##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K



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

For the fiscal year ended December 31, 2000

or



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

Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of Registrant as specified in its
Charter)


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

Registrants telephone number: (978) 292-5000

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

None

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

Common Stock

(Title and Class)


Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the last
90 days.  Yes  

  No

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

The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of March 9,
2001 was $140,313,102. On such date, the average of the high and
low price of the Common Stock was $3.13 per share. The
Registrant has 45,095,941 shares of Common Stock outstanding as
of March 9, 2001.

Documents Incorporated by Reference

Portions of the definitive 2001 Proxy Statement in connection
with the Annual Meeting of Stockholders to be held June 14,
2001 are incorporated by reference into Part III.

A list of all Exhibits to this Annual Report on Form 10-K
is located at 47 through 51.



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TABLE OF CONTENTS



|                                                                                           |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 
|PART II                                                                                   
|PRICE RANGE OF COMMON STOCK                                                               
|DIVIDEND POLICY                                                                           
|SELECTED FINANCIAL DATA                                                                   
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     
|INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                      
|REPORT OF INDEPENDENT ACCOUNTANTS                                                         
|CONSOLIDATED BALANCE SHEETS                                                               
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                     
|CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                
|REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE                         
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                                          
|PART III                                                                                  
|PART IV                                                                                   
|SIGNATURES                                                                                
|EX-3.1.1.1 CERTIFICATE OF DECREASE                                                        
|EX-10.6.3 CHANGE IN CONTROL AGREEMENT                                                     
|EX-10.29.1 CHANGE IN CONTROL AGREEMENT                                                    
|EX-10.30.1 CHANGE IN CONTROL AGREEMENT                                                    
|EX-10.31 EMPLOYMENT AGREEMENT                                                             
|EX-10.31.1 CHANGE IN CONTROL AGREEMENT                                                    
|EX-10.32 EMPLOYMENT AGREEMENT                                                             
|EX-10.32.1 CHANGE IN CONTROL AGREEMENT                                                    
|EX-10.33 CHANGE IN CONTROL AGREEMENT                                                      
|EX-21 SUBSIDIARIES OF THE REGISTRANT                                                      
|EX-23 CONSENT OF PRICEWATERHOUSECOOPERS LLP                                               



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Item 1.  Business

PictureTel Corporation (the Company or
PictureTel) is a world leader in developing,
manufacturing and marketing a full range of visual and audio
collaboration solutions. Visual collaboration employs
videoconferencing, video streaming and data collaboration
technologies to facilitate productive meeting environments that
may incorporate video, audio, and real-time and archived
multimedia data. The Companys products and services enable
businesses, schools, medical facilities, government and other
organizations to eliminate the barrier of distance so they can
work together more effectively. PictureTel markets a complete
line of videoconferencing systems, multi-location servers,
peripheral equipment and a full suite of enterprise-wide
services.

PictureTel is organized into two business segments. The business
segments are videoconferencing products and videoconferencing
services. The videoconferencing products direct sales
organization and its worldwide sales channels currently also
sell certain videoconferencing services offerings.

PictureTel is a Delaware corporation organized in 1984, with
executive offices at 100 Minuteman Road, Andover, Massachusetts
01810 (telephone: 978-292-5000).

Videoconferencing Products

The benefits of PictureTels business since the
Companys inception in 1984 has been the delivery of
business solutions which improve productivity and quality of
life by enhancing remote communications and reducing the costs
and hassle of travel. PictureTels core business has
evolved into development, manufacture and marketing of a
complete line of full-featured videoconferencing systems.
PictureTels videoconferencing systems deliver full-color
video and high fidelity, FM radio-caliber audio, so customers
can enjoy a natural, productive meeting environment whether they
are in the same office complex or halfway around the world from
each other. The video and audio signals are transmitted over
either digital telephone lines, most often ISDN (Integrated
Services Digital Network) lines, which are part of the public
switched telephone network, or networks that use the Internet
Protocol (IP). PictureTel has been, and remains, the world
technology leader in its industry with more than twelve thousand
organizations around the world using PictureTel systems to
conduct face-to-face meetings with colleagues, partners,
suppliers, customers and others.

The Company delivers a complete portfolio of products to the
marketplace and its channels, so that the videoconferencing
solution can be integrated into various network environments,
expanded to multipoint conferencing, and customized for vertical
and specialized applications and markets. The videoconferencing
elements are developed by PictureTel and the peripheral elements
are typically outsourced to third party manufacturers.

PictureTels group videoconferencing systems was completely
overhauled from 1997 to 2000 and the resulting breakthrough
development (iPower architecture) was introduced to the
market in mid 2000. iPower enables PictureTel to deliver to the
market a range of products at a range of price points using a
common software and hardware base. The PictureTel 900 Series was
the first product using iPower. iPower is a completely new
business tool which combines state of the art videoconferencing
with easy information sharing and with typical meeting room
tools and applications found in a conference room for extended
value even when videoconferencing is not being used. The Company
also continues to market its appliance type (single purpose)
set-top videoconferencing system, the PictureTel 760XL.
This model has roots back to 1996 when PictureTel created the
compact category of videoconferencing with the introduction of
SwiftSite, the worlds first compact
videoconferencing system. SwiftSite  and its follow-on
SwiftSite II and PictureTel 760XL models 
deliver high-quality performance in a simple, portable and
affordable package. These compact-class products, which sit on
top of the monitor to which they are connected, are optimized
for use in smaller offices. They have proven popular in field
sales offices, franchises and other similar locations where they
can complement the larger group systems deployed at headquarters
and other larger sites. The Company also markets Intel
Corporations TeamStation, a PC-based
videoconferencing system capable of operating on ISDN and IP
networks, under the terms of an exclusive distribution agreement.

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PictureTel also has a complete line of personal or desktop
videoconferencing systems. These systems, which add
videoconferencing capabilities to standard personal computers,
are suited for use by individuals who not only need to
videoconference with one or more sites, but also share any
number of PC documents through the systems data-conferencing
capabilities. PictureTels desktop systems run on the most
popular Microsoft® operating systems. PictureTel introduced
its first PC-based personal systems in 1994, when that segment
of the market was emerging. PictureTels personal systems
operate in much the same way as the Companys group
systems. PictureTel markets several different models of personal
videoconferencing systems under the PictureTel 550
Personal Videoconferencing system brand. These systems operate
over both ISDN lines and networks that use the Internet
Protocol. Using IP network capabilities enables the systems to
operate over many different types of IP-based networks,
including Ethernet local area networks (LANs). These IP-based
systems, which are becoming an increasingly significant part of
PictureTels product line, are expected to play an even
more prominent role in the future of PictureTel and the
videoconferencing industry in general.

When business people need to collaborate with colleagues across
a city or halfway around the world, they often require network
products that enable more than two systems to participate in the
same conference. PictureTel markets three ISDN-based
multi-location conferencing server lines: Montage,
Prism and Accord MCG-100. The MCG-100 and Montage
are designed for large, reservation-based videoconferencing
networks. Prism is a smaller system designed for use with
personal videoconferencing systems and in situations where users
want to conduct multi-location conferences more spontaneously.
In the IP-conferencing market, PictureTel provides PictureTel
330 NetConference multipoint server software. With the
PictureTel 330, organizations can create virtual conference
rooms on a variety of local area networks and the Internet for
videoconferencing and data conferencing. In addition to
multi-location servers, PictureTels complete network
products line includes scheduling software, gateway products
that enable users to conduct conferences between ISDN- and
IP-based videoconferencing systems, and management software that
enables the user to control videoconference network traffic on
their local area network.

PictureTel systems support international standards for
videoconferencing. H.320 is the international standard for
ISDN-based videoconferencing and H.323 is the standard for
IP-based videoconferencing. PictureTel products also support
T.120, the international standard for data collaboration.
PictureTel has been a staunch supporter of and contributor to
worldwide videoconferencing standards. PictureTel co-authored
the H.323 standard and has contributed portions of the H.320 and
T.120 standards as well. PictureTel authored the new G.722.1
audio compression algorithm and has licensed this technology to
Microsoft, Nortel and others. PictureTels commitment to
industry standards gives its customers the peace of mind that
their PictureTel systems will interoperate with any other
manufacturers standards-based systems. In a
PictureTel-to-PictureTel operating environment, users can take
advantage of proprietary PictureTel technology to get the
highest available video and audio performance prior to industry
standardization of such capabilities.

Intel Relationship

In January 1999, PictureTel entered into a distribution and
joint product development agreement to accelerate growth of
videoconferencing worldwide. Under terms of the distribution and
development agreement, Intel provided PictureTel with
distribution rights to sell the Intel® ProShare® Video
System 500, and exclusive worldwide distribution rights to sell
and support the Intel® TeamStation System. In
addition to its expertise in videoconferencing distribution,
sales and marketing, PictureTel provides its complete line of
professional, managed and maintenance support services for both
products. Intel TeamStation System is a conference room
workstation that combines videoconferencing, Internet access,
corporate network access and PC applications in one convenient
system. Based on the Intel Pentium® line of processors, the
Intel TeamStation is a turnkey, high-performance system that
brings increased productivity to conference rooms. Intel
ProShare Video System 500 is an add-in kit for desktop PCs.
It operates over both ISDN and LAN networks and offers fully
integrated data-sharing capabilities. These Intel products
augment PictureTels existing product line of group,
desktop/personal and network server systems.

Intel and PictureTel also agreed to begin joint development of
videoconferencing and collaboration products based on a common
PC-based technology platform. The common platform will be the
foundation for future products that will feature communication
and multimedia capabilities such as collaboration over LANs,

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Sharp Relationship

In August 2000, the Company entered into a joint design and
manufacturing partnership with Sharp to develop iPower
-based visual and audio collaboration tools. The new products
will be based on the PictureTel iPower architecture, which was
jointly developed by PictureTel and Intel. They will run the
Microsoft Windows 2000 Professional operating system and will
incorporate Windows NetMeeting and Internet Explorer. The
PictureTel/Sharp joint development relationship will leverage
the scalable iPower core technology, which serves as the common
ITU-standards-based platform for the products. The first of the
products jointly developed with Sharp are expected to be
introduced in the second quarter of 2001.

Videoconferencing Services

PictureTel assists customers in implementing and managing their
visual collaboration technology on a global enterprise-wide
basis through a comprehensive portfolio of maintenance and
professional services, which together address each phase of the
product life cycle. Professional services include conferencing,
consulting, education, design and project management services.
Consulting services provide planning and needs analysis to
customers. Design services, such as room design and custom
solutions, provide customized videoconferencing solutions to
meet each customers unique requirements. Project
management, installation and training provide customers with
effective implementation of videoconferencing systems. For the
on-going operation of customers videoconferencing
environments, PictureTel provides conference services and
maintenance services. Conference services facilitate the
customers use of the videoconferencing technology by
providing conference room scheduling, call launching, bridging
and end-to-end problem resolution during conferences. These
services are delivered for point-to-point, as well as multipoint
conferences on a global basis. All services are sold both
directly to customers and through PictureTels
distributors. Service programs for local and international
distributors range from reselling PictureTels service
offerings to providing back-end support for servicing end-users.

All maintenance services are delivered on a worldwide basis from
several integrated global support centers located in the United
States, United Kingdom, Singapore and Japan. Spare parts are
stocked around the world to meet response time commitments to
customers and distributors. PictureTel utilizes direct field
service staff as well as distributors and third party service
providers to perform installation and on-site repairs.
Conference services are delivered from geographically
distributed Network Operations Centers. Major centers are in the
United States, United Kingdom, and Singapore. PictureTel
delivers professional services and training through conferencing
engineers, consultants, project managers and instructors. In
addition, PictureTel offers electronic support via the World
Wide Web.

PictureTel believes that the quality and reliability of its
systems and services are important to customer satisfaction.
Accordingly, PictureTels videoconferencing services are
ISO9002 registered and PictureTel expects to continue to
maintain its certification. PictureTel also regularly measures
customer satisfaction and strives to implement corrective
actions to improve the quality of its service. The delivery of
service is backed by PictureTels certification program,
which tests and certifies the technical abilities of all support
personnel dealing with videoconferencing products. PictureTel
provides warranty support for parts and software media on the
majority of its products. The warranty period is generally one
year for hardware, ninety days for software media, and ninety
days for repaired parts.

Current Strategy

In 2000, the Company adopted and is now pursuing a three-pronged
approach to meeting the anticipated needs of the developing
multimedia collaboration marketplace. First, in conjunction with
Intel and Sharp, it developed, and continues to develop, its
next generation endpoint conferencing products for video, voice
and

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Research and Development

PictureTel continues to invest a significant percentage of its
annual revenue in its research and development activities. A
strong investment in research and development since the
Companys inception has enabled PictureTel to become the
world leader in videoconferencing and is the basis for the
Companys new visual collaboration strategy.
PictureTels historic investments in research and
development have earned the Company more than thirty patents for
its video and audio technologies.

Sales

The Company and its subsidiaries currently distribute PictureTel
products worldwide by direct sales and indirect channels of
distribution. In 2000, the Company derived approximately 11% of
its worldwide product revenues from direct selling activities,
and 89% from indirect channels.

Direct Sales Organization.The Company directly markets
its videoconferencing products and videoconferencing services
principally to large companies, which typically have multiple
locations in the United States as well as internationally and
specify a single vendor to supply equipment on a worldwide
basis. The Company believes that it is important to maintain a
close working relationship with these customers in order to meet
their demands for sales and support on a multinational basis.

Within the United States, the Company maintains seven regional
sales and support offices, as well as seven demonstration
centers. Sales offices typically include demonstration equipment
as well as a number of customer and technical sales
representatives and field support personnel.

Indirect Channels.To provide a large competitive
presence, the Company uses indirect channels to expand its
market presence. The Company utilizes telecommunication
equipment distributors, value-added resellers (VARs)
and dedicated dealers who sell the Companys
videoconferencing products and videoconferencing services.

International Distribution.Outside of the United States,
the Company relies on a network of foreign market distributors
and its own international subsidiaries. Agreements with the
Companys foreign market distributors generally provide for
pricing, volume discounts, order lead times, a specific
geographic territory and other terms and conditions and are
typically for terms of one to three years with options to extend
such terms by mutual agreement.

Competition

In its established businesses of group systems and desktop
systems, the Company competes with a number of larger
corporations, which have greater financial and marketing
resources than the Company. In the developing businesses of
network-based videoconferencing systems and compact systems, a
number of corporations have begun to offer competitive products.
In addition, partnerships between corporations that compete with
the Company and corporations that develop and market network
products, as well as mergers among competitors, are intensifying
competition in the marketplace. This increased competition,
together with a slowdown in the growth of the general market for
videoconferencing products, has led, and may continue to lead,
to decreases in average selling prices and margins in both group
and desktop videoconferencing systems, a lower segment market
share by the Company for products and services in the emerging
area of network-based visual collaboration, and to increases in
the defection or dilution of the Companys distribution
channel partners to competitors.

The Company competes primarily on the basis of video and audio
quality and data collaboration, as well as on favorable
features, support services and the pricing of those systems and
services. The Company believes that its products and services
are competitive in each of these areas. Moreover, in response to
this competitive

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Additional risks with regard to competition may be found in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations under Risk Factors
Which May Affect Future Results.

Manufacturing

The Company has developed a supply chain that encompasses the
Companys subassemblies and products supplied by vendors to
the delivery of finished goods to the customer. This effort has
resulted in a cost effective and timely delivery of products to
the Companys customers. This strategy allows the Company
to reduce costly investment in manufacturing capital and to
leverage the expertise of its vendors.

The Companys manufacturing operation consists of final
assembly and testing of complete systems. Subassemblies of large
systems, including tested printed circuit boards, are assembled
into complete systems. These final systems are tested to ensure
they meet all functional requirements.

Desktop/personal hardware products are purchased in final form
from various vendors. The products have been subjected to
PictureTels quality testing at the vendor site. These
products are placed into inventory, and are shipped according to
demand.

The Company utilizes a European Distribution Center
(EDC) in Holland to centralize videoconferencing product
shipments to its customer base in Europe. PictureTel has sourced
components from local vendors in Europe to support proper
stocking levels in Holland and maintain timely customer
shipments. The EDC incorporates the same working relationships
and policies with vendors in Europe as the Company currently
does in the United States.

Patents

The Companys principal technology consists primarily of
certain advances in video and audio compression algorithms, echo
cancellation and audio signal processing, camera positioning,
and automatic speaker location technology, implemented in
software and hardware configurations for use in PictureTel
products and unique product designs. The Company has been issued
a number of United States patents relating to the
above-described technology, which expire at various dates from
2004 to 2017. The Company has a number of additional patent
applications issued and pending in various countries including
the United States, Canada, Europe and Japan, and will continue
to file additional applications. However, there can be no
assurance that its current patents (or any additional patents
that may be issued in the future) provide broad protection from
the development of similar product technology by competitors of
the Company. In the absence of broad patent protection, and
despite the Companys reliance upon its proprietary
confidential information, competitors of the Company may be able
to use algorithms similar to those used by the Company to design
and manufacture products that are directly competitive with the
Companys products.

Employees

At December 31, 2000, the Company had 820 full-time
employees, of whom 474 were employed in sales, marketing and
customer support, 140 in product development and engineering, 51
in manufacturing and 155 in administration and finance. The
Company had 257 employees in foreign countries at
December 31, 2000.

The Companys future success will depend in part on its
ability to attract and retain highly skilled and motivated
personnel who are currently in great demand throughout the
industry.

None of the Companys employees are represented by a labor
union. The Company believes its relations with its employees to
be good.

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Item 2.  Properties

The Company has substantially reduced its real estate footprint
over the past three years. PictureTels corporate offices
and research, development and manufacturing facilities are
currently located in one leased facility in Andover,
Massachusetts and one leased facility in Chelmsford,
Massachusetts, aggregating approximately 321,000 and 69,940
square feet, respectively. The lease at 100 Minuteman Road in
Andover, Massachusetts expires in 2014. The lease for the
product distribution facility in Chelmsford, Massachusetts
expires in August 2003.

In June 1998, the Company subleased its property at 50
Minuteman Road for a period of ten years. This lease was
accounted for as a capital lease until December 2000, at
which time the Company, pursuant to an option agreement with the
landlord, renegotiated its lease term on the 50 Minuteman
facility. The lease on the 50 Minuteman facility expires in
June 2008 and is currently classified as an operating lease.

Effective July 1999, the Companys property at 6
Riverside Drive in Andover was subleased for a period of five
years. The Companys lease on this facility expires in
July, 2007. Additionally, the Company did not renew the lease at
100 Brickstone Square in Andover when it expired in
August 1999.

In September 2000, pursuant to an option agreement with the
landlord of its facility located at 200 Minuteman Road in
Andover, Massachusetts, the Company vacated certain space in the
200 Minuteman facility in exchange for termination of the lease.
Additionally, the Company continues to lease its facility in
Mountain View, California where offices for its former Starlight
division were located until disposition of the division in
October 2000. This lease is scheduled to expire in 2003.

PictureTel also leases office space for its regional and branch
sales and support offices in the United States and for similar
offices of its subsidiary and branch operations worldwide.

Item 3.  Legal Proceedings

A.  SEC Investigation

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

B.  RevNet, Inc.

On June 2, 1998, the Company was served with a complaint
from a former distribution channel customer, RevNet, Inc., which
has ceased operations. (RevNet, Inc., v. PictureTel
Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The
complaint alleged that the Company breached an oral contract.
RevNet was seeking $200 million in damages. On
September 13, 1999, the Company filed a related action in
the Circuit Court for Baltimore City, Maryland against RevNet,
Inc., Vuecom, Inc. (an entity related to RevNet, Inc.), George
Harris IV, George Sandmann and Lou Brown, (PictureTel
Corporation v. RevNet, Inc., et al. Civil Action
24-C99-004406) alleging among other things Breach of Contract,
Fraudulent Inducement and Securities Fraud. This issue was
scheduled to go to trial on May 14, 2001. On
October 30, 2000, the parties agreed to a settlement of
this matter. Under the terms of the settlement, the Company will
pay to the RevNet group $700 thousand over the course of the
year 2001. In return, all parties have dismissed all claims and
have released the others of all related causes of actions. This
closes this matter.

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

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Item 4.  Submission of Votes

There were no items submitted to the shareholders during the
fiscal year 2000.




