##### Table of Contents












SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 10-K



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

For the fiscal year ended December 31, 1999

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

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

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  [X]  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.  [X]

The aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of March 10,
2000 was $540,814,422. On such date, the average of the high and
low price of the Common Stock was $13.31 per share. The
Registrant has 40,954,784 shares of Common Stock outstanding as
of March 10, 2000.

Documents Incorporated by Reference

Portions of the definitive 2000 Proxy Statement in connection
with the Annual Meeting of Stockholders to be held June 16,
2000 are incorporated by reference into Part III.

A list of all Exhibits to this Annual Report on Form 10-K is
 located at 50 through 54.









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TABLE OF CONTENTS



|                                                 |                                                                                               |                             |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------- |  |  |  |  |  | 
|FRONT COVER                                     
|                                                 | Item 1. Business                                                                             
|                                                 | Item 2. Properties                                                                           
|                                                 | Item 3. Legal Proceedings                                                                    
|                                                 | Item 4. Submission of Votes                                                                  
|PART II                                         
|                                                 | Item 5. Market for Registrants Common Equity and related Stockholder Matters                
|                                                 |                                                                                               | PRICE RANGE OF COMMON STOCK
|                                                 |                                                                                               | DIVIDEND POLICY            
|                                                 | Item 6. Selected Financial Data                                                              
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                 | Item 8. Financial Statements and Supplementary Data                                          
|REPORT OF INDEPENDENT ACCOUNTANTS               
|CONSOLIDATED BALANCE SHEETS                     
|CONSOLIDATED STATEMENTS OF OPERATIONS           
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY 
|CONSOLIDATED STATEMENTS OF CASH FLOWS           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      
|REPORT OF INDEPENDENT ACCOUNTANTS               
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
|PART III                                        
|                                                 | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                 | Item 11. Executive Compensation                                                              
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                 | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                         
|                                                 | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                      



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Item 1.  Business

PictureTel Corporation (the Company or
PictureTel) is the 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 three distinct business segments,
each responsible for its own profitability. The business segments
 are videoconferencing products, videoconferencing services, and
audioconferencing products, which consists of its
MultiLink®, Inc. subsidiary. During 1999, the Company
transitioned from a common sales organization selling
PictureTels entire range of video and audio products and
services to stand-alone sales organizations within each business
unit. 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 core of PictureTels business since the Companys
inception in 1984 has been the 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
 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s
videoconferencing systems consist of three categories: group,
desktop/personal and network server systems.

PictureTels group videoconferencing systems, the
performance line Concorde 4500 and the value line Venue
2000 families of products, are dedicated conference-room
systems that deliver high-quality video and audio performance at
a variety of price points. Units include all equipment necessary
to videoconference. PictureTel created the compact category of
videoconferencing in 1996 with the introduction of
SwiftSite, the worlds first compact videoconferencing
 system. SwiftSite  and its follow-on
SwiftSite II and PictureTel 760
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.

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. The PictureTel Live200 is an
ISDN-based system. The PictureTel 550 desktop system
operates over both ISDN lines and networks that use the Internet
Protocol. In addition, the Company distributes the Intel®
ProShare® Video System 500. Using IP network capabilities
enables the systems to operate over many





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All of PictureTels group, desktop/personal and network
server videoconferencing systems deliver 15 frames-per-second of
video performance at 128 Kbps (Kilobits per second) over ISDN
lines. Many PictureTel systems in all three categories also have
the ability to deliver up to 30 frames per second of video
performance  the same frame rate as broadcast
television  at 384 Kbps. PictureTel IP-based systems
also can deliver up to 30 frames per second of video performance.

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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, PictureTel
systems are built to function in an above-standards mode using
proprietary technology to deliver the highest possible video and
audio performance.

One of the key new technologies behind visual collaboration is
streaming video. In 1998, PictureTel acquired Starlight Networks,
 Inc., a provider of streaming-media solutions for enterprise
communications. PictureTel sees tremendous synergy between its
traditional videoconferencing technologies and video-streaming
technology. When businesses add video-streaming technology to
their existing videoconferencing capabilities, they will be able
to take some of their important intellectual capital 
meetings involving technical, marketing, sales and other
experts  and enable employees, suppliers, partners and
 customers anywhere in the world to experience these meetings
first hand by viewing the streamed content over IP-based
networks. They also can extend the reach of that information by
providing on-demand access at a later time. The acquisition of
Starlight is expected to enable the Company to address a wider
set of customers visual collaboration needs with solutions
for enterprise briefings, distance learning applications, and
business television. The acquisition also provides the Company
with a knowledge base of streaming technology, which is a natural
 extension of PictureTels interactive visual collaboration
leadership and complements PictureTels IP-based
videoconferencing technology. The first new product resulting
from this acquisition, known as eVideo Application Server, was
released for commercial sale in March 2000.

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

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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,
streaming audio and video, and real-time conferencing. The first
products resulting from this joint development agreement are
expected to be introduced starting the second quarter of 2000.
These future products, which will operate over multiple networks,
 including IP, ISDN and asynchronous transfer mode (ATM), are
expected to replace PictureTels existing product line over
time and will be marketed under the PictureTel brand name. Both
PictureTel and Intel will receive compensation for the sale of
products or components featuring either companys
technology.

Additionally, on February 18, 1999, Intel invested $30.5 million
in the Company, acquiring approximately 10% of the Companys
 equity through convertible preferred stock.

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.

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Audioconferencing Business

In addition to its core visual collaboration products and
services, PictureTel, through its MultiLink business unit, also
is a leading worldwide provider of audioconferencing solutions.
MultiLink, which PictureTel acquired in 1997, develops,
manufactures and markets audioconferencing systems 
commonly known as bridges  that allow multiple parties
 to participate in a telephone call simultaneously. MultiLink
introduced its next generation audio bridge (System 700) in
December 1999. Many of the worlds leading
telecommunications service providers use MultiLink
audioconferencing technology to support their multi-location
audio conference call services. Corporate customers use MultiLink
 systems throughout their enterprise to conduct multi-location
audio conference calls for a variety of business purposes,
including but not limited to business meetings, shareholder
services, public relations, project management, focus groups,
teletraining, distance learning and crisis management. MultiLink
also provides maintenance and other customer support services for
 its installed base.

Current Strategy

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 and streaming technology
developed by its Starlight subsidiary.

To focus these efforts, the Company is presently in the process
of establishing independent business units within PictureTel
built around the above initiatives. Each will be free to pursue
its market and to seek strategic and financial partners to help
them increase PictureTels value.

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.

The overall Company investment in research and development has
been reduced and will continue at reduced levels in 2000 and
beyond. While spending fewer dollars on research and development
programs, PictureTel believes that effective management will
result in the same level  if not a higher
level  of productivity from its research and
development investment.

Sales

The Company and its subsidiaries currently distribute PictureTel
products worldwide by direct sales and indirect channels of
distribution. In 1999, the Company derived approximately 24% of
its worldwide product revenues from direct selling activities,
and 76% from indirect channels.

Direct Sales Organization. The Company directly markets
its videoconferencing products, videoconferencing services and
audioconferencing principally to the Fortune 500® (the
largest product and service businesses in the United States as
published annually by Fortune magazine). These large companies
typically have multiple locations in the United States as well as
 internationally and typically specify a single vendor to supply
equipment on a world wide 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 eight regional
sales and support offices, as well as five demonstration centers.
 Sales offices typically include demonstration equipment as well
as a number of customer and technical sales representatives and
field support personnel.

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Indirect Channels. To address the market below the Fortune
 500 and expand the Companys presence in the Fortune 500
market, 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 environment, the Company is increasing its
investment in perceived growth areas such as visual, audio and
data collaboration applications; web-based scheduling and
call-launching tools; integration services; and other value-added
 offerings. The Company believes that these investments, combined
 with the launch of its new-generation products, will well
position the Company in this competitive landscape.

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 video and audioconferencing
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.

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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. In addition, the Company has recently
applied for several new patents based on inventions developed by
its Starlight business. 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, 1999, the Company had 1,113 full-time
employees, of whom 609 were employed in sales, marketing and
customer support, 243 in product development and engineering, 72
in manufacturing and 189 in administration and finance. The
Company had 299 employees in foreign countries at
December 31, 1999.

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




Item 2.  Properties

The Company has substantially reduced its real estate footprint
over the past two years. PictureTels corporate offices and
research, development and manufacturing facilities are currently
located in two leased facilities in Andover, Massachusetts, one
leased facility in Chelmsford, Massachusetts, and one leased
facility in Mountain View, California, aggregating approximately
490,000, 69,940, and 30,000 square feet, respectively. The lease
at 100 Minuteman Road in Andover, Massachusetts expires in 2014.
The lease at 200 Minuteman Road in Andover, Massachusetts,
which is accounted for as a capital lease, began in
October 1998 and expires in 2016. The lease for the product
distribution facility in Chelmsford, Massachusetts expires in
2002. The lease in Mountain View, California expires in 2003. The
 videoconferencing products and videoconferencing services
segments share common office space, and the audioconferencing
segment is located at the 200 Minuteman Road property.

In June 1998, the Company subleased its property at 50
Minuteman Road for a period of ten years. This lease is accounted
 for as a capital lease. Effective July 1999, its property
at 6 Riverside Drive in Andover was subleased for a period of
five years. Additionally, the Company did not renew the lease at
100 Brickstone Square in Andover when it expired in
August 1999.

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.  Datapoint Litigation

In December 1993, PictureTel was sued by Datapoint
Corporation in the United States District Court for the Northern
District of Texas. Datapoint alleged that certain of
PictureTels products infringed patent rights allegedly
owned by Datapoint. On April 9, 1998, a jury returned a
verdict in favor of PictureTel finding that PictureTel did not
infringe the Datapoint patents and that the Datapoint patent
claims raised against PictureTel were invalid. On May 3,
1999, an appeals hearing took place with regard to this
litigation. On July 15, 1999, the United States Court of
Appeals for the Federal Circuit issued a ruling in favor of

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B.  Shareholder Litigation

Since September 23, 1997, seven class action
shareholders complaints have been filed against the
Company, Norman E. Gaut, Director and former Chairman of the
Board and Chief Executive Officer, and Les Strauss, the former
Vice President and Chief Financial Officer, in the United States
District Court for the District of Massachusetts. The plaintiffs
filed a consolidated complaint on February 11, 1998.

The original complaints were filed following the Companys
announcement on September 19, 1997 that it would restate its
 financial results for the first quarter of the fiscal year
ending December 31, 1997 and the last two quarters of the
fiscal year ending December 31, 1996 and were amended when
the Company announced on November 13, 1997 that it would
also restate the second quarter of the fiscal year ending
December 31, 1997. The consolidated complaint alleges that
PictureTel and Messrs. Gaut and Strauss violated
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder, during the period from
October 17, 1996 through November 13, 1997, through the
alleged preparation and dissemination of materially false and
misleading financial statements which artificially inflated the
price of PictureTel Common Stock. The consolidated complaint
seeks to recover an unspecified amount of damages, including
attorneys and experts fees and expenses.

On April 7, 1998, the Company filed a motion to dismiss the
complaint. On October 28, 1998, the motion to dismiss Norman
 E. Gaut was granted and the motion to dismiss PictureTel and Les
 Strauss was denied.

On June 17, 1999, the Company announced that it had entered
into a settlement agreement with the Plaintiffs. The Settlement
provides that the claim against PictureTel and Mr. Straus
will be dismissed. In agreeing to the proposed settlement, the
Company and Mr. Strauss specifically deny any wrongdoing.
The settlement provided for a cash payment of $12 million by
 the Company, plus interest, after the settlement was final. More
 than 75% of the settlement amount was recovered by the Company
from insurance proceeds. The settlement was subject to certain
customary conditions, including preliminary and final approval by
 the United States District Court for the District of
Massachusetts, and notice to the class. On July 29, 1999,
the Court gave preliminary approval of the settlement. Formal
notices with details of the settlement were sent to the purported
 class members by the Plaintiffs counsel. On
November 4, 1999, the Court gave its final approval of the
settlement. Since all appellate statue of limitations have now
expired, this decision closes the lawsuit brought by the
plaintiffs.

C.  SEC Investigation

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

D.  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 alleges that the Company breached an oral contract.
Revnet is allegedly seeking $200 million in damages.
Discovery is in process. The Company believes that the complaint
and the claim for damages are without merit and intends to
vigorously defend against them. In addition, after limited
discovery under the above named suit, the Company on
September 13, 1999 filed a related action in the Circuit
Court for Baltimore City, Maryland against Revnet, Inc., Vuecom,
Inc. (an entity related to Revnet, Inc.), George Harris IV,
George Sandmann and Lou Brown, (PictureTel Corporation v.
RevNet, Inc., et al. Civil Action 24-C99-004406) alleging
among other things Breach of Contract, Fraudulent Inducement and
Securities Fraud. The Companys complaint is seeking more
than $7 million in damages. While no assurance can be
provided, the Company does not believe that the

7



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##### Table of Contents





E.  Patent Infringement

In February 2000, the Company settled a patent infringement claim
 for the Companys use of an ITU-U standard. The Company
received a license to use the standard until 2007 for the payment
 of $1.3 million spread ratably over five years. In
connection with this license the Company recognized approximately
 $0.4 million in amortization expense in 1999 and has
recorded net prepaid royalties of approximately $0.9 million
 at December 31, 1999.

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




Item 4.  Submission of Votes

There were no items submitted to the shareholders during the
fourth quarter of 1999.




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
|                                       |  |      |        |    
|1998                                   |  |      |        |     |  |   |       | 
|                                      
|                                      
|                                      
|                                      
|First Quarter                          |  | $    | 8.250  |     |  | $ | 5.750 | 
|                                      
|                                      
|                                      
|                                      
|Second Quarter                         |  | $    | 11.938 |     |  | $ | 6.000 | 
|                                      
|                                      
|                                      
|                                      
|Third Quarter                          |  | $    | 11.125 |     |  | $ | 5.375 | 
|                                      
|                                      
|                                      
|                                      
|Fourth Quarter                         |  | $    | 7.938  |     |  | $ | 4.750 | 
|                                      
|                                      
|                                      
|                                      
|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 (through March 10, 2000) |  | $    | 15.219 |     |  | $ | 4.250 | 

As of March 10, 2000 there were approximately 1,728 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.

