<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                  FORM 10-K/A
                          AMENDMENT NO. 1 TO FORM 10-K
(MARK ONE)
[X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                         COMMISSION FILE NUMBER 1-9434
 
                             PICTURETEL CORPORATION
 
             (Exact Name of Registrant as Specified in Its Charter)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      04-2835972
       (State or Other Jurisdiction of                       (I.R.S. Employer
       Incorporation or Organization)                       Identification No.)
       100 MINUTEMAN ROAD, ANDOVER, MA                             01810
  (Address of Principal Executive Offices)                      (Zip Code)
</TABLE>
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (508) 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 of Each 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 past 90 days.   Yes [X]        No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of 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 14, 1997 was $485,343,335. On such
date, the average of the high and low price of the Common Stock was $14.32 per
share. The Registrant has 34,150,462 shares of Common Stock outstanding as of
March 14, 1997.
                            ------------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the definitive 1997 Proxy Statement in connection with the
Annual Meeting of Stockholders to be held June 12, 1997 are incorporated by
reference into Part III.
 
     A list of all Exhibits to this Annual Report on Form 10-K is located at
pages 43 through 45.
================================================================================
<PAGE>   2
 
     The undersigned registrant hereby amends the following items, financial
statement, exhibits or other portions of its Annual Report for the year ended
December 31, 1996, on Form 10-K as set forth in the pages attached thereto:
 
        The Consolidated Statements of Cash Flows is amended to reflect the
following:
 
        "Years ended December 31, 1996, 1995, 1994"
 
        Interest paid for 1994 of $938 (in thousands)
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
April 18, 1997
 
                                          PICTURETEL CORPORATION
 
                                          By: /s/ LES B. STRAUSS
                                            ------------------------------------
                                            Les B. Strauss,
                                            Vice President, Chief Financial
                                              Officer
                                            (Principal Financial and Accounting
                                              Officer)
<PAGE>   3
 
ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
 
                             PICTURETEL CORPORATION
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Index to Financial Statements and Supplementary Data
Financial Statements:
     Report of Independent Accountants................................................    2
     Consolidated Statements of Income................................................    3
     Consolidated Balance Sheets......................................................    4
     Consolidated Statements of Stockholders' Equity..................................    5
     Consolidated Statements of Cash Flows............................................    6
     Notes to Consolidated Financial Statements.......................................    7
Supplementary Data:
     Report of Independent Accountants................................................   19
     Schedule II Valuation and Qualifying Accounts....................................   20
</TABLE>
<PAGE>   4
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
  PICTURETEL CORPORATION:
 
     We have audited the accompanying consolidated balance sheets of PictureTel
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PictureTel
Corporation as of December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
COOPERS & LYBRAND L.L.P.


Boston, Massachusetts
February 12, 1997
 
                                        2
<PAGE>   5
 
                             PICTURETEL CORPORATION
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Revenues...................................................  $482,532     $346,758     $255,193
Cost of sales..............................................   254,772      175,043      129,039
                                                             --------     --------     --------
Gross margin...............................................   227,760      171,715      126,154
Operating expenses:
Selling, general and administrative........................   123,520      101,229       82,618
Research and development...................................    60,089       46,184       38,327
                                                             --------     --------     --------
Total operating expenses...................................   183,609      147,413      120,945
                                                             --------     --------     --------
Income from operations.....................................    44,151       24,302        5,209
Other income (expense):
Interest income............................................     5,337        4,123        2,826
Interest expense...........................................       924          971          985
Other income (expense), net................................     3,147           87         (101)
                                                             --------     --------     --------
Income before provision for income taxes...................    51,711       27,541        6,949
Provision for income taxes.................................    16,938        7,915        2,370
                                                             --------     --------     --------
Net income.................................................  $ 34,773     $ 19,626     $  4,579
                                                             ========     ========     ========
Net income per common and common equivalent share..........  $   0.96     $   0.56     $   0.15
                                                             ========     ========     ========
Weighted average common and common equivalent shares
  outstanding..............................................    36,054       35,014       31,354
                                                             ========     ========     ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        3
<PAGE>   6
 
                             PICTURETEL CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                         ---------------------
                                                                           1996         1995
                                                                         --------     --------
<S>                                                                      <C>          <C>
                                            ASSETS
Current assets:
Cash and cash equivalents..............................................  $ 62,957     $ 39,476
Marketable securities..................................................    38,918       20,463
Accounts receivable less allowance for doubtful accounts of $3,284 and
  $1,791 at December 31, 1996 and 1995, respectively...................   147,350       97,735
Inventories............................................................    43,320       43,791
Deferred taxes, net....................................................     5,950        6,665
Other current assets...................................................     5,506        5,781
                                                                         --------     --------
          Total current assets.........................................   304,001      213,911
Marketable securities..................................................     9,118       34,084
Deferred taxes, net....................................................     5,088        6,000
Property and equipment, net............................................    44,217       22,515
Capitalized software costs, net........................................     6,832        5,073
Other assets...........................................................     6,791        6,558
                                                                         --------     --------
          Total assets.................................................  $376,047     $288,141
                                                                         ========     ========
 