PART II

Item 5.  Market for Registrants
Common Equity and related Stockholder Matters




PRICE RANGE OF COMMON STOCK

The following table sets forth the high and low sale prices for
the Companys Common Stock for the periods indicated as
reported by NASDAQ under the symbol PCTL.

|                                      |  |      |        |     |  |   |       | 
|------------------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|                                      |  | High |        | Low
|                                      |  |      |        |    
|1999                                  |  |      |        |     |  |   |       | 
|                                     
|                                     
|                                     
|                                     
|First Quarter                         |  | $    | 11.000 |     |  | $ | 5.875 | 
|                                     
|                                     
|                                     
|                                     
|Second Quarter                        |  | $    | 11.000 |     |  | $ | 4.313 | 
|                                     
|                                     
|                                     
|                                     
|Third Quarter                         |  | $    | 8.125  |     |  | $ | 3.625 | 
|                                     
|                                     
|                                     
|                                     
|Fourth Quarter                        |  | $    | 6.500  |     |  | $ | 3.250 | 
|                                     
|                                     
|                                     
|                                     
|2000                                  |  |      |        |     |  |   |       | 
|                                     
|                                     
|                                     
|                                     
|First Quarter                         |  | $    | 15.219 |     |  | $ | 4.250 | 
|                                     
|                                     
|                                     
|                                     
|Second Quarter                        |  | $    | 9.000  |     |  | $ | 1.875 | 
|                                     
|                                     
|                                     
|                                     
|Third Quarter                         |  | $    | 9.940  |     |  | $ | 2.813 | 
|                                     
|                                     
|                                     
|                                     
|Fourth Quarter                        |  | $    | 8.000  |     |  | $ | 2.190 | 
|                                     
|                                     
|                                     
|                                     
|2001                                  |  |      |        |     |  |   |       | 
|                                     
|                                     
|                                     
|                                     
|First Quarter (through March 9, 2001) |  | $    | 4.190  |     |  | $ | 2.060 | 

As of March 9, 2001 there were approximately 1,626 holders
of record of the Companys Common Stock.




DIVIDEND POLICY

The Company has not paid any dividends on its Common Stock since
its inception. The Board of Directors does not anticipate
declaring any cash dividends in the foreseeable future.

7



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##### Table of Contents



Item 6.  Selected Financial Data




SELECTED FINANCIAL DATA

(Dollars in thousands, except per share amounts)


|                                                          |  |                         |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|--------------------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                                          |  |                        
|                                                          |  | Year Ended December 31,
|                                                          |  |                        
|                                                          |  | 2000                    |          | 1999 |  | 1998 |         | 1997 |  | 1996
|                                                          |  |                         |          |      |  |      |         |      |  |     
|Statement of Operations Data:                             |  |                         |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|                                                         
|                                                         
|                                                         
|                                                         
|Revenue(1)                                                |  | $                       | 245,149  |      |  | $    | 323,995 |      |  | $    | 407,143 |   |  | $ | 466,425 |   |  | $ | 490,225 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss)(2)                                      |  | $                       | (106,971 | )    |  | $    | (84,526 | )    |  | $    | (55,679 | ) |  | $ | (39,398 | ) |  | $ | 32,172  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) applicable to Common shareholders(2)(3) |  | $                       | (113,871 | )    |  | $    | (90,138 | )    |  | $    | (55,679 | ) |  | $ | (39,398 | ) |  | $ | 32,172  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) per common share  
	basic(2)(3)(4)     |  | $                       | (2.73    | )    |  | $    | (2.23   | )    |  | $    | (1.45   | ) |  | $ | (1.04   | ) |  | $ | 0.89    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) per common
	share  diluted(2)(3)(4)    |  | $                       | (2.73    | )    |  | $    | (2.23   | )    |  | $    | (1.45   | ) |  | $ | (1.04   | ) |  | $ | 0.81    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Weighted average shares Outstanding  
	basic(4)          |  |                         | 41,739   |      |  |      | 40,376  |      |  |      | 38,527  |   |  |   | 37,760  |   |  |   | 36,097  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Weighted average shares Outstanding  diluted(4)          |  |                         | 41,739   |      |  |      | 40,376  |      |  |      | 38,527  |   |  |   | 37,760  |   |  |   | 39,598  | 

|                           |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                           |  |                   
|                           |  | As of December 31,
|                           |  |                   
|                           |  | 2000               |         | 1999 |  | 1998 |         | 1997 |  | 1996
|                           |  |                    |         |      |  |      |         |      |  |     
|Balance Sheet Data:        |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|                          
|                          
|                          
|                          
|Working capital            |  | $                  | 45,395  |      |  | $    | 82,994  |      |  | $    | 112,322 |  |  | $ | 152,973 |  |  | $ | 202,063 | 
|                          
|                          
|                          
|                          
|Total assets               |  | $                  | 147,020 |      |  | $    | 294,870 |      |  | $    | 352,994 |  |  | $ | 355,051 |  |  | $ | 386,254 | 
|                          
|                          
|                          
|                          
|Total short-term debt      |  | $                  | 1,487   |      |  | $    | 1,978   |      |  | $    | 4,418   |  |  | $ | 3,612   |  |  | $ | 3,942   | 
|                          
|                          
|                          
|                          
|Total long-term debt       |  | $                  |        |      |  | $    | 54,584  |      |  | $    | 56,411  |  |  | $ | 22,000  |  |  | $ | 14,202  | 
|                          
|                          
|                          
|                          
|Redeemable preferred stock |  | $                  | 42,845  |      |  | $    | 30,500  |      |  | $    |        |  |  | $ |        |  |  | $ |        | 
|                          
|                          
|                          
|                          
|Stockholders equity       |  | $                  | 21,620  |      |  | $    | 109,266 |      |  | $    | 190,242 |  |  | $ | 227,965 |  |  | $ | 264,846 | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective in the fourth quarter of 2000, the Company adopted the
	FASBs Emerging Issues Task Force (EITF) Issue
	No. 00-10, Accounting for Shipping and Handling Fees
	and Costs. Consistent with this Issue, amounts billed to
	customers for shipping and handling have been reclassified as
	revenue from cost of revenue in the Companys financial
	statements. Amounts reclassified for the first three quarters of
	2000, and for the years 1999 and 1998 were $546, $716 and $991,
	respectively. Reclassification for years prior to 1998 was
	determined to be impracticable.                                                         
|   
|(2) | Includes other charges totaling $42,313, $9,752, $10,564 and
	$42,664 before income tax benefit in 2000, 1999, 1998 and 1997,
	respectively. Also includes a $15,245 gain on the sale of
	MultiLink, Inc. and a gain of $104 on the sale of Starlight
	Networks, Inc. in 2000, an $8,495 gain on the sale of
	RealNetworks stock in 1999, a $4,442 charge in 1998 for
	in-process technology acquired in connection with the 1998
	Starlight Networks purchase, and tax expense of $35,141 in 1998
	to record a full valuation allowance against deferred tax
	assets. See Notes 3, 10, 15 and 16 of Notes to
	Consolidated Financial Statements.
|   
|(3) | Includes beneficial conversion feature adjustments of $6,900 and
	$5,612 in 2000 and 1999, respectively, related to issuance of
	convertible preferred stock. See Note 9 of Notes to
	Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | The Company has not paid dividends on its common stock since its
	inception. The Board of Directors does not anticipate declaring
	any cash dividends in the foreseeable future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

8



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##### Table of Contents



Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations




MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Dollars in thousands, unless otherwise indicated)


The following table sets forth, for the periods indicated, the
percentages of revenue for certain items in the Companys
Statement of Operations for each period. The table and the
following discussion reflect the other charges described in Note
15 of the Notes to Consolidated Financial Statements:

|                                              |  |              |       |      |  |      |       |   |  |  |       |  
|--------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                              |  |             
|                                              |  | Year Ended  
|                                              |  | December 31,
|                                              |  |             
|                                              |  | 2000         |       | 1999 |  | 1998
|                                              |  |              |       |      |  |     
|Revenue                                       |  |              | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                             
|                                             
|                                             
|                                             
|Cost of revenue                               |  |              | 76.8  |      |  |      | 68.5  |   |  |  | 57.5  |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |              | 23.2  |      |  |      | 31.5  |   |  |  | 42.5  |  
|                                             
|                                             
|                                             
|                                             
|Selling, general and administrative           |  |              | 52.8  |      |  |      | 39.0  |   |  |  | 32.1  |  
|                                             
|                                             
|                                             
|                                             
|Research and development                      |  |              | 19.1  |      |  |      | 20.4  |   |  |  | 16.2  |  
|                                             
|                                             
|                                             
|                                             
|Total operating expense                       |  |              | 71.9  |      |  |      | 59.4  |   |  |  | 48.3  |  
|                                             
|                                             
|                                             
|                                             
|Loss from operations                          |  |              | (48.7 | )    |  |      | (27.9 | ) |  |  | (5.8  | )
|                                             
|                                             
|                                             
|                                             
|Interest income (expense), net                |  |              | (0.9  | )    |  |      | (0.1  | ) |  |  | 0.5   |  
|                                             
|                                             
|                                             
|                                             
|Other income, net                             |  |              | 6.4   |      |  |      | 3.3   |   |  |  | 0.4   |  
|                                             
|                                             
|                                             
|                                             
|Loss before income tax expense                |  |              | (43.2 | )    |  |      | (24.7 | ) |  |  | (4.9  | )
|                                             
|                                             
|                                             
|                                             
|Income tax expense                            |  |              | (0.5  | )    |  |      | (1.4  | ) |  |  | (8.8  | )
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  |              | (43.7 | )    |  |      | (26.1 | ) |  |  | (13.7 | )
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |  |              | (2.8  | )    |  |      | (1.7  | ) |  |  |      |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |              | (46.5 | )    |  |      | (27.8 | ) |  |  | (13.7 | )

Forward-Looking Statements

This document includes forward-looking statements about the
Companys business, revenue and expenses, effective tax
rate, operating and capital requirements, liquidity and
managements plans to introduce new products and seek
additional equity investment. 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

In early 2000, the Company adopted and is now pursuing a
three-pronged approach to meeting the anticipated needs of the
developing multimedia collaboration marketplace. First, in
conjunction with Intel, it is developing its next generation
endpoint conferencing products for video, voice and data
collaboration. Second, it is expanding its enterprise-wide
solutions services beyond management of multipoint
videoconferences to include streaming video services, custom
integration, and outsourced management of enterprise
conferencing. The last prong is the development of
Internet-based, multimedia application services built around a
network-neutral collaboration hub. As part of this approach,
PictureTel entered into a distribution and joint product
development agreement with Intel, Inc. PictureTel and Intel
agreed to jointly develop videoconferencing and collaboration
products based on a common PC-based technology platform. These
joint development efforts resulted in the new iPower
architecture. Use of this single architecture improves ease of
use and functionality, while reducing both product and
associated support costs. The Company has focused its
development and engineering resources on new products evolving
around the iPower architecture. The first

9



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##### Table of Contents





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

The Company took several steps during 2000 to improve the
Companys liquidity. On July 24, 2000, the Company
consummated a preferred stock transaction resulting in funding
of $21,845 through issuance of Series B redeemable
convertible preferred shares. In addition to the stock
transaction, in August 2000, the Company obtained an
asset-based secured revolving line of credit with a limit of up
to $35,000.

With regard to disposition of non-core business assets, the
Company sold its Starlight division, in exchange for a $300 note
receivable, on October 12, 2000, resulting in estimated
expense reductions of approximately $1,800 and on
November 27, 2000, the Company sold its audioconferencing
subsidiary, MultiLink, Inc., for $25,900 in cash. These
dispositions have strengthened the Companys liquidity
position by reducing future anticipated cash outflows.

Real estate consolidation opportunities were negotiated with the
landlord of the Companys various facilities located on
Minuteman Road in Andover, Massachusetts. During the third
quarter of 2000, the lease at 200 Minuteman Road was terminated.
Related lease termination charges amounted to $15,142 and
restricted cash and deposits, amounting to approximately $4,000,
were returned to the Company as available funds. Anticipated
annualized reductions in rent and related costs associated with
the 200 Minuteman facility are approximately $4,500. At the end
of the fourth quarter, lease options held by the landlord on 50
and 100 Minuteman Road facilities were exercised and resulted in
a one-time net charge of $7,654 and restricted cash of
approximately $6,850 became unrestricted.

Management has reduced operating expense quarter over quarter
during the year ended December 31, 2000, as follows:

|                               |  |               |        |         |  |               |        |              |  |       |        |     |  |   |        |     |  |   |         | 
|------------------------------ |  | ------------- | ------ | ------- |  | ------------- | ------ | ------------ |  | ----- | ------ | --- |  | - | ------ | --- |  | - | ------- | 
|                               |  |               |        |        
|                               |  | Quarter Ended |        |        
|                               |  |               |        |        
|                               |  | April 1,      |        | July 1, |  | September 30, |        | December 31, |  |      
|                               |  | 2000          |        | 2000    |  | 2000          |        | 2000         |  | Total
|                               |  |               |        |         |  |               |        |              |  |      
|Operating expense, as reported |  | $             | 40,762 |         |  | $             | 43,673 |              |  | $     | 56,858 |     |  | $ | 35,085 |     |  | $ | 176,378 | 
|                              
|                              
|                              
|                              
|Significant/other charges      |  |               |       |         |  |               | 4,139  | (a)          |  |       | 23,615 | (b) |  |   | 7,654  | (c) |  |   | 35,408  | 
|                               |  |               |        |         |  |               |        |              |  |       |        |     |  |   |        |     |  |   |         | 
|Operating expense, as adjusted |  | $             | 40,762 |         |  | $             | 39,534 |              |  | $     | 33,243 |     |  | $ | 27,431 |     |  | $ | 140,970 | 
|                               |  |               |        |         |  |               |        |              |  |       |        |     |  |   |        |     |  |   |         | 




| |     |                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Impairment charge relating to intangible assets.                                                                                                                                                                                                
|
| | (b) | Lease termination charge of $15,142, $1,205 write-off of
	capitalized costs related to Web development, $6,207 for costs
	associated with the beneficial conversion feature of the
	preferred stock issuance and $1,061 for severance and other.
|
| | (c) | Lease termination charge, net.                                                                                                                                                                                                                  

Operating expense, as adjusted, for the quarter ended
December 31, 2000 compared to the quarter ended
July 1, 2000 was $27,431 compared to $39,534, a reduction
of $12,103, or 31%. The reduction was principally due to the
effects of plans implemented by management and result from real
estate consolidation, disposition of non-core business assets,
noted above, as well as staff reductions and other initiatives.
Management is continuing the review process and plans to further
reduce operating expense and improve working capital measures.

In early 2000, the Company announced the formation of 1414c,
Inc., a wholly-owned subsidiary established to provide
application service providers (ASPs) access to a broad range of
IP-based interactive communication solutions. These solutions
will enable ASPs to provide rapid Web access to streaming,
videoconferencing, Voice-over-IP, and other Web-enabled
interactive solutions such as call scheduling and launching. The
Company is currently exploring joint venture and other financing
opportunities to develop this activity.

10



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##### Table of Contents



Year ended December 31, 2000 Compared to the
Year ended December 31, 1999

Revenue.The Company reported revenue of $245,149 in the
year ended December 31, 2000, compared to $323,995 in the
previous year, a decrease of $78,846, or 24%. The overall
decrease is principally attributable to declining sales of
legacy group videoconferencing systems (Concorde 4500 and
Venue 2000), which were not offset by sales of the new
iPower PictureTel 900 Series, lower average selling prices
on new system units, and changes in product sales mix. In
addition, as a result of changes during 2000 associated with a
change in the Companys management of certain channel
partners, the Company deferred sales of approximately $8,000 as
of December 31, 2000, due to changes over the last year in
our product portfolio, the expansion of our global distribution
and the credit risk associated with these geographies.

Revenue from sales to foreign markets was approximately 44% and
46% of total revenue in 2000 and 1999, respectively. The Company
expects that international revenue will continue to account for
a significant portion of total revenue. Revenue from 2000 sales
to foreign markets was principally comprised of sales
originating in the United States of $20,019, the United Kingdom
of $51,129 and Japan of $20,305. Revenue from sales to foreign
markets in 1999 were principally comprised of sales originating
in the United States of $27,822, the United Kingdom of $65,654
and Japan of $27,055.

Gross Margin.Overall gross margin dollars decreased
$45,184, or 44%, to $56,952 in 2000 versus 1999. This decrease
is principally attributed to lower dollar volume and significant
charges, including a $4,721 charge necessary to reduce legacy
PC-based inventory to net realizable value and an impairment
charge of $6,905 to write-down purchased software, associated
with the Starlight division. Gross margin as a percentage of
revenue was 23% in 2000 compared to 32% in 1999. In addition to
the significant charges, under-absorption of manufacturing
variances on lower revenue, lower selling prices resulting from
competitive pricing pressures on legacy product offerings and an
inability to reduce costs related to products approaching
end-of-life contributed to the decreased margin percentage.

Operating Expense.Selling, general and administrative
expense of $129,595 increased $3,305, or 3%, from 1999 and
increased as a percentage of revenue to 53% from 39%. Research
and development expense, inclusive of all engineering costs, of
$46,783 decreased $19,347, or 29%, during 2000 as compared to
prior year. As a percentage of revenue, research and development
expense was nearly consistent year over year at 19% and 20% in
2000 and 1999, respectively. The Company did not capitalize any
software costs in either 2000 or 1999, as these costs were
deemed immaterial. Total operating expense of $176,378 for 2000
was 8% lower than total operating expense in the prior year.
Significant charges totaling $35,408 were included in operating
expense for the year ended December 31, 2000. These charges
included $22,796 in lease termination costs associated with the
Companys 200 and 50 Minuteman Road facilities, a $1,205
write-off of capitalized website development costs, $917 of
severance charges related to headcount reduction, $6,207 for
costs associated with the beneficial conversion feature of the
Series B preferred stock issuance and $4,283 of impairment
charges related to the write-down of tradename and assembled
workforce for a division of the Companys videoconferencing
products segment. Without these charges, operating expense for
the year ended December 31, 2000 declined $38,838, or 23%,
as compared to operating expense, exclusive of significant
charges totaling $9,261, for the year ended December 31,
1999.

Videoconferencing Products.The videoconferencing
products segment develops, manufactures, and markets a full
range of videoconferencing and advanced collaboration solutions.
Videoconferencing products scale from personal/ desktop systems
to large conference room solutions. Additionally, the segment
markets a wide range of network infrastructure products and
peripheral devices. Videoconferencing product revenue decreased
32% to $159,160 in 2000 from $233,249 in 1999. The decrease in
revenue is primarily due to declining sales in legacy product
systems, which were not offset by increases in new product
sales. In the third quarter of 2000, the Company introduced a
new line of advanced collaboration solutions based on
PictureTels iPower architecture developed jointly by
PictureTel and Intel®. The PictureTel 900 Series delivers
superior audio and video capabilities and advanced information
sharing in a flexible open-PC platform. The decrease in year
over year revenue is further attributed to lower average selling
prices on new system units, increased competition and changes in
product sales mix. In addition, as a result of changes during
2000 associated with a change in the Companys management
of certain channel partners, the Company deferred sales of
approxi-

11



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##### Table of Contents





The videoconferencing products segment generated an operating
loss of $74,161 in 2000 compared with a $68,409 operating loss
in 1999, an increase of 8%. Significant effort and investment
went into the development and launch of the PictureTel 900
Series products. Product development, selling and marketing
efforts were all focused on product introduction activities.
These efforts only began to yield corresponding revenue in the
second half of 2000. Significant charges of $12,599 and $4,062
are included in the 2000 and 1999 operating losses,
respectively. Of these charges, $6,905 impacted gross margin in
2000 and $329 impacted gross margin in 1999. The 2000 charges
reflect impairment charges totaling $11,188 related to the
write-down of certain intangible assets, $1,205 write-off of
capitalized website development costs and $206 in severance
charges related to headcount reduction. Excluding the
significant charges, the operating loss in 2000 would have been
$61,562 compared to $64,347 in 1999, a 4% improvement.

Gross margin for the videoconferencing products segment in 2000
was 23% as compared to 34% in 1999. Excluding significant
charges in both years, gross margin was 27% and 34% in 2000 and
1999, respectively. Margin declined, in part, due to increased
competitive pricing pressures on legacy product offerings and an
inability to reduce costs related to products approaching
end-of-life. In addition, margins were unfavorably impacted by a
charge to reduce legacy PC-based inventory to net realizable
value and under-absorption of fixed manufacturing costs on lower
revenue.

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 1% from $70,304 in 1999 to $69,741 in 2000.
Maintenance revenue was 4% lower than the prior year while
professional services increased 5%. The professional services
growth came largely from managing multipoint videoconferences
for customers.

Operating profits were $9,585 in 2000, which represents a 222%
increase from the prior years $2,976 figure. The increase
is largely due to the absence in 2000 of excessive charges
incurred in 1999 for spare parts obsolescence, higher selling
expenses and development costs associated with new service
offerings.

Year ended December 31, 1999 Compared to the
Year ended December 31, 1998

Revenue.Total 1999 revenue of $323,995 decreased
$83,148, or 20%, from prior year levels. Lower average selling
prices and changes in the videoconferencing products sales mix
to more products at the lower end of the product line
principally account for the decline. The Companys revenue
from sales to foreign markets was approximately 46% and 43% of
total revenue in 1999 and 1998, respectively. The Company
expects that international revenue will continue to account for
a significant portion of total revenue. Revenue from 1999 sales
to foreign markets was principally comprised of sales
originating in the United States of $27,822, the United Kingdom
of $65,654 and Japan of $27,055. Revenue from sales to foreign
markets in 1998 were principally comprised of sales originating
in the United States of $35,618, the United Kingdom of $79,396
and Japan of $24,747.