8



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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,
|                                                          |  |                        
|                                                          |  | 1999                    |         | 1998 |  | 1997 |         | 1996 |  | 1995
|                                                          |  |                         |         |      |  |      |         |      |  |     
|Statement of Operations Data:                             |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|                                                         
|                                                         
|                                                         
|                                                         
|Revenue                                                   |  | $                       | 323,279 |      |  | $    | 406,152 |      |  | $    | 466,425 |   |  | $ | 490,225 |  |  | $ | 363,799 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss)(1)                                      |  | $                       | (84,526 | )    |  | $    | (55,679 | )    |  | $    | (39,398 | ) |  | $ | 32,172  |  |  | $ | 21,859  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) applicable to Common shareholders(1)(2) |  | $                       | (90,138 | )    |  | $    | (55,679 | )    |  | $    | (39,398 | ) |  | $ | 32,172  |  |  | $ | 21,859  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) per common share 
	basic(1)(2)(3)(4)   |  | $                       | (2.23   | )    |  | $    | (1.45   | )    |  | $    | (1.04   | ) |  | $ | 0.89    |  |  | $ | 0.64    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Net income (loss) per common share 
	diluted(1)(2)(3)(4) |  | $                       | (2.23   | )    |  | $    | (1.45   | )    |  | $    | (1.04   | ) |  | $ | 0.81    |  |  | $ | 0.57    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Weighted average shares Outstanding  basic(3)(4)         |  |                         | 40,376  |      |  |      | 38,527  |      |  |      | 37,760  |   |  |   | 36,097  |  |  |   | 34,178  | 
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|Weighted average shares Outstanding  diluted(3)(4)       |  |                         | 40,376  |      |  |      | 38,527  |      |  |      | 37,760  |   |  |   | 39,598  |  |  |   | 38,428  | 
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|Balance Sheet Data:                                       |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|                                                         
|                                                         
|                                                         
|                                                         
|Working capital                                           |  | $                       | 82,994  |      |  | $    | 112,322 |      |  | $    | 152,973 |   |  | $ | 202,063 |  |  | $ | 143,130 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Total assets                                              |  | $                       | 294,870 |      |  | $    | 352,994 |      |  | $    | 355,051 |   |  | $ | 386,254 |  |  | $ | 300,613 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Total short-term debt                                     |  | $                       | 1,978   |      |  | $    | 4,418   |      |  | $    | 3,612   |   |  | $ | 3,942   |  |  | $ | 4,383   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Total long-term debt                                      |  | $                       | 54,584  |      |  | $    | 56,411  |      |  | $    | 22,000  |   |  | $ | 14,202  |  |  | $ | 12,804  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Stockholders equity                                      |  | $                       | 139,766 |      |  | $    | 190,242 |      |  | $    | 227,965 |   |  | $ | 264,846 |  |  | $ | 208,384 | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes other charges totaling $9,752, $10,564 and $42,664
	before income tax benefit in 1999, 1998 and 1997, respectively.
	Also includes 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, and 15 of
	 Notes to Consolidated Financial Statements.
|   
|(2) | Includes preferred stock accretion of $5,612 in 1999 related to
	issuance of convertible preferred stock to Intel Corporation. See
	 Note 9 of Notes to Consolidated Financial
	Statements.                                                                                                                                                                                                                                                                                                                   
|   
|(3) | All common and per share amounts in 1995 have been retroactively
	restated to reflect the two-for-one common stock split effected
	by a 100% common stock dividend paid during the fourth quarter of
	 1995. The effect of the MultiLink acquisition accounted for as a
	 pooling-of-interests is included in all numbers presented. See
	Note 2 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.                                                                                                                                                                                                                                                                                                                                

9



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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,
|                                              |  |             
|                                              |  | 1999         |        | 1998 |  | 1997
|                                              |  |              |        |      |  |     
|Revenue                                       |  |              | 100.0% |      |  |      | 100.0% |   |  |  | 100.0% |  
|                                             
|                                             
|                                             
|                                             
|Cost of revenue                               |  |              | 68.4   |      |  |      | 57.4   |   |  |  | 59.2   |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |              | 31.6   |      |  |      | 42.6   |   |  |  | 40.8   |  
|                                             
|                                             
|                                             
|                                             
|Selling, general and administrative           |  |              | 39.1   |      |  |      | 32.2   |   |  |  | 36.0   |  
|                                             
|                                             
|                                             
|                                             
|Research and development                      |  |              | 20.4   |      |  |      | 16.2   |   |  |  | 17.0   |  
|                                             
|                                             
|                                             
|                                             
|Total operating expenses                      |  |              | 59.5   |      |  |      | 48.4   |   |  |  | 53.0   |  
|                                             
|                                             
|                                             
|                                             
|Loss from operations                          |  |              | (27.9  | )    |  |      | (5.8   | ) |  |  | (12.2  | )
|                                             
|                                             
|                                             
|                                             
|Interest income (expense), net                |  |              | (0.1   | )    |  |      | 0.5    |   |  |  | 0.5    |  
|                                             
|                                             
|                                             
|                                             
|Other income (expense), net                   |  |              | 3.2    |      |  |      | 0.4    |   |  |  | (0.2   | )
|                                             
|                                             
|                                             
|                                             
|Loss before income tax expense (benefit)      |  |              | (24.8  | )    |  |      | (4.9   | ) |  |  | (11.9  | )
|                                             
|                                             
|                                             
|                                             
|Income tax expense (benefit)                  |  |              | 1.4    |      |  |      | 8.8    |   |  |  | (3.5   | )
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  |              | (26.2  | )    |  |      | (13.7  | ) |  |  | (8.4   | )
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |  |              | (1.7   | )    |  |      |       |   |  |  |       |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |              | (27.9  | )    |  |      | (13.7  | ) |  |  | (8.4   | )

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, negotiate an
expanded credit facility, 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

On January 19, 1999, the Company announced it had entered
into a distribution and joint development agreement with Intel
Corporation. The two companies have jointly developed
videoconferencing and collaborative products based on a common
PC-based technology platform. Use of a single architecture is
expected to improve ease of use and functionality, while reducing
 both product and associated support costs. The first of these
new products, which will be marketed under the PictureTel name,
is expected to be available in the second quarter of 2000. Also,
under the terms of the agreement, the Company has distribution
rights to sell the Intel® ProShare® Video System 500
and exclusive worldwide distribution rights to sell and support
the Intel® TeamStation System. Additionally, on
February 18, 1999, Intel invested $30,500 in the Company,
acquiring approximately 10% of the Companys equity through
convertible preferred stock.

On August 31, 1999, the Company announced that
Dr. Norman Gaut had succeeded Bruce R. Bond as Chairman of
the Board, Chief Executive Officer, and President of the Company
following Mr. Bonds resignation. While affirming the
strategic direction developed by Mr. Bond, the Board of
Directors and Mr. Bond were of the opinion that the Company
would make faster progress toward execution of the strategy under
 different leadership.

10



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##### Table of Contents



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 and streaming technology
developed by its Starlight subsidiary.

To focus these efforts, the Company is presently in the process
of establishing independent business units within PictureTel
built around the above initiatives. Each will be free to pursue
its market and to seek strategic and financial partners to help
them increase PictureTels value.

On October 28, 1999, the Company announced it had retained
an investment banker to represent it in the sale of MultiLink,
Inc., the Companys audioconferencing subsidiary. The
Company intends to operate MultiLink, Inc. as a wholly-owned
subsidiary while it considers a number of divestiture
alternatives.

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

Revenue. Total 1999 revenue of $323,279 decreased $82,873,
 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 Expenses. Selling, general and administrative
expenses 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 expenses of
$66,130 were 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 completed
 technology purchased as part of the Starlight acquisition. No
such costs were capitalized in 1999, as no current projects in
progress had achieved technological feasibility.

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 $232,533 in
1999 from $323,487 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

11



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##### Table of Contents





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.

Audioconferencing (MultiLink). The audioconferencing
segment develops, manufactures, markets and services multipoint
audio control units. Segment revenue decreased $2,463, or 11%,
from 1998 to $20,442 in 1999. This decrease relates to the
delayed introduction of MultiLinks next generation product
line, the System 700, which occurred in December 1999.

The segment recorded a $2,880 operating loss during 1999 compared
 to a $7,334 operating profit the previous year. Charges of
$2,481 related to the July 1999 sublease of MultiLinks
 former facility at Riverside Drive in Andover, Massachusetts are
 included in 1999s results. Decreased revenue and sharply
increased research and development spending on enhancing current
products and developing next generation products are the other
major factors responsible for the profitability decline.

Year ended December 31, 1998 Compared
to the Year ended December 31, 1997

Revenue. The Companys revenue decreased $60,273, or
13%, in 1998 from 1997s $466,425 level. The decrease in
revenue was primarily a result of decreased unit shipments of
videoconferencing products offset by increased videoconferencing
services revenue. Sales to foreign markets accounted for
approximately 43% of total revenue in both 1998 and 1997. 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. Revenue from sales to
foreign markets in 1997 was principally comprised of sales
originating in the United States of $41,667, the United Kingdom
of $76,318 and Japan of $36,689.

Gross Margin. The Companys 1998 gross margin of
$173,066 decreased $17,448, or 9%, compared to 1997. Gross margin
 as a percentage of revenue was 43% in 1998 compared to 41% in
1997. Gross margin as a percentage of revenue increased due to
decreased significant charges included in cost of revenue for the
 videoconferencing products segment in 1998 versus 1997, as
discussed below.

Operating Expenses. Selling, general and administrative
expenses in 1998 of $130,662 decreased $37,179, or 22%, from 1997
 and decreased as a percentage of revenue to 32% from 36%.
Research and development expenses decreased $13,469, or 17%, in
1998 from 1997 and were 16% and 17% of revenue for

12



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##### Table of Contents





Videoconferencing Products. Segment revenue fell $69,425,
or 18%, to $323,487 in 1998 compared to 1997, with a 16% decline
in overall videoconferencing system unit volume primarily
responsible for the decrease. Group system shipments were down
22%, mainly in the Concorde and Swiftsite lines, while
desktop/personal system shipments decreased 12%. Network server
product volume, which is driven largely by group and
desktop/personal shipments, also declined. Average selling prices
 were generally lower across all products compared to 1997, but a
 shift in mix towards higher priced group and associated network
products kept overall average selling prices nearly flat. Delayed
 introduction of Swiftsite II, the Companys successor
compact system to Swiftsite I, from the fourth quarter of
1998 to the second quarter of 1999 accounted for much of the
group systems volume decline and the favorable mix as higher
priced systems made up a larger proportion of revenue.

The videoconferencing products segment generated a $16,049
operating loss during 1998 compared to a $30,533 loss the
previous year. The losses for both years include significant
charges, with $11,394 of the $14,484 operating loss reduction
from 1997 to 1998 resulting from lower charges in 1998. The 1998
charges totaled $11,250, as discussed previously. Charges of
$22,644 are included in the 1997 loss and include $4,940 for
various write-downs of excess and obsolete inventory, $9,881 for
capitalized software costs impaired as a result of canceled
development projects, $1,122 for product retrofit accruals,
$4,037 for severance charges and office closings, $1,880 for
advances to vertical partners written off to reflect changing
business conditions and shifts in distribution channels and $784
to write off other assets associated with the canceled
development projects.

Absent these significant charges, the videoconferencing product
segment operating loss would have been $4,799 in 1998 compared to
 a $7,889 loss the previous year. For 1998, an 18% reduction in
research and development expenditures along with an 18% reduction
 in other operating expenses due to managements efforts to
reduce the Companys overall cost structure more than offset
 a gross margin decline caused by the lower segment revenue.
Gross margin as a percent of revenue was approximately 46% in
both years excluding charges.

Videoconferencing Services. Segment revenue increased 22%
from $48,988 in 1997 to $59,760 in 1998. Growth in professional
service revenue, particularly from managing multipoint
videoconferences for customers, was primarily responsible for the
 increase.

Operating profits were $7,191 in 1998, which represents a 61%
increase over the prior years $4,455 figure. Higher revenue
 and lower field operating expense account for the improvement.

Audioconferencing. Segment revenue decreased $1,620, or
7%, from prior year levels to $22,905 in 1998. A decrease in
average selling prices that was partially offset by increased
unit shipments accounted for the decrease.

The segment generated $7,334 of operating profit during 1998
compared to a $6,568 operating loss the previous year. Operating
expenses in 1997 included $2,561 for investment banking and other
 advisory fees recorded when the Company acquired MultiLink as
well as $3,431 to establish accruals for severance, sales tax and
 benefit liabilities. The 1997 loss would have been $576 without
these charges. The year-over-year profitability improvement
between 1997 and 1998 was driven largely by reductions in
research and development and sales expenses due to lower
headcount. Gross margin improved versus 1997, despite lower
revenue, as a result of improved service profitability.

13



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##### Table of Contents



Other

Net Interest Income (Expense). The Company had net
interest expense of $375 in 1999 compared with net interest
income of $1,948 and $2,518 in 1998 and 1997, respectively. The
decrease from 1998 to 1999 resulted primarily from lower invested
 cash balances and a full year of interest expense on the
200 Minuteman facilitys capital lease. The lease began
 in October 1998. The $570 decrease from 1997 to 1998 was
primarily the result of higher interest expense on capital lease
obligations.

Other Income (Expense). Other income of $10,517 in 1999
consists principally of net gains on foreign currency
transactions and a $8,495 gain from the third quarter sale of
RealNetwork shares acquired through an investment in a company
later acquired by RealNetworks. Net gains on foreign currency
transactions are also the primary component of 1998s other
income of $1,804. Both 1999 and 1998 figures also include net
sublease income related to the 50 Minuteman facility. Other
expenses of $1,158 in 1997 consisted primarily of a $3,000
write-off of an equity investment offset by net gains on foreign
currency transactions and net gains on sales of securities.

Income Taxes. The Companys effective tax rate for
1999, 1998 and 1997 was 6%, 180%, and (29)%, respectively. The
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 and 1999. The 1997 rate differs from the federal
 statutory rate due to state and foreign taxes offset by research
 and development tax credits and increased valuation allowances
related to certain current year tax credits and net operating
losses whose benefits are uncertain.

Liquidity and Capital Resources

At December 31, 1999, the Company had $21,915 in cash and
cash equivalents and $37,787 in short-term marketable securities.
 Operating activities used $65,369 of cash during 1999 and
generated $55,550 of cash during 1998. The primary operating uses
 of cash during 1999 were to fund operating losses in excess of
non-cash expense and to decrease accounts payable. During 1998,
the Company had positive operating income before non-cash expense
 and also generated cash by reducing accounts receivable and
inventories. The Company paid $2,010 of accrued severance and
restructuring charges during 1999 and had a remaining accrual in
the amount of $1,960 for such items as of December 31, 1999
that will be paid over the next year and eight months.

Investing activities used $3,465 of cash in 1999 compared with a
$39,102 usage the previous year. Capital spending totaled $12,591
 and was partially offset by $8,495 of cash generated through
selling the Companys RealNetworks shares. Capital spending
of $19,421 in 1998 included leasehold improvements at the
200 Minuteman facility while internal software development,
securities purchases, and the Starlight acquisition are
responsible for the balance of the 1998 investing cash usage.

Financing activities generated $27,736 of cash in 1999, with the
principal source being $30,500 of cash from the issuance of
convertible preferred stock to Intel Corporation. Principal
payments on capital leases were the major use of cash. Financing
activities used $3,727 of cash in 1998, primarily to pay
principal on capital leases.

Cash utilization is of major concern to the Company. To reduce
this usage, the Company has restructured several areas, reduced
staffing, intensified programs to reduce working capital, and
curtailed capital spending. However, without increased revenue
these actions alone will not return the Company to a cash
positive position.

The Company has a revolving credit agreement, expiring
June 15, 2001, as a source of funds. The Company has up to
$35,000 available for borrowing under the credit agreement. At
December 31, 1999, no borrowings were outstanding under this
 credit agreement. The Company currently has $30,595 of
outstanding standby letters of credit issued under this agreement
 which reduces the amount available for borrowing on a dollar for
 dollar basis. Fees for letters of credit outstanding against
this revolving credit line are payable at 125 basis points per
annum of the face amount. The revolving credit agreement is
collateralized by substantially all

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The Company is currently seeking a waiver for not meeting its
first quarter 2000 covenants and anticipates that its quarterly
financial results for the balance of 2000 will likely be out of
compliance with the current credit facilitys financial
covenants. To address this and to provide necessary additional
liquidity and borrowing capacity, the Company and its bank group
are currently negotiating an expanded credit facility. In the
event such efforts are unsuccessful, the Companys cash
could be reduced by the amount of the letters of credit.

