10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)

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

For the quarterly period ended July 1, 2000

or

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

For the transition period from                to                

For the Quarter ended July 1, 2000

Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	04-2835972
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
100 Minuteman Road, Andover, MA	01810
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number: 978-292-5000

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

[X]  Yes  No  [   ]

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

     As of August 4, 2000, there were outstanding 40,966,647 shares of common stock of the registrant.

TABLE OF CONTENTS

PART I. CONSOLIDATED FINANCIAL INFORMATION
	Item 1.   Consolidated Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
	SIGNATURE
EX-3.1.2 Certificate of Decrease
EX-10.19.2 Amendment #1 to Credit Agreement
EX-10.28 Employment Agreement w/ Lewis Jaffe
EX-10.28.1 Executive Officer Change in Control
EX-27 Financial Data Schedule

PICTURETEL CORPORATION

FORM 10-Q

INDEX

PART I.  CONSOLIDATED FINANCIAL INFORMATION
	Item  1.	Consolidated Financial Statements:
		Consolidated Balance Sheets July 1, 2000 and December 31, 1999	2
		Consolidated Statements of Operations Three and Six Months Ended July 1, 2000 and July 4, 1999	3
		Consolidated Statements of Cash Flows Six Months Ended July 1, 2000 and July 4, 1999	4
		Notes to Consolidated Financial Statements	5-10
	Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-21
	Item  3.	Quantitative and Qualitative Disclosures about Market Risk	21
PART II.  OTHER INFORMATION
	Item  1.	Legal Proceedings	21
	Item  2.	Changes in Securities	22
	Item  3.	Defaults Upon Senior Securities	Not Applicable
	Item  4.	Submission of Matters to a Vote of Security Holders	23
	Item  5.	Other Information	23
	Item  6.	Exhibits and Reports on Form 8-K	23
Signatures			25

1

PART I.  CONSOLIDATED FINANCIAL INFORMATION

PICTURETEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

			July 1,			December 31,
			2000			1999
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	21,033		$	21,915
	Restricted cash and cash equivalents			2,625			1,200
	Marketable securities			—			37,787
	Accounts receivable, less allowances for doubtful accounts of $2,872 and $5,642 at July 1, 2000 and December  31, 1999, respectively			50,144			77,120
	Inventories			32,837			32,930
	Other current assets			10,018			12,562
	Total current assets			116,657			183,514
Restricted cash				28,441			—
Property and equipment, net				81,067			86,219
Capitalized software costs, net				2,663			11,341
Goodwill, net				—			4,242
Other assets				7,467			9,554
		Total assets	$	236,295		$	294,870
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	9,450		$	196
	Accounts payable			20,814			21,681
	Accrued compensation and benefits			8,737			10,517
	Accrued expenses			35,851			37,518
	Current portion of capital lease obligations			1,866			1,782
	Deferred revenue			25,286			28,826
	Total current liabilities			102,004			100,520
Capital lease obligations, net of current portion				53,640			54,584
		Total liabilities		155,644			155,104
Commitments and contingencies (Notes 6 and 9)
Redeemable convertible preferred stock, $.01 par value; 15,000,000 shares authorized; 4,478,708 shares outstanding at July 1, 2000 and December 31, 1999				30,500			30,500
Stockholders’ equity:
	Common stock, $.01 par value; 80,000,000 shares authorized; 41,058,712 and 40,617,634 shares issued and outstanding at July 1, 2000 and December 31, 1999			411			406
	Additional paid-in capital			228,500			225,513
	Accumulated deficit			(176,595	)		(114,780	)
	Accumulated other comprehensive loss			(1,609	)		(1,317	)
	Treasury stock, 92,065 shares, at cost			(556	)		(556	)
		Total stockholders’ equity		50,151			109,266
		Total liabilities, redeemable preferred stock and stockholders’ equity	$	236,295		$	294,870

