of 2001.

11.     Litigation

SEC
Investigation

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

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

12.     Merger
Agreement

On May 24, 2001, the Company announced an
agreement under which Polycom, Inc. will acquire PictureTel.
Under the terms of the agreement, Polycom commenced an offer to
purchase all of the outstanding shares of PictureTel for a
combination of 0.1177 shares of Polycom common stock and $3.11
in cash to be exchanged for each share of PictureTel. The offer,
when closed, will be followed by a merger in which Polycom
common stock and cash will be issued at the same exchange ratio
paid in the offer. Consummation of the acquisition transaction
is subject to customary closing conditions, including, but not
limited to the tender of a majority of shares by Company
stockholders and expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvement Act. On
July 16, 2001, the companies announced that the Department
of Justice had requested additional information and documentary
material in connection with its review of the proposed
transaction. The request will extend the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act. The companies
are in the process of responding promptly to such request and
still anticipate closing the transaction in the third or fourth
quarter, on the timetable originally announced on May 24,
2001. There can, however, be no assurance that the closing
conditions will be satisfied, that Company stockholders will
tender a majority of shares or that regulatory requirements will
be satisfied. Therefore, there can be no assurance that the
acquisition transaction will actually be consummated, in which
case the Company will remain an independent entity.

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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, operating and capital requirements and
contemplated closing under the merger agreement with Polycom.
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 second quarter of 2001, the Company
entered into several business agreements and launched its latest
product in the iPower family. On April 30, 2001, the
Company announced it had started shipping the PictureTel 600
SeriesTM. The solution is the second product in the
iPowerTM family, following the introduction of the
PictureTel 900 SeriesTM in July 2000.
iPowerTM is a breakthrough integrated collaboration
architecture developed jointly by PictureTel and Intel
Corporation. Since the July 2000 iPowerTM
introduction, total iPowerTM unit sales have
increased each consecutive quarter. Although iPowerTM
unit sales have increased, sales of the new 600
SeriesTM, which has a lower average selling price,
have resulted in an overall lower average selling price for the
iPowerTM products and a lower overall margin. Margins
in the second quarter of 2001 were somewhat below margins in the
first quarter of 2001.

On May 8, 2001, the Company announced an
agreement with First Virtual Communications and CUseeMe
Networks, for a strategic technology, marketing, and
distribution alliance that is expected to deliver an end-to-end
rich media collaboration solution for enterprises and service
providers. Under the terms of the agreement, PictureTel will
provide engineering personnel and a license for its
PurePointTM rich media communications solution to
First Virtual Communications. In consideration of technology,
marketing and sales contributions, PictureTel will receive a
technology license, which is anticipated to allow the Company to
broaden its endpoint product line, and warrants of up to 15% of
First Virtual Communications current outstanding common
stock, exercisable upon PictureTels achievement of
specified milestones. The transaction was finalized by a
strategic alliance agreement executed on July 27, 2001.

In addition, on May 24, 2001, the Company
announced an agreement under which Polycom, Inc. will acquire
PictureTel. Under the terms of the agreement, Polycom commenced
an offer to purchase all of the outstanding shares of PictureTel
for a combination of 0.1177 shares of Polycom common stock and
$3.11 in cash to be exchanged for each share of PictureTel. The
offer, when closed, will be followed by a merger in which
Polycom common stock and cash will be issued at the same
exchange ratio paid in the offer. Consummation of the
acquisition transaction is subject to customary closing
conditions, including, but not limited to, the tender of a
majority of shares by Company stockholders and expiration or
termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act. On July 16, 2001, the companies
announced that the Department of Justice had requested
additional information and documentary material in connection
with its review of the proposed transaction. The request will
extend the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act. The companies are in the process of responding
promptly to such request and still anticipate closing the
transaction in the third or fourth quarter, on the timetable
originally announced on May 24, 2001. There can, however,
be no assurance that the closing conditions will be satisfied,
that Company stockholders will tender a majority of shares or
that regulatory requirements will be satisfied. Therefore, there
can be no assurance that the acquisition transaction will
actually be consummated, in which case the Company will remain
an independent entity.

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Also during the second quarter of 2001, to help
improve liquidity, the Company executed a restructuring plan
that included a 9% worldwide headcount reduction. To this
regard, the Company incurred an approximate $1,400 charge during
the quarter, of which approximately $700 was paid during the
quarter. It is anticipated that this reduction will reduce
future quarterly operating expense by approximately $1,750.

In a continuing effort to focus company resources
on its core businesses, the Company has engaged Robertson
Stephens, an investment banking firm, to address alternatives
with respect to the disposition of the Companys network
operating centers.

As set forth below, the Company reported an
operating loss of $6,374 for the second quarter of 2001 and an
operating loss of $13,896 for the six months ended June 30,
2001. Cash used in operating activities for the two periods were
$7,754 and $13,594, respectively.