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................................  $    519     $    557
Accounts payable.......................................................    53,329       25,639
Accrued compensation and benefits......................................     8,906        9,881
Accrued expenses.......................................................    17,897       16,646
Current portion of capital lease obligations...........................     3,294        2,283
Deferred revenue.......................................................    19,110       19,509
                                                                         --------     --------
          Total current liabilities....................................   103,055       74,515
Long-term borrowings...................................................     9,242       12,226
Capital lease obligations..............................................     4,692          578
Commitments and contingencies (Notes 6, 7 and 13)
Stockholders' equity:
Preference stock, $.01 par value; 15,000,000 shares authorized; none
  issued...............................................................        --           --
Common stock, $.01 par value; 80,000,000 shares authorized; 34,036,186
  and 32,723,444 shares issued and outstanding at December 31, 1996 and
  1995.................................................................       341          328
Additional paid-in capital.............................................   196,249      173,379
Retained earnings......................................................    62,195       27,422
Cumulative translation adjustment......................................      (615)        (531)
Unrealized gain on marketable securities, net..........................       888          224
                                                                         --------     --------
          Total stockholders' equity...................................   259,058      200,822
                                                                         --------     --------
          Total liabilities and stockholders' equity...................  $376,047     $288,141
                                                                         ========     ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        4
<PAGE>   7
 
                             PICTURETEL CORPORATION
         
                       STATEMENTS OF STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                     UNREALIZED
                                                                                                     (LOSS) GAIN
                           COMMON STOCK        ADDITIONAL                             CUMULATIVE    ON MARKETABLE       TOTAL
                      ----------------------    PAID-IN     RETAINED     UNEARNED     TRANSLATION    SECURITIES,    STOCKHOLDERS'
                        SHARES     PAR VALUE    CAPITAL     EARNINGS   COMPENSATION   ADJUSTMENT         NET           EQUITY
                      ----------   ---------   ----------   --------   ------------   -----------   -------------   -------------
<S>                   <C>          <C>         <C>          <C>        <C>            <C>           <C>             <C>
Balance, December 31,
  1993............... 30,297,690      $303      $143,978    $ 3,217         $(40)         $(519)           --          $146,939
Exercise of employee
  stock options and
  related tax
  benefit............    420,110         4         2,021         --           --             --            --             2,025
Amortization of
  unearned
  compensation.......         --        --            --         --           40             --            --                40
Foreign currency
  translation
  adjustment.........         --        --            --         --           --             67            --                67
Unrealized loss on
  marketable
  securities, net....         --        --            --         --           --             --         $(414)             (414)
Net income...........         --        --            --      4,579           --             --            --             4,579
                      ----------      ----      --------    -------         ----          -----         -----          --------
Balance, December 31,
  1994............... 30,717,800       307       145,999      7,796           --           (452)         (414)          153,236
Exercise of employee
  stock options and
  related tax
  benefit............  1,873,650        19        26,229         --           --             --            --            26,248
Employee stock
  purchase plan
  shares.............    131,994         2         1,151         --           --             --            --             1,153
Foreign currency
  translation
  adjustment.........         --        --            --         --           --            (79)           --               (79)
Unrealized gain on
  marketable
  securities, net....         --        --            --         --           --             --           638               638
Net income...........         --        --            --     19,626           --             --            --            19,626
                      ----------      ----      --------    -------         ----          -----         -----          --------
Balance, December 31,
  1995............... 32,723,444       328       173,379     27,422           --           (531)          224           200,822
Exercise of employee
  stock options and
  related tax
  benefit............  1,238,915        12        20,992         --           --             --            --            21,004
Employee stock
  purchase plan
  shares.............     73,827         1         1,878         --           --             --            --             1,879
Foreign currency
  translation
  adjustment.........         --        --            --         --           --            (84)           --               (84)
Unrealized gain on
  marketable
  securities, net....         --        --            --         --           --             --           664               664
Net income...........         --        --            --     34,773           --             --            --            34,773
                      ----------      ----      --------    -------         ----          -----         -----          --------
Balance, December 31,
  1996............... 34,036,186      $341      $196,249    $62,195         $ --          $(615)        $ 888          $259,058
                      ==========      ====      ========    =======         ====          =====         =====          ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        5
<PAGE>   8
 