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

2

PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

			Three Months Ended						Six Months Ended
			July 1,			July 4,			July 1,			July 4,
			2000			1999			2000			1999
Revenue			$	61,424		$	85,962		$	126,490		$	162,156
Cost of revenue				54,847			58,937			102,195			110,909
Gross margin				6,577			27,025			24,295			51,247
Operating expenses:
	Selling, general and administrative			30,077			39,485			57,385			71,847
	Research and development			13,596			18,348			27,049			35,871
		Total operating expenses		43,673			57,833			84,434			107,718
Loss from operations				(37,096	)		(30,808	)		(60,139	)		(56,471	)
Interest expense, net				(584	)		(363	)		(875	)		(164	)
Other income, net				503			375			829			890
Loss before income tax expense				(37,177	)		(30,796	)		(60,185	)		(55,745	)
Income tax expense				796			1,036			1,630			2,057
Net loss				(37,973	)		(31,832	)		(61,815	)		(57,802	)
Preferred stock beneficial conversion feature				—			—			—			5,612
Net loss applicable to common shareholders			$	(37,973	)	$	(31,832	)	$	(61,815	)	$	(63,414	)
Net loss per common share — basic and diluted			$	(0.93	)	$	(0.79	)	$	(1.52	)	$	(1.57	)
Weighted average shares outstanding — basic and diluted				40,967			40,334			40,798			40,276

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

3

PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

			Six Months Ended
			July 1,			July 4,
			2000			1999
Cash flows from operating activities:
	Net loss		$	(61,815	)	$	(57,802	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		14,523			18,163
		Provision for doubtful accounts		(109	)		1,822
		Provision for inventory obsolescence		9,710			2,435
		Write-down of long-lived assets		9,159			—
		Other non-cash items		—			102
	Changes in operating assets and liabilities:
		Accounts receivable		25,905			4,136
		Inventories		(10,252	)		(8,362	)
		Insurance recovery receivable		—			(9,450	)
		Other current assets		2,199			(276	)
		Accounts payable		(589	)		(10,213	)
		Accrued compensation and benefits and accrued expenses		(2,958	)		3,011
		Accrued litigation settlement		—			12,000
		Deferred revenue		(3,113	)		4,633
Net cash used in operating activities				(17,340	)		(39,801	)
Cash flows from investing activities:
	Purchase of marketable securities			(31,262	)		(73,718	)
	Proceeds from sale of marketable securities			69,049			77,601
	Purchases of property and equipment			(3,465	)		(7,076	)
	Proceeds from sale of fixed assets			9			13
Net cash provided by (used in) investing activities				34,331			(3,180	)
Cash flows from financing activities:
	Increase in restricted cash and cash equivalents			(29,866	)		(5,000	)
	Proceeds (payments) on short-term/ long-term borrowings			9,252			(842	)
	Principal payments under capital lease obligations			(860	)		(2,395	)
	Purchase of treasury stock			—			(556	)
	Proceeds from preferred stock issuance			—			30,500
	Proceeds from exercise of stock options			2,460			1,811
	Proceeds from employee stock purchase plan			533			790
Net cash provided by (used in) financing activities				(18,481	)		24,308
Effect of exchange rate changes on cash				608			975
Net decrease in cash and cash equivalents				(883	)		(17,698	)
Cash and cash equivalents at beginning of period				21,915			62,642
Cash and cash equivalents at end of period			$	21,033		$	44,944

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

4

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1.  Basis of Presentation

      As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all the disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 1999, as filed with the Securities and Exchange Commission on August 14, 2000.

      In the opinion of the management of PictureTel Corporation, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position at July 1, 2000 and December 31, 1999, results of operations for the three and six months ended July 1, 2000 and July 4, 1999 and changes in cash flows for the six months ended July 1, 2000 and July 4, 1999.

      The results disclosed in the Consolidated Balance Sheet at July 1, 2000, the Consolidated Statement of Operations for the three and six months ended July 1, 2000 and the Consolidated Statement of Cash Flows for the six months ended July 1, 2000 are not necessarily indicative of the results to be expected for the full year.