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        |        | Six Months Ended
|                                    |  |              |        |                 
|                                    |  | June 30,     |        | July 1,          |  | June 30, |        | July 1,
|                                    |  | 2001         |        | 2000             |  | 2001     |        | 2000   
|                                    |  |              |        |                  |  |          |        |        
|Revenue                             |  |              | 100.0% |                  |  |          | 100.0% |         |  |  | 100.0% |   |  |  | 100.0% |  
|                                   
|                                   
|                                   
|                                   
|Cost of revenue                     |  |              | 68.1   |                  |  |          | 89.3   |         |  |  | 66.1   |   |  |  | 80.8   |  
|                                   
|                                   
|                                   
|                                   
|Gross margin                        |  |              | 31.9   |                  |  |          | 10.7   |         |  |  | 33.9   |   |  |  | 19.2   |  
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |              | 32.3   |                  |  |          | 48.8   |         |  |  | 34.4   |   |  |  | 45.3   |  
|                                   
|                                   
|                                   
|                                   
|Research and development            |  |              | 12.6   |                  |  |          | 22.1   |         |  |  | 13.6   |   |  |  | 21.3   |  
|                                   
|                                   
|                                   
|                                   
|Total operating expense             |  |              | 44.9   |                  |  |          | 70.9   |         |  |  | 48.0   |   |  |  | 66.6   |  
|                                   
|                                   
|                                   
|                                   
|Loss from operations                |  |              | (13.0  | )                |  |          | (60.2  | )       |  |  | (14.1  | ) |  |  | (47.4  | )
|                                   
|                                   
|                                   
|                                   
|Interest income (expense), net      |  |              | 0.8    |                  |  |          | (1.0   | )       |  |  | 1.0    |   |  |  | (0.7   | )
|                                   
|                                   
|                                   
|                                   
|Other income (expense), net         |  |              | (6.1   | )                |  |          | 0.8    |         |  |  | (3.1   | ) |  |  | 0.6    |  
|                                   
|                                   
|                                   
|                                   
|Loss before income tax expense      |  |              | (18.3  | )                |  |          | (60.4  | )       |  |  | (16.2  | ) |  |  | (47.5  | )
|                                   
|                                   
|                                   
|                                   
|Income tax expense                  |  |              | 0.6    |                  |  |          | 1.3    |         |  |  | 0.7    |   |  |  | 1.3    |  
|                                   
|                                   
|                                   
|                                   
|Net loss                            |  |              | (18.9  | )                |  |          | (61.7  | )       |  |  | (16.9  | ) |  |  | (48.8  | )

Three Months
Ended June 30, 2001 Compared to Three Months Ended
July 1, 2000

Revenue.Consolidated second quarter 2001 revenue of $48,864 decreased
$12,701, or 21%, from second quarter 2000 levels.
Videoconferencing products revenue for the second quarter of
2001 was impacted primarily by an approximate $4,500 decline in
personal/desktop system sales, where the Companys current
product offerings in this market category are very limited.
Additionally, second quarter 2000 revenue included $7,093 from
the Companys audioconferencing segment, MultiLink, Inc.,
which was sold in the fourth quarter of 2000. Service revenue
declined during the second quarter as the result of decreased
sales of spare parts, hosting of multipoint videoconference
calls and maintenance contracts. Revenue from sales to foreign
markets was approximately 43% and 40% of total revenue during
the second quarters of 2001 and 2000, respectively.

Gross
Margin.Overall second
quarter 2001 gross margin of $15,605 increased $9,028, or 137%,
from prior year levels and represented 32% of revenue versus 11%
in the second quarter of 2000. Gross margin for the second
quarter of 2000 was reduced by charges of $4,721 necessary to
reduce inventory to net realizable value and an impairment
charge of $5,020 to write-down purchased software. Additionally,
second quarter 2000 margin included $4,525 from the MultiLink
operations, however this amount has been partially offset by a
decrease in gross margin resulting from the decline in
personal/desktop system sales in the second quarter of 2001.

Operating
Expense.Second quarter
2001 operating expense of $21,979 decreased $21,694, or 50%,
from a comparable prior year level of $43,673. As a percent of
revenue, second quarter 2001 operating expense

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represented 45% of revenue while second quarter
2000 operating expense represented 71% of revenue. Selling,
general and administrative expense decreased $14,286, or 47%, to
$15,791 for the second quarter of 2001 compared to $30,077 for
the second quarter of 2000. Research and development decreased
$7,408, or 54%, to $6,188 for the second quarter of 2001
compared to $13,596 for the second quarter of 2000. The decline
in operating expense is primarily the result of initiatives
taken by the Company over the past twelve months to reduce
operating expense, including headcount reductions and real
estate consolidation, along with the elimination of expenses
associated with the Companys Starlight division and
audioconferencing segment, MultiLink, Inc., which were sold in
the fourth quarter of 2000. Operating expense for the second
quarter of 2000 included an impairment charge of $4,139 related
to the write-down of goodwill, tradename and assembled workforce.


Income
Taxes.The Companys
effective income tax rate was 3.0% in the second quarter of 2001
compared to 2.1% in the second quarter of 2000. The tax rate in
both periods relates to state and/or foreign taxes.

Videoconferencing Products and Videoconferencing
Services

Videoconferencing
Products.The
videoconferencing products segment develops, manufactures, and
markets a full range of videoconferencing and advanced
collaboration solutions. Videoconferencing products scale from
personal/desktop systems to large conference room solutions,
depending primarily on differences in the peripherals that are
utilized with the core systems. Additionally, the segment
markets a wide range of network infrastructure products and
peripheral devices. Videoconferencing products revenue was
$31,683 for the second quarter of 2001. This represents a
decrease of $4,581, or 13%, compared with the second quarter of
2000. The decrease is largely attributable to a decrease in
sales of personal/desktop systems, as current product offerings
in this market category are very limited. The Company
anticipates the introduction of personal/desktop products based
on its iPowerTM architecture in 2002. Currently the
Company offers two room system product lines based on the
iPowerTM architecture, the PictureTel 900
SeriesTM and the PictureTel 600 SeriesTM.