Local lines of credit are available for short-term advances of up
 to $979 to certain of the Companys foreign subsidiaries.
The agreements require interest payable up to one quarter of one
percent per annum. Approximately $196 was outstanding against
these local lines of credit at December 31, 1999.

In June 1999, the Company entered into a short-term security
 agreement with BankBoston. Under this agreement, the Company
pledged to the Bank certain amounts of cash and cash equivalents
as collateral for obligations of the Company arising from use of
the Banks cash management and foreign exchange services.
The required collateral was $1,200 as of December 31, 1999.

We have 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.
Moreover, managements plans to continue as a going concern
rely heavily on forecasted revenue from new products being
jointly developed with Intel Corporation, new multi-media
applications services, and enhanced compact videoconferencing
systems, all of which are planned for delivery commencing in the
second quarter of 2000. Under generally accepted auditing
standards, the Companys auditors have concluded that they
are unable to rely on future revenue from these new products and
services in evaluating the achievability of managements
plan to continue as a going concern. In addition to the revenue
plan, management is currently negotiating an expanded credit
facility and may seek 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, if successful, will provide sufficient
financial resources for the next twelve months and beyond.

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, 1999, the remaining obligation
under this operating lease was $8,135. After giving effect to
expected sublease income, this obligation is $5,082. In addition,
 in June 1998, the Company subleased its property at
50 Minuteman Road for a ten-year term. After giving effect
to expected sublease income, the remaining principal obligation
under the capital lease was $16,694 at December 31, 1999.

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 (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.

Outlook

The Company has begun to show its next generation
videoconferencing products, which are expected to be released in
the second quarter of 2000, to direct customers and distributors.
 As a result, it expects that some customers may defer purchasing
 decisions, particularly of group videoconferencing systems,
until the new products are available. On April 4, 2000, the
Company announced that it expects consolidated first quarter 2000
 revenue to be between $63 and $66 million with a corresponding
net loss of between $0.55 and $0.60 per share. The Company
currently intends to continue investing in new product and
service development and the

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The Company expects to return to revenue growth once its new
products are launched and management presently believes
PictureTel will become profitable during the second half of 2000.

Recently Issued Accounting Pronouncements

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

In December 1998, the American Institute of Certified Public
 Accountants issued SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, which addresses software revenue
recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4,
Deferral of the Effective Date of a Provision of
SOP 97-2, to extend the deferral of application of
certain passages of SOP 97-2 through fiscal years beginning
on or before March 15, 1999. All other provisions of
SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company
will comply with the requirements of this SOP as they become
effective and does not expect this to have a material effect on
the Companys result of operations.

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements,
(SAB 101) as amended by SAB 101A, which is
effective no later than the quarter ending June 30, 2000.
SAB 101 clarifies the Securities and Exchange
Commissions views regarding recognition of revenue. The
Company will adopt SAB 101 in the second quarter of 2000 and
 is currently evaluating the effects it will have. The Company
anticipates that the adoption of SAB 101 will have a
material effect on the Companys 2000 financial position and
 results of operations.

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 November 1998, the
Company acquired all of the common stock of Starlight Networks,
Inc. Starlight develops, manufactures and markets streaming video
 that enables live, interactive multicast video-on-demand. There
can be no assurance that the integration of Starlight will be
successful or produce products that will be accretive to the
Companys results of operations and financial condition. In
January 1999, the Company entered into a distribution and
joint product development agreement with Intel Corporation. The
two companies have jointly developed videoconferencing and
collaborative products based on a common PC-based technology
platform. There can be no assurance that the partnership will be
successful or produce products that will be accretive to the
Companys results of

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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
further decrease from historical levels as a result of new
product introductions by competitors, price competition,
technological advances, or otherwise. Any of these factors could
have a material adverse effect on PictureTels business,
financial condition and results of operations.

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

Recent History of Losses. The Companys revenue
decreased 20% during 1999 as compared to 1998 and
decreased 13% between 1998 and 1997. Losses from operations
were $90,284, $23,650 and $56,850 in 1999, 1998 and 1997,
respectively. On April 4, 2000, the Company announced that
it expects consolidated first quarter 2000 revenue to be between
$63 and $66 million with a corresponding net loss of between
$0.55 and $0.60 per share. Continued negative operating results
could adversely impact the Companys relationship with
customers, vendors and employees, as well as its liquidity and
ability to remain in compliance with covenants under its
revolving credit agreement. We have received a report from our
independent accountants containing

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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. There can
 be no assurance that the Company will be able to increase or to
maintain the current level of unit volume sales. Other factors
which may cause period-to-period fluctuations in operational
results include the timing of new product announcements and
introductions by the Company and its competitors, market
acceptance of new or enhanced versions of the Companys
products, changes in the product mix of sales, changes in the
relative proportions of sales among distribution channels or
among customers within each distribution channel, changes in
manufacturing costs, and general economic factors such as the
recent decline of currency values in the Asian markets.

International Operations. Revenue related to international
 operations of the Company totaled approximately 46%, 43%
and 43% of total revenues for the three years ended
December 31, 1999, 1998 and 1997, 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

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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
and there is no assurance that this transition will be
successful. The Company depends on a limited number of key senior
 management personnel, including Norman Gaut; Arthur Fatum, Vice
President and CFO; David Grainger, Group Vice President and
General Manager of Services; Timothy Duffy, Group Vice President
and General Manager of Conferencing Products; Robert Byrnes,
Group Vice President for Emerging Products; Lawrence Bornstein,
Vice President, Human Resources; and John Nye, President and
General Manager, MultiLink. There has been and continues to be
considerable turnover in the Companys senior management
team over the past several years, and the loss of the services of
 one or more of the Companys senior management team or the
inability to attract, retain, motivate and manage additional key
personnel could have a material adverse effect on the business,
financial condition or operating results of the Company. In
addition, the Company continues to experience an increase in
voluntary employee attrition from engineering and other
departments. There is no assurance, given the competitive nature
of the current job market, that the Company will be able to
adequately fill the open positions.

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

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

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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, 1999. All values are
represented in U.S. dollar equivalents (in thousands):

|                                  |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|--------------------------------- |  | -------------------- | ----- | ------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                  |  |                      |       |              |  |                     
|                                  |  | 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                     |  | $                    | 3,045 |              |  | $                    | 3,133 |      |  | $    | 2,956 |  |  | $ | 2,867 |  |  | $ | 2,779 | 
|                                 
|                                 
|                                 
|                                 
|Swedish Krona                     |  |                      | 278   |              |  |                      | 286   |      |  |      | 270   |  |  |   | 262   |  |  |   | 254   | 
|                                 
|                                 
|                                 
|                                 
|Japanese Yen                      |  |                      | 2,678 |              |  |                      | 2,756 |      |  |      | 2,600 |  |  |   | 2,522 |  |  |   | 2,444 | 
|                                 
|                                 
|                                 
|                                 
|Germany Demark                    |  |                      | 2,172 |              |  |                      | 2,235 |      |  |      | 2,109 |  |  |   | 2,045 |  |  |   | 1,982 | 
|                                 
|                                 
|                                 
|                                 
|Australian Dollar                 |  |                      | 1,787 |              |  |                      | 1,839 |      |  |      | 1,735 |  |  |   | 1,683 |  |  |   | 1,631 | 
|                                 
|                                 
|                                 
|                                 
|Functional Currency  Switzerland |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                                 
|                                 
|                                 
|                                 
|U.S. Dollar                       |  | $                    | 515   |              |  | $                    | 530   |      |  | $    | 500   |  |  | $ | 485   |  |  | $ | 470   | 
|                                 
|                                 
|                                 
|                                 
|Functional Currency  Germany     |  |                      |       |              |  |                      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                                 
|                                 
|                                 
|                                 
|U.S. Dollar                       |  | $                    | 317   |              |  | $                    | 326   |      |  | $    | 308   |  |  | $ | 299   |  |  | $ | 290   | 

The Companys investments include corporate obligations with
 various issuers and maturities. The Companys primary
market risk exposure for its investments relates to fluctuations
in interest rates. Given the short maturities and investment
grade quality of the portfolio holdings at December 31,
1999, a sharp rise in interest rates is not expected to have a
material adverse impact on the fair value of the Companys
investment portfolio. As a result, the Company does not hedge
these interest rate exposures.

The following table represents hypothetical changes in fair value
 in the Companys investment portfolio at December 31,
1999 that are sensitive to changes in interest rates. The
modeling technique measures the change in fair value arising from
 selected potential changes in interest rates. Movements in
interest rates of plus or minus 50 basis points
(BP) and 100 BP reflect hypothetical shifts in
the fair value of these investments. Fair value represents the
market principal plus accrued interest and dividends of certain
interest-rate-sensitive securities. No change in interest
rates represents fair value at December 31, 1999. All
dollars are presented in thousands:

|                      |  |                        |        |           |  |                        |        |         |  |          |        |  |  |   |        |  |  |   |        | 
|--------------------- |  | ---------------------- | ------ | --------- |  | ---------------------- | ------ | ------- |  | -------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                      |  |                        |        |           |  |                       
|                      |  | Valuation of           |        |           |  | Valuation of          
|                      |  | securities given an    |        |           |  | securities given an   
|                      |  | interest rate increase |        |           |  | interest rate decrease
|                      |  |                        |        | No change |  |                       
|Type of security      |  | 50 BP                  |        | 100 BP    |  | in interest rates      |        | (50 BP) |  | (100 BP)
|                      |  |                        |        |           |  |                        |        |         |  |         
|Corporate Obligations |  | $                      | 46,463 |           |  | $                      | 46,430 |         |  | $        | 46,495 |  |  | $ | 46,528 |  |  | $ | 46,560 | 

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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               |      |  | 22 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Balance Sheets                     |      |  | 23 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Operations           |      |  | 24 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Stockholders Equity |      |  | 25 | 
|                     
|                     
|                     
|                     
|                      | Consolidated Statements of Cash Flows           |      |  | 26 | 
|                     
|                     
|                     
|                     
|                      | Notes to Consolidated Financial Statements      |      |  | 27 | 
|                     
|                     
|                     
|                     
|                     
|Supplementary Data:   |                                                 |      |  |   
|                     
|                     
|                     
|                     
|                      | Report of Independent Accountants               |      |  | 47 | 
|                     
|                     
|                     
|                     
|                      | Schedule II Valuation and Qualifying Accounts   |      |  | 48 | 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of 
   PICTURETEL CORPORATION:

In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of PictureTel
Corporation and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
 responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States, 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 the opinion expressed above.

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




22



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except per share amounts)


|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |         |         | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ------ | ------- | ------- | 
|                                                  |                                                                                                                                                     |                                           
|                                                  |                                                                                                                                                     | December 31,                              
|                                                  |                                                                                                                                                     |                                           
|                                                  |                                                                                                                                                     | 1999                                       |        | 1998    
|                                                  |                                                                                                                                                     |                                            |        |         
|ASSETS                                           
|                                                 
|                                                 
|                                                 
|                                                 
|Current assets:                                   |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash and cash equivalents                                                                                                                           |                                            | $      | 21,915   |         |  | $      | 62,642  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Restricted cash and cash equivalents                                                                                                                |                                            |        | 1,200    |         |  |        |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Marketable securities                                                                                                                               |                                            |        | 37,787   |         |  |        | 38,078  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts receivable, less allowances for doubtful accounts of
	$5,642, and $5,392 at December 31, 1999 and 1998,
	respectively                      |                                            |        | 77,120   |         |  |        | 78,995  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Inventories                                                                                                                                         |                                            |        | 32,930   |         |  |        | 30,256  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other current assets                                                                                                                                |                                            |        | 12,562   |         |  |        | 8,692   |        
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  | Total current assets                                                                                                                                |                                            |        | 183,514  |         |  |        | 218,663 |        
|                                                 
|                                                 
|                                                 
|                                                 
|Property and equipment, net                       |                                                                                                                                                     |                                            | 86,219 |          |         |  | 95,655 |        
|                                                 
|                                                 
|                                                 
|                                                 
|Capitalized software costs, net                   |                                                                                                                                                     |                                            | 11,341 |          |         |  | 20,484 |        
|                                                 
|                                                 
|                                                 
|                                                 
|Goodwill, net                                     |                                                                                                                                                     |                                            | 4,242  |          |         |  | 5,336  |        
|                                                 
|                                                 
|                                                 
|                                                 
|Other assets                                      |                                                                                                                                                     |                                            | 9,554  |          |         |  | 12,856 |        
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  |                                                                                                                                                     | Total assets                               |        | $        | 294,870 |  |        | $       | 352,994 | 
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY             
|                                                 
|                                                 
|                                                 
|                                                 
|Current liabilities:                              |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Short-term borrowings                                                                                                                               |                                            | $      | 196      |         |  | $      | 881     |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts payable                                                                                                                                    |                                            |        | 21,681   |         |  |        | 32,777  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accrued compensation and benefits                                                                                                                   |                                            |        | 10,517   |         |  |        | 11,214  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accrued expenses                                                                                                                                    |                                            |        | 37,518   |         |  |        | 35,316  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current portion of capital lease obligations                                                                                                        |                                            |        | 1,782    |         |  |        | 3,537   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Deferred revenue                                                                                                                                    |                                            |        | 28,826   |         |  |        | 22,616  |        
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  | Total current liabilities                                                                                                                           |                                            |        | 100,520  |         |  |        | 106,341 |        
|                                                 
|                                                 
|                                                 
|                                                 
|Capital lease obligations, net of current portion |                                                                                                                                                     |                                            | 54,584 |          |         |  | 56,411 |        
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  |                                                                                                                                                     | Total liabilities                          |        |          | 155,104 |  |        |         | 162,752 | 
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|Commitments and contingencies (Notes 7, 8 and 16) |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|Stockholders equity:                             |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Convertible preferred stock, $.01 par value; 15,000,000 shares
	authorized; 4,478,708 shares issued and outstanding at
	December 31, 1999           |                                            |        | 45       |         |  |        |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock, $.01 par value; 80,000,000 shares authorized;
	40,617,634 and 40,067,771 shares issued and outstanding at
	December 31, 1999 and 1998 |                                            |        | 406      |         |  |        | 400     |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Additional paid-in capital                                                                                                                          |                                            |        | 255,968  |         |  |        | 222,230 |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accumulated deficit                                                                                                                                 |                                            |        | (114,780 | )       |  |        | (30,254 | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accumulated other comprehensive loss                                                                                                                |                                            |        | (1,317   | )       |  |        | (2,134  | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Treasury stock, 92,065 shares, at cost                                                                                                              |                                            |        | (556     | )       |  |        |        |        
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  |                                                                                                                                                     | Total stockholders equity                 |        |          | 139,766 |  |        |         | 190,242 | 
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        
|                                                  |                                                                                                                                                     | Total liabilities and stockholders equity |        | $        | 294,870 |  |        | $       | 352,994 | 
|                                                  |                                                                                                                                                     |                                            |        |          |         |  |        |        