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

      The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred recurring losses from operations and 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 third quarter of 2000. In addition to the revenue plan, management has obtained a letter of commitment from Congress Financial Corporation for an asset-based secured revolving line of credit and has obtained an additional $21,845 in convertible Series B Preferred Stock which will be classified as mezzanine financing on the Company’s balance sheet. Management is continuing to identify and implement other actions to improve the Company’s liquidity, including the sale of non-core business assets. While there can be no assurances that these plans will be successful, management believes these actions, if successful, will provide sufficient financial resources for the next twelve months and beyond. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2.  Inventories

      Inventories consist of the following:

	July 1,		December 31,
	2000		1999
Purchased Parts	$	5,543	$	3,184
Work in Process		1,218		1,157
Finished Goods		26,076		28,589
	$	32,837	$	32,930

      In the second quarter of 2000, the Company recorded a $4,721 charge to reduce inventory to its net realizable value. The charge primarily reflects a reduction in the carrying value of the inventory to its

5

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollars in thousands, except per share amounts)

estimated fair market value, based on estimated selling prices, less costs to sell. The inventory write-down is associated with lower than expected sales of PC-based videoconferencing systems, exacerbated by the Company’s transition to its next generation product line, PictureTel Series 900.

3.  Impairment of Long-lived Assets

      Based on continuing operating losses and a change in product strategy for a division of the Company’s videoconferencing products segment, the Company performed a review of its intangible assets including purchased software, tradename, assembled workforce and goodwill. In connection with this review, the Company determined that the carrying value of the goodwill and other intangible assets exceeded its fair value based on Company projections of the discounted future net cash flows from use together with the residual value of these assets. Accordingly, the Company recorded an impairment charge of $9,159 during the second quarter of 2000, of which $5,020 is included in cost of revenue and $4,139 is included in selling, general and administrative expense in the Company’s Consolidated Statements of Operations and impacted the Company’s videoconferencing products segment.

4.  Earnings Per Share

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

		Three Months Ended						Six Months Ended
		July 1,			July 4,			July 1,			July 4,
		2000			1999			2000			1999
Basic and Diluted EPS Computation
Numerator:
	Net loss applicable to common shareholders	$	(37,973	)	$	(31,832	)	$	(61,815	)	$	(63,414	)
Denominator:
	Weighted average common shares outstanding		40,967			40,334			40,798			40,276
Basic and diluted EPS		$	(0.93	)	$	(0.79	)	$	(1.52	)	$	(1.57	)

      Options to purchase shares of the Company’s common stock of 6,821,164 and 6,406,873 were outstanding at July 1, 2000 and July 4, 1999, respectively, but were not included in the computation of diluted EPS because they were antidilutive due to the net losses sustained in 2000 and in 1999. Warrants for 2,723 shares of the Company’s Common Stock and Series A Convertible Preferred Stock of 4,478,708 shares were outstanding at July 1, 2000, but were not included in the computation of diluted EPS because they were antidilutive due to the loss sustained in 2000.

6

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollars in thousands, except per share amounts)

5.  Comprehensive Loss

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

	Three Months Ended						Six Months Ended
	July 1,			July 4,			July 1,			July 4,
	2000			1999			2000			1999
Net loss	$	(37,973	)	$	(31,832	)	$	(61,815	)	$	(57,802	)
Foreign currency translations, net		(43	)		871			(291	)		62
Unrealized gains on marketable securities, net		17			1,150			—			9,573
Comprehensive loss	$	(37,999	)	$	(29,811	)	$	(62,106	)	$	(48,167	)

6.  Debt

      In May 2000, the Company amended its asset-based secured revolving credit agreement dated July 15, 1999, which will now expire on May 17, 2001. The amended credit facility has provided $8,500 in working capital through a short-term loan and a $30,086 letter of credit facility. The Company has $29,587 of outstanding standby letters of credit issued under this agreement as of July 1, 2000. Fees for letters of credit outstanding against this facility are payable at 225 basis points per annum of the face amount. Interest for the term loan is payable at prime plus 3% and such rate shall increase by 1 1/2% on August 15, 2000 and on each ninetieth day anniversary of such date thereafter. The amended credit agreement is collateralized by all assets of the parent Company and certain stock of its subsidiaries. The Company is required to maintain cash collateral equal to 105% of outstanding letters of credit in an account held at the lender. Cash subject to the cash collateral requirement amounts to $31,066 as of July 1, 2000. The secured letters of credit expire between October 31, 2000 and June 1, 2001. The credit agreement also contains certain financial covenants, including net income (loss) and minimum working capital requirements. The Company has obtained a waiver on August 10, 2000 for not meeting its second quarter 2000 net income requirement.