Videoconferencing system units sold during the
second quarter of 2001 were 61% less than the comparable quarter
in the prior year. A 7% increase in larger or room systems was
more than offset by an 87% decrease in smaller or
personal/desktop systems during the second quarter of 2001 as
compared to the second quarter of 2000.

The videoconferencing products segment generated
an operating loss of $8,577 during the second quarter of 2001
compared to a $34,308 operating loss in the second quarter of
2000. The operating loss in the second quarter of 2000 included
a charge of $4,721 to reduce PC-based videoconferencing systems
inventory to net realizable value and an impairment charge of
$9,159 related to the write-down of certain intangible assets.
Second quarter 2001 operating results positively reflected
initiatives taken by the Company over the past twelve months to
reduce future operating expense, including headcount reductions,
real estate consolidation, disposition of an under-performing
non-core business division, along with reductions in overall
general and capital expenditures.

Videoconferencing
Services.The
videoconferencing services segment provides maintenance as well
as professional consulting and management services for
videoconferencing products sold by the Company and its
competitors. Segment revenue decreased 7% from $18,208 in the
second quarter of 2000 to $16,987 in the second quarter of 2001.
The decrease in service revenue is primarily attributed to a
decrease in sales of spare parts, multipoint videoconference
hosting and maintenance contracts.

Operating income was $6,283 in the second quarter
of 2001 compared with operating income of $2,748 in the
comparable prior year period, representing a 129% increase.
Increased profitability was due to decreased costs in all areas.

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Six Months
Ended June 30, 2001 Compared to Six Months Ended
July 1, 2000

Revenue.Total revenue of $98,470 decreased $28,298, or 22%, during the
six months ended June 30, 2001 compared to the comparable
six months of 2000. Videoconferencing products revenue for the
first half of 2001 was impacted primarily by an approximate
$6,400 decline in personal/desktop system sales, where the
Companys current product offerings in this market category
are very limited. Also impacting revenue during the first half
of 2001, was a decrease in unit sales of legacy systems, which
was not offset by an increase in new system product sales.
Additionally, revenue for the first half of 2000 included $9,323
from the Companys audioconferencing segment, MultiLink,
Inc., which was sold in the fourth quarter of 2000. Service
revenue declined during the first half of 2001, as compared to
the comparable period in 2000, as the result of decreased sales
of spare parts, hosting of multipoint videoconference calls and
maintenance contracts. Revenue from sales to foreign markets was
approximately 44% and 46% of total revenue during the six months
ended June 30, 2001 and July 1, 2000, respectively.

Gross
Margin.Overall gross
margin increased $9,088 to $33,384 in the six months ended
June 30, 2001 compared to the comparable period in 2000.
Gross margin as a percentage of revenue increased to 34% from
19% for the period ended June 30, 2001 as compared to the
comparable period in 2000. Gross margin for the first half of
2000 was reduced by charges of $6,006 necessary to reduce
inventory to net realizable value and an impairment charge of
$5,020 to write-down purchased software. Additionally, first
half 2000 margin included $4,723 from the MultiLink operations,
however this amount has been partially offset by a decrease in
gross margin resulting from the decline in personal/desktop
system sales and lower margin dollars associated with the
decline in service revenue in the first half of 2001.

Operating
Expense.Operating expense
for the first six months of 2001 totaled $47,280, representing a
decline of $37,155, or 44%, compared to the first six months of
2000. As a percent of revenue, first half 2001 operating expense
represented 48% of revenue while first half 2000 operating
expense represented 67% of revenue. Selling, general and
administrative expense decreased $23,478, or 41%, to $33,908 for
the six months of 2001 compared to $57,386 for the first six
months of 2000. Research and development decreased $13,677, or
51%, to $13,372 for the first half of 2001 compared to $27,049
for the first half of 2000. The decline in operating expense is
primarily the result of initiatives taken by the Company over
the past twelve months to reduce future operating expense,
including headcount reductions and real estate consolidation,
along with the elimination of expenses associated with the
Companys Starlight division and audioconferencing segment,
MultiLink, Inc., which were sold in the fourth quarter of 2000.

Income
Taxes.The Companys
effective income tax rate for the six months ended June 30, 2001
was 4.3% as compared with 2.7% for the comparable period in
2000. The effective tax rate in both years relates to foreign
and/or state taxes.

Videoconferencing Products and Videoconferencing
Services

Videoconferencing
Products.Videoconferencing
products revenue totaled $65,539 for the first six months of
2001, which represents a $15,500, or 19%, decrease from the
first six months of 2000. Though average selling prices for
personal/desktop systems were higher during the first half of
2001 as compared to the first half of 2000, this increase was
offset by a decline in personal/desktop units sold. Also
contributing to the large revenue decline was a decrease in
legacy product sales of room systems that was not offset by
sales of PictureTels new 900 SeriesTM and 600
SeriesTM product offerings, which have lower average
selling prices as compared to the legacy systems. Total
videoconferencing system units sold during the first half of
2001 declined across all product lines, with a 7% decrease in
room systems and a 79% decrease in personal/desktop systems.

The videoconferencing products segment operating
loss decreased to $15,045 during the first six months of 2001
compared to $49,970 operating loss during the first six months
of 2000. The decrease in operating loss during the first half of
2001 is in part attributed to lower engineering costs resulting
from completion of the iPowerTM architecture
development. In addition, a reduction in selling, general and
administrative expense, resulting from on-going efforts to
reduce expenses on a worldwide basis, along with the elimination
of

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operating expense related to the Companys
Starlight division sold in the fourth quarter of 2000, also
contributed to the decrease in operating loss.