                             PICTURETEL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
    
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Cash flows from operating activities:
     Net income............................................  $ 34,773     $ 19,626     $  4,579
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
     Depreciation and amortization.........................    21,521       17,906       18,345
     Deferred taxes, net...................................     1,627       (2,127)      (1,162)
     Other non-cash items..................................      (348)         (79)          53
Changes in operating assets and liabilities:
     Accounts receivable...................................   (49,615)     (32,707)     (16,682)
     Inventories...........................................       471      (12,130)      (7,384)
     Other assets..........................................      (682)      (2,401)      (3,364)
     Accounts payable......................................    27,690        7,423        7,481
     Accrued compensation and benefits and accrued
       expenses............................................       276        9,472        5,693
     Income taxes, net.....................................    10,325        8,056          660
     Deferred revenue......................................      (399)       5,786        5,384
                                                             --------     --------     --------
Net cash provided by operating activities..................    45,639       18,825       13,603
Cash flows from investing activities:
     Purchase of marketable securities.....................   (20,115)     (71,772)     (19,014)
     Proceeds from marketable securities...................    25,987       70,902       38,182
     Additions to property and equipment...................   (38,547)     (16,251)     (14,335)
     Proceeds from disposals of property and equipment.....       387           --           --
     Capitalized software costs............................    (5,924)      (4,247)      (2,916)
     Purchase of intangible asset..........................      (565)          --           --
     Proceeds from sale of intangible asset................     2,050           --           --
                                                             --------     --------     --------
Net cash provided by (used in) investing activities........   (36,727)     (21,368)       1,917
Cash flows from financing activities:
     Payments on short-term borrowings.....................        38       (6,412)       4,944
     Proceeds from long-term borrowings....................     2,803       12,226           --
     Principal payments on long-term borrowings............    (5,787)          --        2,483
     Principal payments under capital lease obligations....    (3,367)      (3,482)      (5,533)
     Proceeds from capital leases..........................     8,492           --           --
     Proceeds from exercise of stock options...............    10,676       13,786        2,025
     Proceeds from employee stock purchase plan............     1,878        1,153           --
                                                             --------     --------     --------
Net cash provided by financing activities..................    14,733       17,271        3,919
Effect of exchange rate changes on cash....................      (164)         401       (2,013)
                                                             --------     --------     --------
Net increase in cash and cash equivalents..................    23,481       15,129       17,426
                                                             --------     --------     --------
Cash and cash equivalents at beginning of year.............    39,476       24,347        6,921
                                                             --------     --------     --------
Cash and cash equivalents at end of year...................  $ 62,957     $ 39,476     $ 24,347
                                                             ========     ========     ========
Supplemental cash flow information:
     Interest paid.........................................  $    895     $    958     $    938
     Income taxes paid.....................................  $  1,632     $  2,893     $  2,782
</TABLE>
     
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        6
<PAGE>   9
 
                             PICTURETEL CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  NATURE OF THE BUSINESS:
 
     PictureTel Corporation (the "Company"), operates in one business segment,
the development, manufacture, marketing and servicing of videoconferencing
equipment.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  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.
 
  PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All material inter-company accounts and
transactions have been eliminated in consolidation.
 
  FOREIGN CURRENCY TRANSLATION
 
     The financial statements of the Company's non-U.S. subsidiaries, 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 as a separate component of stockholders' equity.
 
  FOREIGN EXCHANGE CONTRACTS
 
     The Company and its subsidiaries have entered into foreign currency forward
contracts as a hedge against specific inter-company and foreign currency
receivable transactions. Forward contracts involve agreements to purchase or
sell foreign currencies at specific rates at future dates. 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 contract premiums or discounts
are amortized over the life of the foreign exchange contracts and are recognized
in other income. At December 31, 1996 and 1995 the Company had contracts
maturing through May 7, 1997 to purchase $18,534,000 and $21,779,000,
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. The carrying amount of the foreign currency
forward contracts is the fair value which is determined by obtaining market
prices.
 
  CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
     The Company classifies all debt and equity 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 a separate component of
stockholders' equity. 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, along
with equity securities, 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, 1996 and 1995 cash equivalents
and marketable debt securities primarily consist of U.S. government securities,
corporate and municipal issues and commercial paper.
 
     The amortized 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
 
                                        7
<PAGE>   10
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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:
    
<TABLE>
          <S>                                             <C>
          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
</TABLE>
     
     Maintenance and repairs are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of, and the related accumulated depreciation, are removed
from the accounts and any resulting gain or loss is included in the
determination of net income.
 
  RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS
 
     Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense. Software production costs incurred
subsequent to the establishment of technological feasibility are capitalized
until the product is available for general release to customers. Amortization is
based on the greater of (i) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (ii) the straight-line method over the remaining estimated life of
the product.
 
     During the years ended December 31, 1996, 1995, and 1994, the Company
capitalized approximately $5,924,000, $4,247,000, and $2,916,000, respectively,
of software costs. During the years ended December 31, 1996, 1995, and 1994, the
Company amortized approximately $4,165,000, $3,337,000, and $3,973,000,
respectively, of software costs.
 
  OTHER ASSETS
 
     Included in other assets are intangible assets which consist primarily of
intellectual property rights and non-compete agreements which are amortized over
their estimated useful life, which range from eighteen to thirty-six months.
Accumulated amortization on intangible assets was $3,771,000 and $3,203,000 at
December 31, 1996 and 1995, 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).
 
REVENUE RECOGNITION
 
     Revenue from product sales is recognized upon shipment in accordance with
contractual acceptance terms or upon completion of all significant obligations,
whichever is later. Revenue from maintenance contracts is recognized ratably
over the term of the contract. Allowances for estimated future product returns
 
                                        8
<PAGE>   11
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and price protection under the Company's agreements with its distributors and
resellers are provided in the same period as the related revenues.
 
  WARRANTY
 
     The Company provides a warranty for parts and labor on its products.
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 costs related to warranty are accrued at the
time of revenue recognition.
 
  INCOME TAXES
 
     The Company provides for the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The measurement of deferred tax assets is reduced by a valuation allowance if,
based upon the weighted available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized.
 
  NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
 
     Net income per common and common equivalent share is based on the weighted
average number of shares of common and common equivalent shares (stock options)
outstanding during the period. Fully diluted earnings per common and common
equivalent share did not differ materially from primary earnings per common and
common equivalent share.
 