      On July 24, 2000, the Company received, and accepted, a letter of commitment from Congress Financial Corporation for an asset-based secured revolving line of credit with a limit of $35,000, based upon certain lending formulas. This facility replaces the credit facility amended in May 2000. This new facility will provide additional borrowing capacity of $26,500. This new facility also provides the Company with letter of credit capabilities, secured by the Company’s receivables and inventory pledged under this new debt facility and/ or its cash.

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

7

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollars in thousands, except per share amounts)

      Local lines of credit are available for short-term advances of up to $950 to certain of the Company’s foreign subsidiaries. The agreements require interest payable up to one quarter of one percent, per annum. Borrowings of $950 were outstanding against these local lines of credit at July 1, 2000.

      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 requirement for collateral under this agreement was terminated in June 2000. There are no remaining liabilities under this agreement.

      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 July 1, 2000, the remaining obligation under this operating lease was $7,634. After giving effect to expected sublease income, this obligation is $4,918. In addition, in June 1998, the Company subleased its property at 50 Minuteman Road for a ten-year term. After giving effect to expected sublease income, the remaining obligation under the capital lease was $16,694 at July 1, 2000.

      On June 26, 2000, the Company negotiated an option agreement with the landlord of its facility located at 200 Minuteman Road in Andover, Massachusetts, whereby the Company has agreed to vacate certain space in the 200 Minuteman facility during the third quarter in exchange for termination of the lease. The Company anticipates that under this option agreement, an $11,992 letter of credit would be drawn down by the landlord and an approximate $4,000 in deposits would be returned to the Company.

7.  Recently Issued Accounting Pronouncements

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

      In December 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”). SOP 98-9 amends SOP 97-2 to require recognition of revenue using the “residual method” in circumstances outlined in SOP 98-9. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by vendor specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. The Company has adopted SOP 98-9 and it has not had a significant impact on its results of operations or financial position.

      In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” (“SAB 101”) as amended by SAB 101B, which is effective no later than the year ending December 31, 2000. SAB 101 clarifies the Securities and Exchange Commission’s views regarding recognition of revenue. The Company will adopt SAB 101 in the fourth quarter of 2000. The Company has identified one series of transactions where the adoption of SAB 101 is expected to

8

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollars in thousands, except per share amounts)

have a material effect on its 2000 financial position and results of operations but it has not yet completed its analysis.

      In March 2000, the Financial Accounting Standards Board released FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25.” FIN 44 provides guidance for certain issues that arise in applying Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.” The Company does not expect that the adoption of FIN 44 will have a significant impact on the Company’s results of operations or financial position.

8.  Segment Information

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

	Video-			Video-
	conferencing			conferencing		Audio-
	Products			Services		Conferencing			Other			Total
Three months ended July 1, 2000:
Revenue from external customers	$	36,123		$	18,208	$	7,093			—		$	61,424
Operating income (loss)	$	(34,308	)	$	2,748	$	621		$	(6,157	)	$	(37,096	)
Three months ended July 4, 1999:
Revenue from external customers	$	65,838		$	16,109	$	4,015			—		$	85,962
Operating income (loss)	$	(19,685	)	$	231	$	(3,459	)	$	(7,895	)	$	(30,808	)
Six months ended July 1, 2000:
Revenue from external customers	$	80,761		$	36,406	$	9,323			—		$	126,490
Operating income (loss)	$	(49,970	)	$	4,209	$	(2,745	)	$	(11,633	)	$	(60,139	)
Six months ended July 4, 1999:
Revenue from external customers	$	119,676		$	32,889	$	9,591			—		$	162,156
Operating income (loss)	$	(41,910	)	$	1,291	$	(3,036	)	$	(12,816	)	$	(56,471	)