Gross Margin.Overall gross margin decreased $70,930, or
41%, to $102,136 in 1999 versus 1998. Gross margin as a
percentage of revenue was 32% in 1999 compared to 43% in 1998.
Both declines were primarily caused by lower average selling
prices coupled with increased relative sales of lower margin
products in the videoconferencing products segment. Higher
videoconferencing services costs also contributed to the lower
gross margin performance.

Operating Expense.Selling, general and administrative
expense decreased $4,372, or 3%, from 1998 but increased as a
percentage of revenue to 39% from 32%. A 25% headcount decrease,
partially offset by $2,554 of severance and related expense,
$2,550 settlement cost of shareholder litigation, and $2,481
related to subleasing excess real estate, is responsible for the
lower dollar expenses. Research and development expense of
$66,130 was essentially the same as in 1998 and represented 20%
and 16% of revenue for 1999 and 1998, respectively. Research and
development expenditures, prior to the capitalization of
software costs, were $73,500 in 1998, or 18% of revenue. The
Company capitalized software costs of $7,446 in 1998, excluding

12



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##### Table of Contents





Videoconferencing Products.The videoconferencing
products segment develops, manufactures and markets visual
communications systems and collaboration software.
Videoconferencing products scale from personal/desktop systems
to large conference room solutions. Additionally, the segment
markets a wide range of network infrastructure products and
peripheral devices. Videoconferencing product revenue decreased
28% to $233,249 in 1999 from $324,478 in 1998. The decrease can
be attributed to lower average selling prices and significant
changes in product sales mix. Trends toward lower average
selling prices are expected to continue in response to increased
competition. Shifts in sales mix from large room systems such as
the Concorde and Venue product lines to compact class room
systems, such as SwiftSite II and Intel® TeamStation
System, continued in 1999. Traditional large room systems
represented 36% of total room system sales in 1999 compared with
62% in 1998. Overall unit sales grew only 2% versus the prior
year with room systems increasing 13% and personal systems
decreasing 6%. Revenue was further impacted by a delay in
releasing SwiftSite II, a next generation compact room system,
until the second quarter of 1999, and lower investment in legacy
product features and functionality. Significant resources have
been redirected to next generation products being jointly
developed with Intel Corporation that are scheduled for release
starting in the second quarter of 2000.

The videoconferencing products segment generated an operating
loss of $68,409 in 1999 compared to a $16,049 operating loss in
1998. Significant charges of $4,062 and $11,250 are included in
the 1999 and 1998 losses, respectively. Severance and other
workforce reduction related costs account for the 1999 charges.
The 1998 charges included $4,442 for incomplete technology
acquired in connection with the November 1998 acquisition
of Starlight Networks plus $6,808 related to the write-down of
inventory and capitalized software to their net realizable value
plus other costs associated with discontinuance of a video
network server product line.

Absent these charges the videoconferencing product segment
operating losses would have been $64,347 in 1999 versus $4,799
in 1998. Lower revenue, decreased software development cost
capitalization, capitalized software amortization related to
SwiftSite II, and amortization of goodwill and completed
technology purchased as part of the Starlight acquisition were
the primary contributors to the earnings decline. Ongoing
operating expenses excluding capitalized software decreased
approximately 12% versus 1998 as segment headcount was reduced
by nearly 40% during the year in response to lower revenue
expectations. Gross margin was 34% in 1999 excluding charges
compared with a 1998 figure of 46%.

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 increased 18% from $59,760 in 1998 to $70,304 in 1999.
Maintenance revenue was 10% higher than the prior year while
professional services increased 35%. The professional services
growth came largely from managing multipoint videoconferences
for customers and from custom product integration sales and
services.

Operating profits were $2,976 in 1999, which represents a 59%
decrease from the prior years $7,191 figure. Higher
average costs for contracted services, increased provision for
spare parts obsolescence, higher selling expenses, and
development costs associated with new service offerings are
responsible.

Other

Net Interest Income (Expense).The Company had net
interest expense of $2,082 in 2000 compared with net interest
expense of $375 in 1999 and $1,948 of net interest income in
1998. The decreasing trend from 1998 to 2000 resulted primarily
from reduced interest income on lower invested cash balances,
which has offset interest expense associated with capital leases
and short-term borrowings.

Other Income (Expense).Other income of $15,707 in 2000
includes a $15,245 gain on the sale of MultiLink, Inc., a $104
gain on the sale of Starlight Networks and net gains on foreign
currency transactions. Other income of $10,517 in 1999 consists
principally of net gains on foreign currency transactions and a
$8,495

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Income Taxes.The Companys effective tax rate for
2000, 1999, and 1998 was 1%, 6%, and 180%, respectively. The
2000, 1999 and 1998 rates differ from the federal statutory rate
due to state and foreign taxes and an increase in the valuation
allowance for deferred taxes. Due to uncertainty surrounding the
Companys ability to fully realize deferred tax assets,
PictureTel established a full valuation allowance against its
deferred tax assets in 1998 and recognized no deferred tax
benefits in 1998, 1999 or 2000.

Liquidity and Capital Resources

At December 31, 2000 the Company had $43,441 in
unrestricted cash and cash equivalents. Operating activities
used $57,913 of cash during 2000 and used $65,369 of cash during
1999. The primary operating use of cash during 2000 was to fund
operating losses in excess of non-cash expense. The Company paid
$2,371 of accrued severance and restructuring charges during
2000 and had a remaining accrual in the amount of $1,430 for
such items as of December 31, 2000 that will be paid over
the next twelve months.

Investing activities provided $57,489 of cash in 2000 compared
with a $3,465 usage during the previous year. Maturation and
conversion of marketable securities into cash generated a
primary source of cash in both 2000 and 1999. Proceeds of
$25,900 from the sale of MultiLink provided an additional source
of cash in 2000.

Financing activities generated $21,409 of cash in 2000 compared
with $27,736 provided in 1999. The principal source of cash from
financing activities was from the issuance of convertible
preferred stock in both 2000 and 1999. Proceeds from issuance of
convertible preferred stock amounted to $21,845 and $30,500 in
2000 and 1999, respectively. An increase in restricted cash
balances and principal payments on capital leases constituted
major uses of cash in both 2000 and 1999, though lease payments
in 2000 were reduced due to the termination of capital leases.

Liquidity is a major priority for the Company. The Company
entered into a new asset-based secured revolving credit
agreement dated August 21, 2000, which will expire on
August 21, 2003. The new credit facility provides a
revolving credit line of up to $35,000 with Congress Financial
Corporation (New England) (the Lender). The
availability for borrowings under the new credit facility are
variable based on eligible receivables and is subject to a
$10,000 minimum reserve, which is available at the Lenders
discretion. The Company is required to maintain cash collateral
equal to 105% in an account held at the Lender of the
outstanding obligations or an equal dollar amount of eligible
receivables. At December 31, 2000, availability based on
receivables and net of the $10,000 discretionary reserve was
$4,448. Interest for loans under this facility is payable at 1%
above the Lenders prime rate. There were no borrowings
outstanding against the calculated receivable availability at
December 31, 2000. The Company has $5,500 of outstanding
standby letters of credit issued under this agreement as of
December 31, 2000. The letters of credit have been
collateralized 105% and are in an account held at the Lender.
Cash subject to the cash collateral requirement amounts to
$5,775 and is classified as current on the Companys
balance sheet at December 31, 2000. Fees for letters of
credit outstanding against this facility are payable at 225
basis points per annum of the face amount. The secured letters
of credit expire between September 2001 and December 2001. This
credit agreement also contains certain financial covenants,
including minimum net worth and working capital requirements.
This new credit facility replaces the amended facility entered
into in May 2000. A term loan provided by the amended
credit facility in the amount $8,500 was paid in full in
July 2000 from a portion of the proceeds of the
Series B Preferred Stock issued in the third quarter of
2000. (See also Note 9.)

Local lines of credit are available for short-term advances of
up to $1,487 to certain of the Companys foreign
subsidiaries. The agreements require interest payable up to one
and three-quarter percent, per annum. Borrowings totaling $1,487
were outstanding against these local lines of credit at
December 31, 2000.

In 2000, management disposed of non-core assets, raised equity
and implemented expense reductions which are expected to reduce
2001 quarterly operating expenses substantially compared to the
amounts incurred in 2000. Margins are expected to improve from
levels experienced in 2000, since significant charges

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

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

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

In March 2000, the Company received a report from our
independent accountants containing an explanatory paragraph
stating that our recurring losses and requirement for additional
financing raise substantial doubt about our ability to continue
as a going concern. Managements plans to continue as a
going concern rely heavily on forecasted revenue from new
products being jointly developed with Sharp and Intel
Corporation, including recently introduced new products
utilizing the new iPower architecture, new multi-media
applications services, and enhanced compact videoconferencing
systems and on continued implementation of cost reductions.
There can be no guarantee that either such revenue increase will
occur or, if it does occur, will be sufficient to meet the
Companys needs or that cost reduction measures will be
sufficient to maintain liquidity.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease MultiLinks
former facility at 6 Riverside Drive in Andover, Massachusetts
in May 1999 as part of its space consolidation efforts. As
of December 31, 2000, the remaining obligation under this
operating lease was $7,125. After giving effect to expected
sublease income, this obligation is $4,748. In addition, in
June 1998, the Company subleased its property at 50
Minuteman Road for a ten-year term. As of December 31,
2000, the remaining obligation under this operating lease was
$19,220. After giving effect to expected sublease income, the
remaining obligation under the operating lease was $1,209.

In October 1998, the Board of Directors authorized a plan
to repurchase up to 1,000,000 shares of the Companys
Common Stock in open market, privately negotiated or other
transactions. No shares were repurchased during 2000. The
Company repurchased 70,000 shares during 1999 at a cost of $556
(approximately $7.94 per share). In addition, 22,065 shares were
returned to the Company from shares held in escrow related to
the MultiLink acquisition. There are no definitive plans to
repurchase the additional shares under the plan.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended
by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. This
statement, as amended, was originally effective for all fiscal
years beginning after June 15, 1999. In June 1999, the
FASB issued Statement 137, which delayed the effective date of
Statement 133 by one year. Statement 133 will be effective for
PictureTels fiscal year beginning January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company is currently evaluating
the effects of this change but anticipates that the adoption of
SFAS 133 will not have a significant effect on the
Companys financial position or results of operations.

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Risk Factors Which May Affect Future Results

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

New Products, Cost Reductions, Technological Change, and
Evolving Markets. The Company is engaged in an industry that
is still emerging as a result of extensive research and
development efforts and which continues to bring to market new,
more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications
market is in a heightened competitive state due to deregulation
throughout the world. In order to maintain its market share in
this fast-paced emerging market, the Company must continue to
introduce, through internal development or by acquisition, joint
venture or other collaborative arrangements, significant
innovative, technologically leading and cost-competitive
products. There can be no assurance that such new products will
be introduced by the Company, or if introduced, will be accepted
by the market and its customers. In January 1999, the
Company entered into a distribution and joint product
development agreement with Intel Corporation. The Company
announced that it began shipping the resulting product (known as
the 900 Series) in mid August 2000. However, there can be
no assurance that the products produced by this partnership will
be accretive to the Companys results of operations and
financial condition, or if accretive will, by themselves return
the Company to profitability. In addition to offering products
that operate in an integrated service digital network
(ISDN) environment, the Company and its competitors are
exploring new technologies and networks, such as the Internet
and corporate intranets or LANs, for delivering
videoconferencing and data collaboration services. The industry
standards for such new technologies and networks, however, are
still in the early stages of development, which the Company
believes has led to customer uncertainty and, accordingly, a
slowdown in the growth of the general market for
videoconferencing products. As a result of customer preferences,
the Company continues to experience a shift in its sales model
to videoconferencing systems with lower average selling prices.
There can be no assurance that the Company will be successful in
implementing cost reductions for all of its products or in
developing and marketing suitable new products and related
services with attractive margins for these new technologies and
networks. The possible transition, migration and/or convergence
of technologies is difficult to predict and could have profound
implications for the industry and the business of the Company.
Further, there is significant risk that existing products could
be rendered obsolete due to changing technology. The
Companys failure to develop and market new products on a
timely basis or to enhance its existing products or to respond
effectively to technological changes, new industry standards or
product announcements by competitors could have a material
adverse effect on the Companys business, financial
condition and results of operations.

Competition.This increased competition resulting from
such partnerships and acquisitions, together with mergers among
competitors and a slowdown in the growth of the general market
for visual collaboration products, has led and may continue to
lead to increases in the defection or dilution of
PictureTels distribution channel partners to competitors,
decreases in average selling prices and margins in both group
and desktop visual collaboration systems, and a lower segment
market share by PictureTel for products and services in the
emerging area of network-based visual collaboration. In some
cases, PictureTel competes with its channel partners for various
services, which increases the complexity of channel management.
In addition, competitors may offer network-based visual
collaboration software solutions or incorporate standard
algorithms into processor chips free of additional charge, which
may reduce the value PictureTel technology provides to the
market, especially in its lower end visual collaboration
products. In addition, the prices which PictureTel is able to
charge for its visual collaboration products and services may
continue to decrease 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. In addition, several
vendors are corporations with limited financial resources that
could in the future prove to be inadequate. In some cases
components are sourced from only one vendor, even where multiple
sources are available, to maintain quality control and enhance
the working relationship with the vendor. In addition, the
Company from time to time enters into development arrangements
with third parties to develop and

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

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

Although the Company does not believe that its products infringe
the proprietary rights of any third parties, third parties have
asserted infringement and other claims against the Company from
time to time. There can be no assurance that third parties will
not assert such claims against the Company in the future or that
such claims will not be successful. The Company could incur
substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary
rights, which in turn could have a material adverse effect on
the Companys business, financial condition and result of
operations.

Potential Fluctuations of Quarterly Operating Results.The majority of the Companys revenues in each quarter
result from orders booked in that quarter, and a substantial
portion of the Companys orders and shipments typically
occur during the last weeks of each quarter such that
forecasting of revenue and product mix is both complex and
difficult. Unanticipated variations in the timing of receipt of
customer orders in any quarter may produce significant
fluctuations in quarterly revenues. As a result, a shortfall in
revenue compared to internal expectations may not evidence
itself until late in the quarter and any resulting impact on
earnings may not be determinable until several weeks after the
end of the quarter. The Companys ability to maintain or
increase net revenues depends upon its ability to increase unit
volume sales; the Company has not been successful in increasing
unit volume sales during the year 2000. There can be no
assurance that the Company will be able to increase or to
maintain the current level of unit volume sales in the year
2001. Other factors which may cause period-to-period
fluctuations in operational results include the timing of new
product

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International Operations.Revenue related to
international operations of the Company totaled approximately
44%, 46%, and 43% of total revenues for the three years ended
December 31, 2000, 1999, and 1998, respectively. Management
of the Company expects international revenues to continue to
constitute a significant portion of total revenues in future
periods. However, there can be no assurance that the Company
will be able to maintain or increase international market demand
for its products and, to the extent the Company is unable to do
so, its business, financial condition, results of operations or
cash flows could be materially adversely affected. The
Companys sales to international distributors are
denominated in U.S. dollars in order to minimize risks
associated with fluctuating foreign currency rates. An increase
in the value of the U.S. dollar relative to other currencies,
however, could make the Companys product more expensive
and, therefore, potentially less competitive in foreign markets.
Sales by the Companys foreign subsidiaries are generally
made in the foreign subsidiarys local currency, in which
case fluctuations in the value of the U.S. dollar relative to
such other currencies could have a material adverse effect on
the operating results of the Company. Currently, the Company
employs various currency hedging strategies to reduce these
risks. In addition, a significant portion of the Companys
revenue is derived from Asian markets. Given the current general
weakness in the Asian markets, there can be no assurance that
the Company will be able to sustain current revenue levels or
growth in such markets. There can be no assurance that the above
factors will not have a material adverse effect on the
Companys future international sales and, consequently, on
its business, financial condition, results of operations or cash
flows.

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

Dependence on Key Personnel.On August 31, 1999, the
Company announced that Dr. Norman Gaut had succeeded Bruce
R. Bond as Chairman of the Board, CEO and President of the
Company. In February 1998, Mr. Bond succeeded
Dr. Gaut as Chief Executive Officer and President and had
been elected Chairman of the Board in June 1998. At that
time, Dr. Gaut had retired as an active employee while
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. 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; David Snow, Vice President,
Worldwide Sales; and W. Robert Kellegrew, Jr., Vice President,
General Counsel and Treasurer. 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

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Euro.On January 1, 1999, eleven of the fifteen
member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and
established the euro, making the euro their common legal
currency on that date. Based on a recent assessment, the euro
conversion is not anticipated to have a material impact on the
Companys business.

Item 7a.  Quantitative and Qualitative
Disclosures About Market Risk

The Company and its subsidiaries face exposures to financial
market risks, including adverse movements in foreign currency
exchange rates and changes in interest rates. The Companys
primary currency exposure has been related to foreign currency
denominated receivables and receivables denominated in a
currency other than the functional currency. Historically, the
Company has hedged currency exposures associated with foreign
currency denominated receivables by entering into foreign
currency forward contracts as a hedge against the foreign
currency receivable transaction. Forward contracts generally
have a maturity date within four to six months of the contract
date. The goal of the Companys hedging activity is to
minimize the exposures inherent in these transactions. The
Companys hedging activities minimize the Companys
exchange rate risk because the gains and losses on these
contracts offset the losses and gains on the transactions being
hedged.

The following table represents hypothetical changes in fair
value in the Companys foreign currency forward contracts.
The modeling technique measures the fair value of the forward
contract by currency type arising from potential changes in
foreign currency rates. Movements in foreign currency rates of
plus or minus 3% and 6% reflect hypothetical shifts in fair
value of these forward contracts. No change in currency
rates represents the market value of each market-rate
sensitive currency as of December 31, 2000. All values are
represented in U.S. dollar equivalents:

|                               |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|------------------------------ |  | -------------------- | ----- | ------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                               |  |                      |       |              |  |                     
|                               |  | Valuation of forward |       |              |  | Valuation of forward
|                               |  | given a currency     |       |              |  | given a currency    
|                               |  | rate increase of     |       |              |  | rate decrease of    
|                               |  |                      |       | No change in |  |                     
|Forward contract currency type |  | 3%                   |       | 6%           |  | currency rates       |       | (3%) |  | (6%)
|                               |  |                      |       |              |  |                      |       |      |  |     
|Functional Currency  USD      |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                              
|                              
|                              
|                              
|British Pound                  |  | $                    | 2,195 |              |  | $                    | 2,258 |      |  | $    | 2,131 |  |  | $ | 2,067 |  |  | $ | 2,003 | 
|                              
|                              
|                              
|                              
|Japanese Yen                   |  |                      | 2,045 |              |  |                      | 2,105 |      |  |      | 1,986 |  |  |   | 1,926 |  |  |   | 1,867 | 
|                              
|                              
|                              
|                              
|German Deutschemark            |  |                      | 753   |              |  |                      | 775   |      |  |      | 731   |  |  |   | 709   |  |  |   | 687   | 
|                              
|                              
|                              
|                              
|Australian Dollar              |  |                      | 1,235 |              |  |                      | 1,271 |      |  |      | 1,199 |  |  |   | 1,163 |  |  |   | 1,127 | 
|                              
|                              
|                              
|                              
|Functional Currency  Germany  |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                              
|                              
|                              
|                              
|U.S. Dollar                    |  | $                    | 144   |              |  | $                    | 148   |      |  | $    | 140   |  |  | $ | 136   |  |  | $ | 132   | 

The Companys cash is primarily held in high investment
grade quality mutual funds. Cash can be accessed daily to meet
the Companys operational needs. As a result, the Company
does not have any market risk due to the liquidity of the
Companys cash.