Videoconferencing
Services.Videoconferencing
services revenue decreased from $36,406 during the first six
months of 2000 to $32,695 during the first six months of 2001, a
10% decrease. The decrease was attributable to an increase in
sales of custom integration services which was more than offset
by a decrease in sales of spare parts, multipoint
videoconference hosting and maintenance contracts.

Segment operating income for the first six months
of 2001 was $10,262 compared with $4,209 in the same prior year
period, an increase of $6,053, or 144%. Increased profitability
was due to decreased costs in all areas.

Liquidity and Capital Resources

At June 30, 2001, the Company had $40,525 in
cash and cash equivalents. Operating activities used $13,594 of
cash during the first half of 2001 compared with a $17,340 use
in the comparable period in 2000. The primary operating use of
cash during the first half of both years was to fund operating
losses in excess of non-cash expense. Changes in working capital
resulted in a $5,735 usage of cash during the first half of 2001
compared to generating $11,192 of cash during the first half of
2000. The Company paid $1,721 of accrued severance and
restructuring charges during the first six months of 2001 and
had a remaining accrual in the amount of $1,113 for such items
as of June 30, 2001 that will be paid over the next eleven
months.

Investing activities used $1,244 of cash in the
first half of 2001 compared with $34,331 provided in the
comparable prior year period. The usage in the first half of
2001 is principally attributable to the purchase of property and
equipment. This usage is approximately 64% less than the
comparable 2000 figure, as the Company has sharply curtailed
spending on property and equipment. Changes in marketable
securities balances were the principal source of cash provided
by investing activities in the first half of 2000. During the
first half of 2001, the Company held no marketable securities.

Financing activities provided $11,456 of cash in
the first half of 2001, primarily due to proceeds from
borrowings in excess of an increase in restricted cash balances.
During the first half of 2000 the Companys financing
activities used $18,481 of cash, primarily due to an increase in
restricted cash balances in excess of proceeds from borrowings.

In February 2001, the Company received a
report from its independent accountants containing an
explanatory paragraph stating that its recurring losses and
requirement for additional financing raise substantial doubt
about our ability to continue as a going concern as an
independent company. Managements plans to continue as a
going concern as an independent entity rely heavily on
forecasted revenue from products that were released in the third
quarter of 2000 and in April 2001. Management is also
continuing to identify and implement internal actions to improve
the Companys liquidity.

Cash utilization continues to be a major concern
for the Company. During the past twelve months, the Company
raised $21,845 of cash through equity financing (July, 2000),
$26,000 from the sale of its MultiLink subsidiary (November,
2000) and $41,500 in cash (subject to certain restrictions on
its usage) through interim merger financing from
Polycom (June, 2001). Along with these steps, the Company has
significantly reduced its operating expenses through various
measures, including workforce reductions, real estate
consolidation, disposition of an under-performing non-core
business division, as well as reductions in working capital
investments. In this regard, the transaction with First Virtual
Communications, which closed on July 27, 2001 with the
signing of the Strategic Alliance Agreement, and the proposed
disposition of the network operating centers (as to which there
is no guarantee that it will be consummated) may not generate
cash, except to the extent that consideration for these
transactions may have value at some point in the future, at
which time they may be turned into cash. The disposition of
these assets should, however, reduce the use of operating cash.
As noted above, the Companys management is continuing to
identify and implement internal actions to improve liquidity.
Most importantly, the Companys management and Board of
Directors approved the Merger Agreement with Polycom and, in
connection therewith, obtained the interim merger
financing described below. There can be no assurance that,
should the merger with Polycom not close for any reasons, the
Companys revenue from the new products and the
interim merger financing, obtained in connection
with and after termination of such merger agreement, will be
sufficient to maintain liquidity.

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To help improve liquidity, the Company executed a
restructuring plan during the second quarter of 2001 that
included a 9% worldwide headcount reduction. To this regard, the
Company incurred an approximate $1,400 charge during the
quarter, of which approximately $700 was paid during the
quarter. It is anticipated that this reduction will reduce
future quarterly operating expense by approximately $1,750.

The Company entered into an asset-based secured
revolving credit agreement dated August 21, 2000, which
will expire on August 21, 2003. This credit facility
provides a revolving credit line of up to $35,000 with Congress
Financial Corporation (New England). In connection with the
merger agreement with Polycom, the Company amended the Loan and
Security Agreement on June 15, 2001. The amendment allowed
for the issuance of up to $15,000 of senior convertible notes
 Series A and $34,900 of senior convertible notes
 Series B to Polycom and for the granting of second
position security for the senior convertible notes. In addition
to the consent to the merger, the amendment suspended any
availability for revolving loans that would have been available
otherwise under the line. The Company has $8,000 of outstanding
standby letters of credit issued under this agreement as of
June 30, 2001. Polycom has issued to Congress Financial
Corporation an irrevocable standby letter of credit equal to
105%, or $8,400, to secure the outstanding letters of credits
issued under this agreement. As a result, cash subject to the
cash collateral requirement of $8,400 was released and made
available to the Company to fund ongoing operations. Fees for
letters of credit outstanding against this facility are payable
at 225 basis points per annum of the face amount. The secured
letters of credit expire between September 2001 and
March 2002. This credit agreement also contains certain
financial covenants, including minimum net worth and working
capital requirements.