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

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

9.  Litigation

  A.  SEC Investigation

      In May 1999, the Company was informed that the Securities and Exchange Commission (SEC) had initiated a formal investigation of matters related to the Company’s 1997 restatement of its earnings. The Company has been cooperating with the SEC and will continue to do so. The Company expresses no opinion

9

PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollars in thousands, except per share amounts)

as to the likely outcome. While no assurances can be provided, the Company does not believe that the investigation will have a material adverse affect to its business, financial condition, results of operations or cash flows.

  B.  Revnet, Inc.

      On June 2, 1998, the Company was served with a complaint from a former distribution channel customer, Revnet, Inc., which has ceased operations. (Revnet, Inc., v. PictureTel Corporation. Civil Action 98092039, filed April 2, 1998, in the Circuit Court for Baltimore City, Maryland.) The complaint 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.

      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.

10

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, unless otherwise indicated)

Forward-Looking Statements

      This document includes forward-looking statements about the Company’s business, revenue and expenses, effective tax rate, and operating and capital requirements. Forward-looking statements made or incorporated by reference herein are not guarantees of future performance. In addition, forward-looking statements may be included in various other PictureTel documents to be issued in the future and in various oral statements by PictureTel representatives to security analysts and investors from time to time. Any forward-looking statements are subject to risks that could cause the actual results to vary materially. Such risks are discussed in “Risk Factors Which May Affect Future Results” and in other related portions of this document.

Business Developments

      During the second quarter of 2000, the Company has continued to develop its business plan, inclusive of a multi-pronged approach by focusing on improving liquidity, disposition of non-core business assets, consolidation opportunities and process improvement.

      Financing activities are in process. On July 24, 2000, the Company consummated a preferred stock transaction resulting in funding of $21,845 through the issuance of Series B convertible preferred shares which will be classified in the mezzanine section of the Company’s balance sheet. In conjunction with the purchase of convertible Series B Preferred Stock, each investor also received a specified small minority interest in the Company’s subsidiary, 1414c, Inc. Additionally, in accordance with the convertible Series B Preferred Stock agreement, the Company also entered into a joint venture and hosting agreement with one of the investors. In addition, the Company has received a commitment for an asset-based secured revolving line of credit. While there are no assurances, the Company expects to finalize this transaction within the next few weeks.

      With regard to disposition of non-core business assets, the Company received a letter of intent on July 31, 2000 from a third party to acquire the Company’s Starlight division and expects the sale, if completed, to occur in the third quarter. 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.

      The Company has continued to seek out consolidation opportunities. During the second quarter of 2000, the Company negotiated an option agreement with the landlord of its facility located at 200 Minuteman Road in Andover, Massachusetts, whereby the Company has agreed to vacate certain space in the 200 Minuteman facility during the third quarter in exchange for termination of the lease. The Company anticipates that under this option agreement, a $11,992 letter of credit would be drawn down by the landlord and an approximate $4,000 in deposits would be returned to the Company. Furthermore, an annual reduction of approximately $5,000 in rent and related costs would result from this consolidation. The Company will continue to pursue opportunities with focus on consolidation and process improvements.

      On July 31, 2000, the Company announced the launch of its next generation product, PictureTel 900 Series. Deferred customer orders, in anticipation of the new product, impacted second quarter revenue and are expected to continue impacting revenue in the third quarter. The Company started shipping the PictureTel 900 Series on August 14, 2000.