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Item 8.  Financial Statements and
Supplementary Data

PICTURETEL CORPORATION






INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


|                      |                                                 |      |  |    | 
|--------------------- | ----------------------------------------------- | ---- |  | -- | 
|                      |                                                 | Page
|                      |                                                 |     
|Financial Statements: |                                                 |      |  |   
|                     
|                     
|                     
|                     
|                      | Report of Independent Accountants               |      |  | 21 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Balance Sheets                     |      |  | 22 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Operations           |      |  | 23 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Stockholders Equity |      |  | 24 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Cash Flows           |      |  | 25 | 
|                     
|                     
|                     
|                     
|                      | Notes to Consolidated Financial Statements      |      |  | 26 | 
|                     
|                     
|                     
|                     
|Supplementary Data:   |                                                 |      |  |   
|                     
|                     
|                     
|                     
|                      | Report of Independent Accountants               |      |  | 44 | 
|                     
|                     
|                     
|                     
|                      | Schedule II Valuation and Qualifying Accounts   |      |  | 45 | 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of



In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of PictureTel Corporation and its
subsidiaries at December 31, 2000 and December 31,
1999, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements,
the Company has incurred recurring losses from operations and
requires additional financing. These factors raise substantial
doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except share data)


|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |          |         | 
|----------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                                                              |                                                                                                                                                                   |                                                                        
|                                                                              |                                                                                                                                                                   | December 31,                                                           
|                                                                              |                                                                                                                                                                   |                                                                        
|                                                                              |                                                                                                                                                                   | 2000                                                                    |        | 1999    
|                                                                              |                                                                                                                                                                   |                                                                         |        |         
|ASSETS                                                                        |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Current assets:                                                               |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Cash and cash equivalents                                                                                                                                         |                                                                         | $      | 43,441   |         |  | $      | 21,915   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Restricted cash and cash equivalents                                                                                                                              |                                                                         |        | 5,775    |         |  |        | 1,200    |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Marketable securities                                                                                                                                             |                                                                         |        |         |         |  |        | 37,787   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accounts receivable, less allowances for doubtful accounts of
	$4,100 and $5,642 at December 31, 2000 and 1999,
	respectively                                     |                                                                         |        | 39,897   |         |  |        | 73,483   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Inventories                                                                                                                                                       |                                                                         |        | 27,020   |         |  |        | 32,930   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Other current assets                                                                                                                                              |                                                                         |        | 9,716    |         |  |        | 12,562   |        
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total current assets                                                    |        |          | 125,849 |  |        |          | 179,877 | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Property and equipment, net                                                   |                                                                                                                                                                   |                                                                         | 18,310 |          |         |  | 86,219 |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Capitalized software costs, net                                               |                                                                                                                                                                   |                                                                         |       |          |         |  | 11,341 |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Goodwill, net                                                                 |                                                                                                                                                                   |                                                                         |       |          |         |  | 4,242  |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other assets                                                                  |                                                                                                                                                                   |                                                                         | 2,861  |          |         |  | 9,554  |         
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total assets                                                            |        | $        | 147,020 |  |        | $        | 291,233 | 
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
	STOCKHOLDERS EQUITY |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Current liabilities:                                                          |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Short-term borrowings                                                                                                                                             |                                                                         | $      | 1,487    |         |  | $      | 196      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accounts payable                                                                                                                                                  |                                                                         |        | 20,575   |         |  |        | 21,681   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accrued compensation and benefits                                                                                                                                 |                                                                         |        | 7,280    |         |  |        | 10,517   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accrued expenses                                                                                                                                                  |                                                                         |        | 31,610   |         |  |        | 32,166   |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accrued income taxes                                                                                                                                              |                                                                         |        | 1,286    |         |  |        | 5,352    |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Current portion of capital lease obligations                                                                                                                      |                                                                         |        |         |         |  |        | 1,782    |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Deferred revenue                                                                                                                                                  |                                                                         |        | 18,216   |         |  |        | 25,189   |        
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total current liabilities                                               |        |          | 80,454  |  |        |          | 96,883  | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other non-current liabilities                                                 |                                                                                                                                                                   |                                                                         | 2,101  |          |         |  |       |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Capital lease obligations, net of current portion                             |                                                                                                                                                                   |                                                                         |       |          |         |  | 54,584 |         
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total liabilities                                                       |        |          | 82,555  |  |        |          | 151,467 | 
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|Commitments and contingencies                                                 |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Redeemable convertible preferred stock, $.01 par value                        |                                                                                                                                                                   |                                                                         | 42,845 |          |         |  | 30,500 |         
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|Stockholders equity:                                                         |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Preferred stock, $.01 par value 1,500,000 shares authorized; 0
	issued and outstanding at December 31, 2000 and
	December 31, 1999                                |                                                                         |        |          |         |  |        |          |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Common stock, $.01 par value; 80,000,000 shares authorized;
	45,049,032 and 40,617,634 shares issued and outstanding at
	December 31, 2000 and 1999, respectively |                                                                         |        | 450      |         |  |        | 406      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Additional paid-in capital                                                                                                                                        |                                                                         |        | 245,399  |         |  |        | 225,513  |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accumulated deficit                                                                                                                                               |                                                                         |        | (221,751 | )       |  |        | (114,780 | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accumulated other comprehensive loss                                                                                                                              |                                                                         |        | (1,922   | )       |  |        | (1,317   | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Treasury stock, 92,065 shares, at cost                                                                                                                            |                                                                         |        | (556     | )       |  |        | (556     | )      
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total stockholders equity                                              |        |          | 21,620  |  |        |          | 109,266 | 
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         
|                                                                              |                                                                                                                                                                   | Total liabilities, redeemable preferred stock and
	stockholders equity |        | $        | 147,020 |  |        | $        | 291,233 | 
|                                                                              |                                                                                                                                                                   |                                                                         |        |          |         |  |        |         

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

22



---



##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands, except per share amounts)


|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------------------- | ----------------------------------- | ----------------------- | -------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                |                                     |                        
|                                                                |                                     | Year Ended December 31,
|                                                                |                                     |                        
|                                                                |                                     | 2000                    |          | 1999    |         | 1998
|                                                                |                                     |                         |          |         |         |     
|Revenue:                                                        |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Product revenue                     |                         | $        | 174,071 |         |      | $       | 251,914 |         |   | $       | 346,067 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Service revenue                     |                         |          | 71,078  |         |      |         | 72,081  |         |   |         | 61,076  |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total revenue           |          |         | 245,149 |      |         |         | 323,995 |   |         |         | 407,143 | 
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Cost of revenue:                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Product cost of revenue             |                         |          | 128,252 |         |      |         | 159,005 |         |   |         | 185,725 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Service cost of revenue             |                         |          | 59,945  |         |      |         | 62,854  |         |   |         | 48,352  |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total cost of revenue   |          |         | 188,197 |      |         |         | 221,859 |   |         |         | 234,077 | 
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Gross margin                                                    |                                     |                         | 56,952   |         |         |      | 102,136 |         |         |   | 173,066 |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Operating expense:                                              |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Selling, general and administrative |                         |          | 129,595 |         |      |         | 126,290 |         |   |         | 130,662 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Research and development            |                         |          | 46,783  |         |      |         | 66,130  |         |   |         | 66,054  |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total operating expense |          |         | 176,378 |      |         |         | 192,420 |   |         |         | 196,716 | 
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Loss from operations                                            |                                     |                         | (119,426 | )       |         |      | (90,284 | )       |         |   | (23,650 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Interest income                                                 |                                     |                         | 2,886    |         |         |      | 4,261   |         |         |   | 4,857   |        
|                                                               
|                                                               
|                                                               
|                                                               
|Interest expense                                                |                                     |                         | 4,968    |         |         |      | 4,636   |         |         |   | 2,909   |        
|                                                               
|                                                               
|                                                               
|                                                               
|Other income, net                                               |                                     |                         | 15,707   |         |         |      | 10,517  |         |         |   | 1,804   |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Loss before income tax expense                                  |                                     |                         | (105,801 | )       |         |      | (80,142 | )       |         |   | (19,898 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Income tax expense                                              |                                     |                         | (1,170   | )       |         |      | (4,384  | )       |         |   | (35,781 | )      
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Net loss                                                        |                                     |                         | (106,971 | )       |         |      | (84,526 | )       |         |   | (55,679 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Preferred stock beneficial conversion feature                   |                                     |                         | (6,900   | )       |         |      | (5,612  | )       |         |   |        |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Net loss applicable to common shareholders                      |                                     | $                       | (113,871 | )       |         | $    | (90,138 | )       |         | $ | (55,679 | )      
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Net loss per common share  basic and diluted                   |                                     | $                       | (2.73    | )       |         | $    | (2.23   | )       |         | $ | (1.45   | )      
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        
|Weighted average common shares outstanding  basic and
	diluted |                                     |                         | 41,739   |         |         |      | 40,376  |         |         |   | 38,527  |        
|                                                                |                                     |                         |          |         |         |      |         |         |         |   |         |        

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

23



---



##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS EQUITY


For the Years Ended December 31, 2000, 1999 and 1998


(Dollars in thousands, except share amounts)


|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |          |      |  
|---------------------------------------------- | --------------------------------- | ---------------------------------------- | ---------- | ------------ | - | ------- | ------ | ------------ | - | ------------- | ---------- | ------------- | - | ------ | --- | ------ | - | - | ------- | - | - | - | -------- | -------- | - | - | ------ | ---- | - | - | -------- | -------- | ---- | -
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |       
|                                               |                                   | Redeemable                               |            |              |   |         |        |              |   |               |            | Accumulated   |   |       
|                                               |                                   | Convertible                              |            |              |   |         |        | Retained     |   | Other         |            |              
|                                               |                                   | Preferred Stock                          |            | Common Stock |   | Addtl  |        | Earnings     |   | Comprehensive |            | Comprehensive
|                                               |                                   |                                          |            |              |   | Paid-In |        | (Accumulated |   | Income        |            | Income       
|                                               |                                   | Shares                                   |            | Amount       |   | Shares  |        | Par Value    |   | Capital       |            | Deficit)      |   | (Loss) |     | (Loss)
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |       
|Balance, December  31, 1997                    |                                   |                                          |           |              |   |         |       |              |   |               | 38,040,363 |               |   | $      | 380 |        |   | $ | 204,242 |   |   | $ | 25,425   |          |   | $ | (2,082 | )    |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |           |              |   |         |       |              |   |               | 232,068    |               |   |        | 2   |        |   |   | 979     |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |           |              |   |         |       |              |   |               | 286,074    |               |   |        | 3   |        |   |   | 2,345   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Issuance of shares  Starlight acquisition     |                                   |                                          |           |              |   |         |       |              |   |               | 1,509,266  |               |   |        | 15  |        |   |   | 14,664  |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          | (55,679  | ) |   |        |     |   |   | $        | (55,679  | )   
|                                               | Other comprehensive income (loss) |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustment  |            |              |  |         |        |              |  |               |            |               |  |        |     |        |  |   |         |   |  |   |          |          |  |   |        |      |  |   |          |          | (63  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Unrealized gain on marketable securities |            |              |  |         |        |              |  |               |            |               |  |        |     |        |  |   |         |   |  |   |          |          |  |   |        |      |  |   |          |          | 11   |  
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|                                               | Other comprehensive loss          |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          |         |   |   |        | (52  | ) |   |          | (52      | )   
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Comprehensive loss                             |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   | $ | (55,731  | )       
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Balance, December  31, 1998                    |                                   |                                          |           |              |   |         |       |              |   |               | 40,067,771 |               |   |        | 400 |        |   |   | 222,230 |   |   |   | (30,254  | )        |   |   | (2,134 | )    |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |           |              |   |         |       |              |   |               | 254,043    |               |   |        | 3   |        |   |   | 1,841   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |           |              |   |         |       |              |   |               | 295,820    |               |   |        | 3   |        |   |   | 1,442   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Treasury stock transactions                    |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Issuance of preferred shares  Series A        |                                   |                                          | 4,478,708  |              |   | $       | 30,500 |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          | (84,526  | ) |   |        |      |   |   | $        | (84,526  | )   
|                                               | Other comprehensive income (loss) |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustments |            |              |  |         |        |              |  |               |            |               |  |        |     |        |  |   |         |   |  |   |          |          |  |   |        |      |  |   |          |          | 823  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Unrealized loss on marketable securities |            |              |  |         |        |              |  |               |            |               |  |        |     |        |  |   |         |   |  |   |          |          |  |   |        |      |  |   |          |          | (6   | )
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|                                               | Other comprehensive income        |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          |         |   |   |        | 817  |   |   |          | 817      |     
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Comprehensive loss                             |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   | $ | (83,709  | )       
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Balance, December  31, 1999                    |                                   |                                          | 4,478,708  |              |   |         | 30,500 |              |   |               | 40,617,634 |               |   |        | 406 |        |   |   | 225,513 |   |   |   | (114,780 | )        |   |   | (1,317 | )    |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |           |              |   |         |       |              |   |               | 438,659    |               |   |        | 4   |        |   |   | 3,187   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |           |              |   |         |       |              |   |               | 192,739    |               |   |        | 2   |        |   |   | 1,030   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Treasury stock transactions                    |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |          |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Issuance of preferred shares  Series B        |                                   |                                          | 8,738,000  |              |   |         | 21,845 |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Conversion of preferred shares to common stock |                                   |                                          | (3,800,000 | )            |   |         | (9,500 | )            |   |               | 3,800,000  |               |   |        | 38  |        |   |   | 9,462   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|Beneficial conversion feature adjustment       |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   | 6,207   |   |   |   |         |          |   |   |       |      |   |   |          |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          | (106,971 | ) |   |        |     |   |   | $        | (106,971 | )   
|                                               | Other comprehensive income (loss) |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustments |            |              |  |         |        |              |  |               |            |               |  |        |     |        |  |   |         |   |  |   |          |          |  |   |        |      |  |   |          |          | (605 | )
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|                                               | Other comprehensive loss          |                                          |            |             |   |         |        |             |   |               |            |              |   |        |     |       |   |   |         |  |   |   |          |         |   |   |        | (605 | ) |   |          | (605     | )   
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Comprehensive loss                             |                                   |                                          |           |              |   |         |       |              |   |               |           |               |   |        |    |        |   |   |        |   |   |   |         |          |   |   |       |      |   | $ | (107,576 | )       
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         
|Balance, December  31, 2000                    |                                   |                                          | 9,416,708  |              |   | $       | 42,845 |              |   |               | 45,049,032 |               |   | $      | 450 |        |   | $ | 245,399 |   |   | $ | (221,751 | )        |   | $ | (1,922 | )    |   |   |          |         
|                                               |                                   |                                          |            |              |   |         |        |              |   |               |            |               |   |        |     |        |   |   |         |   |   |   |          |          |   |   |        |      |   |   |          |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                               |                                   |                                          |        |               |   |        |      |   |   |   |         |          |      |  
|---------------------------------------------- | --------------------------------- | ---------------------------------------- | ------ | ------------- | - | ------ | ---- | - | - | - | ------- | -------- | ---- | -
|                                               |                                   |                                          |        |              
|                                               |                                   | Treasury Stock                           |        | Total        
|                                               |                                   |                                          |        | Stockholders
|                                               |                                   | Shares                                   |        | Cost          |   | Equity
|                                               |                                   |                                          |        |               |   |       
|Balance, December  31, 1997                    |                                   |                                          |       |               |   |        |     |   |   | $ | 227,965 |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |       |               |   |        |     |   |   |   | 981     |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |       |               |   |        |     |   |   |   | 2,348   |         
|                                              
|                                              
|                                              
|                                              
|Issuance of shares  Starlight acquisition     |                                   |                                          |       |               |   |        |     |   |   |   | 14,679  |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |        |              |   |        |      |  |   |   |         | (55,679  | )   
|                                               | Other comprehensive income (loss) |                                          |        |               |   |        |      |   |   |   |         |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustment  |        |               |  |        |      |   |  |   |         |          | (63  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Unrealized gain on marketable securities |        |               |  |        |      |   |  |   |         |          | 11   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Other comprehensive loss          |                                          |        |              |   |        |      |  |   |   |         |         |     
|                                              
|                                              
|                                              
|                                              
|Comprehensive loss                             |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                               |                                   |                                          |        |               |   |        |      |   |   |   |         |         
|Balance, December  31, 1998                    |                                   |                                          |       |               |   |        |     |   |   |   | 190,242 |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |       |               |   |        |     |   |   |   | 1,844   |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |       |               |   |        |     |   |   |   | 1,445   |         
|                                              
|                                              
|                                              
|                                              
|Treasury stock transactions                    |                                   |                                          | 92,065 |               |   | $      | (556 | ) |   |   | (556    | )       
|                                              
|                                              
|                                              
|                                              
|Issuance of preferred shares  Series A        |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |        |              |   |        |      |  |   |   |         | (84,526  | )   
|                                               | Other comprehensive income (loss) |                                          |        |               |   |        |      |   |   |   |         |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustments |        |               |  |        |      |   |  |   |         |          | 823  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Unrealized loss on marketable securities |        |               |  |        |      |   |  |   |         |          | (6   | )
|                                              
|                                              
|                                              
|                                              
|                                               | Other comprehensive income        |                                          |        |              |   |        |      |  |   |   |         |         |     
|                                              
|                                              
|                                              
|                                              
|Comprehensive loss                             |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                               |                                   |                                          |        |               |   |        |      |   |   |   |         |         
|Balance, December  31, 1999                    |                                   |                                          | 92,065 |               |   |        | (556 | ) |   |   | 109,266 |         
|                                              
|                                              
|                                              
|                                              
|Exercise of employee stock options             |                                   |                                          |       |               |   |        |     |   |   |   | 3,191   |         
|                                              
|                                              
|                                              
|                                              
|Employee stock purchase plan shares            |                                   |                                          |       |               |   |        |     |   |   |   | 1,032   |         
|                                              
|                                              
|                                              
|                                              
|Treasury stock transactions                    |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                              
|                                              
|                                              
|                                              
|Issuance of preferred shares  Series B        |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                              
|                                              
|                                              
|                                              
|Conversion of preferred shares to common stock |                                   |                                          |       |               |   |        |     |   |   |   | 9,500   |         
|                                              
|                                              
|                                              
|                                              
|Beneficial conversion feature adjustment       |                                   |                                          |       |               |   |        |     |   |   |   | 6,207   |         
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                          |                                          |        |              |   |        |      |  |   |   |         | (106,971 | )   
|                                               | Other comprehensive income (loss) |                                          |        |               |   |        |      |   |   |   |         |          |     
|                                              
|                                              
|                                              
|                                              
|                                               |                                   | Foreign currency translation adjustments |        |               |  |        |      |   |  |   |         |          | (605 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Other comprehensive loss          |                                          |        |              |   |        |      |  |   |   |         |         |     
|                                              
|                                              
|                                              
|                                              
|Comprehensive loss                             |                                   |                                          |       |               |   |        |     |   |   |   |        |         
|                                               |                                   |                                          |        |               |   |        |      |   |   |   |         |         
|Balance, December  31, 2000                    |                                   |                                          | 92,065 |               |   | $      | (556 | ) |   | $ | 21,620  |         
|                                               |                                   |                                          |        |               |   |        |      |   |   |   |         |         