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

23



---



##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands, except per share amounts)


|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------------------- | ----------------------------------- | ----------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                |                                     |                        
|                                                                |                                     | Year Ended December 31,
|                                                                |                                     |                        
|                                                                |                                     | 1999                    |         | 1998    |         | 1997
|                                                                |                                     |                         |         |         |         |     
|Revenue:                                                        |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Product revenue                     |                         | $       | 251,198 |         |      | $       | 345,076 |         |   | $       | 417,115 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Service revenue                     |                         |         | 72,081  |         |      |         | 61,076  |         |   |         | 49,310  |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total revenue           |         |         | 323,279 |      |         |         | 406,152 |   |         |         | 466,425 | 
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Cost of revenue:                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Product cost of revenue             |                         |         | 158,289 |         |      |         | 184,734 |         |   |         | 234,953 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Service cost of revenue             |                         |         | 62,854  |         |      |         | 48,352  |         |   |         | 40,958  |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total cost of revenue   |         |         | 221,143 |      |         |         | 233,086 |   |         |         | 275,911 | 
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Gross margin                                                    |                                     |                         | 102,136 |         |         |      | 173,066 |         |         |   | 190,514 |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Operating expense:                                              |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Selling, general and administrative |                         |         | 126,290 |         |      |         | 130,662 |         |   |         | 167,841 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Research and development            |                         |         | 66,130  |         |      |         | 66,054  |         |   |         | 79,523  |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|                                                                |                                     | Total operating expense |         |         | 192,420 |      |         |         | 196,716 |   |         |         | 247,364 | 
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Loss from operations                                            |                                     |                         | (90,284 | )       |         |      | (23,650 | )       |         |   | (56,850 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Interest income                                                 |                                     |                         | 4,261   |         |         |      | 4,857   |         |         |   | 4,339   |        
|                                                               
|                                                               
|                                                               
|                                                               
|Interest expense                                                |                                     |                         | 4,636   |         |         |      | 2,909   |         |         |   | 1,821   |        
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (expense), net                                     |                                     |                         | 10,517  |         |         |      | 1,804   |         |         |   | (1,158  | )      
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Loss before income tax expense (benefit)                        |                                     |                         | (80,142 | )       |         |      | (19,898 | )       |         |   | (55,490 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Income tax expense (benefit)                                    |                                     |                         | 4,384   |         |         |      | 35,781  |         |         |   | (16,092 | )      
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Net loss                                                        |                                     |                         | (84,526 | )       |         |      | (55,679 | )       |         |   | (39,398 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|Preferred stock beneficial conversion feature                   |                                     |                         | 5,612   |         |         |      |        |         |         |   |        |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Net loss applicable to common shareholders                      |                                     | $                       | (90,138 | )       |         | $    | (55,679 | )       |         | $ | (39,398 | )      
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Net loss per common share  basic and diluted                   |                                     | $                       | (2.23   | )       |         | $    | (1.45   | )       |         | $ | (1.04   | )      
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        
|Weighted average common shares outstanding  basic and
	diluted |                                     |                         | 40,376  |         |         |      | 38,527  |         |         |   | 37,760  |        
|                                                                |                                     |                         |         |         |         |      |         |         |         |   |         |        

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

24



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##### Table of Contents



PICTURETEL CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


For the Years Ended December 31, 1999, 1998 and 1997


(Dollars in thousands, except share amounts)


|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |        |   | 
|---------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------ | --------- | ------------ | - | -------------- | -- | ------------ | - | ------------- | ---------- | -------- | - | ----------- | --- | - | - | - | ------- | - | - | - | -------- | ------- | - | - | ------ | ------ | - | 
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   | Accumulated
|                                                           |                                        |                                                              |           |              |   |                |    | Retained     |   | Other        
|                                                           |                                        | Preferred Stock                                              |           | Common Stock |   |                |    | Earnings     |   | Comprehensive
|                                                           |                                        |                                                              |           |              |   | Addtl Paid-In |    | (Accumulated |   | Income       
|                                                           |                                        | Shares                                                       |           | Par Value    |   | Shares         |    | Par Value    |   | Capital       |            | Deficit) |   | (Loss)     
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |            
|Balance, December  31, 1996                                |                                        |                                                              |          |              |   | $              |   |              |   |               | 37,499,111 |          |   | $           | 376 |   |   | $ | 199,755 |   |   | $ | 64,429   |         |   | $ | 286    |       
|                                                          
|                                                          
|                                                          
|                                                          
|Exercise of employee stock options and related tax benefit |                                        |                                                              |          |              |   |                |   |              |   |               | 358,235    |          |   |             | 3   |   |   |   | 1,196   |   |   |   |         |         |   |   |       |       
|                                                          
|                                                          
|                                                          
|                                                          
|Employee stock purchase plan shares                        |                                        |                                                              |          |              |   |                |   |              |   |               | 183,017    |          |   |             | 1   |   |   |   | 3,291   |   |   |   |         |         |   |   |       |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Net loss                               |                                                              |           |             |   |                |    |             |   |               |            |         |   |             |     |  |   |   |         |  |   |   |          | (39,398 | ) |   |        |       |  
|                                                           | Other comprehensive losses, net of tax |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |        |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustment                      |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized loss on marketable securities, net of tax of $(3) |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other comprehensive losses             |                                                              |           |             |   |                |    |             |   |               |            |         |   |             |     |  |   |   |         |  |   |   |          |        |   |   |        | (2,368 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Comprehensive loss                                         |                                        |                                                              |          |              |   |                |   |              |   |               |           |          |   |             |    |   |   |   |        |   |   |   |         |         |   |   |       |       
|                                                          
|                                                          
|                                                          
|                                                          
|Adjustment to conform MultiLinks fiscal year              |                                        |                                                              |          |              |   |                |   |              |   |               |           |          |   |             |    |   |   |   |        |   |   |   | 394      |         |   |   |       |       
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |       
|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 | ) |   |        |       |  
|                                                           | Other comprehensive losses             |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |        |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustment                      |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized gain on marketable securities                     |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other comprehensive losses             |                                                              |           |             |   |                |    |             |   |               |            |         |   |             |     |  |   |   |         |  |   |   |          |        |   |   |        | (52    | )
|                                                          
|                                                          
|                                                          
|                                                          
|Comprehensive loss                                         |                                        |                                                              |          |              |   |                |   |              |   |               |           |          |   |             |    |   |   |   |        |   |   |   |         |         |   |   |       |       
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |       
|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 to Intel                      |                                        |                                                              | 4,478,708 |              |   |                | 45 |              |   |               |           |          |   |             |    |   |   |   | 30,455  |   |   |   |         |         |   |   |       |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Net loss                               |                                                              |           |             |   |                |    |             |   |               |            |         |   |             |     |  |   |   |         |  |   |   |          | (84,526 | ) |   |        |        |  
|                                                           | Other comprehensive losses             |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |        |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustments                     |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized loss on marketable securities                     |           |              |  |                |    |              |  |               |            |          |  |             |     |   |  |   |         |   |  |   |          |         |  |   |        |        |  | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other comprehensive losses             |                                                              |           |             |   |                |    |             |   |               |            |         |   |             |     |  |   |   |         |  |   |   |          |        |   |   |        | 817    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Comprehensive loss                                         |                                        |                                                              |          |              |   |                |   |              |   |               |           |          |   |             |    |   |   |   |        |   |   |   |         |         |   |   |       |       
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |       
|Balance, December  31, 1999                                |                                        |                                                              | 4,478,708 |              |   | $              | 45 |              |   |               | 40,617,634 |          |   | $           | 406 |   |   | $ | 255,968 |   |   | $ | (114,780 | )       |   | $ | (1,317 | )     
|                                                           |                                        |                                                              |           |              |   |                |    |              |   |               |            |          |   |             |     |   |   |   |         |   |   |   |          |         |   |   |        |       

[Additional columns below]

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

|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |         |        |  
|---------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------ | ------- | -------------- | ------ | ------------- | ------ | ------ | - | - | ---- | - | - | - | ------- | ------- | ------ | -
|                                                           |                                        |                                                              |         |                |        |              
|                                                           |                                        | Comprehensive                                                |         | Treasury Stock |        | Total        
|                                                           |                                        | Income                                                       |         |                |        | Stockholders
|                                                           |                                        | (Loss)                                                       |         | Shares         |        | Par Value     |        | Equity
|                                                           |                                        |                                                              |         |                |        |               |        |       
|Balance, December  31, 1996                                |                                        |                                                              |         |                |        |               |       |        |   | $ |     |   |   | $ | 264,846 |        
|                                                          
|                                                          
|                                                          
|                                                          
|Exercise of employee stock options and related tax benefit |                                        |                                                              |         |                |        |               |       |        |   |   |     |   |   |   | 1,199   |        
|                                                          
|                                                          
|                                                          
|                                                          
|Employee stock purchase plan shares                        |                                        |                                                              |         |                |        |               |       |        |   |   |     |   |   |   | 3,292   |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Net loss                               |                                                              | $       | (39,398        | )      |               |        |       |   |   |      |  |   |   |         | (39,398 | )     
|                                                           | Other comprehensive losses, net of tax |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |         |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustment                      |         |                | (1,475 | )             |        |        |  |   |      |   |  |   |         |         | (1,475 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized loss on marketable securities, net of tax of $(3) |         |                | (893   | )             |        |        |  |   |      |   |  |   |         |         | (893   | )
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|                                                           | Other comprehensive losses             |                                                              |         | (2,368         | )      |               |        |       |   |   |      |  |   |   |         |        |       
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|Comprehensive loss                                         |                                        | $                                                            | (41,766 | )              |        |               |       |        |   |   |     |   |   |   |        |        
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|Adjustment to conform MultiLinks fiscal year              |                                        |                                                              |         |                |        |               |       |        |   |   |     |   |   |   | 394     |        
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|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        | )      |               |        |       |   |   |      |  |   |   |         | (55,679 | )     
|                                                           | Other comprehensive losses             |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |         |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustment                      |         |                | (63    | )             |        |        |  |   |      |   |  |   |         |         | (63    | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized gain on marketable securities                     |         |                | 11     |               |        |        |  |   |      |   |  |   |         |         | 11     |  
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|                                                           | Other comprehensive losses             |                                                              |         | (52            | )      |               |        |       |   |   |      |  |   |   |         |        |       
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|Comprehensive loss                                         |                                        | $                                                            | (55,731 | )              |        |               |       |        |   |   |     |   |   |   |        |        
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|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 to Intel                      |                                        |                                                              |         |                |        |               |       |        |   |   |     |   |   |   | 30,500  |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Net loss                               |                                                              | $       | (84,526        | )      |               |        |       |   |   |      |  |   |   |         | (84,526 | )     
|                                                           | Other comprehensive losses             |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |         |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Foreign currency translation adjustments                     |         |                | 823    |               |        |        |  |   |      |   |  |   |         |         | 823    |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                        | Unrealized loss on marketable securities                     |         |                | (6     | )             |        |        |  |   |      |   |  |   |         |         | (6     | )
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|                                                           | Other comprehensive losses             |                                                              |         | 817            |        |               |        |       |   |   |      |  |   |   |         |         |       
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|Comprehensive loss                                         |                                        | $                                                            | (83,709 | )              |        |               |       |        |   |   |     |   |   |   |        |        
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        
|Balance, December  31, 1999                                |                                        |                                                              |         |                |        |               | 92,065 |        |   | $ | (556 | ) |   | $ | 139,766 |        
|                                                           |                                        |                                                              |         |                |        |               |        |        |   |   |      |   |   |   |         |        

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

25



---



##### Table of Contents



PICTURETEL CORPORATION




CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in thousands)


|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------ | ------- | -------- | ------- | ---- | ------- | -------- | ------ | - | ------- | ------- | ------- | -
|                                                     |                                                                                            |                                                       
|                                                     |                                                                                            | Year Ended December 31,                               
|                                                     |                                                                                            |                                                       
|                                                     |                                                                                            | 1999                                                   |         | 1998     |         | 1997
|                                                     |                                                                                            |                                                        |         |          |         |     
|Cash flows from operating activities:                |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |                                                                                            | $                                                      | (84,526 | )        |         | $    | (55,679 | )        |        | $ | (39,398 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash provided by (used
	in) operating activities: |                                                        |         |          |         |      |         |          |        |   |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Depreciation and amortization                          |         |          | 34,576  |      |         |          | 28,183 |   |         |         | 35,221  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Provision for doubtful accounts                        |         |          | 2,474   |      |         |          | 4,160  |   |         |         | 4,241   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Inventory provision                                    |         |          | 3,834   |      |         |          | 6,004  |   |         |         | 4,476   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-down of capitalized software                     |         |          |        |      |         |          | 1,088  |   |         |         | 9,881   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-down of long-lived assets                        |         |          |        |      |         |          | 3,149  |   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Loss on disposal of fixed assets                       |         |          | 687     |      |         |          |       |   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Deferred taxes, provision (benefit)                    |         |          |        |      |         |          | 31,721 |   |         |         | (21,314 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Gain on sales of securities                            |         |          | (8,495  | )    |         |          |       |   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Write-off of incomplete technology                     |         |          |        |      |         |          | 4,442  |   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Other non-cash items                                   |         |          | (6      | )    |         |          | 896    |   |         |         | 2,107   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in operating assets and liabilities, net of effects of
	purchased business:        |                                                        |         |          |         |      |         |          |        |   |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accounts receivable                                    |         |          | (638    | )    |         |          | 26,513 |   |         |         | 30,267  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Inventories                                            |         |          | (6,298  | )    |         |          | 8,812  |   |         |         | 2,161   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Other current assets                                   |         |          | (4,619  | )    |         |          | (1,086 | ) |         |         | (1,022  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accounts payable                                       |         |          | (10,938 | )    |         |          | 2,468  |   |         |         | (24,124 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Accrued compensation and benefits and accrued expenses |         |          | 2,306   |      |         |          | (4,035 | ) |         |         | 18,314  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                            | Deferred revenue                                       |         |          | 6,274   |      |         |          | (1,086 | ) |         |         | 4,020   |  
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Net cash provided by (used in) operating activities  |                                                                                            |                                                        | (65,369 | )        |         |      | 55,550  |          |        |   | 24,830  |        
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Cash flows from investing activities:                |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of marketable securities                                                          |                                                        |         | (120,012 | )       |      |         | (126,262 | )      |   |         | (26,392 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                                |                                                        |         | 128,796  |         |      |         | 120,336  |        |   |         | 42,276  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                        |                                                        |         | (12,591  | )       |      |         | (19,421  | )      |   |         | (21,645 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales of fixed assets                                                        |                                                        |         | 342      |         |      |         | 506      |        |   |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalized software costs                                                                 |                                                        |         |         |         |      |         | (7,446   | )      |   |         | (17,133 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid to acquire business, less cash acquired                                          |                                                        |         |         |         |      |         | (3,964   | )      |   |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of other assets                                                                   |                                                        |         |         |         |      |         | (2,851   | )      |   |         | (5,350  | )      
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Net cash used in investing activities                |                                                                                            |                                                        | (3,465  | )        |         |      | (39,102 | )        |        |   | (28,244 | )      
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Cash flows from financing activities:                |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Restricted cash and cash equivalents                                                       |                                                        |         | (1,200   | )       |      |         |         |        |   |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments on short-term/long-term borrowings                                                |                                                        |         | (706     | )       |      |         | (2,955   | )      |   |         | (9,575  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capital lease obligations                                         |                                                        |         | (3,591   | )       |      |         | (3,471   | )      |   |         | (3,895  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of treasury stock                                                                 |                                                        |         | (556     | )       |      |         |         |        |   |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from preferred stock issuance                                                     |                                                        |         | 30,500   |         |      |         |         |        |   |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from exercise of stock options                                                    |                                                        |         | 1,844    |         |      |         | 981      |        |   |         | 954     |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from employee stock purchase plan                                                 |                                                        |         | 1,445    |         |      |         | 1,718    |        |   |         | 3,537   |        
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Net cash provided by (used in) financing activities  |                                                                                            |                                                        | 27,736  |          |         |      | (3,727  | )        |        |   | (8,979  | )      
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Adjustment to conform fiscal year of MultiLink       |                                                                                            |                                                        |        |          |         |      |        |          |        |   | 394     |        
|                                                    
|                                                    
|                                                    
|                                                    
|Effect of exchange rate changes on cash              |                                                                                            |                                                        | 371     |          |         |      | 62      |          |        |   | (1,475  | )      
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                            |                                                        | (40,727 | )        |         |      | 12,783  |          |        |   | (13,474 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of year       |                                                                                            |                                                        | 62,642  |          |         |      | 49,859  |          |        |   | 63,333  |        
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        
|Cash and cash equivalents at end of year             |                                                                                            | $                                                      | 21,915  |          |         | $    | 62,642  |          |        | $ | 49,859  |        
|                                                     |                                                                                            |                                                        |         |          |         |      |         |          |        |   |         |        

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

26



---



##### 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.
Managements plans to continue as a going concern rely
heavily on forecasted revenue from new products which are planned
 for delivery commencing in the second quarter of 2000. In
addition, management is currently negotiating an expanded credit
facility and may seek 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 and beyond. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

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 enters
into derivatives only

27



---



##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

with counterparties which are financial institutions having
credit ratings of single A to minimize credit risk. The
Companys hedging activities do not subject the Company to
exchange rate risk because the gains and losses on these
contracts offset the losses and gains on the assets, liabilities,
 and transactions being hedged. The criteria the Company uses for
 designating a forward contract as a hedge include the
instruments effectiveness in risk reduction and one-to-one
matching of the forward contract to the underlying transaction.
The carrying amount of the forward contracts is the fair value,
which is determined by obtaining market prices. Gains and losses
on forward contracts are recognized each reporting period and are
 offset against the gain or loss on the hedged item in the same
period that the underlying transactions are settled. At
December 31, 1999 and 1998, the Company had contracts
maturing through April 3, 2000 and April 6, 1999 to
purchase $10,473 and $17,570, respectively, in foreign currency
(British pounds, French francs, German marks, Japanese yen, Swiss
 francs, Swedish krona and Australian dollars). Cash flows
resulting from hedging contracts are classified in the same
category as the cash flows from the items being hedged.