In connection with the merger agreement, the
Company has entered into a note agreement with Polycom providing
for interim merger financing as specified. The
Company issued to Polycom a Series A senior convertible
note having an original principal amount of $6,600 and a
Series B senior convertible note having an original
principal amount of $34,900. The principal amount of the
Series A note is subject to increase from time to time to
the extent of any draws on the backup letter of credit obtained
by Polycom, up to a maximum aggregate principal amount of
$15,000. The face amount of the letter of credit obtained by
Polycom is $8,400 and the face amount declines over time as the
letters of credit it is backing expire, as referenced in the
preceding paragraph. The proceeds of the Series B note,
which are classified as restricted on the Companys balance
sheet at June 30, 2001, are held in an account (the
Account) in which Polycom has first priority
interest, subject to no other liens (See Note 2.). The note
agreement permits the Company to withdraw funds from the Account
upon meeting certain withdrawal criteria. As of June 30,
2001, the Company has not met the withdrawal criteria to draw
funds from the Account. Interest accrues at a rate of 8% per
annum and is payable quarterly under the Series A note. As
of June 30, 2001, the balance under the Series A note,
including accrued interest, was $6,623. Interest on the
Series B note is payable quarterly and accrues at a rate of
8% per annum, except to the extent funds are held in the
Account, interest accrues on the funds at a rate equal to the
interest payable to the Company on the Account. Accrued interest
on the Account amounted to $50 as of June 30, 2001.
Interest on both notes may be paid in cash or in kind by issuing
a note in substantially the form as the Series A note or
the Series B note, as applicable, except that the payment
in kind note is not convertible. Interest on any payment in kind
note accrues at a rate of 8% per annum and is payable in cash or
in kind. The Series A note is due on June 15, 2003 and
to the extent not automatically converted pursuant to the terms
of the note, the principal of the Series B note is payable
in four quarterly installments beginning August 31, 2004,
with the final installment due on May 31, 2005.

The Series A and Series B notes are
convertible by the holder into common stock at any time after
the termination of the merger agreement and prior to the
repayment in full of the principal amount of the note. The
conversion rate is 222.22 shares of common stock for each $1,000
in principal amount of the note (or $4.50 per share), except
that if the transactions contemplated by the merger agreement
are not completed for certain reasons, the conversion rate is
164.74 shares of common stock for each $1,000 in principal
amount (or $6.07 per share).

Both notes are subject to redemption at the
election of the Company, in whole or in part, upon not less than
30 or more than 60 days notice at a redemption price equal
to 100% of the principal amount plus accrued interest. In
addition, the holder of the notes may require the Company to
repurchase them upon a change in control or other repurchase
events described in the notes. The repurchase events arise from
the termination of

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the merger agreement under specified
circumstances. The notes also contain certain events of default
and covenants.


The Company has granted a security interest in
favor of Polycom on substantially all of its assets to secure
its obligations under the notes. The Companys obligations
to Polycom under the notes are subordinated to the obligations
of the Company to Congress Financial Corporation (New England)
under the Loan and Security Agreement dated August 21, 2000.

Local lines of credit of up to $1,364 are
available to certain of the Companys foreign subsidiaries
for short-term advances. The agreements require interest payable
up to one and three-quarter percent per annum. There were no
borrowings outstanding against these local lines of credit at
June 30, 2001.

Recently Issued Accounting
Pronouncements

In July 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141,
Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142
requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwills impairment and that
intangible assets other than goodwill be amortized over their
useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all
business combinations accounted for by the purchase method for
which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, in fiscal year 2002. The
Company has not completed its evaluation, but anticipates that
the adoption of these pronouncements will not have an impact on
the Companys financial statements.

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.

Acquisition agreement with Polycom,
Inc.On
May 24, 2001 the Company and Polycom, Inc. announced the
signing of a definitive agreement under which Polycom will
acquire the Company (the Acquisition Transaction).
Under the terms of the agreement, Polycom commenced an offer to
purchase all of the outstanding shares of the Company for a
combination of 0.1177 shares of Polycom common stock and $3.11
in cash to be exchanged for each share of the Company. The
offer, when closed, will be followed by a merger in which
Polycom common stock and cash will be issued at the same
exchange ratio paid in the offer. Consummation of the
acquisition transaction is subject to customary closing
conditions, including, but not limited to the tender of a
majority of shares by Company stockholders and expiration or
termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act. There can, however, be no assurance
that the closing conditions will be satisfied, that Company
stockholders will tender a majority of shares or that regulatory
requirements will be satisfied. Therefore, there can be no
assurance that the Acquisition Transaction will actually be
consummated, in which case the Company will remain an
independent entity.

Operation as an Independent Business Entity.Until such time as the Acquisition
Transaction is consummated, and in the event that the
Acquisition Transaction does not close, the Company will
continue to be subject to risk factors in its operation as an
independent entity, similar to those risk factors that it has
encountered in the recent past, including the following:

New Products, Cost Reductions, Technological
Change, New Entrants, and Evolving Markets.The Company is engaged in an industry
that is still emerging as a result of extensive research and
development efforts and which continues to bring to market new,
more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications
market is in a heightened competitive state due to deregulation
throughout the world. In order to maintain its market share in
this fast-paced emerging market, the Company must continue to
introduce, through internal development or by acquisition, joint