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

24



---



##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in thousands)


|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |          |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | -------- | ------- | ------- | ---- | ------- | -------- | ------- | - | ------- | -------- | ------ | -
|                                                     |                                                                                            |                                                                               
|                                                     |                                                                                            | Year Ended December 31,                                                       
|                                                     |                                                                                            |                                                                               
|                                                     |                                                                                            | 2000                                                                           |          | 1999    |         | 1998
|                                                     |                                                                                            |                                                                                |          |         |         |     
|Cash flows from operating activities:                |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |                                                                                            | $                                                                              | (106,971 | )       |         | $    | (84,526 | )        |         | $ | (55,679 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash provided by (used
	in) operating activities: |                                                                                |          |         |         |      |         |          |         |   |         |          |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Depreciation and amortization                                                  |          |         | 23,520  |      |         |          | 34,576  |   |         |          | 28,183 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Provision for doubtful accounts                                                |          |         | 596     |      |         |          | 2,474   |   |         |          | 4,160  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Provision for inventory obsolescence                                           |          |         | 14,695  |      |         |          | 3,834   |   |         |          | 6,004  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-down of capitalized software                                             |          |         |        |      |         |          |        |   |         |          | 1,088  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-down of long-lived assets                                                |          |         | 11,603  |      |         |          |        |   |         |          | 3,149  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Loss on disposal of fixed assets                                               |          |         | 5,270   |      |         |          | 687     |   |         |          |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Provision for deferred taxes                                                   |          |         |        |      |         |          |        |   |         |          | 31,721 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Gain on sales of securities                                                    |          |         |        |      |         |          | (8,495  | ) |         |          |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Reduction in obligation of terminated capital lease                            |          |         | (3,870  | )    |         |          |        |   |         |          |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Operating charge related to preferred stock issuance                           |          |         | 6,207   |      |         |          |        |   |         |          |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-off of incomplete technology                                             |          |         |        |      |         |          |        |   |         |          | 4,442  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Gain on sale of MultiLink and Starlight                                        |          |         | (15,349 | )    |         |          |        |   |         |          |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Other non-cash items                                                           |          |         |        |      |         |          | (6      | ) |         |          | 896    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in operating assets and liabilities, net of effects of
	purchased business:        |                                                                                |          |         |         |      |         |          |         |   |         |          |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accounts receivable                                                            |          |         | 27,508  |      |         |          | 136     |   |         |          | 29,376 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Inventories                                                                    |          |         | (14,776 | )    |         |          | (6,298  | ) |         |          | 8,812  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Other current assets                                                           |          |         | 5,762   |      |         |          | (4,619  | ) |         |          | (1,086 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accounts payable                                                               |          |         | (369    | )    |         |          | (10,938 | ) |         |          | 2,468  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accrued compensation and benefits, accrued expenses, and accrued
	income taxes |          |         | (3,763  | )    |         |          | 2,306   |   |         |          | (4,035 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Deferred revenue                                                               |          |         | (7,976  | )    |         |          | 5,500   |   |         |          | (3,949 | )
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Net cash provided by (used in) operating activities  |                                                                                            |                                                                                | (57,913  | )       |         |      | (65,369 | )        |         |   | 55,550  |         
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Cash flows from investing activities:                |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of marketable securities                                                          |                                                                                |          | (31,262 | )       |      |         | (120,012 | )       |   |         | (126,262 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                                |                                                                                |          | 69,049  |         |      |         | 128,796  |         |   |         | 120,336  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                        |                                                                                |          | (6,207  | )       |      |         | (12,591  | )       |   |         | (19,421  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of fixed assets                                                        |                                                                                |          | 9       |         |      |         | 342      |         |   |         | 506      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of MultiLink, Inc.                                                      |                                                                                |          | 25,900  |         |      |         |         |         |   |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalized software costs                                                                 |                                                                                |          |        |         |      |         |         |         |   |         | (7,446   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid to acquire business, less cash acquired                                          |                                                                                |          |        |         |      |         |         |         |   |         | (3,964   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of other assets                                                                   |                                                                                |          |        |         |      |         |         |         |   |         | (2,851   | )     
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Net cash provided by (used in) investing activities  |                                                                                            |                                                                                | 57,489   |         |         |      | (3,465  | )        |         |   | (39,102 | )       
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Cash flows from financing activities:                |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Restricted cash and cash equivalents                                                       |                                                                                |          | (4,575  | )       |      |         | (1,200   | )       |   |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds (payments) on short-term/long-term borrowings                                     |                                                                                |          | 1,395   |         |      |         | (706     | )       |   |         | (2,955   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capital lease obligations                                         |                                                                                |          | (1,479  | )       |      |         | (3,591   | )       |   |         | (3,471   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of treasury stock                                                                 |                                                                                |          |        |         |      |         | (556     | )       |   |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from preferred stock issuance                                                     |                                                                                |          | 21,845  |         |      |         | 30,500   |         |   |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from exercise of stock options                                                    |                                                                                |          | 3,191   |         |      |         | 1,844    |         |   |         | 981      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from employee stock purchase plan                                                 |                                                                                |          | 1,032   |         |      |         | 1,445    |         |   |         | 1,718    |       
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Net cash provided by (used in) financing activities  |                                                                                            |                                                                                | 21,409   |         |         |      | 27,736  |          |         |   | (3,727  | )       
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Effect of exchange rate changes on cash              |                                                                                            |                                                                                | 541      |         |         |      | 371     |          |         |   | 62      |         
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Net increase (decrease) in cash and cash equivalents |                                                                                            |                                                                                | 21,526   |         |         |      | (40,727 | )        |         |   | 12,783  |         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of year       |                                                                                            |                                                                                | 21,915   |         |         |      | 62,642  |          |         |   | 49,859  |         
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         
|Cash and cash equivalents at end of year             |                                                                                            | $                                                                              | 43,441   |         |         | $    | 21,915  |          |         | $ | 62,642  |         
|                                                     |                                                                                            |                                                                                |          |         |         |      |         |          |         |   |         |         

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

25



---



##### Table of Contents



PICTURETEL CORPORATION






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands, except per share amounts)


1.  Nature of the Business:

PictureTel Corporation (the Company) develops,
manufactures and markets a full range of visual and audio
collaboration equipment and services. These products and
services enable businesses, schools, medical facilities,
government and other organizations to eliminate the barrier of
distance so they can work together more effectively. The Company
sells its products internationally through both direct and
indirect channels.

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

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

2.  Summary of Significant Accounting Policies:

Principles of Consolidation

The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial
Statements

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Foreign Currency

The financial statements of the Companys foreign
operations, where the local currency is the functional currency,
are translated using exchange rates in effect at the end of the
year for assets and liabilities and average exchange rates
during the year for results of operations. Related translation
adjustments are reported in accumulated other comprehensive
income. Transaction gains and losses are recognized in the
statement of operations.

For the financial statements of the Companys foreign
operations, where the U.S. dollar is the functional currency,
monetary assets and liabilities of the operations are translated
into U.S. dollars at the exchange rate in effect at period end
and nonmonetary assets and liabilities are remeasured at
historic exchange rates. Income and expense are remeasured at
the average exchange rate for the period. Translation gains and
losses are reflected in other income in the consolidated
statement of operations.

Foreign Exchange Contracts

The Company and its subsidiaries have entered into foreign
currency forward contracts as a hedge against specific
intercompany and foreign currency receivable transactions.
Forward contracts involve agreements to purchase or sell foreign
currencies at specific rates at future dates. The Company does
not hold or issue derivative financial instruments for trading
purposes. The Company enters into derivatives only with

26



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##### Table of Contents





Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with a
maturity of three months or less at the date of purchase to be
cash equivalents. Those instruments with maturities between
three months and twelve months are considered to be short-term
marketable securities and investments with maturities of greater
than one year are classified as long-term marketable securities.
At December 31, 1999, marketable securities primarily
consist of corporate obligations. The Company had no marketable
securities at December 31, 2000.

The Company classifies all marketable securities as available
for sale. They are carried at their fair value, based on quoted
market prices, with the unrealized gains and losses; net of tax,
reported in accumulated other comprehensive income. The cost of
marketable securities is adjusted for the amortization of
premiums and accretion of discounts over the life of the
security. Such amortization and interest are included in
interest income. For the purpose of determining gain or loss,
the specific identification of securities method is used.
Realized gains and losses are included in other income.

Inventories

Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over
the following estimated useful lives:

|                                             |  |                                                      |           | 
|-------------------------------------------- |  | ---------------------------------------------------- | --------- | 
|                                            
|                                            
|                                            
|                                            
|Buildings under capital lease                |  |                                                      | 18 years  | 
|                                            
|                                            
|                                            
|                                            
|Equipment                                    |  |                                                      | 2-5 years | 
|                                            
|                                            
|                                            
|                                            
|Equipment and furniture under capital leases |  |                                                      | 3-5 years | 
|                                            
|                                            
|                                            
|                                            
|Furniture and fixtures                       |  |                                                      | 3-5 years | 
|                                            
|                                            
|                                            
|                                            
|Leasehold improvements                       |  | Estimated useful lifeor term of the lease,if shorter

Maintenance and repairs are charged to expense as incurred.
Significant improvements and costs incurred during the
application development stage of software developed for internal
use, including website development, are capitalized and
depreciated. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in
the determination of net income.

Research and Development and Capitalized Software
Costs

Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
Software production costs incurred subsequent to the
establishment of technological feasibility are capitalized until
the product is available for general release to customers.

During the years ended December 31, 1998 and 1997, the
Company capitalized approximately $7,446 and $7,252,
respectively, of software production costs. No such costs were
capitalized during the years ended

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Other Assets

Included in other assets are intangible assets, consisting
primarily of intellectual property rights and non-compete
agreements, which are amortized over their estimated useful
life, ranging from eighteen to thirty-six months. Accumulated
amortization on intangible assets was $3,698, $3,144 and $279,
at December 31, 2000, 1999 and 1998, respectively. Also
included in other assets are prepaid royalties and investments
accounted for under the cost method. The Company reviews other
long-term assets for any impairment in accordance with the
Statement of Financial Accounting Standard No. 121
Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 121),
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no
longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value
of the asset. If an impairment is indicated, the asset is
written down to its estimated fair value on a discounted cash
flow basis.

Revenue Recognition

The Company considers revenue recognized when it has persuasive
evidence of an arrangement, the product has been shipped or the
services have been provided to the customer, the sales price is
fixed or determinable and collectibility is reasonably assured.

Revenue from product sales is recognized when the product is
shipped to the customer and there are either no unfulfilled
company obligations or any obligations will not affect the
customers final acceptance of the arrangement. Revenue
from professional service is recognized as the services are
provided. Revenue from maintenance contracts is recognized
ratably over the term of the contract. Allowances for estimated
future product returns and price protection under the
Companys agreements with its distributors and resellers
are provided for in the same period as the related revenue. In
addition, revenue related to sales to certain resellers who
stock the Companys products and for which a right of
return exists, is recognized only when the reseller sells its
stock through to its customers. Revenue under arrangements where
products and services are sold together is allocated to each
element based on their relative fair values.

Warranty

The Company provides a warranty for parts and labor on its
products. Hardware warranty periods are generally one year from
installation date on sales to end-users and one year from
delivery date on sales to distributors. In addition, warranty
periods for certain software products, repairs, and upgraded
parts are 90 days upon receipt. Estimated warranty costs
are recorded at the time of revenue recognition.

Income Taxes

The Company provides for the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred
tax assets is reduced by a valuation allowance if, based upon
the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.

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Earnings Per Share

Basic earnings per share (EPS) excludes the effect
of any dilutive options, warrants or convertible securities and
is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were issued, exercised or converted into common stock.
Common share equivalents are not included in the per share
calculations where the effect of their inclusion would be
anti-dilutive. Dilutive common share equivalents consist of
stock options and warrants calculated using the treasury stock
method. The following table reconciles the numerator and the
denominators of the basic and diluted EPS computations shown on
the Consolidated Statements of Operations:

|                                  |                                            |                         |       |          |   |      |       |         |   |   |       |         |  
|--------------------------------- | ------------------------------------------ | ----------------------- | ----- | -------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                  |                                            |                        
|                                  |                                            | Year Ended December 31,
|                                  |                                            |                        
|                                  |                                            | 2000                    |       | 1999     |   | 1998
|                                  |                                            |                         |       |          |   |     
|Basic and Diluted EPS Computation |                                            |                         |       |          |   |      |       |         |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|Numerator:                        |                                            |                         |       |          |   |      |       |         |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Net loss applicable to common shareholders |                         | $     | (113,871 | ) |      | $     | (90,138 | ) |   | $     | (55,679 | )
|                                  |                                            |                         |       |          |   |      |       |         |   |   |       |        
|Denominator:                      |                                            |                         |       |          |   |      |       |         |   |   |       |        
|                                 
|                                 
|                                 
|                                 
|                                  | Weighted average common shares outstanding |                         |       | 41,739   |   |      |       | 40,376  |   |   |       | 38,527  |  
|                                  |                                            |                         |       |          |   |      |       |         |   |   |       |        
|Basic and diluted EPS             |                                            | $                       | (2.73 | )        |   | $    | (2.23 | )       |   | $ | (1.45 | )      
|                                  |                                            |                         |       |          |   |      |       |         |   |   |       |        

Options to purchase shares of the Companys Common Stock of
5,819,086, 6,912,081 and 6,686,832 were outstanding at
December 31, 2000, 1999 and 1998, respectively, but were
not included in the computation of diluted EPS because they were
antidilutive due to the net losses sustained in 2000, 1999 and
1998. Warrants for 2,723 shares of the Companys Common
Stock and Convertible Preferred Stock of 9,461,708 shares
were outstanding at December 31, 2000, but were not
included in the computation of diluted EPS because they were
antidilutive due to the loss sustained in 2000.

Concentrations

Credit Risk

Financial instruments, which potentially subject the Company to
concentration of credit risk, include cash, cash equivalents,
foreign currency forward contracts and trade receivables. With
respect to its cash and cash equivalents, the Company invests
its excess cash primarily in deposits with a commercial bank and
corporate obligations and has established guidelines relative to
credit ratings, diversification and maturities that maintain
safety and liquidity. The Company sells its products to a
variety of customers, including end users, dealers and
distributors, in a variety of different industries and
geographic regions. The Company performs ongoing credit
evaluations of its customers and maintains reserves for
potential credit losses.

Suppliers

Certain components and parts used in the Companys products
are procured from a single source. The Company obtains parts
from one vendor only, even where multiple sources are available,
to maintain quality control and enhance the working relationship
with suppliers. These purchases are made under existing
contracts or purchase orders. The failure of a supplier,
including a subcontractor, to deliver on schedule could delay or
interrupt the Companys delivery of products and thereby
adversely affect the Companys revenues and profits.

Newly Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended
by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. This
statement, as amended, was originally effective for all fiscal
years beginning after June 15, 1999. In June 1999, the
FASB issued Statement 137, which

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Reclassifications

The presentation of certain prior year information has been
reclassified to conform with the current year presentation.
These reclassifications had no effect on net income or
stockholders equity.

Effective in the fourth quarter of 2000, the Company adopted the
FASBs Emerging Issues Task Force (EITF) Issue
No. 00-10, Accounting for Shipping and Handling Fees
and Costs. Consistent with this issue, amounts billed to
customers for shipping and handling have been reclassified as
revenue from cost of revenue in the Companys financial
statements. Amounts reclassified for the first three quarters of
2000, and for the years 1999 and 1998 were $546, $716 and $991,
respectively.

3.  Impairment of Long-lived Assets:

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

4.  Inventories:

Inventories consist of the following:

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2000         |        | 1999
|                |  |              |        |     
|Purchased parts |  | $            | 4,018  |      |  | $ | 3,184  | 
|               
|               
|               
|               
|Work-in-process |  |              | 234    |      |  |   | 1,157  | 
|               
|               
|               
|               
|Finished goods  |  |              | 22,768 |      |  |   | 28,589 | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 27,020 |      |  | $ | 32,930 | 
|                |  |              |        |      |  |   |        | 

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

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5.  Marketable Securities:

The Company has no marketable securities at December 31,
2000. At December 31, 1999, marketable securities,
including $8,708 reported in cash equivalents, were as follows:

|                                 |                       |                   |        |        |  |   |        |        | 
|-------------------------------- | --------------------- | ----------------- | ------ | ------ |  | - | ------ | ------ | 
|                                 |                       |                  
|                                 |                       | December 31, 1999
|                                 |                       |                  
|                                 |                       | Amortized         |        | Fair  
|                                 |                       | Cost              |        | Value 
|                                 |                       |                   |        |       
|U.S. Government and its agencies |                       | $                 | 3,726  |        |  | $ | 3,726  |       
|                                
|                                
|                                
|                                
|Corporate obligations            |                       |                   | 42,769 |        |  |   | 42,769 |       
|                                 |                       |                   |        |        |  |   |        |       
|                                 | Total debt securities |                   | $      | 46,495 |  |   | $      | 46,495 | 
|                                 |                       |                   |        |        |  |   |        |       

During the third quarter of 1999, the Company recorded an $8,495
gain on the sale of RealNetworks stock. This stock was acquired
through a 1996 investment in Vivo Software, Inc., which was
subsequently acquired by RealNetworks. This gain is included in
other income.

6.  Property and Equipment:

Property and equipment consist of the following:

|                                                               |                                |              |         |         |  |  |         |         | 
|-------------------------------------------------------------- | ------------------------------ | ------------ | ------- | ------- |  |  | ------- | ------- | 
|                                                               |                                |             
|                                                               |                                | December 31,
|                                                               |                                |             
|                                                               |                                | 2000         |         | 1999   
|                                                               |                                |              |         |        
|Property and equipment, excluding assets under capital leases: |                                |              |         |         |  |  |         |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Equipment                      |              | $       | 107,750 |  |  | $       | 113,572 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Furniture and fixtures         |              |         | 15,875  |  |  |         | 18,071  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Leasehold improvements         |              |         | 16,634  |  |  |         | 20,777  | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 140,259 |         |  |  | 152,420 |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Less: Accumulated depreciation |              |         | 121,949 |  |  |         | 119,918 | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 18,310  |         |  |  | 32,502  |        
|                                                               |                                |              |         |         |  |  |         |        
|Assets under capital leases:                                   |                                |              |         |         |  |  |         |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Buildings                      |              |         |        |  |  |         | 38,000  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Buildings held for sublease    |              |         |        |  |  |         | 20,938  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Equipment and furniture        |              |         |        |  |  |         | 2,774   | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              |        |         |  |  | 61,712  |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Less: Accumulated depreciation |              |         |        |  |  |         | 7,995   | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              |        |         |  |  | 53,717  |        
|                                                               |                                |              |         |         |  |  |         |        
|                                                               | Property and equipment, net    |              | $       | 18,310  |  |  | $       | 86,219  | 
|                                                               |                                |              |         |         |  |  |         |        

At December 31, 2000 and 1999, accumulated depreciation
amounted to $0 and $5,353 on buildings under capital leases and
$0 and $2,642 on equipment and furniture under capital leases,
respectively. Depreciation expense for the years ended
December 31, 2000 and 1999 was $16,538 and $20,926,
respectively. Annual depreciation expense for the years 2000 and
1999 of $1,163, related to the buildings under capital lease
held for sublease and the related sublease income of $2,353, was
included in other income.

7.  Debt:

The Company entered into a new asset-based secured revolving
credit agreement dated August 21, 2000, which will expire
on August 21, 2003. The new credit facility provides a
revolving credit line of up to $35,000 with Congress Financial
Corporation (New England) (the Lender). The
availability for borrowings under the new credit facility are
variable based on eligible receivables and is subject to a
$10,000 minimum reserve, which is available at the Lenders
discretion. The Company is required to maintain cash collateral
equal to 105% in an account held at the Lender of the
outstanding obligations or an equal dollar amount of eligible

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Local lines of credit are available for short-term advances of
up to $1,487 to certain of the Companys foreign
subsidiaries. The agreements require interest payable up to one
and three-quarter percent, per annum. Borrowings totaling $1,487
were outstanding against these local lines of credit at
December 31, 2000.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease MultiLinks
former facility at 6 Riverside Drive in Andover, Massachusetts
in May 1999, as part of its space consolidation efforts. As
of December 31, 2000, the remaining obligation under this
operating lease was $7,125. After giving effect to expected
sublease income, this obligation is $4,748. In addition, in
June 1998, the Company subleased its property at 50
Minuteman Road for a ten-year term. As of December 31,
2000, the remaining obligation under this operating lease was
$19,220. After giving effect to expected sublease income, the
remaining obligation under this operating lease was $1,209.

Pursuant to an option agreement with the landlord of its
facility located at 200 Minuteman Road in Andover,
Massachusetts, the Company vacated certain space in the 200
Minuteman facility during the third quarter in exchange for
termination of the lease. Under the terms of this agreement,
termination charges amounted to $15,142, net of a $1,806 gain on
the elimination of the capitalized lease and related liability
of $35,760 and $37,566, respectively. The $15,142 net charges
included a $3,756 loss on leasehold improvements, $340 real
estate commission, $1,419 incremental rent charge, cash payment
of $11,433, and the above mentioned $1,806 gain. In December
2000, pursuant to an option agreement exercisable only by the
landlord, with respect to other properties in the Minuteman Park
on Minuteman Road in Andover, Massachusetts, the Company
renegotiated its lease term on the 50 Minuteman facility. In
connection therewith, termination charges amounted to $7,654,
net of a $2,064 gain on the elimination of the capitalized lease
and related liability of $17,061 and $19,125, respectively. The
$7,654 net charges included a $718 incremental rent charge, a
cash payment of $9,000 and the gain of $2,064 mentioned above.

8.  Commitments:

The Company has commitments under non-cancelable operating
leases for office and manufacturing space. The facility leases
are for terms ranging from one to fourteen years. The leases
generally contain provisions that allow for expansion, extension
and termination. In December 2000, the Company renegotiated
the 1997 eighteen year lease agreement for the building at 50
Minuteman Road in Andover, Massachusetts, shortening the lease
term by seven years, now expiring in 2008. In June 1998,
the property was subleased for a period of ten years. As of
December 31, 2000, the lease is accounted for as an
operating lease. Effective July 1999, the Company subleased
the property at 6 Riverside Drive in Andover for a period of
5 years. This operating lease expires in 2007.
Additionally, the Company continues to lease its facility in
Mountain View, California where offices for its former Starlight
division were located until disposition of the division in
October 2000. This lease is scheduled to expire in 2003.

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Future minimum lease payments under operating leases with
initial or remaining terms of one year or more are:

|                                    |  |           |        | 
|----------------------------------- |  | --------- | ------ | 
|                                    |  | Operating
|                                    |  | Leases   
|                                    |  |          
|2001                                |  | $         | 10,981 | 
|                                   
|                                   
|                                   
|                                   
|2002                                |  |           | 10,467 | 
|                                   
|                                   
|                                   
|                                   
|2003                                |  |           | 9,732  | 
|                                   
|                                   
|                                   
|                                   
|2004                                |  |           | 9,170  | 
|                                   
|                                   
|                                   
|                                   
|2005                                |  |           | 9,147  | 
|                                   
|                                   
|                                   
|                                   
|Thereafter                          |  |           | 42,392 | 
|                                    |  |           |        | 
|Total future minimum lease payments |  | $         | 91,889 | 
|                                    |  |           |        | 

Total future minimum lease payments have not been reduced by
future minimum sublease payments under non-cancelable sublease
agreements. Income from future minimum sublease agreements with
initial or remaining terms of one year or more are:

|                                       |  |           |        | 
|-------------------------------------- |  | --------- | ------ | 
|                                       |  | Operating
|                                       |  | Leases   
|                                       |  |          
|2001                                   |  | $         | 3,209  | 
|                                      
|                                      
|                                      
|                                      
|2002                                   |  |           | 3,188  | 
|                                      
|                                      
|                                      
|                                      
|2003                                   |  |           | 3,106  | 
|                                      
|                                      
|                                      
|                                      
|2004                                   |  |           | 2,765  | 
|                                      
|                                      
|                                      
|                                      
|2005                                   |  |           | 2,414  | 
|                                      
|                                      
|                                      
|                                      
|Thereafter                             |  |           | 6,034  | 
|                                       |  |           |        | 
|Total future minimum sublease payments |  | $         | 20,716 | 
|                                       |  |           |        | 

Net rental expense for operating leases was $10,165, $10,783 and
$11,692 for 2000, 1999 and 1998, respectively.