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 and 1998, marketable securities
primarily consist of corporate obligations.

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 life
	or 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 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.

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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 internal software costs. No such costs were
capitalized during the year ended December 31, 1999, as no
current projects had achieved technological feasibility.
Capitalized software for the year ended December 31, 1998
also included completed technology of $12,781 acquired through
the purchase of Starlight. Amortization is based on the
straight-line method over the remaining estimated life of the
product or, on the ratio of current revenue to total projected
product revenue, whichever is greater. During the years ended
December 31, 1999, 1998 and 1997, the Company amortized
approximately $9,143, $1,023 and $13,994, respectively, of
software costs.

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 $3,144, $279, and $3,868 at
 December 31, 1999, 1998, and 1997, 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

Revenue from product sales is recognized upon execution of a
contract and delivery provided collectibility is deemed probable.
 Revenue from professional services is recognized as the services
 are performed. 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 revenues. Revenue
 under arrangements where products and services are sold together
 is allocated to each element based on their relative fair
values, with fair value being the price charged when that element
 is sold separately.

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

29



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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,
|                                   |                                            |                        
|                                   |                                            | 1999                    |       | 1998    |   | 1997
|                                   |                                            |                         |       |         |   |     
|Basic and Diluted EPS Computation: |                                            |                         |       |         |   |      |       |         |   |   |       |        
|                                  
|                                  
|                                  
|                                  
|Numerator:                         |                                            |                         |       |         |   |      |       |         |   |   |       |        
|                                  
|                                  
|                                  
|                                  
|                                   | Net loss applicable to common shareholders |                         | $     | (90,138 | ) |      | $     | (55,679 | ) |   | $     | (39,398 | )
|                                   |                                            |                         |       |         |   |      |       |         |   |   |       |        
|Denominator:                       |                                            |                         |       |         |   |      |       |         |   |   |       |        
|                                  
|                                  
|                                  
|                                  
|                                   | Weighted average common shares outstanding |                         |       | 40,376  |   |      |       | 38,527  |   |   |       | 37,760  |  
|                                   |                                            |                         |       |         |   |      |       |         |   |   |       |        
|Basic and diluted EPS              |                                            | $                       | (2.23 | )       |   | $    | (1.45 | )       |   | $ | (1.04 | )      
|                                   |                                            |                         |       |         |   |      |       |         |   |   |       |        

Options to purchase shares of the Companys Common Stock of
6,912,081, 6,686,832 and 4,728,190 were outstanding at
December 31, 1999, 1998 and 1997, respectively, but were not
 included in the computation of diluted EPS because they were
antidilutive due to the net losses sustained in 1999, 1998 and
1997. Warrants for 2,723 shares of the Companys Common
Stock and Convertible Preferred Stock of 4,478,708 shares were
outstanding at December 31, 1999, but were not included in
the computation of diluted EPS because they were antidilutive due
 to the loss sustained in 1999.

Concentrations

Credit Risk

Financial instruments, which potentially subject the Company to
concentration of credit risk, include cash, cash equivalents,
marketable securities, foreign currency forward contracts and
trade receivables. With respect to its cash, cash equivalents and
 marketable securities, 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

30



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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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. This
statement was originally effective for all fiscal year ends
beginning after June 15, 1999. In June 1999, the FASB issued
 Statement 137, which delayed the effective date of
Statement 133 by one year. Statement 133 will be
effective for PictureTels fiscal year beginning
January 1, 2001. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
 Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
The Company is currently evaluating the effects of this change
but anticipates that the adoption of SFAS 133 will not have
a significant effect on the Companys financial position or
results of operations.

In December 1998, the American Institute of Certified Public
 Accountants issued SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions, which addresses software revenue
recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4,
Deferral of the Effective Date of a Provision of
SOP 97-2, to extend the deferral of application of
certain passages of SOP 97-2 through fiscal years beginning
on or before March 15, 1999. All other provisions of
SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company
will comply with the requirements of this SOP effective
January 1, 2000, and does not expect this to have a material
 effect on the Companys financial position or results of
operations.

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements,
(SAB 101) as amended by SAB 101A, which is
effective no later than the quarter ending June 30, 2000.
SAB 101 clarifies the Securities and Exchange
Commissions views regarding recognition of revenue. The
Company will adopt SAB 101 in the second quarter of 2000 and is
currently evaluating the effects it will have. The Company
anticipates that the adoption of SAB 101 will have a
material effect on the Companys 2000 financial position and
 results of operations.

Reclassifications

Certain reclassifications of prior year amounts have been made to
 conform with current year presentation. These reclassifications
had no effect on net income or stockholders equity.

3.  Acquisitions:

Starlight Networks, Inc.

On November 10, 1998, the Company acquired all of the Common
 Stock of Starlight Networks, Inc. (Starlight) in a
transaction accounted for using the purchase method of
accounting. Starlight develops, manufactures and markets
streaming video software that enables live, interactive multicast
 video and video-on-demand. Total consideration of $17,798
consisted of 1,509,266 shares of common stock and 2,723 warrants
which totaled $14,679 and cash of $3,119. The total purchase
price of $22,252 included the consideration as

31



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

well as assumed debt of $3,544 and acquisition costs of $910
which related to legal, accounting and financial advisory fees
and was allocated to the fair value of the assets acquired as
follows:

|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|                     
|                     
|                     
|                     
|Completed technology  |  | $ | 12,781 |  
|                     
|                     
|                     
|                     
|In-process technology |  |   | 4,442  |  
|                     
|                     
|                     
|                     
|Long-term liabilities |  |   | (1,853 | )
|                     
|                     
|                     
|                     
|Fixed assets          |  |   | 555    |  
|                     
|                     
|                     
|                     
|Net working capital   |  |   | (510   | )
|                     
|                     
|                     
|                     
|Goodwill              |  |   | 5,473  |  
|                     
|                     
|                     
|                     
|Workforce             |  |   | 778    |  
|                     
|                     
|                     
|                     
|Tradename             |  |   | 586    |  
|                      |  |   |        |  
|Total assets acquired |  | $ | 22,252 |  
|                      |  |   |        |  

Goodwill is being amortized on a straight-line basis over five
years and the fair value of the workforce and tradename are being
 amortized on a straight line basis over three years. Goodwill
amortization expense for the years ended December 31, 1999
and 1998, amounted to $1,095 and $139, respectively. Amortization
 of workforce and tradename is included in the Companys
amortization of intangibles. Completed technology is being
amortized over a period of two to five years based upon the
expected life of the products using the technology. Amortization
of completed technology is included in the Companys
amortization of capitalized software (See Note 2).

The fair value of the purchased in-process research and
development was determined using the stage of completion
methodology. Under this technique, expected net cash flows from
the resulting product are discounted at a risk-adjusted discount
rate to arrive at the projects expected present value and
then the percentage of project completion as of the acquisition
date is applied to arrive at a fair value. The Company used a 30%
 risk-adjusted discount rate for the Starlight project. The
project was intended to seamlessly integrate several prototype
streaming media applications into one, customer-supportable and
distribution channel ready product suitable for managing high
quality streaming events such as business briefings, distance
learning and business television. The purchased in-process
research and development has no alternative use, and accordingly
was charged to research and development expense in the fourth
quarter of 1998. The project was estimated to be 54% complete as
of the acquisition date. The new product was introduced in the
first quarter of 2000, several months later than originally
anticipated. This delay did not have a material effect on the
Companys results of operations or liquidity.

The following information presents certain statement of
operations data for 1998 and 1997 as though the acquisition had
occurred on January 1, 1997:

|                                              |  |                         |         |      |  |   |         |  
|--------------------------------------------- |  | ----------------------- | ------- | ---- |  | - | ------- | -
|                                              |  |                        
|                                              |  | Year ended December 31,
|                                              |  |                        
|                                              |  | 1998                    |         | 1997
|                                              |  |                         |         |     
|                                              |  |                        
|                                              |  | (Unaudited Proforma)   
|                                             
|                                             
|                                             
|                                             
|Revenue                                       |  | $                       | 408,083 |      |  | $ | 474,499 |  
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  | $                       | (63,372 | )    |  | $ | (53,572 | )
|                                             
|                                             
|                                             
|                                             
|Net loss per common share  basic and diluted |  | $                       | (1.59   | )    |  | $ | (1.36   | )

MultiLink, Inc.

On July 22, 1997, the Company acquired all of the Common
Stock of MultiLink, Inc. (MultiLink) in a transaction accounted
for as a pooling of interests. MultiLink develops, manufactures
and markets software and hardware that enable users at two or
more sites to participate in audio meetings. The Company issued
3,578,026 shares of common stock in exchange for 6,389,332 shares
 of MultiLink Common Stock at a ratio of one share of MultiLink
Common Stock to 0.56 shares of the Companys Common Stock.
The accompanying

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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

consolidated financial statements for all periods prior to the
acquisition have been restated to include the results of
operations, financial position and cash flows of MultiLink.
Intercompany sales between MultiLink and the Company were
insignificant and have been eliminated in consolidation. Costs
associated with the acquisition of $2,561 were charged to
operations for the year ended December 31, 1997. These costs
 principally relate to investment banking, accounting and legal
advisory fees and severance expense.

The following information presents certain statement of
operations data of the separate companies for the periods prior
to the acquisition which for these purposes has been assumed to
occur on June 29, 1997:

|                  |            |                  |   |              |   |      |   |         |  |  |   |         | 
|----------------- | ---------- | ---------------- | - | ------------ | - | ---- | - | ------- |  |  | - | ------- | 
|                  |            |                  |   |             
|                  |            | Six months ended |   | Year ended  
|                  |            | June 29,         |   | December 31,
|                  |            |                  |   |             
|                  |            | 1997             |   | 1996         |   | 1996
|                  |            |                  |   |              |   |     
|Revenue           |            |                  |   |              |   |      |   |         |  |  |   |        
|                 
|                 
|                 
|                 
|                  | PictureTel |                  | $ | 227,439      |   |      | $ | 221,083 |  |  | $ | 467,805 | 
|                 
|                 
|                 
|                 
|                  | MultiLink  |                  |   | 12,462       |   |      |   | 9,662   |  |  |   | 22,420  | 
|Net income (loss) |            |                  |   |              |   |      |   |         |  |  |   |        
|                 
|                 
|                 
|                 
|                  | PictureTel |                  | $ | (1,513       | ) |      | $ | 15,957  |  |  | $ | 30,598  | 
|                 
|                 
|                 
|                 
|                  | MultiLink  |                  |   | (1,376       | ) |      |   | 651     |  |  |   | 1,574   | 

4.  Inventories:

Inventories consist of the following:

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 1999         |        | 1998
|                |  |              |        |     
|Purchased parts |  | $            | 3,184  |      |  | $ | 2,609  | 
|               
|               
|               
|               
|Work-in-process |  |              | 1,157  |      |  |   | 1,399  | 
|               
|               
|               
|               
|Finished goods  |  |              | 28,589 |      |  |   | 26,248 | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 32,930 |      |  | $ | 30,256 | 
|                |  |              |        |      |  |   |        | 

5.  Marketable Securities:

At December 31, 1999 and 1998, marketable securities,
including those reported in cash equivalents, were as follows:

|                                 |                       |              |        |        |  |           |        |        |  |   |        |        |  |   |        |        | 
|-------------------------------- | --------------------- | ------------ | ------ | ------ |  | --------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                 |                       |             
|                                 |                       | December 31,
|                                 |                       |             
|                                 |                       |              |        |       
|                                 |                       | 1999         |        | 1998  
|                                 |                       |              |        |       
|                                 |                       | Amortized    |        | Fair   |  | Amortized |        | Fair  
|                                 |                       | Cost         |        | Value  |  | Cost      |        | Value 
|                                 |                       |              |        |        |  |           |        |       
|U.S. Government and its agencies |                       | $            | 3,727  |        |  | $         | 3,726  |        |  |   |       |        |  |   |       |       
|                                
|                                
|                                
|                                
|Corporate obligations            |                       |              | 42,769 |        |  |           | 42,769 |        |  | $ | 58,192 |        |  | $ | 58,200 |       
|                                 |                       |              |        |        |  |           |        |        |  |   |        |        |  |   |        |       
|                                 | Total debt securities |              | $      | 46,496 |  |           | $      | 46,495 |  |   | $      | 58,192 |  |   | $      | 58,200 | 
|                                 |                       |              |        |        |  |           |        |        |  |   |        |        |  |   |        |       

Net unrealized holding gains of $0 and $6 for 1999 and 1998,
respectively, are included in other comprehensive income. Gross
unrealized holding gains were $0 and $10 for 1999 and 1998,
respectively. Realized losses of approximately $0 and $1 and
realized gains of approximately $1,500 from the sales of
available for sale securities are included in other income for
the years ended December 31, 1999, 1998 and 1997,
respectively.

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.

33



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

At December 31, 1999, all of the Companys marketable
securities have stated maturity dates within one year of the
balance sheet date.