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venture or other collaborative arrangements,
significant innovative, technologically leading and
cost-competitive products. There can be no assurance that such
new products will be introduced by the Company, or if
introduced, will be accepted by the market and its customers or
that such products will be sold at margins that would be
sufficiently profitable, thereby eliminating both operating
losses and cash losses, both of which are continuing to occur in
2001. In January 1999, the Company entered into a
distribution and joint product development agreement with Intel
Corporation, pursuant to which the companies developed the
PictureTel iPowerTM architecture. The Company began
shipping the first iPowerTM product (known as the
PictureTel 900 SeriesTM) in mid August 2000.
Also in August 2000, the Company entered into a joint
design and manufacturing partnership with Sharp to develop
iPowerTM-based visual and audio collaboration tools.
On April 30, 2001, the Company began shipping the first of
these new products, the PictureTel 600 SeriesTM. This
PC-based videoconferencing solution in a compact package is the
second product series in the iPower family. There can, however,
be no assurance that the products produced by this partnership
will be accretive to the Companys results of operations
and financial condition or, if accretive, will by themselves
return the Company to profitability both in terms of operating
results and cash generation. In addition to offering products
that operate in an integrated service digital network
(ISDN) environment, the Company and its competitors are
exploring new technologies and networks, such as the Internet
and corporate intranets or LANs, for delivering
videoconferencing and data collaboration services. The industry
standards for such new technologies and networks, however, are
still in the early stages of development, which the Company
believes has led to customer uncertainty and, accordingly, a
slowdown in the growth of the general market for
videoconferencing products. As a result of customer preferences,
the Company continues to experience a shift in its sales model
to videoconferencing systems with lower average selling prices.
There can be no assurance that the Company will be successful in
implementing cost reductions for all of its products or in
developing and marketing suitable new products and related
services with attractive margins for these new technologies and
networks. The possible transition, migration and/or convergence
of technologies are difficult to predict and could have profound
implications for the industry and the business of the Company.
Further, there is significant risk that existing products could
be rendered obsolete due to changing technology and new entrants
into the marketplace, including the announced entry by Microsoft
for late in 2001. The Companys failure to develop and
market new products on a timely basis or to enhance its existing
products or to respond effectively to technological changes, new
industry standards or product announcements by competitors could
have a material adverse effect on the Companys business,
financial condition and results of operations. The Company
announced on May 8, 2001, its intention to license its
PurePointTM technology to First Virtual
Communications (FVC). In return, the Company will receive a
technology license and warrants in FVC. There can be no
assurance that the technology from FVC will be beneficial to
PictureTel or that the warrants will have any value. The
transaction was finalized by a strategic alliance agreement
executed on July 27, 2001.


Competition.The increased competition resulting
from partnerships and acquisitions by and with our competitors,
together with mergers among competitors and with new entrants
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 for its various 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

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from time to time enters into development
arrangements with third parties to develop and incorporate new
features and functions into the Companys products. Failure
of these third parties to fulfill their respective obligations
under these development arrangements could have a material
adverse effect on the Companys business, financial
condition and results of operations. The Companys business
could also be adversely affected by delays or interruptions in
delivery, and poor quality of supplies, subassemblies or
products from key vendors. In addition, the Company designs and
procures certain circuits, components and subassemblies from
non-videoconferencing divisions of its competitors, such as
Sharp, Sony and Panasonic Corporation. The failure to obtain
adequate supplies or the requirement to redesign and source
supplies from another manufacturer may take substantial time and
result in significant expense, each of which could adversely
impact product shipments and materially and adversely affect the
Companys business, financial condition or results of
operations.


Recent History of Losses and Liquidity
Risks.Revenue for the second quarter of 2001 was flat compared with
the first quarter 2001, while the Company reported a 21%
decrease in revenue for the second quarter of 2001 as compared
to the second quarter of 2000. Losses from operations were
$6,374 and $37,096 for the second quarter of 2001 and 2000,
respectively, representing an 83% decrease in losses from
operations. Losses from operations in the second quarter of 2001
of $6,374 compare with losses from operations in the first
quarter of 2001 of $7,523.

Liquidity is a major priority for the Company.
The Companys negative operating results have adversely
impacted the Companys relationship with customers, vendors
and employees, as well as its liquidity. Further negative
operating results could affect the Companys ability to
remain in compliance with covenants under its revolving credit
agreement (under which no borrowings are presently permitted)
and further diminish its liquidity. In February 2001, the
Company received a report from its independent accountants for
the year ended December 31, 2000 containing an explanatory
paragraph stating that our recurring losses and requirement for
additional financing raise substantial doubt about our ability
to continue as a going concern as an independent company.
Managements plans to continue as a going concern as an
independent company rely heavily on forecasted revenue from
products that were released in the third quarter of 2000 and in
April 2001 and on continued implementation of cost
reductions. In addition, in connection with the merger agreement
with Polycom, the Company entered into a note agreement whereby
the Company issued to Polycom two series of notes, generating
for the Company cash and credit guarantees of $49,900, of which
$34,900 is restricted, usable only under specified terms,
pursuant to certain conditions (See Liquidity and Capital
Resources, above). As of June 30, 2001, the Company has not
met the specified terms and conditions. However, there can be no
guarantee that the above-mentioned revenue will occur (product
revenue in the second quarter of 2001 was below first quarter
2001 levels, and 2001 revenue to date has been below the earlier
forecasted amounts). Cash used in operating activities was
$5,840 and $7,754 in the first and second quarters of 2001,
respectively. There can be no assurance that, should the merger
with Polycom not close for any reasons, the Companys
revenue from the new products and the interim merger
financing, obtained in connection with and after
termination of such merger agreement, will be sufficient to
maintain liquidity.