CONCENTRATIONS
 
  Credit Risk
 
     Financial instruments which potentially subject the Company to
concentration of credit risk include cash, cash equivalents, marketable
securities and trade receivables. 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.
With respect to its cash, cash equivalents and marketable securities, the
Company invests its excess cash primarily in deposits with a commercial bank,
U.S. government securities, corporate and municipal issues, and commercial paper
and has established guidelines relative to credit ratings, diversification and
maturities that maintain safety and liquidity. The Company has not experienced
any significant losses on these financial instruments.
 
  Suppliers
 
     Certain components and parts used in the Company's products are procured
from a single source. The Company obtains parts from one vendor only, even where
multiple sources are available, to maintain quality control and enhance the
working relationship with suppliers. These purchases are made under existing
contracts or purchase orders. The failure of a supplier, including a
subcontractor, to deliver on schedule could delay or interrupt the Company's
delivery of products and thereby adversely affect the Company's revenues and
profits.
 
  NEWLY ISSUED ACCOUNTING STANDARDS
 
     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings per Share," which is effective for fiscal years
ending after December 15, 1997, including interim
 
                                        9
<PAGE>   12
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
periods. SFAS 128 requires the presentation of basic and diluted earning per
share (EPS). Basic EPS, which replaces primary EPS, excludes dilution 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 exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS under the
existing rules. SFAS 128 requires restatement of all prior-period earnings per
share data presented after the effective date. The Company will adopt SFAS 128
in 1997 and has not yet determined the impact of adoption.
 
3.  INVENTORIES:
 
     Inventories consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1996
                                                                  ---------------------
                                                                   1996          1995
                                                                  -------       -------
        <S>                                                       <C>           <C>
        Purchased parts.........................................  $ 6,409       $11,492
        Work in process.........................................    2,018         3,252
        Finished goods..........................................   34,893        29,047
                                                                  -------       -------
                                                                  $43,320       $43,791
                                                                  =======       =======
</TABLE>
 
4.  MARKETABLE SECURITIES:
 
     At December 31, 1996 and 1995, marketable securities can be summarized as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                 AVAILABLE FOR SALE SECURITIES
                                                         ---------------------------------------------
                                                                 1996                     1995
                                                         --------------------     --------------------
                                                         AMORTIZED     FAIR       AMORTIZED     FAIR
                                                           COST       VALUE         COST       VALUE
                                                         ---------   --------     ---------   --------
<S>                                                      <C>          <C>          <C>         <C>
U. S. Government and its agencies......................   $42,992     $42,956      $45,983     $46,252
Municipal Issues.......................................     3,352       3,353        8,217       8,295
                                                          -------     -------      -------     -------
     Total Debt Securities.............................    46,344      46,309       54,200      54,547
Equity Securities......................................       482       1,727           --          --
                                                          -------     -------      -------     -------
                                                          $46,826     $48,036      $54,200     $54,547
                                                          =======     =======      =======     =======
</TABLE>
 
     Unrealized holding gains of $1,210,000 for 1996 and $347,000 for 1995 are
included as a separate component of stockholders' equity, net of tax. Realized
gains of approximately $3,000,000, $107,000 and $84,000 from the sales of
available for sale securities are included in other income for the years ended
December 31, 1996, 1995 and 1994, respectively.
 
     At December 31, 1996, $37,192,000, or 58% of the Company's marketable
securities have stated maturity dates within one year of the balance sheet date,
the remaining securities have stated maturity dates within two years of the
balance sheet date.
 
                                       10
<PAGE>   13
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  PROPERTY AND EQUIPMENT:
 
     Property and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1996
                                                                  ---------------------
                                                                   1996          1995
                                                                  -------       -------
        <S>                                                       <C>           <C>
        Equipment...............................................  $79,795       $49,526
        Equipment and furniture under capital leases............   11,410         7,867
        Furniture and fixtures..................................    6,865         6,166
        Leasehold improvements..................................    5,081         2,735
                                                                  -------       -------
                                                                  103,151        66,294
        Less:  Accumulated depreciation and amortization........   58,934        43,779
                                                                  -------       -------
                                                                  $44,217       $22,515
                                                                  =======       =======
</TABLE>
 
     At December 31, 1996 and 1995 accumulated amortization amounted to
$3,618,000 and $5,907,000 on equipment and furniture under capital leases.
Depreciation expense for the years ended December 31, 1996, 1995, and 1994 was
$16,807,000, $13,112,000 and $12,426,000, respectively.
 
6.  DEBT:
 
     On December 19, 1996, the Company amended its unsecured revolving credit
agreement to increase the borrowing capacity from $17,000,000 to $40,000,000
with an expiration date of October 4, 1999. This agreement requires interest
payable at either the bank's base rate, or the adjusted eurocurrency rate plus
applicable margin. The applicable margin ranges from seven-eighths percent to
one and three-eighths percent based on certain financial ratios. Commitment fees
are payable on any unused portion and range from 0.225% to 0.375% based upon
certain financial ratios. The amended agreement contains no demand feature and
provides that the principal portion of the borrowings be paid by the expiration
date. Accordingly, the borrowings under the amended agreement are classified as
long-term borrowings.
 
     In addition, the Company has $18,319,000 of outstanding standby letters of
credit under this agreement. Fees for letters of credit outstanding against this
revolving credit line were payable at one percent per annum of the face amount.
Each letter of credit issued subsequent to the amendment date will be calculated
at a fee equal to the applicable margin times the face amount of such letter of
credit.
 