6.  Property and Equipment:

Property and equipment consist of the following:

|                                                               |                                |              |         |         |  |  |         |         | 
|-------------------------------------------------------------- | ------------------------------ | ------------ | ------- | ------- |  |  | ------- | ------- | 
|                                                               |                                |             
|                                                               |                                | December 31,
|                                                               |                                |             
|                                                               |                                | 1999         |         | 1998   
|                                                               |                                |              |         |        
|Property and equipment, excluding assets under capital leases: |                                |              |         |         |  |  |         |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Equipment                      |              | $       | 113,572 |  |  | $       | 103,274 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Furniture and fixtures         |              |         | 18,071  |  |  |         | 13,922  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Leasehold improvements         |              |         | 20,777  |  |  |         | 15,077  | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 152,420 |         |  |  | 132,273 |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Less: Accumulated depreciation |              |         | 119,918 |  |  |         | 95,611  | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 32,502  |         |  |  | 36,662  |        
|                                                               |                                |              |         |         |  |  |         |        
|Assets under capital leases:                                   |                                |              |         |         |  |  |         |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Buildings                      |              |         | 38,000  |  |  |         | 38,000  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Buildings held for sublease    |              |         | 20,938  |  |  |         | 20,938  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Equipment and furniture        |              |         | 2,774   |  |  |         | 11,268  | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 61,712  |         |  |  | 70,206  |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Less: Accumulated depreciation |              |         | 7,995   |  |  |         | 11,213  | 
|                                                               |                                |              |         |         |  |  |         |        
|                                                               |                                |              | 53,717  |         |  |  | 58,993  |        
|                                                               |                                |              |         |         |  |  |         |        
|                                                               | Property and equipment, net    |              | $       | 86,219  |  |  | $       | 95,655  | 
|                                                               |                                |              |         |         |  |  |         |        

At December 31, 1999 and 1998, accumulated depreciation
amounted to $5,353 and $2,079 on buildings under capital leases
and $2,642 and $9,134 on equipment and furniture under capital
leases, respectively. Depreciation expense for the years ended
December 31, 1999 and 1998 was $20,926 and $26,967,
respectively. Depreciation expense of $1,163 related to the
buildings under capital lease held for sublease and the related
sublease income of $2,353 for 1999 was included in other income.

7.  Debt:

The Company has a revolving credit agreement, expiring
June 15, 2001, as a source of funds. The Company has up to
$35,000 available for borrowing under the credit agreement. At
December 31, 1999, no borrowings were outstanding under this
 credit agreement. The Company currently has $30,595 of
outstanding standby letters of credit issued under this agreement
 which reduces the amount available for borrowing on a dollar for
 dollar basis. Fees for letters of credit outstanding against
this revolving credit line are payable at 125 basis points per
annum of the face amount. The revolving credit agreement is
collateralized by substantially all assets of the parent Company
and certain stock of its subsidiaries. The credit agreement also
contains certain financial covenants, including net income (loss)
 and minimum cash requirements. The Company is retroactively in
compliance with these covenants after receiving a waiver on
March 28, 2000 for not meeting its fourth quarter 1999 net
income requirement.

The Company is currently seeking a waiver for not meeting its
first quarter 2000 covenants and anticipates that its quarterly
financial results for the balance of 2000 will likely be out of
compliance with the current credit facilitys financial
covenants. To address this and to provide necessary additional
liquidity and borrowing capacity, the Company and its bank group
are currently negotiating an expanded credit facility. In the
event such efforts are unsuccessful, the Companys cash
could be reduced by the amount of the letters of credit.

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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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, 1999, the remaining obligation under this
operating lease was $8,135. After giving effect to expected
sublease income, this obligation is $5,082. In addition, in June
1998, the Company subleased its property at 50 Minuteman Road for
 a ten-year term. After giving effect to expected sublease
income, the remaining principal obligation under the capital
lease was $16,694 at December 31, 1999.

Local lines of credit are available for short-term advances of up
 to $979 to certain of the Companys foreign subsidiaries.
The agreements require interest payable up to one quarter of one
percent per annum. Approximately $196 was outstanding against
these local lines of credit at December 31, 1999.

In June 1999, the Company entered into a short-term security
 agreement with BankBoston. Under this agreement, the Company
pledged to the bank certain amounts of cash and cash equivalents
as collateral for obligations of the Company arising from use of
the Banks cash management and foreign exchange services.
The required collateral was $1,200 as of December 31, 1999.

8.  Commitments:

The Company has commitments under capital and non-cancelable
operating leases for office and manufacturing space. The facility
 leases are for terms ranging from one to eighteen years. The
leases generally contain provisions that allow for expansion,
extension and termination. In August 1997, the Company
entered into an eighteen-year lease agreement for the building at
 50 Minuteman Road in Andover, Massachusetts. In
June 1998, the property was subleased for a period of ten
years. The lease is accounted for as a capital lease. In
March 1997, the Company entered into another eighteen-year
lease agreement for an additional building at 200 Minuteman
Road in Andover, Massachusetts. The lease, which commenced in
October 1998, is accounted for as a capital 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.

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

|                                                   |  |         |        |           |  |   |        | 
|-------------------------------------------------- |  | ------- | ------ | --------- |  | - | ------ | 
|                                                   |  | Capital |        | Operating
|                                                   |  | Leases  |        | Leases   
|                                                   |  |         |        |          
|2000                                               |  | $       | 6,103  |           |  | $ | 8,684  | 
|                                                  
|                                                  
|                                                  
|                                                  
|2001                                               |  |         | 6,105  |           |  |   | 8,241  | 
|                                                  
|                                                  
|                                                  
|                                                  
|2002                                               |  |         | 6,103  |           |  |   | 7,467  | 
|                                                  
|                                                  
|                                                  
|                                                  
|2003                                               |  |         | 6,103  |           |  |   | 6,710  | 
|                                                  
|                                                  
|                                                  
|                                                  
|2004                                               |  |         | 6,103  |           |  |   | 5,859  | 
|                                                  
|                                                  
|                                                  
|                                                  
|Thereafter                                         |  |         | 69,159 |           |  |   | 37,379 | 
|                                                   |  |         |        |           |  |   |        | 
|Total future minimum lease payments                |  |         | 99,676 |           |  | $ | 74,340 | 
|                                                   |  |         |        |           |  |   |        | 
|Less amount representing interest                  |  |         | 43,310 |           |  |   |        | 
|                                                   |  |         |        |           |  |   |        | 
|Present value of net future minimum lease payments |  |         | 56,366 |           |  |   |        | 
|                                                  
|                                                  
|                                                  
|                                                  
|Less current portion                               |  |         | 1,782  |           |  |   |        | 
|                                                   |  |         |        |           |  |   |        | 
|Long-term obligation under capital leases          |  | $       | 54,584 |           |  |   |        | 
|                                                   |  |         |        |           |  |   |        | 

35



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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:

|                                    |  |         |        |           |  |   |       | 
|----------------------------------- |  | ------- | ------ | --------- |  | - | ----- | 
|                                    |  | Capital |        | Operating
|                                    |  | Leases  |        | Leases   
|                                    |  |         |        |          
|2000                                |  | $       | 2,353  |           |  | $ | 907   | 
|                                   
|                                   
|                                   
|                                   
|2001                                |  |         | 2,353  |           |  |   | 856   | 
|                                   
|                                   
|                                   
|                                   
|2002                                |  |         | 2,388  |           |  |   | 805   | 
|                                   
|                                   
|                                   
|                                   
|2003                                |  |         | 2,414  |           |  |   | 692   | 
|                                   
|                                   
|                                   
|                                   
|2004                                |  |         | 2,414  |           |  |   | 352   | 
|                                   
|                                   
|                                   
|                                   
|Thereafter                          |  |         | 8,246  |           |  |   |      | 
|                                    |  |         |        |           |  |   |       | 
|Total future minimum lease payments |  | $       | 20,168 |           |  | $ | 3,612 | 
|                                    |  |         |        |           |  |   |       | 

Net rental expense for operating leases was $10,783, $11,692 and
$11,600 for 1999, 1998 and 1997, respectively.

In conjunction with the Intel distribution agreement, the Company
 had outstanding commitments at December 31, 1999, to
purchase $5,700 of inventory over the first half of the year
2000.

9.  Capital Stock:

Convertible Preferred Stock

On February 18, 1999, Intel invested $30,500 in the Company,
 acquiring approximately 10% of the Companys equity through
 convertible preferred stock. The convertible preferred stock was
 issued to Intel 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 preference stock. Issuance of the
preference stock limits the rights of the common stockholders.
The convertible preferred stock issued to Intel Corporation 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
convertible preferred stock has no redemption rights.

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 (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.

36



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Warrants

As part of the acquisition of Starlight Networks, Inc., the
Company assumed warrants to purchase 2,723 shares of Common
Stock. The warrants 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 1999,
1998, and 1997.

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,
|                                                           |           |                        
|                                                           |           | 1999                    |         | 1998    |   | 1997
|                                                           |           |                         |         |         |   |     
|Net loss applicable to common shareholders As reported     |           | $                       | (90,138 | )       |   | $    | (55,679 | )       |   | $ | (39,398 | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Pro forma |                         |         | (98,638 | ) |      |         | (66,224 | ) |   |         | (46,554 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss per common share  basic and diluted As
	reported |           | $                       | (2.23   | )       |   | $    | (1.45   | )       |   | $ | (1.04   | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Pro forma |                         |         | (2.44   | ) |      |         | (1.72   | ) |   |         | (1.23   | )

The effects of applying SFAS No. 123 for the purpose of
providing pro forma disclosures may not be indicative of the
effects on reported net income (loss) and net income (loss) per
share for future years, as the pro forma disclosures include the
effects of only those awards granted after January 1, 1995
and additional awards are anticipated in future years.

37



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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, 1999, shareholders
have authorized the purchase of up to 2,000,000 shares of Common
Stock under the ESPP. The ESPP was amended at the annual meeting
on June 17, 1999 so as to increase the aggregate number of
shares available for issuance under the ESPP from 1,000,000 to
2,000,000. Shares purchased under the ESPP in 1999, 1998 and 1997
 totaled 295,820, 286,074 and 183,017, respectively. The weighted
 average grant date fair value of the shares purchased was $2.15,
 $2.64 and $5.43 in 1999, 1998 and 1997, 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 no shares purchased under the Foreign
Plan in 1999. At December 31, 1999, there were 1,529,268
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 1999, 1998 and 1997,
respectively: a risk-free interest rate of 4.97%, 5.11%, and
6.07%, an expected life of 6 months, expected volatility of
69%, 65%, and 56%, and no expected dividends.

Stock Option Plans

On February 18, 1997, the Compensation Committee of the
Board of Directors granted replacement options, at an exercise
price of $16.875 per share, to all employees other than the
executive officers and directors (and other than those few who
did not consent) holding outstanding options exercisable at a
price of $20.00 or more. The replacement options become
exercisable (unless accelerated by the Compensation Committee)
over a four-year period, and to the extent the canceled option
had already become exercisable, such portion of the new option
became exercisable in six months from the date of re-grant and
the remaining options became exercisable over a four-year period
commencing in February, 1998.

On November 5, 1997, the Compensation Committee of the Board
 of Directors granted replacement options at the rate of four
replacement options for every five outstanding options (including
 replacement options granted in February, 1997) returned, at an
exercise price of $9.187 per share, to all employees other than
the executive officers and directors (and other than those few
who did not consent) holding outstanding options exercisable at a
 price of $10.00 or more. The replacement options become
exercisable (unless accelerated by the committee) over a
four-year period, and to the extent the canceled options had
already become exercisable, such portion of the new option became
 exercisable in six months from the date of re-grant and the
remaining options became exercisable over a four-year period
commencing in November, 1998.

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 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, 1999, 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

38



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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.

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 options to outside directors, the Plan was amended by the
Board of Directors to provide for the immediate vesting of all
options granted after August 1, 1999. All options expire ten
 years after the effective date of grant; all options, except
annual and non-automatic options, granted prior to August 1,
 1999 become exercisable over a one-year period; and all options
granted after August 1, 1999 become exercisable immediately
at the date of grant. At December 31, 1999, there were
1,891,321 shares available for future grant under these plans.

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 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, 1999, there were 191,340 shares available for
future grant under the Plan.

39



---



##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The following table summarizes the Companys stock option
plans at December 31, 1999, 1998 and 1997 and changes during
 the years then ended:

|                                                                                                |  |        |            |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|----------------------------------------------------------------------------------------------- |  | ------ | ---------- | --------- |  | ------ | ----- | --------- |  | ------ | ---------- | --------- |  | - | ----- |  |  |  | ---------- | - |  | - | ----- | 
|                                                                                                |  |        |            |           |  |       
|                                                                                                |  | 1999   |            | 1998      |  | 1997  
|                                                                                                |  |        |            |           |  |       
|                                                                                                |  |        |            | Weighted- |  |        |       | Weighted- |  |        |            | Weighted-
|                                                                                                |  |        |            | Average   |  |        |       | Average   |  |        |            | Average  
|                                                                                                |  |        |            | Exercise  |  |        |       | Exercise  |  |        |            | Exercise 
|                                                                                                |  | Shares |            | Price     |  | Shares |       | Price     |  | Shares |            | Price    
|                                                                                                |  |        |            |           |  |        |       |           |  |        |            |          
|Outstanding at beginning of year                                                                |  |        | 6,686,832  |           |  | $      | 9.16  |           |  |        | 4,728,190  |           |  | $ | 11.21 |  |  |  | 5,252,627  |   |  | $ | 17.82 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Granted at fair market value                                                                    |  |        | 4,790,305  |           |  |        | 5.35  |           |  |        | 3,627,100  |           |  |   | 7.01  |  |  |  | 4,356,743  |   |  |   | 13.17 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Exercised                                                                                       |  |        | (254,043   | )         |  |        | 7.26  |           |  |        | (232,068   | )         |  |   | 4.23  |  |  |  | (342,222   | ) |  |   | 4.95  | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Forfeited                                                                                       |  |        | (4,311,013 | )         |  |        | 8.41  |           |  |        | (1,436,390 | )         |  |   | 11.26 |  |  |  | (4,538,958 | ) |  |   | 21.22 | 
|                                                                                                |  |        |            |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|Outstanding at end of year                                                                      |  |        | 6,912,081  |           |  | $      | 7.05  |           |  |        | 6,686,832  |           |  | $ | 9.16  |  |  |  | 4,728,190  |   |  | $ | 11.21 | 
|                                                                                                |  |        |            |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |   |  |   |       | 
|Options exercisable at year-end                                                                 |  |        | 1,921,405  |           |  | $      | 10.23 |           |  |        | 2,328,993  |           |  | $ | 11.52 |  |  |  | 2,034,527  |   |  | $ | 10.05 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Weighted-average grant date fair value of options granted during
	the year at fair market value |  |        |            |           |  | $      | 3.49  |           |  |        |            |           |  | $ | 4.38  |  |  |  |            |   |  | $ | 7.62  | 

The following table summarizes information about stock options
outstanding at December 31, 1999:

|                         |                 |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|------------------------ | --------------- | ------------------- |  | ------------------- | --------- | -------------- |  | ----------- | ---- | -------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |                 |                     |  |                    
|                         |                 | Options Outstanding |  | Options Exercisable
|                         |                 |                     |  |                    
|                         |                 |                     |  | Weighted-Average    |           |                |  |            
|                         |                 | Number              |  | Remaining           |           | Weighted-      |  | Number      |      | Weighted-     
|                         |                 | Outstanding         |  | Contractual Life    |           | Average        |  | Exercisable |      | Average       
|Range of Exercise Prices |                 | at 12/31/99         |  | (In years)          |           | Exercise Price |  | at 12/31/99 |      | Exercise Price
|                         |                 |                     |  |                     |           |                |  |             |      |               
|$                        | 0.268   0.893  |                     |  |                     | 5,694     |                |  |             | 3.34 |                |  | $ | .83   |  |  |  | 5,694     |  |  | $ | .83   | 
|                         | 2.679   3.719  |                     |  |                     | 1,499,698 |                |  |             | 9.08 |                |  |   | 3.71  |  |  |  | 24,817    |  |  |   | 3.47  | 
|                         | 3.970   5.531  |                     |  |                     | 1,803,117 |                |  |             | 9.59 |                |  |   | 5.01  |  |  |  | 80,942    |  |  |   | 5.14  | 
|                         | 5.565   8.563  |                     |  |                     | 1,983,595 |                |  |             | 8.19 |                |  |   | 7.36  |  |  |  | 604,447   |  |  |   | 7.22  | 
|                         | 8.625  10.250  |                     |  |                     | 1,140,589 |                |  |             | 6.17 |                |  |   | 9.25  |  |  |  | 865,479   |  |  |   | 9.22  | 
|                         | 10.360  14.970 |                     |  |                     | 188,498   |                |  |             | 7.19 |                |  |   | 10.89 |  |  |  | 118,736   |  |  |   | 10.94 | 
|                         | 15.625  23.375 |                     |  |                     | 186,765   |                |  |             | 7.08 |                |  |   | 16.90 |  |  |  | 131,528   |  |  |   | 16.91 | 
|                         | 23.625  40.500 |                     |  |                     | 104,125   |                |  |             | 6.38 |                |  |   | 36.48 |  |  |  | 89,762    |  |  |   | 36.64 | 
|                         |                 |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|$                        | 0.268  40.500  |                     |  |                     | 6,912,081 |                |  |             | 8.33 |                |  | $ | 7.05  |  |  |  | 1,921,405 |  |  | $ | 10.23 | 
|                         |                 |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 

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 1999, 1998 and 1997, respectively:
 a risk-free interest rate of 5.65%, 5.10% and 6.06%, an expected
 life of 5.5 months, expected volatility of 71%, 67% and 57%
 (no volatility assumption was used for MultiLink options) and no
 expected dividends.