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

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

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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 shipments typically
occur during the last weeks of each quarter such that
forecasting of revenue and product mix is both complex and
difficult. Unanticipated variations in the timing of receipt of
customer orders or deferral of revenue in any quarter may
produce significant fluctuations in quarterly revenues. As a
result, a shortfall in revenue compared to internal forecasts
and expectations may not evidence itself until late in the
quarter and any resulting impact on earnings/losses may not be
determinable until several weeks after the end of the quarter.
The Companys ability to maintain or increase net revenue
depends upon its ability to increase unit volume sales and
achieve acceptable margins for those sales. Gross margin as a
percentage of net revenue was somewhat lower in the second
quarter of 2001 (32%) than in the first quarter of 2001 (36%).
There can be no assurance that the Company will be able to
increase or to maintain the current level of unit volume sales
or margins. Other factors which may cause period-to-period
fluctuations in operational results include the timing of new
product announcements and introductions by the Company and its
competitors, including new entrants, market acceptance of new or
enhanced versions of the Companys products, changes in the
product mix of sales, changes in the relative proportions of
sales among distribution channels or among customers within each
distribution channel, changes in manufacturing costs, and
general economic factors, such as current recessionary trends
and currency fluctuations.

International
Operations.
Revenue related to international operations of
the Company totaled approximately 43% and 40% of total revenue
for the quarters ended June 30, 2001 and July 1, 2000,
respectively. Revenue related to international operations of the
Company totaled approximately 44% and 46% of total revenue for
the six month period ended June 30, 2001 and July 1,
2000, respectively. Management of the Company expects
international revenue to continue to constitute a significant
portion of total revenue in future periods. However, there can
be no assurance that the Company will be able to maintain or
increase international market demand for its products and, to
the extent the Company is unable to do so, its business,
financial condition, results of operations or cash flows could
be materially adversely affected. The Companys sales to
international distributors are denominated in U.S. dollars in
order to minimize risks associated with fluctuating foreign
currency rates. An increase in the value of the U.S. dollar
relative to other currencies, however, could make the
Companys product more expensive and, therefore,
potentially less competitive in foreign markets. Sales by the
Companys foreign subsidiaries are generally made in the
foreign subsidiarys local currency, in which case
fluctuations in the value of the U.S. dollar relative to such
other currencies could have a material adverse effect on the
operating results of the Company. Currently, the Company employs
various currency hedging strategies to reduce these risks. In
addition, a significant portion of the Companys revenue is
derived from Asian markets. Given the current general weakness
in the Asian markets, there can be no assurance that the Company
will be able to sustain current revenue levels or growth in such
markets. There can be no assurance that the above factors will
not have a material adverse effect on the Companys future
international sales and, consequently, on its business,
financial condition, results of operations or cash flows.

Volatility of Stock
Price.As
is frequently the case with the stocks of high technology
corporations, the market price of PictureTel Common Stock has
been, and may continue to be, volatile. Factors such as
quarterly fluctuations in results of operations, increased
competition, the introduction of new products by the Company and
by its competitors, including new entrants, 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.

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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 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. On January 9, 2001 the Company
announced that Mr. Dalton Edgecomb would become its Chief
Financial Officer. In May 2001 Mr. Edgecomb became
Company Treasurer. The Company depends on a limited number of
key senior management personnel, including Norman Gaut; Lewis
Jaffe; Dalton Edgecomb; Jonathan Kosheff, Vice President,
Operations; Edward Semonite, Vice President, Marketing; Amit
Akkad, Vice President, Services; and David Snow, Vice President,
Worldwide Sales. There has been and continues to be considerable
turnover in the Companys senior management team over the
past several years, and the loss of the services of one or more
of the Companys senior management team or the inability to
attract, retain, motivate and manage additional key personnel
could have a material adverse effect on the business, financial
condition or operating results of the Company. In addition, the
Company has made redundant a number of positions and continues
to experience significant voluntary employee attrition from
engineering and other departments. There is no assurance, given
the competitive nature of the current job market, that the
Company will be able to adequately fill the open positions.




Item 3.     Quantitative and Qualitative Disclosures about Market
Risk

There were no material changes in the
Companys exposure to market risk from March 30, 2001.

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PART II  OTHER INFORMATION




Item 1.     Legal Proceedings

SEC Investigation

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

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




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

The Annual Meeting of Stockholders of the Company
was held on June 14, 2001. The Stockholders of the company
were asked to vote on the following items, and voted as follows:

Proposal I:     Election
of the Board of Directors

|                  |  |     |            |          |  |  |         | 
|----------------- |  | --- | ---------- | -------- |  |  | ------- | 
|                  |  | For |            | Withheld
|                  |  |     |            |         
|Norman E. Gaut    |  |     | 38,574,383 |          |  |  | 252,697 | 
|Robert T. Knight  |  |     | 38,587,607 |          |  |  | 239,473 | 
|Carl S. Ledbetter |  |     | 38,590,064 |          |  |  | 237,016 | 
|David B. Levi     |  |     | 38,588,649 |          |  |  | 238,431 | 
|Werner Schmucking |  |     | 38,592,919 |          |  |  | 234,161 | 
|Enzo Torresi      |  |     | 38,592,018 |          |  |  | 235,062 | 

Proposal II:     To
ratify the selection of PricewaterhouseCoopers LLP as the
Companys auditors for fiscal year 2001.