     The unsecured revolving credit agreement contains certain financial
covenants, including the maintenance of certain ratios including total
liabilities to tangible net worth and operating cash flow to total debt
services. At December 31, 1996 and 1995, $9,242,000 and $12,226,000,
respectively, were outstanding under this credit agreement and the Company was
in compliance with all covenants.
 
     Local lines of credit are available for short-term advances of up to
$4,400,000 to certain of the Company's foreign subsidiaries. Most of these lines
are guaranteed by the Company. The agreements require interest payable ranging
from the bank's base rate plus one to one and one half of a percent per annum,
and facility fees of up to one eighth of one percent of the facility amount per
annum. A total of $519,000 and $557,000 was borrowed against these local lines
of credit at December 31, 1996 and 1995, respectively. At December 31, 1996 and
1995, the weighted average interest rate on outstanding short-term borrowings
was 4.6% and 6.8%, respectively. The carrying amount of the short-term and
long-term borrowings is a reasonable estimate of the fair value because of the
short maturity of those instruments and because the interest rate in effect at
December 31, 1996 approximates the current market rate, respectively.
 
7.  COMMITMENTS:
 
     The Company has commitments under operating leases for office and
manufacturing space. The facilities leases are for terms ranging from one to
eighteen years. The leases usually contain provisions which allow for
 
                                       11
<PAGE>   14
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
expansion, extension and termination. Total rent expense for operating leases
was $9,114,000, $6,757,000 and $5,724,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The Company entered into an eighteen year lease
agreement for an additional building in Andover, Massachusetts. Beginning in
August, 1997 the Company expects to occupy the new building which will be
accounted for as a capital lease. The future lease payments aggregate
$42,352,000.
 
     The Company is lessee under several capital lease and sale-leaseback
agreements with third parties for certain leasehold improvements, equipment and
furniture.
 
     Future minimum lease payments under capital and operating leases with
initial or remaining terms of one year of more are (in thousands):
 
<TABLE>
<CAPTION>
                                                                    CAPITAL     OPERATING
                                                                    LEASES       LEASES
                                                                    -------     ---------
        <S>                                                         <C>         <C>
        1997......................................................   $3,785      $  8,905
        1998......................................................    3,180         8,601
        1999......................................................    1,822         7,005
        2000......................................................                  5,418
        2001......................................................                  5,247
        Thereafter................................................                 75,704
                                                                     ------      --------
        Total future minimum lease payments.......................   $8,787      $110,880
                                                                     ======      ========
        Less amount representing interest.........................      801
                                                                     ------
        Present value of net future minimum lease payments........    7,986
        Less current portion......................................    3,294
                                                                     ------
        Long-term obligation under capital leases.................   $4,692
                                                                     ======
</TABLE>
 
8.  CAPITAL STOCK:
 
  PREFERENCE STOCK
 
     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.
 
  COMMON STOCK
 
     On September 28, 1995, the Board of Directors authorized a two-for-one
split of the Company's outstanding Common Stock (the "Stock Split") by means of
a 100% stock dividend. All Common Stock and Common Stock equivalents and per
share amounts have been retroactively restated to reflect the two-for-one split.
 
  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.
 
                                       12
<PAGE>   15
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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 1996, 1995, and 1994.
 
     Net income and net income 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 (in thousands, except
per share amounts):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                                 ------------------------
                                                                  1996             1995
                                                                 -------          -------
        <S>                                      <C>             <C>              <C>
        Net income.............................  As reported     $34,773          $19,626
                                                 Pro forma        30,020           18,395
        Primary net income per share...........  As reported     $  0.96          $  0.56
                                                 Pro forma          0.85             0.53
        Fully diluted net income per share.....  As reported     $  0.96          $  0.56
                                                 Pro forma          0.85             0.52
</TABLE>
 
     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 and net
income 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
in future years are anticipated.
 
  EMPLOYEE STOCK PURCHASE PLAN
 
     On April 15, 1994 the Company adopted an Employee Stock Purchase Plan (the
"Plan") under which eligible employees are able to purchase shares of the
Company's Common Stock at 85% of the market value at the date of the start of
each six month option period or the end of such period, whichever is lower.
Under the provisions of the Plan up to 1,000,000 shares are authorized after the
Stock Split. Shares purchased under the Plan in 1996 and 1995 totaled 73,827 and
131,994, respectively. The weighted average grant date fair value of the shares
purchased was $7.86 and $4.43 in 1996 and 1995. There are 794,179 shares
available under the Plan at December 31, 1996.
 
     For the purpose of providing pro forma disclosures, the fair values of
share purchased were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for purchases in 1996 and 1995,
respectively: a risk-free interest rate of 5.23% and 5.89%, an expected life of
6 months, expected volatility of 50%, and no expected dividends.
 
                                       13
<PAGE>   16
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  STOCK OPTION PLANS
 
     Under the Company's 1984 Amended and Restated Stock Option Plan, employees
and other persons who are in a position to make significant contributions to the
success of the Company may be granted either non-statutory or incentive stock
options to purchase up to 2,094,174 shares of Common Stock after the Stock
Split. The options are exercisable as stipulated by the Board of Directors (or a
Committee thereof) and will expire no more than ten years from the date of the
grant. The incentive option price per share will not be less than the fair
market value at the date of the grant. No new options will be issued as the Plan
has been terminated.
 