40



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

10.  Income Taxes:

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

|                                                |                               |              |         |      |  |   |         |   | 
|----------------------------------------------- | ----------------------------- | ------------ | ------- | ---- |  | - | ------- | - | 
|                                                |                               |             
|                                                |                               | December 31,
|                                                |                               |             
|                                                |                               | 1999         |         | 1998
|                                                |                               |              |         |     
|Net operating loss and tax credit carryforwards |                               | $            | 66,723  |      |  | $ | 39,441  |  
|                                               
|                                               
|                                               
|                                               
|Inventory reserves                              |                               |              | 3,387   |      |  |   | 3,578   |  
|                                               
|                                               
|                                               
|                                               
|Depreciation and amortization                   |                               |              | (2,816  | )    |  |   | (5,357  | )
|                                               
|                                               
|                                               
|                                               
|Other temporary differences                     |                               |              | 15,985  |      |  |   | 13,880  |  
|                                               
|                                               
|                                               
|                                               
|Valuation allowance                             |                               |              | (83,279 | )    |  |   | (51,542 | )
|                                                |                               |              |         |      |  |   |         |  
|                                                | Total net deferred tax assets |              | $       |     |  |   | $       |  | 
|                                                |                               |              |         |      |  |   |         |  

Other temporary differences principally represent bad debt and
warranty reserves, 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 $7,451 of the gross deferred tax assets at
December 31, 1999 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.

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

|                      |                   |                         |   |       |       |      |   |        |        |  |   |         |         |  
|--------------------- | ----------------- | ----------------------- | - | ----- | ----- | ---- | - | ------ | ------ |  | - | ------- | ------- | -
|                      |                   |                        
|                      |                   | Year Ended December 31,
|                      |                   |                        
|                      |                   | 1999                    |   | 1998  |       | 1997
|                      |                   |                         |   |       |       |     
|Federal income taxes: |                   |                         |   |       |       |      |   |        |        |  |   |        
|                     
|                     
|                     
|                     
|                      | Currently payable |                         | $ |      |       |      | $ | 253    |        |  | $ | 2,742   |        
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |      |       |      |   | 24,634 |        |  |   | (18,161 | )      
|                     
|                     
|                     
|                     
|State income taxes:   |                   |                         |   |       |       |      |   |        |        |  |   |        
|                     
|                     
|                     
|                     
|                      | Currently payable |                         |   | 204   |       |      |   | 75     |        |  |   |        |        
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |      |       |      |   | 7,011  |        |  |   | (3,134  | )      
|                     
|                     
|                     
|                     
|Foreign taxes:        |                   |                         |   |       |       |      |   |        |        |  |   |        
|                     
|                     
|                     
|                     
|                      | Currently payable |                         |   | 4,180 |       |      |   | 3,732  |        |  |   | 2,002   |        
|                     
|                     
|                     
|                     
|                      | Deferred          |                         |   |      |       |      |   | 76     |        |  |   | 459     |        
|                      |                   |                         |   |       |       |      |   |        |        |  |   |        
|                      |                   | Total                   |   | $     | 4,384 |      |   | $      | 35,781 |  |   | $       | (16,092 | )
|                      |                   |                         |   |       |       |      |   |        |        |  |   |        

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

|                                                            |  |                         |       |      |  |      |        |    |  |  |       |   
|----------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ------ | -- |  |  | ----- | --
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 1999                    |       | 1998 |  | 1997
|                                                            |  |                         |       |      |  |     
|Statutory federal income tax rate                           |  |                         | (35.0 | )%   |  |      | (35.0  | )% |  |  | (35.0 | )%
|                                                           
|                                                           
|                                                           
|                                                           
|State income tax, net of federal tax benefit                |  |                         | (4.4  | )    |  |      | 0.2    |    |  |  | (4.7  | ) 
|                                                           
|                                                           
|                                                           
|                                                           
|Federal and state tax credits from research and development |  |                         | (0.7  | )    |  |      |       |    |  |  | (0.9  | ) 
|                                                           
|                                                           
|                                                           
|                                                           
|Difference between foreign and US tax rates                 |  |                         | 4.4   |      |  |      | 3.1    |    |  |  | 0.7   |   
|                                                           
|                                                           
|                                                           
|                                                           
|Change in deferred asset valuation allowance                |  |                         | 39.6  |      |  |      | 207.6  |    |  |  | 5.0   |   
|                                                           
|                                                           
|                                                           
|                                                           
|Other                                                       |  |                         | 1.6   |      |  |      | 3.9    |    |  |  | 5.9   |   
|                                                            |  |                         |       |      |  |      |        |    |  |  |       |   
|Effective tax rate                                          |  |                         | 5.5%  |      |  |      | 179.8% |    |  |  | (29.0 | )%
|                                                            |  |                         |       |      |  |      |        |    |  |  |       |   

At December 31, 1999, the Company had remaining net
operating loss (NOL) carryforwards available of
approximately $145,000 to offset future federal and state taxable
 income. The Company also has unused

41



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

federal research and development tax credits of approximately
$5,717. The NOL and tax credit carryforwards both expire at
various dates through the year 2019. 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, 1999, 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.

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, 1999, 1998 and 1997, the Companys
matching contribution was 50%, 50%, and 50%, respectively or
$600, $780 and $929, 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.

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 three reportable
operating segments: videoconferencing products, videoconferencing
 services and audioconferencing. The videoconferencing products
segment develops, manufactures and markets visual communications
systems and collaboration software. The videoconferencing
services segment provides services for the videoconferencing
products. The audioconferencing segment develops, manufactures,
markets and services multipoint control units for
teleconferencing.

In 1999, 1998 and 1997, no customer accounted for 10% or more of
total revenue. One supplier accounted for 33% and 32% of the
Companys purchases from outside vendors in 1999 and 1998,
respectively. Another supplier accounted for 17.6% 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 |  | Audio-       |        |       |  |      
|                                |  | Products     |         | Services     |  | conferencing |        | Other |  | Total
|                                |  |              |         |              |  |              |        |       |  |      
|Year ended December 31, 1999:   |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 232,533 |              |  | $            | 70,304 |       |  | $     | 20,442 |   |  | $ |        |   |  | $ | 323,279 |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (68,409 | )            |  | $            | 2,976  |       |  | $     | (2,880 | ) |  | $ | (21,971 | ) |  | $ | (90,284 | )
|                               
|                               
|                               
|                               
|Year ended December 31, 1998:   |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 323,487 |              |  | $            | 59,760 |       |  | $     | 22,905 |   |  | $ |        |   |  | $ | 406,152 |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (16,049 | )            |  | $            | 7,191  |       |  | $     | 7,334  |   |  | $ | (22,126 | ) |  | $ | (23,650 | )
|                               
|                               
|                               
|                               
|Year ended December 31, 1997:   |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $            | 392,912 |              |  | $            | 48,988 |       |  | $     | 24,525 |   |  | $ |        |   |  | $ | 466,425 |  
|                               
|                               
|                               
|                               
|Operating income (loss)         |  | $            | (30,533 | )            |  | $            | 4,455  |       |  | $     | (6,568 | ) |  | $ | (24,204 | ) |  | $ | (56,850 | )

42



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Other consists of corporate administrative functions, which are
excluded from the videoconferencing products, videoconferencing
services and audioconferencing segments for management decision
making.

The Company evaluates the performance of its segments based upon
operating income. There 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.

Videoconferencing products consist of three categories: group,
desktop/personal and network server systems. Revenue for the
videoconferencing products segment is detailed below:

|                         |                                  |                         |         |         |  |      |         |         |  |   |         |         | 
|------------------------ | -------------------------------- | ----------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                         |                                  |                        
|                         |                                  | Year Ended December 31,
|                         |                                  |                        
|                         |                                  | 1999                    |         | 1998    |  | 1997
|                         |                                  |                         |         |         |  |     
|Group Systems            |                                  | $                       | 184,909 |         |  | $    | 265,954 |         |  | $ | 321,835 |        
|                        
|                        
|                        
|                        
|Desktop/Personal Systems |                                  |                         | 19,460  |         |  |      | 29,859  |         |  |   | 41,057  |        
|                        
|                        
|                        
|                        
|Network Server Systems   |                                  |                         | 28,164  |         |  |      | 27,674  |         |  | $ | 30,020  |        
|                         |                                  |                         |         |         |  |      |         |         |  |   |         |        
|                         | Total Videoconferencing Products |                         | $       | 232,533 |  |      | $       | 323,487 |  |   | $       | 392,912 | 
|                         |                                  |                         |         |         |  |      |         |         |  |   |         |        

Videoconferencing services relate to maintenance and professional
 services as detailed below:

|                      |                                  |                         |        |        |  |      |        |        |  |   |        |        | 
|--------------------- | -------------------------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                      |                                  |                        
|                      |                                  | Year Ended December 31,
|                      |                                  |                        
|                      |                                  | 1999                    |        | 1998   |  | 1997
|                      |                                  |                         |        |        |  |     
|Maintenance Services  |                                  | $                       | 44,883 |        |  | $    | 40,933 |        |  | $ | 38,404 |       
|                     
|                     
|                     
|                     
|Professional Services |                                  |                         | 25,421 |        |  |      | 18,827 |        |  |   | 10,584 |       
|                      |                                  |                         |        |        |  |      |        |        |  |   |        |       
|                      | Total Videoconferencing Services |                         | $      | 70,304 |  |      | $      | 59,760 |  |   | $      | 48,988 | 
|                      |                                  |                         |        |        |  |      |        |        |  |   |        |       

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 31,1999     |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 200,764 |         |  | $     | 65,654 |           |  | $     | 27,055 |  |  | $ | 29,806 |  |  | $ | 323,279 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 104,109 |         |  | $     | 3,872  |           |  | $     | 2,225  |  |  | $ | 1,150  |  |  | $ | 111,356 | 
|                               
|                               
|                               
|                               
|Year ended December 31,1998     |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 267,111 |         |  | $     | 79,396 |           |  | $     | 24,747 |  |  | $ | 34,898 |  |  | $ | 406,152 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 125,997 |         |  | $     | 3,804  |           |  | $     | 2,295  |  |  | $ | 2,235  |  |  | $ | 134,331 | 
|                               
|                               
|                               
|                               
|Year ended December 31,1997     |  |               |         |         |  |       |        |           |  |       |        |  |  |   |        |  |  |   |         | 
|                               
|                               
|                               
|                               
|Revenue from external customers |  | $             | 307,450 |         |  | $     | 76,318 |           |  | $     | 36,689 |  |  | $ | 45,968 |  |  | $ | 466,425 | 
|                               
|                               
|                               
|                               
|Long-lived assets               |  | $             | 88,445  |         |  | $     | 4,341  |           |  | $     | 2,086  |  |  | $ | 2,120  |  |  | $ | 96,992  | 

Segment information for 1998 and 1997 have been reclassified to
reflect the new allocation method employed in 1999.

43



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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

13.  Unaudited Interim Financial Information:

Quarterly financial information is as follows:

|                                                        |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | First   |         | Second  |  | Third   |         | Fourth 
|                                                        |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                                        |  |         |         |         |  |         |         |        
|1999                                                    |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|                                                       
|                                                       
|                                                       
|                                                       
|Revenue                                                 |  | $       | 76,194  |         |  | $       | 85,962  |         |  | $ | 78,813  |   |  | $ | 82,310  |  
|                                                       
|                                                       
|                                                       
|                                                       
|Gross margin                                            |  |         | 24,222  |         |  |         | 27,025  |         |  |   | 24,930  |   |  |   | 25,959  |  
|                                                       
|                                                       
|                                                       
|                                                       
|Net loss                                                |  |         | (27,404 | )       |  |         | (34,669 | )       |  |   | (11,908 | ) |  |   | (16,157 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Net loss per common share  basic and diluted           |  | $       | (0.68   | )       |  | $       | (0.86   | )       |  | $ | (0.29   | ) |  | $ | (0.40   | )
|                                                       
|                                                       
|                                                       
|                                                       
|1998                                                    |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|                                                       
|                                                       
|                                                       
|                                                       
|Revenue                                                 |  | $       | 101,045 |         |  | $       | 104,582 |         |  | $ | 102,058 |   |  | $ | 98,467  |  
|                                                       
|                                                       
|                                                       
|                                                       
|Gross margin                                            |  |         | 45,887  |         |  |         | 40,273  |         |  |   | 45,761  |   |  |   | 41,145  |  
|                                                       
|                                                       
|                                                       
|                                                       
|Net income (loss)                                       |  |         | (2,165  | )       |  |         | (6,688  | )       |  |   | 1,624   |   |  |   | (48,450 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Net income (loss) per common share  basic and
	diluted |  | $       | (0.06   | )       |  | $       | (0.17   | )       |  | $ | 0.04    |   |  | $ | (1.23   | )

14.  Supplemental Cash Flow Information:

|                                                        |                                               |      |   |       |  |      |   |        |  |  |   |        | 
|------------------------------------------------------- | --------------------------------------------- | ---- | - | ----- |  | ---- | - | ------ |  |  | - | ------ | 
|                                                        |                                               | 1999 |   | 1998  |  | 1997
|                                                        |                                               |      |   |       |  |     
|Supplemental cash flow information:                     |                                               |      |   |       |  |      |   |        |  |  |   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest paid                                 |      | $ | 4,642 |  |      | $ | 2,903  |  |  | $ | 1,722  | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Income taxes paid                             |      | $ | 1,845 |  |      | $ | 1,245  |  |  | $ | 4,237  | 
|                                                       
|                                                       
|                                                       
|                                                       
|Supplemental disclosure of non-cash investing activity: |                                               |      |   |       |  |      |   |        |  |  |   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Building acquired under capital lease         |      | $ |      |  |      | $ | 38,000 |  |  | $ | 20,938 | 
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | 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 |      | $ | 5,612 |  |      | $ |       |  |  | $ |       | 

15.  Other Charges:

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 (See Note 16 of Notes to
Consolidated Financial Statements), 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.