|           |  |         |         |         |  |  |        | 
|---------- |  | ------- | ------- | ------- |  |  | ------ | 
|For        |  | Against |         | Abstain
|           |  |         |         |        
|38,570,073 |  |         | 203,977 |         |  |  | 53,030 | 




Item 6.     Exhibits and Reports on Form 8-K

(a) Exhibits

|        |     |  |  |                                                                                                                                                                                                                                              
|------- | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     | 
|Number  |     | 
|        |     | 
|        | 2.1 |  |  | Agreement and Plan of Merger, dated as of
	May 24, 2001, among Polycom, the Purchaser and the Company
	(incorporated by reference to Exhibit 2.1 of the Polycom
	Registration Statement on Form S-4 filed on June 18,
	2001).                
|        | 2.2 |  |  | Voting and Tender Agreements, dated as of
	May 24, 2001, by and among Polycom and certain stockholders
	of the Company (incorporated by reference to Exhibit 2.2 of
	the Polycom Registration Statement on Form S-4 filed on
	June 18, 2001).
|        | 2.3 |  |  | Affiliate Agreements, dated as of May 24,
	2001 by and among Polycom and certain stockholders of the
	Company (incorporated by reference to Exhibit 2.3 of the
	Polycom Registration Statement on Form S-4 filed on
	June 18, 2001).         

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|        |         |  |  |                                                                                                                                                                                                                                    
|------- | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         | 
|Number  |         | 
|        |         | 
|        | 4.2.7   |  |  | Amendment No. 3 to the Rights Agreement,
	dated May 24, 2001, betweem the Company and Fleet National
	Bank, c/o EquiServe, as Rights Agent (incorporated by reference
	to Exhibit 1 of Form 8-K filed June 18, 2001).              
|        | 4.2.8   |  |  | Amendment No. 4 to the Rights Agreement,
	dated June 15, 2001, betweem the Company and Fleet National
	Bank, c/o EquiServe, as Rights Agent (incorporated by refernce
	to Exhibit 1 of Form 8-K filed July 11, 2001).              
|        | 4.3     |  |  | Note Agreement dated as of June 15, 2001,
	between the Company and Polycom (incorporated by reference to
	Exhibit  10.1 of the Polycom Registration Statement on
	Form S-4 filed June 18, 2001).                                   
|        | 4.4     |  |  | Series A Senior Convertible Note due 2003
	dated June 15, 2001 of the Company (incorporated by
	reference to Exhibit  99.6 of the Polycom Registration
	Statement on Form S-4 filed June 18, 2001).                                
|        | 4.5     |  |  | Series B Senior Convertible Note due 2005
	dated June 15, 2001 of the Company (incorporated by
	reference to Exhibit 99.7 of the Polycom Registration Statement
	on Form S-4 filed June 18, 2001).                                 
|        | 10.6.4  |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Norman Gaut
	(incorporated by reference to Exhibit 99.10 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001).     
|        | 10.19.2 |  |  | First Amendment to Loan and Security Agreement
	between PictureTel Corporation and Congress Financial
	Corporation (New England) as lender, dated June 15, 2001,
	filed herewith.                                                  
|        | 10.28.2 |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Lewis Jaffe
	(incorporated by reference to Exhibit 99.14 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001).     
|        | 10.29.2 |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Edward Semonite
	(incorporated by reference to Exhibit 99.12 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001). 
|        | 10.30.2 |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Jonathan Kosheff
	(incorporated by reference to Exhibit 99.11 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001).
|        | 10.31.2 |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and David Snow
	(incorporated by reference to Exhibit 99.9 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001).       
|        | 10.32.2 |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Dalton Edgecomb
	(incorporated by reference to Exhibit 99.13 of the Polycom
	Registration Statement on Form S-4 filed June 18,
	2001). 
|        | 10.34   |  |  | Amended and Restated Executive Officer Change in
	Control Agreement between the Company and Amit Akkad
	(incorporated by reference to Exhibit 99.8 of the Polycom
	Registration Statement on Form S-4 filed June 18, 2001).        
|        | 10.35   |  |  | Registration Rights Agreement between the Company
	and Polycom dated June 15, 2001 (incorporated by reference
	to Exhibit 10.2 of the Polycom Registration Statement on
	Form  S-4 filed June 18, 2001).                           
|        | 10.36   |  |  | Voting Agreement dated June 15, 2001 between
	Polycom and the Company (incorporated by reference to
	Exhibit 99.21 of the Polycom Registration Statement on
	Form S-4 filed June 18, 2001).                                        

(b)  Reports on Form 8-K

On May 25, 2001 the Company filed a report
on Form 8-K to announce that it had signed a definitive
agreement for the Company to be acquired by a subsidiary of
Polycom, Inc.

On June 18, 2001 the Company filed a report
on Form 8-K to announce that the Board of Directors of the
Company had approved an amendment to its shareholder Rights
Agreement. Pursuant to this Amendment, neither Polycom, Inc. nor
any of its affiliates would be considered to be an
Acquiring Person under the Rights Agreement, solely
to the extent that Polycom, or its affiliates, becomes a more
than 15% shareholder of the Company by virtue of the previously
announced acquisition agreement.

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SIGNATURE

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



| |                                              
| | ---------------------------------------------
| | PICTURETEL CORPORATION                       
|
| | /s/ DALTON EDGECOMB                          
| |                                              
| | Dalton Edgecomb                              
| | Chief Financial Officer                      
| | (Principal Financial and Accounting
	Officer)
|
| | August 14, 2001                              

24