In conjunction with a joint development agreement with Sharp
Corporation, the Company has agreed to pay up to a maximum
amount of $900 for tooling costs in 2001. This amount has been
included in accrued expenses on the Companys balance sheet
as of December 31, 2000. In addition, the Company has
outstanding commitments as of December 31, 2000 to purchase
approximately $20,000 of inventory over a twelve month period,
scheduled to begin with the release of the new products being
jointly developed. The first products are scheduled for release
in the second quarter of 2001.

9.  Capital Stock and Redeemable Preferred Stock:

Redeemable Convertible Preferred Stock

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

|                                        |           |                                                                                                                         |                                              |              |        |        |  |   |        |        | 
|--------------------------------------- | --------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                        |           | December 31,                                                                                                            |                                              | December 31,
|                                        |           | 2000                                                                                                                    |                                              | 1999        
|                                        |           |                                                                                                                         |                                              |             
|Redeemable Convertible Preferred Stock: |           |                                                                                                                         |                                              |              |        |        |  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Series A: |                                                                                                                         |                                              |              |        |        |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        |           | 4,500,000 shares authorized, 4,478,708 shares, issued and
	outstanding at December 31, 2000 and December 31, 1999       |                                              | $            | 30,500 |        |  | $ | 30,500 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Series B: |                                                                                                                         |                                              |              |        |        |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        |           | 9,000,000 shares authorized, 4,983,000 and 0 shares issued and
	outstanding at December 31, 2000 and December  31, 1999 |                                              |              | 12,345 |        |  |   |       |       
|                                        |           |                                                                                                                         |                                              |              |        |        |  |  
|                                        |           |                                                                                                                         | Total Redeemable Convertible Preferred Stock |              | $      | 42,845 |  |   | $      | 30,500 | 
|                                        |           |                                                                                                                         |                                              |              |        |        |  |  

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On July 13, 2000 the Company announced it had agreements
with investors to purchase $21,845 (8,738,000 shares at $2.50
per share) of new convertible shares of Series B Preferred
Stock. In conjunction with the purchase of convertible
Series B Preferred Stock, each investor also received a
specified small minority interest in the Companys
subsidiary, 1414c, Inc. The Company determined that the fair
value of shares received in the Companys subsidiary,
1414c, by the investors was insignificant. In addition, in
accordance with the convertible Series B Preferred Stock
agreement, the Company also entered into a joint venture and
hosting agreement with one of the investors. These transactions
were completed and the funds became available on July 24,
2000. In October 2000, one of the investors converted its
3,800,000 shares of the Series B Preferred Stock to
3,800,000 shares of the Companys Common Stock.

The convertible Series B Preferred Stock is non-voting and
preferred with respect to dividend rights and liquidation
preference to the Companys Common Stock. When issued, each
share of Series B Preferred Stock, was convertible into one
share of common stock, which represents a discount from the fair
value of common stock on the date of issuance of $1.50 per
share. The value attributable to this conversion right
represents an incremental yield, or a beneficial conversion
feature. For investors that have a purely financial relationship
with the Company, the discount resulting from the allocation of
proceeds to the beneficial conversion feature is accreted, using
the interest method, from the date of issuance through the date
the Series B Preferred Stock is first convertible which is
October 13, 2000. The Company has recorded accretion of
$6,900 for the year ended December 31, 2000. This accretion
represents a non-cash charge in determination of net loss
attributable to common shareholders.

The investor that entered into a joint venture and hosting
agreement with the Company as well as investors that are also
employees or directors of the Company are considered to have a
business relationship with the Company beyond that of a
financial investor. As a result, their investments are
considered to involve elements of compensation for goods or
services. Therefore, the Company determined the fair value of
the beneficial conversion feature associated with these shares
to be $6,207, which has been recorded as selling, general and
administrative expense during the year ended December 31,
2000.

On February 18, 1999, an investor acquired approximately
10% of the Companys equity when it invested $30,500 in
convertible Series A Preferred Stock. The convertible preferred
stock was issued to the investor at a price of $6.81 per
share. The shares are convertible to common stock on a one for
one basis, which represents a discount from the fair value of
common stock on the date of issuance of $8.01 per share.
The intrinsic value attributable to this conversion right
represents a beneficial conversion feature that has been
recorded as an increase to net loss in the consolidated
statement of operations in the period ended December 31,
1999, and represents a non-cash charge in the determination of
net loss attributable to common stockholders.

The Companys Board of Directors is empowered to fix the
terms and rights of the Series A preference stock and issuance
of the convertible Series A Preferred Stock limits the rights of
the common stockholders. The Series A convertible Preferred
Stock issued is non-voting and preferred with respect to
dividend rights and liquidation preference to the Companys
Common Stock. For the period through February 17, 2004, the
holders of the convertible preferred stock are entitled to
receive, out of funds legally available, noncumulative dividends
on shares of common stock or preferred stock for each share of
preferred stock held per year, when and if declared by the Board
of Directors. The Series A convertible Preferred Stock is
subject to redemption requirements that are outside of the
control of the Company under certain limited circumstances, as
defined in the Series A Certificate of Designation. Those
circumstances include a merger or consolidation of the Company
in which its stockholders do not retain a majority of the voting
power in the surviving corporation. Under such circumstances,
the holders of Series A convertible Preferred Stock are entitled
to receive a payment equal to the purchase price originally paid
for the Series A convertible Preferred Stock together with any
declared but unpaid dividends, before any payment is made to
holders of common stock.

Treasury Stock

In October 1998, the Board of Directors authorized a plan
to repurchase up to 1,000,000 shares of the Companys
Common Stock in open market, privately negotiated or other
transactions. No shares were repurchased during 1998. The
Company repurchased 70,000 shares during 1999 at a cost of $556
(approxi-

34



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Warrants

As part of the acquisition of Starlight Networks, Inc. in 1998,
the Company assumed warrants, issued by the acquired company.
Provisions of the warrants include rights to purchase 2,723
shares of Common Stock and are exercisable at an average price
of $27.83 per share and have expiration dates ranging from
February 2002 through February 2007.

Stockholders Rights Agreement

On March 25, 1992, the Board of Directors of the Company
declared a dividend of one purchase right (a Right)
for every outstanding share of the Companys Common Stock.
After giving effect to the split, each Right entitles the holder
to purchase from the Company one two-hundredths of a share of
Junior Preference Stock at a price of $90 per one two-hundredths
of a share, subject to adjustment. The Rights will become
exercisable on the fifteenth business day following the date of
a public announcement that an acquiring person (as defined in
the Rights Agreement, the definition of which provides for
certain limited exclusions) has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the
Companys outstanding Common Stock or on the fifteenth
business day following the commencement of a tender offer or
exchange offer that would result in an acquiring person owning
15% or more of the Companys outstanding Common Stock.

If the Company were acquired in a merger or other business
combination, or more than 25% of its assets or earning power
were sold, each holder of a Right would be entitled to exercise
such Right and thereby receive common stock of the acquiring
company with a market value of two times the exercise price of
the Right. If an acquiring person has acquired or obtained the
right to acquire 15% of the Companys Common Stock, each
holder of a Right, other than the acquiring person, will be
entitled to receive shares of the Companys Common Stock
having a market value of two times the exercise price of the
Right. At any time the Company may redeem the Rights at a
redemption price of $0.005 per Right. The Rights expire
March 25, 2002.

Stock-Based Compensation Plans

The Company has adopted the disclosure requirements of Statement
of Financial Accounting Standard (SFAS) No. 123,
Accounting for Stock-Based Compensation. The Company
continues to recognize compensation costs using the intrinsic
value based method described in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees. No compensation costs were recognized in 2000,
1999 and 1998.

Net loss and net loss per share as reported in these
consolidated financial statements and on a pro forma basis, as
if the fair value based method described in SFAS No. 123
had been adopted, are as follows:

|                                              |             |                         |   |          |   |      |   |         |   |  |   |         |  
|--------------------------------------------- | ----------- | ----------------------- | - | -------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                              |             |                        
|                                              |             | Year Ended December 31,
|                                              |             |                        
|                                              |             | 2000                    |   | 1999     |   | 1998
|                                              |             |                         |   |          |   |     
|Net loss applicable to common shareholders    |             |                         |   |          |   |      |   |         |   |  |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | As reported |                         | $ | (113,871 | ) |      | $ | (90,138 | ) |  | $ | (55,679 | )
|                                             
|                                             
|                                             
|                                             
|                                              | Pro forma   |                         |   | (120,601 | ) |      |   | (98,638 | ) |  |   | (66,224 | )
|Net loss per common share  basic and diluted |             |                         |   |          |   |      |   |         |   |  |   |        
|                                             
|                                             
|                                             
|                                             
|                                              | As reported |                         | $ | (2.73    | ) |      | $ | (2.23   | ) |  | $ | (1.45   | )
|                                             
|                                             
|                                             
|                                             
|                                              | Pro forma   |                         |   | (2.89    | ) |      |   | (2.44   | ) |  |   | (1.72   | )

35



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Employee Stock Purchase Plan

Under terms of an Employee Stock Purchase Plan (the
ESPP) adopted in 1994 and amended in 1996, eligible
employees are able to purchase shares of the Companys
Common Stock at 85% of the average market value as of the start
of each six month option period or the end of such period,
whichever is lower. As of December 31, 2000, shareholders
have authorized the purchase of up to 2,000,000 shares of Common
Stock under the ESPP. Shares purchased under the ESPP in 2000,
1999 and 1998 totaled 165,896, 295,820 and 286,074, respectively.

On June 17, 1999, the Companys shareholders approved
the 1999 Foreign Subsidiary Employee Stock Purchase Plan
(the Foreign Plan). Under the Foreign Plan, eligible
foreign subsidiary employees are able to purchase shares of the
Companys Common Stock on terms substantially similar to
those of the ESPP. Up to 500,000 shares are authorized under the
Foreign Plan. There were 26,843 shares purchased under the
Foreign Plan in 2000.

The weighted average grant date fair value of the shares
purchased was $2.63, 2.15 and $2.64 in 2000, 1999 and 1998,
respectively. At December 31, 2000, there were 1,336,529
shares available under these plans.

For the purpose of providing pro forma disclosures, the fair
values of shares purchased were estimated using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for purchases in 2000, 1999
and 1998, respectively:  a risk-free interest rate of
6.01%, 4.97% and 5.11%, an expected life of 6 months,
expected volatility of 78%, 69% and 65% and no expected
dividends.

Stock Option Plans

On November 14, 1989, the Companys shareholders
approved the PictureTel Equity Incentive Plan (the
EIP). Pursuant to terms contained therein, the EIP
terminated on November 14, 1999 and as of November 14,
1999, shareholders have authorized the issuance of up to
9,000,000 shares of post Stock Split Common Stock under the
Plan. Following the Termination Date, no additional options were
granted under the EIP, but earlier option grants made thereunder
expire seven to ten years after the effective date of the grant.
On June 17, 1999, the Companys shareholders approved
the PictureTel 1999 Equity Plan (the 1999 Plan). As
of December 31, 2000, shareholders have authorized the
issuance of up to 3,000,000 shares of Common Stock under the
1999 Plan. The 1999 Plan permits the granting of non-statutory
and incentive stock options, a variety of stock and stock-based
awards and related benefits, and cash performance awards, which
are in addition to option grants under the EIP and the 1984
Amended and Restated Stock Option Plan, to employees and other
persons who are in a position to make significant contributions
to the success of the Company. Generally, grants issued under
these plans become exercisable over a four year period and
expire ten years (seven years for United Kingdom issued grants)
after the effective date.

Effective October 23, 1992, the Board of Directors adopted
the 1992 Non-Employee Directors Stock Option Plan. As of
December 31, 1998, shareholders have authorized the
issuance of up to 430,000 shares of Common Stock under the Plan
to eligible non-employee directors. Under this Plan, each
non-employee director at October 23, 1992 and each
non-employee director subsequently elected receives, at
October 23, 1992 or the directors first election
date, a non-statutory option to purchase 40,000 shares of post
Stock Split Common Stock at an exercise price equal to the fair
market value of the stock on the effective date of grant. The
Plan was amended at the Annual Meeting on June 17, 1996 so
as to increase the aggregate number of shares available for
issuance under the Plan from 280,000 to 430,000, and to further
provide, as of August 1, 1996, for the automatic grant of a
non-statutory option to purchase 20,000 shares of Common Stock
to directors who have been directors for more than two years on
August 1, 1996, and on the later date of first election of
any other director and thereafter, for the annual grant of stock
options to purchase 5,000 shares of the Companys Common
Stock on August first of each year, commencing on August 1,
1997, so long as such individual is serving as a director on the
applicable August first date, provided that no such annual
option for 5,000 shares shall be granted to a director who first
became a director of the Company within six months prior to
August first of said year. The Plan was further amended by the
Board of Directors on February 27, 1998 to provide for
non-automatic grants of non-statutory options not to exceed
60,000 shares in the aggregate for all directors. On
June 17, 1999, because of anticipated accounting rule
changes affecting the grant of stock

36



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##### Table of Contents





Effective upon the consummation of the acquisition of MultiLink,
Inc. on July 22, 1997, the Board of Directors voted to
assume the 1984, 1986, 1987 and 1996 MultiLink, Inc. Stock
Options Plans and renamed the 1984, 1986, 1987 and 1996
PictureTel (MultiLink) Option Plans (the Plans), as
appropriate, and provided for the issuance of shares of Common
Stock in replacement for MultiLink Common Stock upon the
exercise thereof. The Compensation Committee of the Board of
Directors administers the MultiLink Option Plans assumed (and
renamed) by PictureTel. There is reserved for issuance under the
Plans 655,419 shares of Common Stock of PictureTel Corporation
to be issued upon exercise of the options outstanding under the
Plans. No additional options will be issued under the Plans. All
options expire ten years after the effective date of the grant,
and such options become exercisable over a four-year period.

Effective upon the consummation of the acquisition of Starlight
Networks, Inc. on November 10, 1998, the Board of Directors
voted to approve the 1998 Acquisition Stock Option Plan (the
Acquisition Plan). The Acquisition Plan permits the
grant of non-qualified options to purchase shares of Common
Stock of PictureTel Corporation to Starlight employees who are
in a position to make significant contributions to the success
of the Company. The Board of Directors amended the Acquisition
Plan on March 1, 2001 to further permit the grant of stock
options to employees of the Company (excluding directors and
officers of the Company), subsidiaries of the Company, and
business acquired by the Company. The Compensation Committee of
the Board of Directors administers the Acquisition Plan. There
is reserved for issuance under the Plan 400,000 shares of Common
Stock to be issued upon exercise of the options granted under
the Plan. All options expire ten years after the effective date
of the grant, and such options become exercisable over a
four-year period. At December 31, 2000, there were 362,729
shares available for future grant under the Plan.

The following table summarizes the Companys stock option
plans at December 31, 2000, 1999 and 1998 and changes
during the years then ended:

|                                                                                                |  |        |            |           |  |        |      |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|----------------------------------------------------------------------------------------------- |  | ------ | ---------- | --------- |  | ------ | ---- | --------- |  | ------ | ---------- | --------- |  | - | ----- |  |  |  | ---------- | - |  | - | ----- | 
|                                                                                                |  |        |            |           |  |       
|                                                                                                |  | 2000   |            | 1999      |  | 1998  
|                                                                                                |  |        |            |           |  |       
|                                                                                                |  |        |            | Weighted- |  |        |      | Weighted- |  |        |            | Weighted-
|                                                                                                |  |        |            | Average   |  |        |      | Average   |  |        |            | Average  
|                                                                                                |  |        |            | Exercise  |  |        |      | Exercise  |  |        |            | Exercise 
|                                                                                                |  | Shares |            | Price     |  | Shares |      | Price     |  | Shares |            | Price    
|                                                                                                |  |        |            |           |  |        |      |           |  |        |            |          
|Outstanding at beginning of year                                                                |  |        | 6,912,081  |           |  | $      | 7.05 |           |  |        | 6,686,832  |           |  | $ | 9.16  |  |  |  | 4,728,190  |   |  | $ | 11.21 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Granted at fair market value                                                                    |  |        | 2,855,004  |           |  |        | 4.80 |           |  |        | 4,790,305  |           |  |   | 5.35  |  |  |  | 3,627,100  |   |  |   | 7.01  | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Exercised                                                                                       |  |        | (438,659   | )         |  |        | 7.28 |           |  |        | (254,043   | )         |  |   | 7.26  |  |  |  | (232,068   | ) |  |   | 4.23  | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Forfeited                                                                                       |  |        | (3,509,340 | )         |  |        | 6.85 |           |  |        | (4,311,013 | )         |  |   | 8.41  |  |  |  | (1,436,390 | ) |  |   | 11.26 | 
|                                                                                                |  |        |            |           |  |        |      |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|Outstanding at end of year                                                                      |  |        | 5,819,086  |           |  | $      | 6.06 |           |  |        | 6,912,081  |           |  | $ | 7.05  |  |  |  | 6,686,832  |   |  | $ | 9.16  | 
|                                                                                                |  |        |            |           |  |        |      |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|Options exercisable at year-end                                                                 |  |        | 2,135,317  |           |  | $      | 7.97 |           |  |        | 1,921,405  |           |  | $ | 10.23 |  |  |  | 2,328,993  |   |  | $ | 11.52 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Weighted-average grant date fair value of options granted during
	the year at fair market value |  |        |            |           |  | $      | 3.62 |           |  |        |            |           |  | $ | 3.49  |  |  |  |            |   |  | $ | 4.38  | 

37



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##### Table of Contents



The following table summarizes information about stock options
outstanding at December 31, 2000:

|                |                   |                     |  |                     |           |                |  |             |      |                |  |   |        |  |  |  |           |  |  |   |        | 
|--------------- | ----------------- | ------------------- |  | ------------------- | --------- | -------------- |  | ----------- | ---- | -------------- |  | - | ------ |  |  |  | --------- |  |  | - | ------ | 
|                |                   |                     |  |                    
|                |                   | Options Outstanding |  | Options Exercisable
|                |                   |                     |  |                    
|                |                   |                     |  | Weighted-Average    |           |                |  |            
|                |                   |                     |  | Remaining           |           | Weighted-      |  |             |      | Weighted-     
|Range of        |                   | Number              |  | Contractual Life    |           | Average        |  | Number      |      | Average       
|Exercise Prices |                   | Outstanding         |  | (In years)          |           | Exercise Price |  | Exercisable |      | Exercise Price
|                |                   |                     |  |                     |           |                |  |             |      |               
|                | $ 0.893  $ 2.656 |                     |  |                     | 338,856   |                |  |             | 9.44 |                |  | $ | 2.598  |  |  |  | 37,556    |  |  | $ | 2.653  | 
|                | 2.679    3.625   |                     |  |                     | 495,240   |                |  |             | 9.40 |                |  |   | 3.278  |  |  |  | 2,096     |  |  |   | 3.310  | 
|                | 3.656    3.719   |                     |  |                     | 936,991   |                |  |             | 7.81 |                |  |   | 3.718  |  |  |  | 319,676   |  |  |   | 3.715  | 
|                | 3.880    5.031   |                     |  |                     | 858,251   |                |  |             | 9.09 |                |  |   | 4.756  |  |  |  | 165,843   |  |  |   | 4.403  | 
|                | 5.188    5.531   |                     |  |                     | 1,178,988 |                |  |             | 8.63 |                |  |   | 5.497  |  |  |  | 459,175   |  |  |   | 5.521  | 
|                | 5.625    6.810   |                     |  |                     | 624,687   |                |  |             | 8.88 |                |  |   | 6.388  |  |  |  | 109,340   |  |  |   | 6.045  | 
|                | 6.813    8.875   |                     |  |                     | 732,817   |                |  |             | 6.37 |                |  |   | 8.079  |  |  |  | 507,415   |  |  |   | 8.187  | 
|                | 8.940   12.875   |                     |  |                     | 485,606   |                |  |             | 6.00 |                |  |   | 9.722  |  |  |  | 367,251   |  |  |   | 9.730  | 
|                | 14.970   25.815  |                     |  |                     | 106,950   |                |  |             | 6.02 |                |  |   | 17.172 |  |  |  | 106,265   |  |  |   | 17.174 | 
|                | 35.000   40.500  |                     |  |                     | 60,700    |                |  |             | 5.41 |                |  |   | 36.814 |  |  |  | 60,700    |  |  |   | 36.814 | 
|                |                   |                     |  |                     |           |                |  |             |      |                |  |   |        |  |  |  |           |  |  |   |        | 
|                | $ 0.893  $40.500 |                     |  |                     | 5,819,086 |                |  |             | 8.12 |                |  |   | 6.06   |  |  |  | 2,135,317 |  |  |   | 7.97   | 
|                |                   |                     |  |                     |           |                |  |             |      |                |  |   |        |  |  |  |           |  |  |   |        | 

For the purpose of providing pro forma disclosures, the fair
values of options granted were estimated using the Black-Scholes
option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998,
respectively: a risk-free interest rate of 6.27%, 5.65% and
5.10%, an expected life of 6.0, 5.5 and 5.5 months,
expected volatility of 85%, 71% and 67% and no expected
dividends.