     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
will become exercisable in six months from the date of re-grant and the
remaining options will become exercisable over a 4 year period commencing in
February 1998.
 
     On November 14, 1989, the Company's shareholders approved the PictureTel
Equity Incentive Plan. As of December 31, 1996 shareholders have authorized the
issuance of up to 9,000,000 shares of post Stock Split Common Stock under the
Plan. The Equity Incentive Plan permits the granting of non-statutory and
incentive stock options, a variety of stock and stock-based awards and related
benefits, and cash performance awards, which are in addition to option grants
under the 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, 1996 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. All options expire ten
years after the effective date of grant, and such options become exercisable
over a four year period. At December 31, 1996 there were 1,239,297 shares
available for future grant under these plans.
 
                                       14
<PAGE>   17
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes the Company's stock option plans at December
31, 1996, 1995, and 1994, and changes during the years then ended:
 
<TABLE>
<CAPTION>
                                           1996                     1995                    1994
                                  ----------------------   ----------------------   ---------------------
                                               WEIGHTED-                WEIGHTED-               WEIGHTED-
                                                AVERAGE                  AVERAGE                 AVERAGE
                                               EXERCISE                 EXERCISE                EXERCISE
                                    SHARES       PRICE       SHARES       PRICE      SHARES       PRICE
                                  ----------   ---------   ----------   ---------   ---------   ---------
<S>                               <C>          <C>         <C>          <C>         <C>         <C>
Outstanding at beginning of
  year..........................   4,908,811    $ 11.56     5,863,550    $  8.00    4,961,036     $7.77
Granted at fair market value....   1,439,350      34.65     1,089,524      23.37    2,102,300      8.32
Exercised.......................  (1,238,915)      8.64    (1,873,650)      6.74     (420,110)     4.15
Forfeited.......................    (343,973)     14.49      (170,613)     10.63     (779,676)     9.55
                                  ----------               ----------               ---------
Outstanding at end of year......   4,765,273    $ 19.08     4,908,811    $ 11.56    5,863,550     $8.00
                                  ==========               ==========               =========
Options exercisable at
  year-end......................   1,805,678    $ 10.54     1,811,854    $  7.67    2,529,068     $6.84
Weighted-average grant-date fair
  value of options granted
  during the year at fair market
  value.........................                $ 15.74                  $ 10.65
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING
                     ---------------------------------------------------          OPTIONS EXERCISABLE
                                     WEIGHTED-AVERAGE                        ------------------------------
                       NUMBER           REMAINING           WEIGHTED-          NUMBER           WEIGHTED
    RANGE OF         OUTSTANDING     CONTRACTUAL LIFE        AVERAGE         EXERCISABLE        AVERAGE
EXERCISE PRICES      AT 12/31/96        (IN YEARS)        EXERCISE PRICE     AT 12/31/96     EXERCISE PRICE
----------------     -----------     ----------------     --------------     -----------     --------------
<S>                  <C>             <C>                  <C>                <C>             <C>
$ 1.125 -  8.625        584,075             4.4               $ 5.64            348,245          $ 4.39
     8.875              805,353             5.2                 8.88            313,032            8.88
   8.94 -  9.625        734,949             6.4                 9.51            677,297            9.55
   9.75 -  18.44        439,318             6.1                11.30            244,638           11.04
 21.312 - 24.880        739,205             8.0                23.81            150,515           23.34
 25.815 -  34.50        768,100             7.9                31.54             64,226           27.65
  35.00 -  40.50        694,273             8.0                38.48              7,725           35.13
                      ---------                                               ---------
$ 1.125 -  40.50      4,765,273             6.5               $19.08          1,805,678          $10.54
                      =========                                               =========
</TABLE>
 
     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 1996 and 1995,
respectively: a risk-free interest rate of 6.08% and 5.83%, an expected life of
4 years, expected volatility of 50%, and no expected dividends.
 
9.  INCOME TAXES:
 
     Significant items making up total net deferred tax assets are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                    -------------------
                                                                     1996        1995
                                                                    -------     -------
        <S>                                                         <C>         <C>
        Net operating loss and tax credit carryforwards...........  $10,125     $ 9,434
        Inventory reserves........................................    2,185       2,889
        Deferred revenue..........................................        0       1,110
        Other temporary differences...............................    3,495       5,916
        Valuation allowance.......................................   (4,767)     (6,684)
                                                                    -------     -------
        Total net deferred tax assets.............................  $11,038     $12,665
                                                                    =======     =======
</TABLE>
 
     The valuation allowance primarily offsets the deferred benefit of certain
federal and state tax credit carryforwards whose benefit is uncertain. The
Company has recorded a deferred tax asset of approximately
 
                                       15
<PAGE>   18
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$6,856,000 reflecting the benefit of deductions from the exercise of stock
options. This deferred tax asset is partially offset by a valuation allowance of
$3,726,000 until it is more likely than not that the benefit from the exercise
of stock options will be realized. The benefit from this valuation allowance
will be recorded as a credit to additional paid in capital when realized.
 