During the year ended December 31, 1997, the Company
recorded other charges of $42,664. Other charges of $16,096
reported as part of cost of goods sold include $4,940 for various
 write-downs of excess and obsolete inventory to their net
realizable value as a result of lower than forecasted demand,
$9,881 to record

44



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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

impairment charges associated with software development projects
canceled as a result of a realignment in the Companys
planned product offerings, $1,122 for product retrofit accruals,
and $153 related to work-force reductions and organizational
realignment as a result of activities undertaken to reduce the
Companys cost structure to bring it in line with
lower-than-expected revenue.

Other charges of $21,568 in 1997 reported as part of operating
expenses include $2,561 recorded in connection with the
acquisition of MultiLink, $4,373 related to severance expense and
 sales office closings associated with the acquisition of
MultiLink and PictureTel related work-force reductions as a
result of activities undertaken to reduce the Companys cost
 structure to bring it in line with lower-than-expected revenue,
$6,475 in specific accounts and notes receivable write-offs and
provisions for allowances for doubtful accounts, $3,900 in
provisions for sales taxes primarily related to MultiLink, $1,880
 in advances written-off to reflect current business conditions
and shifts in distribution channels, and $2,379 in charges
related to other miscellaneous matters.

Additionally in 1997, the Company established a $1,500 provision
recorded against revenue to accrue for estimated sales returns
and allowances. Other charges of $3,500 included in other
income/expense include the write-off of certain equity
investments to reflect current business conditions.

16.  Litigation:

A.  Datapoint Litigation

In December 1993, PictureTel was sued by Datapoint
Corporation in the United States District Court for the Northern
District of Texas. Datapoint alleged that certain of
PictureTels products infringed patent rights allegedly
owned by Datapoint. On April 9, 1998, a jury returned a
verdict in favor of PictureTel finding that PictureTel did not
infringe the Datapoint patents and that the Datapoint patent
claims raised against PictureTel were invalid. On May 3,
1999, an appeals hearing took place with regard to this
litigation. On July 15, 1999, the United States Court of
Appeals for the Federal Circuit issued a ruling in favor of
PictureTel. The Appellate Court found that all patent claims
raised against PictureTel are invalid. Since all appellate statue
 of limitations have now expired, this decision closes the
lawsuit brought by Datapoint.

B.  Shareholder Litigation

Since September 23, 1997, seven class action
shareholders complaints have been filed against the
Company, Norman E. Gaut, Director and former Chairman of the
Board and Chief Executive Officer, and Les Strauss, the former
Vice President and Chief Financial Officer, in the United States
District Court for the District of Massachusetts. The plaintiffs
filed a consolidated complaint on February 11, 1998.

The original complaints were filed following the Companys
announcement on September 19, 1997 that it would restate its
 financial results for the first quarter of the fiscal year
ending December 31, 1997 and the last two quarters of the
fiscal year ending December 31, 1996 and were amended when
the Company announced on November 13, 1997 that it would
also restate the second quarter of the fiscal year ending
December 31, 1997. The consolidated complaint alleges that
PictureTel and Messrs. Gaut and Strauss violated
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder, during the period from
October 17, 1996 through November 13, 1997, through the
 alleged preparation and dissemination of materially false and
misleading financial statements which artificially inflated the
price of PictureTel Common Stock. The consolidated complaint
seeks to recover an unspecified amount of damages, including
attorneys and experts fees and expenses.

On April 7, 1998, the Company filed a motion to dismiss the
complaint. On October 28, 1998, the motion to dismiss Norman
 E. Gaut was granted and the motion to dismiss PictureTel and Les
 Strauss was denied.

On June 17, 1999, the Company announced that it had entered
into a settlement agreement with the Plaintiffs. The Settlement
provides that the claim against PictureTel and Mr. Straus
will be dismissed. In agreeing to the proposed settlement, the
Company and Mr. Strauss specifically deny any wrongdoing.
The settlement provides for a cash payment of $12,000 by the
Company, plus interest, after the settlement is final.

45



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PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

More than 75% of the settlement amount was recovered by the
Company from insurance proceeds. The settlement is subject to
certain customary conditions, including preliminary and final
approval by the United States District Court for the District of
Massachusetts, and notice to the class. On July 29, 1999,
the Court gave preliminary approval of the settlement. Formal
notices with details of the settlement have been sent to the
purported class members by the Plaintiffs counsel. On
November 4, 1999, the Court gave its final approval of the
settlement. Since all appellate statue of limitations have now
expired, this decision closes the lawsuit brought by the
plaintiffs.

C.  SEC Investigation

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

D.  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 alleges that the Company breached an oral contract.
Revnet is allegedly seeking $200,000 in damages. Discovery is in
process. The Company believes that the complaint and the claim
for damages are without merit and intends to vigorously defend
against them. In addition, after limited discovery under the
above named suit, the Company on September 13, 1999 filed a
related action in the Circuit Court for Baltimore City, Maryland
against Revnet, Inc., Vuecom, Inc. (an entity related to Revnet,
Inc.), George Harris IV, George Sandmann and Lou Brown, (PictureTel Corporation v. RevNet, Inc., et al.Civil Action
24-C99-004406) alleging among other things Breach of Contract,
Fraudulent Inducement and Securities Fraud. The Companys
complaint is seeking more than $7,000 in damages. While no
assurances can be provided, the Company does not believe that the
 outcome of this dispute will have a material adverse affect on
its business, financial condition, results of operations or cash
flows.

E.  Patent Infringement

In February 2000, the Company settled a patent infringement claim
 for the Companys use of an ITU-U standard. The Company
received a license to use the standard until 2007 for the payment
 of $1,300 spread ratably over five years. In connection with
this license the Company recognized approximately $400 in
amortization expense in 1999 and has recorded net prepaid
royalties of approximately $900 at December 31, 1999.

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

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

None.

46



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULES


To the Board of Directors



Our audits of the consolidated financial statements referred to
in our report dated February 15, except for the information
in the first paragraph of Note 7, as to which the date is
March 28, 2000 appearing in the 1999 Annual Report to
Shareholders of PictureTel Corporation (which report and
consolidated financial statements are incorporated by reference
in this Annual Report on Form 10-K) also included an audit
of the financial statement schedules listed in Item 14(a)(2)
 of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the
 information set forth therein when read in conjunction with the
related consolidated financial statements.



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

Boston, Massachusetts



47



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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, 1997:                                |  |                |        |           |  |            |       |             |  |   |       |     |  |   |        | 
|                                                            
|                                                            
|                                                            
|                                                            
|Accounts receivable reserves                                 |  | $              | 1,523  |           |  | $          | 4,241 |             |  | $ | 1,874 | (a) |  | $ | 3,890  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Manufacturing, demonstration, and service inventory reserves |  | $              | 11,424 |           |  | $          | 4,476 |             |  | $ | 760   | (b) |  | $ | 15,140 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Warranty reserves                                            |  | $              | 2,905  |           |  | $          | 7,396 |             |  | $ | 5,574 | (c) |  | $ | 4,727  | 
|                                                            
|                                                            
|                                                            
|                                                            
|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  | 




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

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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 2000 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 2000 Proxy Statement.
(Information in the 2000 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 2000 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 2000 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, 1999 and 1998                                          
|
| |  | Consolidated Statements of Operations for the Years ended
	December 31, 1999, 1998 and 1997           
|
| |  | Consolidated Statements of Stockholders Equity for the
	years ended December  31, 1999, 1998 and 1997
|
| |  | Consolidated Statements of Cash Flows for the years ended
	December 31, 1999, 1998 and 1997           
|
| |  | 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.

(b)Reports on Form 8-K

1. On January 18, 1999, the Company filed a report on
Form 8-K to announce that it had entered into a distribution
 and joint development agreement with Intel Corporation. The two
companies will develop videoconferencing and collaborative
products based on a common PC-based technology platform. Under

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(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).
|        | 3.2     |             |  | 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).                                                                                                                     
|        | 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).                                                                                                       
|        | 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).                                                                                                  

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|        |         |             |  |                                                                                                                                                                                                                                                                                                                                
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 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).                                                                                 
|        | 10.7*   |             |  | Agreement between PictureTel Corporation and Les Strauss as
	amended through January 15, 1995 (incorporated by reference
	to Exhibit 10.2 to Registrants Quarterly Report on
	Form  10-Q for the quarter ended April 1, 1995).                                                                                                
|        | 10.8*   |             |  | Agreement between PictureTel Corporation and Domenic J.
	LaCava as amended through January 17, 1995 (incorporated by
	reference to Exhibit 10.4 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended April 1,
	1995).                                                                                          
|        | 10.9*   |             |  | Agreement between PictureTel Corporation and Lawrence Bornstein
	as amended through January 16, 1995 (incorporated by
	reference to Exhibit 10.5 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended April 1,
	1995).                                                                                         
|        | 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  |             |  | Change in control agreement between PictureTel Corporation and
	Lawrence Bornstein dated December 5, 1997 (incorporated by
	reference to Exhibit 10.9.2 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1997).                                                                                    
|        | 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).                                                                             

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|        |         |             |  |                                                                                                                                                                                                                                                      
|------- | ------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.10   |             |  | Employment agreement between PictureTel Corporation and
	Richard B. Goldman dated June 11, 1997 (incorporated by
	 reference to Exhibit 10.2 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended June 29,
	1997).                   
|        | 10.10.1 |             |  | Employment agreement between PictureTel Corporation and
	Richard B. Goldman dated December 5, 1997 (incorporated
	 by reference to Exhibit 10.10.1 to Registrants Annual
	 Report on Form 10-K for the year ended December 31,
	1997).              
|        | 10.10.2 |             |  | Change in control agreement between PictureTel Corporation and
	Richard B. Goldman dated December 5, 1997 (incorporated
	 by reference to Exhibit 10.10.2 to Registrants Annual
	 Report on Form 10-K for the year ended December 31,
	1997).       
|        | 10.11*  |             |  | Employment agreement between PictureTel Corporation and David
	Grainger dated August 10, 1994 (incorporated by reference to
	 Exhibit 10.10 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 29, 1997).                    
|        | 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 |             |  | Change in control agreement between PictureTel Corporation and
	David Grainger dated December 5, 1997 (incorporated by
	reference to Exhibit 10.11.2 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1997).             
|        | 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*  |             |  | Agreement between PictureTel Corporation and Khoa Nguyen as
	amended through March 6, 1995 (incorporated by reference to
	Exhibit 10.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended April 1, 1995).                          
|        | 10.13.1 |             |  | Separation agreement between PictureTel Corporation and Khoa
	Nguyen dated September 13, 1996 (incorporated by reference
	to Exhibit 10.13.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 29, 1997).                   
|        | 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   |             |  | Lease Agreement between PictureTel Corporation and Andover Mills
	Realty Limited Partnership dated February 10, 1994
	(incorporated by reference to Exhibit 10.51 to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1994).
|        | 10.15.1 |             |  | Amendment No. 1. to lease with Andover Mills Realty Limited
	Partnership dated October 10, 1995 (incorporated by
	reference to Exhibit 10.15.1 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended March 29,
	1997).                
|        | 10.15.2 |             |  | Amendment No. 2 to lease with Andover Mills Realty Limited
	Partnership dated May 28, 1996 (incorporated by reference to
	 Exhibit 10.15.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 29, 1997).                     

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|        |          |             |  |                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 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-K 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* |             |  | Change in Control Agreement by and between PictureTel Corporation
	 and Bruce R. Bond dated February 25, 1998
	(incorporated by Reference to Exhibit 10.2 to the
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 29, 1998).                                                                                                                                 
|        | 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).                                                                                                                                   
|        | 10.19    |             |  | Secured Second Amended and Restated Revolving Credit Agreement by
	 and between PictureTel Corporation and BankBoston, N.A., as
	agent, dated August 12, 1998 (incorporated by reference to
	Exhibit 10.19 to the Registrants Form S-4 dated
	October 5, 1998).                                                                                                                     
|        | 10.19.1  |             |  | $35,000,000 Credit Agreement among PictureTel Corporation and the
	 Chase Manhattan Bank as Agent and Congress Financial Corporation
	 (New England) as Documentation Agent, and other Financial
	Institutions party thereto dated June 15, 1999 (incorporated
	 by reference to Exhibit 10.19.1 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended July 4,
	1999).
|        | 10.20*   |             |  | Employment agreement between PictureTel Corporation and
	Gary L. Bond dated September 1, 1998 (incorporated by
	reference to Exhibit 10.2 to the Registrants Quarterly
	 Report on Form 10-Q for the quarter ended
	September 27, 1998).                                                                                                                                            
|        | 10.20.1* |             |  | Amendment to employment agreement between PictureTel Corporation
	and Gary L. Bond 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).                                                                                                                                         
|        | 10.20.2* |             |  | 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*   |             |  | Employment agreement between PictureTel Corporation and
	Arthur L. Fatum dated October 14, 1998 (incorporated by
	 reference to Exhibit 10.10.1 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1998).                                                                                                                                                  
|        | 10.21.1* |             |  | Amendment to employment agreement between PictureTel Corporation
	and Arthur L. Fatum 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).                                                                                                                                      

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##### Table of Contents



|        |          |             |  |                                                                                                                                                                                                                                                                       
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.22*   |             |  | Employment agreement between PictureTel Corporation and
	Richard S. Haak, Jr. dated May 14, 1998 (incorporated
	by reference to Exhibit 10.10.1 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1998).                                   
|        | 10.22.1* |             |  | Change in Control Agreement by and between PictureTel Corporation
	 and Richard S. Haak, Jr. dated November 30, 1998
	(incorporated by reference to Exhibit 10.10.1 to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1998).               
|        | 10.23*   |             |  | 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 (filed herewith).                                                                                                                                                       
|        | 10.26*   |             |  | Employment agreement between PictureTel Corporation and Catherine
	 ORourke dated December 21, 1999 (filed herewith).                                                                                                                                                
|        | 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).                                          
|        | 21       |             |  | Subsidiaries of the Company (filed herewith).                                                                                                                                                                                                                         
|        | 23       |             |  | Consent of PricewaterhouseCoopers LLP (filed herewith).                                                                                                                                                                                                               
|        | 27       |             |  | Financial Data Schedule as required by Item 601(c) of
	Regulation S-K (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.

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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 14, 2000
| |               

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     |  | President and Chief Executive Officer
	and Chairman of the Board
	(Principal Executive Officer)                  |  | April 14, 2000
|                                    
|/s/ CARL LEDBETTERCarl Ledbetter     |  | Director                                                                                                         |  | April 14, 2000
|                                    
|/s/ DAVID B. LEVIDavid B. Levi       |  | Director                                                                                                         |  | April 14, 2000
|                                    
|/s/ ROBERT T. KNIGHTRobert T. Knight |  | Director                                                                                                         |  | April 14, 2000
|                                    
|/s/ ENZO TORRESIEnzo Torresi         |  | Director                                                                                                         |  | April 14, 2000
|                                    
|/s/ ARTHUR L. FATUMArthur L. Fatum   |  | Vice President, Chief Financial Officer, Treasurer (Principal
	Financial Officer & Principal Accounting Officer) |  | April 14, 2000

55