10.  Income Taxes:

Significant items making up total net deferred tax assets are as
follows:

|                                                |                               |              |          |      |  |   |         |   | 
|----------------------------------------------- | ----------------------------- | ------------ | -------- | ---- |  | - | ------- | - | 
|                                                |                               |             
|                                                |                               | December 31,
|                                                |                               |             
|                                                |                               | 2000         |          | 1999
|                                                |                               |              |          |     
|Net operating loss and tax credit carryforwards |                               | $            | 85,281   |      |  | $ | 66,723  |  
|                                               
|                                               
|                                               
|                                               
|Inventory reserves                              |                               |              | 6,398    |      |  |   | 3,387   |  
|                                               
|                                               
|                                               
|                                               
|Depreciation and amortization                   |                               |              | 6,263    |      |  |   | (2,816  | )
|                                               
|                                               
|                                               
|                                               
|Other temporary differences                     |                               |              | 21,152   |      |  |   | 15,985  |  
|                                               
|                                               
|                                               
|                                               
|Valuation allowance                             |                               |              | (119,094 | )    |  |   | (83,279 | )
|                                                |                               |              |          |      |  |   |         |  
|                                                | Total net deferred tax assets |              | $        |     |  |   | $       |  | 
|                                                |                               |              |          |      |  |   |         |  

Other temporary differences principally represent bad debt and
warranty reserves, deferred research and development, deferred
revenue, vacation and other payroll related differences.
Management believes the Company is unlikely to fully realize the
deferred tax assets and accordingly has established a full
valuation allowance on the deferred tax assets. Approximately
$7,959 of the gross deferred tax assets at December 31,
2000 relates to the benefit of deductions from the exercise of
stock options. The benefit will be recorded as a credit to
additional paid in capital when realized.

38



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##### Table of Contents



The provision (benefit) for income taxes consisted of the
following:

|                      |                   |                         |   |      |       |      |   |       |       |  |   |        |        | 
|--------------------- | ----------------- | ----------------------- | - | ---- | ----- | ---- | - | ----- | ----- |  | - | ------ | ------ | 
|                      |                   |                        
|                      |                   | Year Ended December 31,
|                      |                   |                        
|                      |                   | 2000                    |   | 1999 |       | 1998
|                      |                   |                         |   |      |       |     
|Federal income taxes: |                   |                         |   |      |       |      |   |       |       |  |   |       
|                     
|                     
|                     
|                     
|                      | Currently payable |                         | $ |     |       |      | $ |      |       |  | $ | 253    |       
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |     |       |      |   |      |       |  |   | 24,634 |       
|                     
|                     
|                     
|                     
|State income taxes:   |                   |                         |   |      |       |      |   |       |       |  |   |       
|                     
|                     
|                     
|                     
|                      | Currently payable |                         |   | 450  |       |      |   | 204   |       |  |   | 75     |       
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |     |       |      |   |      |       |  |   | 7,011  |       
|                     
|                     
|                     
|                     
|Foreign taxes:        |                   |                         |   |      |       |      |   |       |       |  |   |       
|                     
|                     
|                     
|                     
|                      | Currently payable |                         |   | 720  |       |      |   | 4,180 |       |  |   | 3,732  |       
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |     |       |      |   |      |       |  |   | 76     |       
|                      |                   |                         |   |      |       |      |   |       |       |  |   |       
|                      |                   | Total                   |   | $    | 1,170 |      |   | $     | 4,384 |  |   | $      | 35,781 | 
|                      |                   |                         |   |      |       |      |   |       |       |  |   |       

The differences between the statutory federal income tax rate
and the Companys effective income tax rate were as follows:

|                                              |  |                         |       |      |  |      |       |    |  |  |       |   
|--------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                              |  |                        
|                                              |  | Year Ended December 31,
|                                              |  |                        
|                                              |  | 2000                    |       | 1999 |  | 1998
|                                              |  |                         |       |      |  |     
|Statutory federal income tax rate             |  |                         | (35.0 | )%   |  |      | (35.0 | )% |  |  | (35.0 | )%
|                                             
|                                             
|                                             
|                                             
|State income tax, net of federal tax benefit  |  |                         | (3.8  | )    |  |      | (4.4  | )  |  |  | 0.2   |   
|                                             
|                                             
|                                             
|                                             
|Federal credits from research and development |  |                         | 0.6   |      |  |      | (0.7  | )  |  |  |      |   
|                                             
|                                             
|                                             
|                                             
|Difference between foreign and US tax rates   |  |                         | 1.7   |      |  |      | 4.4   |    |  |  | 3.1   |   
|                                             
|                                             
|                                             
|                                             
|Change in deferred asset valuation allowance  |  |                         | 33.2  |      |  |      | 39.6  |    |  |  | 207.6 |   
|                                             
|                                             
|                                             
|                                             
|Other                                         |  |                         | 4.4   |      |  |      | 1.6   |    |  |  | 3.9   |   
|                                              |  |                         |       |      |  |      |       |    |  |  |       |   
|Effective tax rate                            |  |                         | 1.1   | %    |  |      | 5.5   | %  |  |  | 179.8 | % 
|                                              |  |                         |       |      |  |      |       |    |  |  |       |   

At December 31, 2000, the Company had remaining net
operating loss (NOL) carryforwards available of
approximately $195,000 to offset future federal taxable income.
The Company also has unused federal research and development tax
credits of approximately $5,151. The NOL and tax credit
carryforwards both expire at various dates through the year
2020. As a result of prior equity issuances, the Companys
use of NOL carryforwards incurred prior to July 1988 is subject
to certain annual limitations. At December 31, 2000,
approximately $3,975 of the available NOL carryforwards have an
annual limitation amount of approximately $662 that may be used
to reduce the Companys taxable income in the future. If
certain substantial changes in the Companys ownership
should occur, there would be an annual limitation on the amount
of the carryforwards which can be utilized.

11.  Employee Benefit Plans:

The Company has a defined contribution profit sharing plan
incorporating features under Section 401(k) of the Internal
Revenue Code designed to provide retirement benefits to its
employees. The Plan covers substantially all employees of the
Company, and eligible participants may contribute up to 15% of
their pay on a pretax basis subject to annual dollar limits
established by the Internal Revenue Code and plan limitations.
The Plan document states that the Company will provide at least
33.3% matching contribution up to the first 3% of each
participants eligible compensation. For the years ended
December 31, 2000, 1999 and 1998, the Companys
matching contribution was 50%, 50% and 50%, respectively or
$400, $600 and $780, respectively.

The Company assumed the MultiLink, Inc. 401K Plan as a result of
the acquisition in July 1997. The Company filed a Plan
termination with the Internal Revenue Service and received a
favorable determination. The Plan was terminated effective
September 30, 1997. No company contributions were made to
the MultiLink Plan in 1997.

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##### Table of Contents



The Company assumed the Starlight, Inc. 401K Plan as a result of
the acquisition in November 1998. The Company filed a Plan
termination with the Internal Revenue Service and received a
favorable determination. The Plan was terminated effective
December 31, 1998. No company contributions were made to
the Starlight Plan in 1998.

12.  Segment Information:

The Company has determined that its reportable segments are
those that are based on the Companys method of internal
reporting, which aggregates its business into two reportable
operating segments: videoconferencing products and
videoconferencing services. The videoconferencing products
segment develops, manufactures and markets visual communications
systems and collaboration software. The videoconferencing
services segment provides services for the videoconferencing
products.

In 2000, 1999 and 1998, no customer accounted for 10% or more of
total revenue. One supplier accounted for 32%, 33% and 32% of
the Companys purchases from outside vendors in 2000, 1999
and 1998, respectively. Another supplier accounted for 18% of
the Companys purchases from outside vendors in 1999 and a
third supplier accounted for 10% of the Companys purchases
from outside vendors in 1998.

|                                |  |              |         |              |  |       |        |       |  |   |         |   |  |   |          |  
|------------------------------- |  | ------------ | ------- | ------------ |  | ----- | ------ | ----- |  | - | ------- | - |  | - | -------- | -
|                                |  | Video-       |         | Video-       |  |       |        |      
|                                |  | conferencing |         | conferencing |  |       |        |      
|                                |  | Products     |         | Services     |  | Other |        | Total
|                                |  |              |         |              |  |       |        |      
|Year ended December 31, 2000    |  |              |         |              |  |       |        |       |  |   |         |   |  |   |          |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 159,160 |              |  | $     | 69,741 |       |  | $ | 16,248  |   |  | $ | 245,149  |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (74,161 | )            |  | $     | 9,585  |       |  | $ | (54,850 | ) |  | $ | (119,426 | )
|                               
|                               
|                               
|                               
|Year ended December 31, 1999    |  |              |         |              |  |       |        |       |  |   |         |   |  |   |          |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 233,249 |              |  | $     | 70,304 |       |  | $ | 20,442  |   |  | $ | 323,995  |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (68,409 | )            |  | $     | 2,976  |       |  | $ | (24,851 | ) |  | $ | (90,284  | )
|                               
|                               
|                               
|                               
|Year ended December 31, 1998    |  |              |         |              |  |       |        |       |  |   |         |   |  |   |          |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 324,478 |              |  | $     | 59,760 |       |  | $ | 22,905  |   |  | $ | 407,143  |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (16,049 | )            |  | $     | 7,191  |       |  | $ | (14,792 | ) |  | $ | (23,650  | )

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 are no material intersegment sales.
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.

40



---



##### Table of Contents



Geographic Data

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

|                                |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|------------------------------- |  | ------------- | ------- | ------- |  | ----- | ------ | --------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                |  |               |         | United  |  |       |        |           |  |      
|                                |  | United States |         | Kingdom |  | Japan |        | All Other |  | Total
|                                |  |               |         |         |  |       |        |           |  |      
|Year ended December 31, 2000    |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 157,180 |         |  | $     | 51,129 |           |  | $     | 20,305 |  |  | $ | 16,535 |  |  | $ | 245,149 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 17,366  |         |  | $     | 2,467  |           |  | $     | 1,112  |  |  | $ | 226    |  |  | $ | 21,171  | 
|                               
|                               
|                               
|                               
|Year ended December 31, 1999    |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 201,480 |         |  | $     | 65,654 |           |  | $     | 27,055 |  |  | $ | 29,806 |  |  | $ | 323,995 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 104,109 |         |  | $     | 3,872  |           |  | $     | 2,225  |  |  | $ | 1,150  |  |  | $ | 111,356 | 
|                               
|                               
|                               
|                               
|Year ended December 31, 1998    |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 268,102 |         |  | $     | 79,396 |           |  | $     | 24,747 |  |  | $ | 34,898 |  |  | $ | 407,143 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 125,997 |         |  | $     | 3,804  |           |  | $     | 2,295  |  |  | $ | 2,235  |  |  | $ | 134,331 | 

Segment information for 1998 has been reclassified to reflect
the new allocation method employed in 1999.

13.  Unaudited Interim Financial Information:

Quarterly financial information is as follows:

|                                              |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                              |  | First   |         | Second  |  | Third   |         | Fourth 
|                                              |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                              |  |         |         |         |  |         |         |        
|2000                                          |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|                                             
|                                             
|                                             
|                                             
|Revenue(1)                                    |  | $       | 65,203  |         |  | $       | 61,565  |         |  | $ | 70,029  |   |  | $ | 48,352  |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |         | 17,719  |         |  |         | 6,577   |         |  |   | 20,829  |   |  |   | 11,827  |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |         | (23,842 | )       |  |         | (37,973 | )       |  |   | (43,619 | ) |  |   | (8,437  | )
|                                             
|                                             
|                                             
|                                             
|Net loss per common share  basic and diluted |  | $       | (0.59   | )       |  | $       | (0.93   | )       |  | $ | (1.06   | ) |  | $ | (0.19   | )
|                                             
|                                             
|                                             
|                                             
|1999                                          |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|                                             
|                                             
|                                             
|                                             
|Revenue(1)                                    |  | $       | 76,421  |         |  | $       | 86,146  |         |  | $ | 78,953  |   |  | $ | 82,475  |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |         | 24,222  |         |  |         | 27,025  |         |  |   | 24,930  |   |  |   | 25,959  |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |         | (31,582 | )       |  |         | (31,832 | )       |  |   | (10,567 | ) |  |   | (16,157 | )
|                                             
|                                             
|                                             
|                                             
|Net loss per common share  basic and diluted |  | $       | (0.79   | )       |  | $       | (0.79   | )       |  | $ | (0.26   | ) |  | $ | (0.40   | )




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective in the fourth quarter of 2000, the Company adopted the
	FASBs Emerging Issues Task Force (EITF) Issue
	No. 00-10, Accounting for Shipping and Handling Fees
	and Costs. Consistent with this Issue, amounts billed to
	customers for shipping and handling have been reclassified as
	revenue from cost of revenue in the Companys financial
	statements. Amounts reclassified for the first, second and third
	quarters of 2000 were $136, $141 and $269, respectively. Amounts
	reclassified for the first, second, third and fourth quarters of
	1999 were $227, $184, $140 and $165, respectively.

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14.  Supplemental Cash Flow Information:

|                                                        |                                               |      |   |       |  |      |   |       |  |  |   |        | 
|------------------------------------------------------- | --------------------------------------------- | ---- | - | ----- |  | ---- | - | ----- |  |  | - | ------ | 
|                                                        |                                               | 2000 |   | 1999  |  | 1998
|                                                        |                                               |      |   |       |  |     
|Supplemental cash flow information:                     |                                               |      |   |       |  |      |   |       |  |  |   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest paid                                 |      | $ | 5,056 |  |      | $ | 4,642 |  |  | $ | 2,903  | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Income taxes paid                             |      | $ | 1,394 |  |      | $ | 1,845 |  |  | $ | 1,245  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Supplemental disclosure of non-cash investing activity: |                                               |      |   |       |  |      |   |       |  |  |   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Building acquired under capital lease         |      | $ |      |  |      | $ |      |  |  | $ | 38,000 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Issuance of stock for acquisition             |      | $ |      |  |      | $ |      |  |  | $ | 14,679 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Assumption of debt for acquisition            |      | $ |      |  |      | $ |      |  |  | $ | 3,544  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Supplemental disclosure of non-cash financing activity: |                                               |      |   |       |  |      |   |       |  |  |   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Preferred stock beneficial conversion feature |      | $ | 6,900 |  |      | $ | 5,612 |  |  | $ |       | 

15.  Sale of Business Assets:

On October 12, 2000, the Company completed the sale of its
Starlight division to AxessPoint, Inc. Terms of the sale
provided for a note receivable in the amount of $300 payable to
PictureTel on April 9, 2001. The Company has recorded a
gain of $104, net an impairment charge of $11,188 (Note 3),
on this sale in 2000, which is included in other income on the
Companys Consolidated Statements of Operations.

Also during 2000, the Company completed the sale of MultiLink,
Inc. to Spectel Group Ltd. for $25,900 cash on November 27,
2000. As a result of this sale, the Company recorded a gain of
$15,245 on the sale in 2000, which is included in other income
on the Companys Consolidated Statements of Operations.

16.  Other Charges:

During the year ended December 31, 2000, the Company
recorded charges totaling $42,313. Of these charges, $6,905 were
included in cost of revenue and $35,408 were included in
operating expense for the year. These charges included $22,796
in lease termination costs associated with the Companys
200 and 50 Minuteman Road facilities, a $1,205 write-off of
capitalized website development costs, $917 of severance charges
related to headcount reduction, $6,207 for costs associated with
the beneficial conversion feature of the preferred stock
issuance and $11,188 of impairment charges related to the
write-down of purchased software, tradename, assembled workforce
and goodwill for a division of the Companys
videoconferencing products segment.

The Company recorded charges of $9,752 during 1999. Cost of
revenue includes $491 of expense associated with workforce
reductions. Operating expense includes approximately $2,554 of
workforce reduction and related costs, $2,550 for the settlement
of shareholder litigation, and $2,481 associated with subleasing
MultiLinks former facility at 6 Riverside Drive, Andover,
Massachusetts.

During 1998, the Company recorded charges of $10,564. Charges of
$6,808 reported in cost of revenue include $5,457 related to the
write down of inventory and capitalized software to their net
realizable value and other costs associated with the
discontinuation of one of the Companys product lines and
$1,351 to record inventory provisions for the write down of
certain inventories to their net realizable value. Charges of
$3,756 included in operating expenses relate to the write down
of leasehold improvements at the 50 Minuteman Road facility
in Andover and transaction costs associated with subleasing this
facility, and certain executive severance charges. The Company
subleased the 50 Minuteman Road facility in June 1998,
and the sublessee did not utilize the leasehold improvements in
the facility.

17.  Related Party

During 2000, the Company was involved in a development and
purchase agreement with a related party, who is a stockholder of
Series A and B redeemable preferred stock issued by the Company.
For the year ended December 31, 2000, purchases from this
related party totaled approximately $8,325 and the amount owed
to this related party as of December 31, 2000, was $204.

42



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##### Table of Contents



18.  Litigation:

A.  SEC Investigation

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

B.  RevNet, Inc.

On June 2, 1998, the Company was served with a complaint
from a former distribution channel customer, RevNet, Inc., which
has ceased operations. (RevNet, Inc., v. PictureTel
Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The
complaint alleged that the Company breached an oral contract.
RevNet was seeking $200,000 in damages. On September 13,
1999, the Company filed a related action in the Circuit Court
for Baltimore City, Maryland against RevNet, Inc., Vuecom, Inc.
(an entity related to RevNet, Inc.), George Harris IV,
George Sandmann and Lou Brown, (PictureTel Corporation v.
RevNet, Inc., et al. Civil Action 24-C99-004406) alleging
among other things Breach of Contract, Fraudulent Inducement and
Securities Fraud. This issue was scheduled to go to trial on
May 14, 2001. On October 30, 2000, the parties agreed
to a settlement of this matter. Under the terms of the
settlement, the Company will pay to the RevNet group $700 over
the course of the year 2001. In return, all parties have
dismissed all claims and have released the others of all related
causes of actions. This closes this matter.

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 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

None.

43



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE


To the Stockholders and Board of Directors of 
   PICTURETEL CORPORATION:

Our audits of the consolidated financial statements referred to
in our report dated February 21, 2001 appearing in this
Form 10-K also included an audit of this financial
statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts



44



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##### Table of Contents






SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                                             |  |                |        |           |  |            |        |             |  |   |       |     |  |   |        | 
|------------------------------------------------------------ |  | -------------- | ------ | --------- |  | ---------- | ------ | ----------- |  | - | ----- | --- |  | - | ------ | 
|                                                             |  | Balance at     |        | Charge to |  |            |        |            
|                                                             |  | Beginning      |        | Costs and |  |            |        | Balance at 
|Description                                                  |  | of Year        |        | Expenses  |  | Deductions |        | End of Year
|                                                             |  |                |        |           |  |            |        |            
|                                                             |  |               
|                                                             |  | (In thousands)
|                                                            
|                                                            
|                                                            
|                                                            
|Year Ended December 31, 1998                                 |  |                |        |           |  |            |        |             |  |   |       |     |  |   |        | 
|                                                            
|                                                            
|                                                            
|                                                            
|Accounts receivable reserves                                 |  | $              | 3,890  |           |  | $          | 4,160  |             |  | $ | 2,658 | (a) |  | $ | 5,392  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Manufacturing, demonstration, and service inventory reserves |  | $              | 15,140 |           |  | $          | 6,004  |             |  | $ | 8,130 | (b) |  | $ | 13,014 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Warranty reserves                                            |  | $              | 4,727  |           |  | $          | 7,410  |             |  | $ | 7,289 | (c) |  | $ | 4,848  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Year Ended December 31, 1999                                 |  |                |        |           |  |            |        |             |  |   |       |     |  |   |        | 
|                                                            
|                                                            
|                                                            
|                                                            
|Accounts receivable reserves                                 |  | $              | 5,392  |           |  | $          | 2,474  |             |  | $ | 2,224 | (a) |  | $ | 5,642  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Manufacturing, demonstration, and service inventory reserves |  | $              | 13,014 |           |  | $          | 3,834  |             |  | $ | 4,759 | (b) |  | $ | 12,089 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Warranty reserves                                            |  | $              | 4,848  |           |  | $          | 5,210  |             |  | $ | 6,915 | (c) |  | $ | 3,143  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Year Ended December 31, 2000                                 |  |                |        |           |  |            |        |             |  |   |       |     |  |   |        | 
|                                                            
|                                                            
|                                                            
|                                                            
|Accounts receivable reserves                                 |  | $              | 5,642  |           |  | $          | 3,207  |             |  | $ | 4,749 | (a) |  | $ | 4,100  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Manufacturing, demonstration, and service inventory reserves |  | $              | 12,089 |           |  | $          | 14,695 |             |  | $ | 7,190 | (b) |  | $ | 19,594 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Warranty reserves                                            |  | $              | 3,143  |           |  | $          | 6,279  |             |  | $ | 6,184 | (c) |  | $ | 3,238  | 




|    |                      
|--- | ---------------------
|(a) | Specific write-offs  
|   
|(b) | Specific dispositions
|   
|(c) | Specific cost        

45



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##### Table of Contents






PART III

Item 10.  Directors and Executive Officers
of the Registrant

Information with respect to this item is incorporated by
reference herein to information contained under the heading
Item 1  Election of Directors,
subheadings Nominees for Election, Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in the definitive 2001 Proxy
Statement.