     The provision for income taxes consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                          -------------------------------
                                                           1996        1995        1994
                                                          -------     -------     -------
        <S>                                               <C>         <C>         <C>
        Federal income taxes:
             Currently payable..........................  $ 9,275     $ 7,311      $1,613
             Deferred...................................    2,813      (1,840)       (595)
        State income taxes:
             Currently payable..........................      501       1,301         671
             Deferred...................................    1,292        (119)       (567)
        Foreign taxes:
             Currently payable..........................    3,593       1,430       1,248
             Deferred...................................     (536)       (168)         --
                                                          -------      ------      ------
        Total...........................................  $16,938     $ 7,915      $2,370
                                                          =======      ======      ======
</TABLE>
 
     The differences between the statutory federal income tax rate and the
Company's effective income tax rate were as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                              1996       1995       1994
                                                              ----       ----       -----
        <S>                                                   <C>        <C>        <C>
        Statutory federal income tax rate...................  35.0%      35.0%      35.0%
        State income tax, net of federal tax benefit........   3.0        5.1        0.8
        Federal and state tax credits from research and
          development.......................................  (1.4)      (1.9)     (30.1)
        Difference between foreign and US tax rates and the
          benefit of the foreign sales corporation..........  (1.7)      (1.0)      (5.1)
        Change in deferred asset valuation allowance........  (2.6)      (8.8)      31.5
        Other...............................................   0.5        0.3        2.0
                                                              ----       ----       ----
        Effective tax rate..................................  32.8%      28.7%      34.1%
                                                              ====       ====       ====
</TABLE>
 
     At December 31, 1996, the Company had remaining net operating loss ("NOL")
carryforwards available of approximately $8,344,000 to offset future federal
taxable income. The Company also has unused federal research and development tax
credits of approximately $2,348,000. The NOL and tax credit carryforwards expire
at various dates through the year 2009 and 2010, respectively. 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, 1996,
approximately $4,637,000 of the available NOL carryforwards have an annual
limitation amount of approximately $662,000 that may be used to reduce the
Company's taxable income in the future.
 
10.  EMPLOYEE BENEFIT PLANS:
 
     The Company has a defined contribution profit sharing plan, including
features under Section 401(k) of the Internal Revenue Code, which will 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. In 1994, the Company contributed
$353,000 to the Plan. In 1995, the Company agreed to provide a 50% matching
contribution up to the first 3% of each participant's eligible compensation. The
Company's matching contribution to the Plan was $857,000 and $661,000 in 1996
and 1995, respectively.
 
                                       16
<PAGE>   19
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11.  GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
 
     The Company's operations involve a single industry segment -- the
development, manufacture, marketing and servicing of videoconferencing
equipment. The Company has subsidiaries in various foreign countries which sell
and service the Company's products in their respective geographic areas.
Revenues are reflected in the geographic areas from which the sales are made.
Financial information, summarized by geographic area, is as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                            UNITED
                                            STATES       EUROPE    ASIA/PACIFIC   ELIMINATIONS   CONSOLIDATED
                                         ------------   --------   ------------   ------------   ------------
<S>                                      <C>            <C>        <C>            <C>            <C>
YEAR ENDED DECEMBER 31, 1996:
Total revenues
Unaffiliated customers.................    $310,022     $114,861     $ 57,649              --      $482,532
Inter-company transfers................     101,230          630           --      $ (101,860)           --
                                           --------     --------     --------      ----------      --------
     Total.............................    $411,252     $115,491     $ 57,649      $ (101,860)     $482,532
                                           ========     ========     ========      ==========      ========
Income from operations.................    $ 30,665     $  7,657     $  3,383      $    2,446      $ 44,151
                                           ========     ========     ========      ==========      ========
Identifiable assets....................    $250,521     $ 55,592     $ 25,691      $  (23,984)     $307,820
                                           ========     ========     ========      ==========
Corporate assets.......................                                                            $ 68,227
                                                                                                   --------
     Total assets......................                                                            $376,047
                                                                                                   ========
YEAR ENDED DECEMBER 31, 1995:
Total revenues
Unaffiliated customers.................    $231,740     $ 79,010     $ 36,008              --      $346,758
Inter-company transfers................      80,300          701           --      $  (81,001)           --
                                           --------     --------     --------      ----------      --------
     Total.............................    $312,040     $ 79,711     $ 36,008      $  (81,001)     $346,758
                                           ========     ========     ========      ==========      ========
Income (loss) from operations..........    $ 23,131     $ (1,515)    $  1,037      $    1,649      $ 24,302
                                           ========     ========     ========      ==========      ========
Identifiable assets....................    $193,496     $ 42,196     $ 17,434      $  (26,254)     $226,872
                                           ========     ========     ========      ==========
Corporate assets.......................                                                              61,269
                                                                                                   --------
     Total assets......................                                                            $288,141
                                                                                                   ========
YEAR ENDED DECEMBER 31, 1994:
Total revenues
Unaffiliated customers..................    $164,176     $62,876     $ 28,141              --      $255,193
Inter-company transfers.................      59,268          --           --      $  (59,268)           --
                                            --------     -------     --------      ----------      --------
     Total..............................    $223,444     $62,876     $ 28,141      $  (59,268)     $255,193
                                            ========     =======     ========      ==========      ========
Income (loss) from operations...........    $  4,026     $   604     $    926      $     (347)     $  5,209
                                            ========     =======     ========      ==========      ========
Identifiable assets.....................    $134,515     $29,919     $ 14,642      $  (20,429)     $158,647
                                            ========     =======     ========      ==========
Corporate assets........................                                                             58,052
                                                                                                   --------
     Total assets.......................                                                           $216,699
                                                                                                   ========
</TABLE>
 
     The United States inter-company transfers primarily represent shipments of
systems to international subsidiaries. The inter-company transfers of systems
are made at transfer prices which approximate cost to distributors plus an
appropriate mark up, and are eliminated from consolidated revenues. Corporate
assets consist primarily of marketable securities.
 