Item 11.  Executive Compensation

Information with respect to this item is incorporated by
reference herein to information contained under the heading
Item 1  Election of Directors,
subheadings Directors Compensation, Management
Compensation and Employment, Severance and Other
Agreements in the definitive 2001 Proxy Statement.
(Information in the 2001 Proxy Statement under Report of
the Compensation Committee and Performance
Graph is not incorporated by reference.)

Item 12.  Security Ownership of Certain
Beneficial Owners and Management

Information with respect to this item is incorporated by
reference herein to information contained under the heading
Security Ownership in the definitive 2001 Proxy
Statement.

Item 13.  Certain Relationships and Related
Transactions

Information with respect to this item is incorporated by
reference herein to information contained under the heading
Certain Relationships and Related Transactions
[there was no such heading in 1996] in the definitive 2001 Proxy
Statement.




PART IV

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

(a)1.  Financial Statements



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Report of Independent Accountants                                                                     
|
| |  | Consolidated Balance Sheets as of December 31, 2000 and 1999                                          
|
| |  | Consolidated Statements of Operations for the years ended
	December 31, 2000, 1999 and 1998           
|
| |  | Consolidated Statements of Stockholders Equity for the
	years ended December  31, 2000, 1999 and 1998
|
| |  | Consolidated Statements of Cash Flows for the years ended
	December 31, 2000, 1999 and 1998           
|
| |  | Notes to Consolidated Financial Statements                                                            

2.  Financial Statement Schedule



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report of Independent Accountants                                                                                                                        
|
| |  | Schedule II  Valuation and Qualifying Accounts                                                                                                          
|
| |  | Schedules other than those listed above have been omitted since
	they are either not required, not applicable, or the information
	is otherwise included.

46



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##### Table of Contents



(b)Reports on Form 8-K

1. On December 15, 2000, the Company filed a report on
Form 8-K to announce the disposition of the assets formerly
owned by the Companys MutliLink subsidiary.

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

(c)Exhibits

|        |         |             |  |                                                                                                                                                                                                                                                                                                                        
|------- | ------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 3.1     |             |  | Third Restated Certificate of Incorporation (incorporated by
	reference to Exhibit 3.1.4 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended June 27,
	1992).                                                                                                                                         
|       
|        | 3.1.1   |             |  | Certificate of designation, preferences and other rights of the
	Series A Preferred Stock of PictureTel Corporation, consisting
	of an Amendment to the Certificate of Incorporation
	(incorporated by reference to Exhibit 3.1.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended April 4, 1999).
|       
|        | 3.1.1.1 |             |  | Certificate of Decrease of the Series A Preference Stock of
	PictureTel Corporation, filed herewith.                                                                                                                                                                                                                   
|       
|        | 3.1.2   |             |  | Certificate of designation, Preferences and Other Rights of
	Series B Preference Stock of PictureTel Corporation,
	consisting of an Amendment to the Certificate of Incorporation
	filed as Exhibit 2 to Report on Form 8-K, dated
	July 31, 2000 and hereby incorporated by reference.                                
|       
|        | 3.2     |             |  | Amended and Restated By-laws (incorporated by reference to
	Exhibit 1 to the Registrants Current Report on
	Form 8-K filed September 14, 1994).                                                                                                                                                                       
|       
|        | 4.1     |             |  | Form of Common Stock Certificate (incorporated by reference to
	Exhibit 4(b) to Registrants Registration Statement on
	Form S-8, Registration Number 33-36315, effective
	August  10, 1990).                                                                                                                          
|       
|        | 4.2     |             |  | Shareholders Rights Agreement between the Company and The
	First National Bank of Boston as Rights Agent, dated March 
	25, 1992 (incorporated by reference to Exhibit 1 to the
	Registrants Registration of Certain Classes of Securities
	on Form 8-A dated March 26, 1992).                                       
|       
|        | 4.2.1   |             |  | Form of Certificate of Designation with respect to Junior
	Preference Stock (incorporated by reference to Exhibit 2 to
	the Registrants Registration of Certain Classes of
	Securities on Form 8-A dated March 26, 1992).                                                                                             
|       
|        | 4.2.2   |             |  | Form of Rights Certificate (incorporated by reference to
	Exhibit 3 to the Registrants Registration of Certain
	Classes of Securities on Form 8-A dated March 26,
	1992).                                                                                                                                             
|       
|        | 4.2.3   |             |  | Summary of Purchase Rights (incorporated by reference to
	Exhibit 4 to the Registrants Registration of Certain
	Classes of Securities on Form 8-A dated March 26,
	1992).                                                                                                                                             
|       
|        | 4.2.4   |             |  | Amendment dated January 13, 1995 to Shareholders
	Rights Agreement (incorporated by reference to
	Exhibit 4.2.4 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1994).                                                                                                                    
|       
|        | 4.2.5   |             |  | Stock Purchase and Investors Rights Agreement dated as of
	July 24, 2000, filed as Exhibit 1 to Report on
	Form 8-K dated July 31, 2000 and hereby incorporated
	by reference.                                                                                                                                         
|       
|        | 4.2.6   |             |  | Stock Purchase Agreement between the Company and Intel
	Corporation, dated January 18, 1999, filed as Exhibit 1 to
	Form SC 13D filed on January 29, 1999.                                                                                                                                                             
|       
|        | 10.1*   |             |  | 1984 Amended and Restated Stock Option Plan as amended through
	December 13, 1988 (incorporated by reference to
	Exhibit 10.10 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1988).                                                                                                      
|       
|        | 10.1.1* |             |  | Amendment to 1984 Amended and Restated Stock Option Plan dated
	October 26, 1994 (incorporated by reference to
	Exhibit 10.10.1 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1994).                                                                                                     

47



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|        |         |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | ------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.2*   |             |  | PictureTel Corporation Equity Incentive Plan as amended through
	October 26, 1994 (incorporated by reference to
	Exhibit 10.11 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1994).                                                                                                             
|       
|        | 10.2.1* |             |  | Amendment to PictureTel Corporation Equity Incentive Plan dated
	June 29, 1995 (incorporated by reference to Exhibit 
	10.1 to Registrants Quarterly Report on Form 10-Q for
	the quarter ended July 1, 1995).                                                                                                               
|       
|        | 10.2.2  |             |  | Amendment to PictureTel Corporation Equity Incentive Plan dated
	October 18, 1996 (incorporated by reference to
	Exhibit 10.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 27, 1998).                                                                                                       
|       
|        | 10.3*   |             |  | 1992 Non-Employee Director Stock Option Plan as amended through
	April 10, 1996 (incorporated by reference to
	Exhibit 4(a) to Registrants Registration Statement on
	Form S-8, Registration Number 333-10163, effective
	September 2, 1997).                                                                                
|       
|        | 10.3.1  |             |  | 1992 Non-Employee Director Stock Option Plan as amended through
	February 27, 1998 (incorporated by reference to
	Exhibit 10.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 27, 1998).                                                                                                      
|       
|        | 10.3.2  |             |  | 1992 Non-Employee Directors Stock Option Plan as amended through
	June 17, 1999 (incorporated by reference to
	Exhibit 10.3.2 to Registrants Quarterly Report on
	Form  10-Q for the quarter ended July 4, 1999).                                                                                                            
|       
|        | 10.4    |             |  | PictureTel Corporation 1994 Employee Stock Purchase Plan
	(incorporated by reference to Exhibit 4 to
	Registrants Registration Statement on Form S-8,
	Registration Number 33-81848, effective July 22, 1994).                                                                                                               
|       
|        | 10.4.1  |             |  | Amendment to PictureTel Corporations 1994 Employee Stock
	Purchase Plan increasing the number of shares of Common Stock
	which may be delivered under the plan from 1,000,000 to
	2,000,000 (incorporated by reference to Exhibit 10.4.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended July 4, 1999).
|       
|        | 10.5    |             |  | 401(k) Profit Sharing Retirement Plan as amended through
	July 1, 1994 (incorporated by reference to
	Exhibit 10.45 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1994).                                                                                                                        
|       
|        | 10.6*   |             |  | Employment Agreement between PictureTel Corporation and Norman
	E. Gaut dated July 29, 1988 (incorporated by reference to
	Exhibit 10.12 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1988).                                                                                                   
|       
|        | 10.6.1* |             |  | Amendment dated January 15, 1995 to the Employment
	Agreement between PictureTel Corporation and Norman E. Gaut
	(incorporated by reference to Exhibit 10.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended April  1, 1995).                                                                            
|       
|        | 10.6.2* |             |  | Employment Agreement Letter by and between Norman Gaut and
	PictureTel Corporation dated August 31, 1999 (incorporated
	by reference to Exhibit 10.6.2 to Registrants
	Quarterly Report on Form 10-Q for the quarter ended
	October 3, 1999).                                                                                
|       
|        | 10.6.3  |             |  | Change in Control Agreement between PictureTel Corporation and
	Norman Gaut dated August 31, 1999, filed herewith.                                                                                                                                                                                                            
|       
|        | 10.7    |             |  | Reserved                                                                                                                                                                                                                                                                                                                      
|       
|        | 10.8    |             |  | Reserved                                                                                                                                                                                                                                                                                                                      
|       
|        | 10.9    |             |  | Reserved                                                                                                                                                                                                                                                                                                                      
|       
|        | 10.9.1* |             |  | Employment agreement between PictureTel Corporation and Lawrence
	Bornstein dated December 5, 1997 (incorporated by reference
	to Exhibit 10.9.1 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1997).                                                                                           
|       
|        | 10.9.2  |             |  | Reserved                                                                                                                                                                                                                                                                                                                      
|       
|        | 10.9.3  |             |  | Amendment to employment agreement between PictureTel Corporation
	and Lawrence Bornstein dated January 20, 1999 (incorporated
	by reference to Exhibit 10.10.1 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1998).                                                                            
|       
|        | 10.10   |             |  | Reserved                                                                                                                                                                                                                                                                                                                      

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|        |          |             |  |                                                                                                                                                                                                                                                  
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.10.1  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.10.2  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.11    |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.11.1* |             |  | Employment agreement between PictureTel Corporation and David
	Grainger dated December 5, 1997 (incorporated by reference
	to Exhibit 10.11.1 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1997).                 
|       
|        | 10.11.2  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.12    |             |  | Form of Indemnification Agreement for directors and officers
	(incorporated by reference to Exhibit 10.34 to
	Registrants Registration Statement on Form S-1,
	Registration No.  33-6368, effective August 12, 1986).                           
|       
|        | 10.13    |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.13.1  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.14    |             |  | Lease Agreement between PictureTel Corporation and 100 Minuteman
	Limited Partnership dated October 7, 1995 (incorporated by
	reference to Exhibit 10.47 to Annual Report on
	Form 10-K for the year ended December 31, 1995).                   
|       
|        | 10.14.1  |             |  | Amendment No. 1 To Lease for 100 Minuteman, dated
	July 10, 1996 (incorporated by reference to
	Exhibit 10.14.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 29, 1997).                                            
|       
|        | 10.14.2  |             |  | Amendment No. 2. To Lease for 100 Minuteman, dated
	August  19, 1996 (incorporated by reference to
	Exhibit 10.14.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 29, 1997).                                        
|       
|        | 10.15    |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.15.1  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.15.2  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.16    |             |  | Lease Agreement between PictureTel Corporation and 50 Minuteman
	Limited Partnership dated August 26, 1996 (incorporated by
	reference to Exhibit 10.1 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended
	September 28, 1996).
|       
|        | 10.16.1  |             |  | Amendment No. 1 to 50 Minuteman Lease dated March 19,
	1997 (incorporated by reference to Exhibit 10.16.2 on
	Form S-4 dated October 5, 1998).                                                                                                   
|       
|        | 10.16.2  |             |  | Sublease Agreement between PictureTel Corporation and Cabletron
	Systems, Inc. dated June 4, 1998 (incorporated by reference
	to Exhibit 10.16.3 on Form S-4 dated October 5,
	1998).                                                            
|       
|        | 10.17    |             |  | Lease Agreement between PictureTel Corporation and 200 Minuteman
	Limited Partnership dated March 19, 1997 (incorporated by
	reference to Exhibit 10.1 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended June  29,
	1997).    
|       
|        | 10.17.1  |             |  | Amendment No. 1 to 200 Minuteman Lease dated June 4,
	1998 (incorporated by reference to Exhibit 10.17.2 on
	Form S-4 dated October 5, 1998).                                                                                                    
|       
|        | 10.18*   |             |  | Employment Agreement by and between PictureTel Corporation and
	Bruce R. Bond dated March 1, 1998 (incorporated by
	reference to Exhibit 10.1 to the Registrants
	Quarterly Report on Form 10-Q for the quarter ended
	March 29, 1998).         
|       
|        | 10.18.1  |             |  | Reserved                                                                                                                                                                                                                                         
|       
|        | 10.18.2* |             |  | Options to Bruce R. Bond effective January 31, 1998
	(incorporated by reference to Exhibit 10.3 to the
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 29, 1998).                                                       
|       
|        | 10.18.3* |             |  | Separation Agreement Letter by and between Bruce R. Bond and
	PictureTel Corporation dated August 31, 1999 (incorporated
	by reference to Exhibit 10.18.3 to Registrants
	Quarterly Report on Form 10-Q for the quarter ended
	October 3, 1999).

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##### Table of Contents



|        |          |             |  |                                                                                                                                                                                                                                                                                                                 
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.19    |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.19.1  |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.19.2  |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.19.3  |             |  | $35 million Loan and Security Agreement dated
	August 22, 2000, by and between Congress Financial
	Corporation (New England), PictureTel Corporation and certain
	subsidiaries of PictureTel Corporation, filed as Exhibit 1
	to report on form 8-K dated August 30, 2000 and hereby
	incorporated by reference.
|       
|        | 10.20    |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.20.1  |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.20.2* |             |  | Separation Agreement Letter by and between Gary L. Bond and
	PictureTel Corporation dated September 10, 1999
	(incorporated by reference to Exhibit 10.20.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended October 3, 1999).                                                             
|       
|        | 10.21    |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.21.1  |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.22    |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.22.1  |             |  | Reserved                                                                                                                                                                                                                                                                                                        
|       
|        | 10.23*   |             |  | 1999 Equity Plan authorizing 3,000,000 shares of Common Stock to
	be delivered from time to time (incorporated by reference to
	Exhibit 10.23 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended July 4, 1999).                                                                               
|       
|        | 10.24*   |             |  | 1999 Foreign Subsidiary Employee Stock Purchase Plan under which
	500,000 shares of Common Stock may be delivered from time to
	time (incorporated by reference to Exhibit 10.24 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended July 4, 1999).                                           
|       
|        | 10.25*   |             |  | Employment agreement between PictureTel Corporation and Robert
	Byrnes dated November 9, 1999 (incorporated by reference to
	Exhibit 10.25 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1999).                                                                                   
|       
|        | 10.26*   |             |  | Employment agreement between PictureTel Corporation and
	Catherine ORourke dated December 21, 1999
	(incorporated by reference to Exhibit 10.26 to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1999).                                                                            
|       
|        | 10.27*   |             |  | Consultant agreement between PictureTel Corporation and Enzo
	Torresi dated January 5, 1999 (incorporated by reference to
	Exhibit 10.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended April 4, 1999).                                                                                    
|       
|        | 10.28*   |             |  | Employment Agreement between PictureTel Corporation and Lewis
	Jaffe dated June 19, 2000, (incorporated by reference to
	Exhibit 10.28 to Registrants Quarterly report on
	Form  10-Q for the quarter ended July 1, 2000).                                                                                     
|       
|        | 10.28.1* |             |  | Change in Control Agreement between PictureTel Corporation and
	Lewis Jaffe dated June 19, 2000, (incorporated by reference
	to Exhibit 10.28.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended July 1, 2000).                                                                             
|       
|        | 10.29*   |             |  | Employment Agreement between PictureTel Corporation and Edward
	Semonite, dated September 15, 2000, (incorporated by
	reference to Exhibit 10.29 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended
	September 30, 2000).                                                                     
|       
|        | 10.29.1* |             |  | Change in Control Agreement between PictureTel Corporation and
	Edward Semonite dated September 18, 2000, filed herewith.                                                                                                                                                                                       
|       
|        | 10.30*   |             |  | Employment Agreement between PictureTel Corporation and Jonathan
	Kosheff, dated September 15, 2000, (incorporated by
	reference to Exhibit 10.30 to Registrants Quarterly
	report on Form 10-Q for the quarter ended
	September 30, 2000).                                                                    
|       
|        | 10.30.1* |             |  | Change in Control Agreement between PictureTel Corporation and
	Jonathan Kosheff dated September 18, 2000, filed herewith.                                                                                                                                                                                      

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|        |          |             |  |                                                                                                                               
|------- | -------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.31*   |             |  | Employment Agreement between PictureTel Corporation and David
	Snow, dated December 22, 2000, filed herewith.                 
|       
|        | 10.31.1* |             |  | Change in Control Agreement between PictureTel Corporation and
	David Snow dated December 18, 2000, filed herewith.           
|       
|        | 10.32*   |             |  | Employment Agreement between PictureTel Corporation and Dalton
	Edgecomb, dated December 20, 2000, filed herewith.            
|       
|        | 10.32.1* |             |  | Change in Control Agreement between PictureTel Corporation and
	Dalton Edgecomb dated January 10, 2001, filed herewith.       
|       
|        | 10.33*   |             |  | Change in Control Agreement between PictureTel Corporation and
	W. Robert Kellegrew dated September 18, 2000, filed
	herewith.
|       
|        | 23       |             |  | Consent of PricewaterhouseCoopers LLP, filed herewith.                                                                        

|  |                                                                              
|- | -----------------------------------------------------------------------------
|* | Indicates management contract or compensatory plan, contract or
	arrangement.

(d)Financial Statement Schedule

The Company hereby files as part of this Annual Report on
Form 10-K the financial statement schedule listed on
Item 14(a)2 as set forth above.

51



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |                       
| | ----------------------
| | PICTURETEL CORPORATION



| |    |                   
| | -- | ------------------
| | By | /s/ NORMAN E. GAUT

| |                                                       
| | ------------------------------------------------------
| |                                                       
| | Norman E. Gaut 
	 Chairman and Chief Executive Officer
|
| | Date April 17, 2001                                   

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

|                                       |  |                                                                                                         |  |               
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | --------------
|/s/ NORMAN E. GAUTNorman E. Gaut       |  | Chairman of the Board and
	Chief Executive Officer
	(Principal Executive Officer)                       |  | April 17, 2001
|                                      
|/s/ LEWIS JAFFELewis Jaffe             |  | President and Chief Operating Officer                                                                   |  | April 17, 2001
|                                      
|/s/ CARL LEDBETTERCarl Ledbetter       |  | Director                                                                                                |  | April 17, 2001
|                                      
|/s/ DAVID B. LEVIDavid B. Levi         |  | Director                                                                                                |  | April 17, 2001
|                                      
|/s/ ROBERT T. KNIGHTRobert T. Knight   |  | Director                                                                                                |  | April 17, 2001
|                                      
|/s/ WERNER SCHMÜCKINGWerner Schmücking |  | Director                                                                                                |  | April 17, 2001
|                                      
|/s/ ENZO TORRESIEnzo Torresi           |  | Director                                                                                                |  | April 17, 2001
|                                      
|/s/ DALTON EDGECOMBDalton Edgecomb     |  | Vice President, Chief Financial Officer,
	(Principal Financial Officer &
	Principal Accounting Officer) |  | April 17, 2001

52