                                       17
<PAGE>   20
 
                             PICTURETEL CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Export sales to unaffiliated customers from the Company's United States
operations were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                            -------------------------------
                                                             1996        1995        1994
                                                            -------     -------     -------
     <S>                                                    <C>         <C>         <C>
     Europe...............................................  $ 1,026     $ 2,693     $ 2,552
     Canada...............................................    8,319       8,341       5,989
     Asia/Pacific.........................................   19,332      13,220       4,703
     Other................................................   15,638       8,709       3,857
                                                            -------     -------     -------
                                                            $44,315     $32,963     $17,101
                                                            =======     =======     =======
</TABLE>
 
     In 1996, 1995 and 1994 no customer accounted for 10% or more of total
revenues.
 
12.  UNAUDITED INTERIM FINANCIAL INFORMATION:
 
     Quarterly financial information is as follows (in thousands, except per
share data):
 
<TABLE>
<CAPTION>
                                              FIRST        SECOND       THIRD        FOURTH
                                             QUARTER      QUARTER      QUARTER      QUARTER
                                             --------     --------     --------     --------
     <S>                                     <C>          <C>          <C>          <C>
     1996
     Revenues..............................  $105,001     $116,082     $121,302     $140,147
     Gross margin..........................    50,892       55,739       58,346       62,783
     Net income............................     7,469        8,488        8,914        9,902
     Net income per common and common
       equivalent share....................  $   0.21     $   0.24     $   0.25     $   0.28
     1995
     Revenues..............................  $ 74,156     $ 80,489     $ 90,098     $102,015
     Gross margin..........................    37,798       41,039       44,335       48,543
     Net income............................     3,088        4,155        5,223        7,160
     Net income per common and common
       equivalent share....................  $   0.09     $   0.12     $   0.15     $   0.20
</TABLE>
 
13.  LITIGATION:
 
     In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleges that certain of the Company's products infringe patent rights allegedly
owned by Datapoint. The complaint seeks approximately $51 million in damages for
alleged past infringement and an injunction against alleged future infringement.
The Company believes that it has meritorious defenses to the allegations of the
complaint, and is vigorously defending against the lawsuit.
 
     In the fall of 1995, the Court appointed a Special Master to consider the
Company's motion for summary judgment of non-infringement. The Special Master
recommended that the motion for summary judgment be denied. On September 16,
1996, the Court adopted the Special Master's claim construction of the Datapoint
patents and denied PictureTel's summary judgment motion. A trial date has been
set for October 6, 1997. The parties are completing discovery.
 
     In the event the Company is found to be infringing a valid patent or
patents, the Company could be required to pay damages for past infringement and
cease the sale of products incorporating the infringing feature (or be required
to take a license and pay royalties with respect to such patents). While there
can be no assurance that the Company will prevail, the Company believes that it
is unlikely that the outcome of the lawsuit would have a material adverse effect
on the business or the financial position, results of operations and cash flows
of the Company.

   
     
                                       18
<PAGE>   21
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
     Our report on the consolidated financial statements of PictureTel
Corporation is included in Item 8 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in Item 14(a) of the Form 10-K.
 
     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
 
COOPERS & LYBRAND L.L.P.
 
Boston, Massachusetts
February 12, 1997
 
                                       19
<PAGE>   22
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                CHARGE TO                  BALANCE AT
                                               BALANCE AT       COSTS AND                    END OF
                                            BEGINNING OF YEAR    EXPENSES    DEDUCTIONS       YEAR
                                            -----------------   ---------    ----------    ----------
<S>                                         <C>                 <C>          <C>             <C>
YEAR ENDED DECEMBER 31, 1994:
Accounts receivable reserves..............     $1,377,000      $  560,000   $  152,000(a)   $1,785,000
Inventory reserves........................     $2,534,000      $2,376,000   $1,739,000(b)   $3,171,000
Warranty reserves.........................     $  815,000      $1,541,000   $  699,000(c)   $1,657,000
YEAR ENDED DECEMBER 31, 1995:
Accounts receivable reserves..............     $1,785,000      $  430,000   $  424,000(a)   $1,791,000
Inventory reserves........................     $3,171,000      $3,036,000   $3,339,000(b)   $2,868,000
Warranty reserves.........................     $1,657,000      $2,181,000   $1,343,000(c)   $2,495,000
YEAR ENDED DECEMBER 31, 1996:
Accounts receivable reserves..............     $1,791,000      $2,850,000   $1,357,000(a)   $3,284,000
Inventory reserves........................     $2,868,000      $3,309,000   $4,766,000(b)   $1,411,000
Warranty reserves.........................     $2,495,000      $4,104,000   $3,938,000(c)   $2,661,000
</TABLE>
 
---------------
 
(a) Specific write-offs
 
(b) Specific dispositions
 
(c) Specific usage
 
                                       20