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

11

Results of Operations

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

	Three Months Ended						Six Months Ended
	July 1,			July 4,			July 1,			July 4,
	2000			1999			2000			1999
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		89.3			68.6			80.8			68.4
Gross margin		10.7			31.4			19.2			31.6
Selling, general and administrative		49.0			45.9			45.4			44.3
Research and development		22.1			21.3			21.3			22.1
Total operating expenses		71.1			67.2			66.7			66.4
Loss from operations		(60.4	)		(35.8	)		(47.5	)		(34.8	)
Interest expense, net		(0.1	)		(0.4	)		(0.7	)		(0.1	)
Other income, net		—			0.4			0.6			0.5
Loss before income tax expense		(60.5	)		(35.8	)		(47.6	)		(34.4	)
Income tax expense		1.3			1.2			1.3			1.2
Net loss		(61.8	)		(37.0	)		(48.9	)		(35.6	)
Preferred stock beneficial conversion feature		—			—			—			3.5
Net loss applicable to common shareholders		(61.8	)		(37.0	)		(48.9	)		(39.1	)

  Three Months Ended July 1, 2000 Compared to Three Months Ended July 4, 1999

      Revenue. Consolidated second quarter 2000 revenue of $61,424 decreased $24,538, or 29%, from second quarter 1999 levels. Videoconferencing products revenue was impacted by customer deferrals of orders, while awaiting the introduction of new products in the third quarter. Service revenue continued to grow during the second quarter as the result of increased sales of spare parts, customer integration services and hosting of multipoint videoconference calls. An increase in the audioconferencing segment’s (MultiLink’s) revenue was the result of new product sales related to the segment’s new high-capacity audio bridge. Revenue from sales to foreign markets was approximately 40% and 51% of total revenue during the second quarters of 2000 and 1999, respectively.

      Gross Margin. Overall second quarter 2000 gross margin of $6,577 declined $20,448, or 76%, from prior year levels and represented 11% of revenue versus 31% in the second quarter of 1999. Lower revenue accounts for the dollar decline, while lower average selling prices for videoconferencing products, together with charges of $4,721 necessary to reduce inventory to net realizable value and an impairment charge of $5,020 to write-down purchased software, were primarily responsible for the decreased margin percentage.

      Operating Expenses. Second quarter 2000 operating expenses of $43,673 decreased $14,160, or 25%, from comparable prior year levels. Based on continuing operating losses and a change in product strategy for a division of the Company’s videoconferencing products segment, impairment charges of $4,139 related to the write-down of goodwill, tradename and assembled workforce are included in operating expenses during the second quarter of 2000. Included in the second quarter of 1999, were special charges of $6,976 related to headcount reductions and real estate consolidation actions. Without these charges, operating expenses declined $11,323, or 22%.

      Income Taxes. The Company’s effective income tax rate was 2.1% in the second quarter of 2000 compared to 3.4% in the second quarter of 1999. The tax rate in both periods relates to state and foreign taxes.

     Videoconferencing Products, Videoconferencing Services and Audioconferencing Segments

      Videoconferencing Products. Second quarter 2000 revenue for this segment, which develops, manufactures, and markets visual communications systems and collaboration software, totaled $36,123. This represents

12

a $29,715, or 45%, decrease from second quarter 1999 levels. Revenue for the second quarter of 2000 decreased $8,516, or 19%, from the first quarter of 2000. Lower demand, as customers delayed purchasing decisions in anticipation of next generation products, was responsible for the revenue decline.

      Although total videoconferencing system units sold was flat versus the prior year, higher-end group system volume decreased by 56%, while lower-end desktop/ personal system volume increased by 100%. The large increase in desktop/ personal systems was the result of significant volume purchases. Total units sold of larger group systems, Concordes and Venues, was down 38% from the second quarter of 1999.

      The videoconferencing products segment generated a $34,308 operating loss during the second quarter of 2000 compared to a $19,685 operating loss in the second quarter of 1999. Declining revenue, together with a charge of $4,721 to reduce PC-based videoconferencing systems inventory to net realizable value, contributed to the increased operating loss. The inventory write-down is associated with lower than expected sales of PC-based videoconferencing systems, exacerbated by the Company’s transition to its next generation product line, PictureTel Series 900. An impairment charge of $9,159 related to the write-down of certain intangible assets also contributed to the increased operating loss for the quarter.

      Videoconferencing Services. The videoconferencing services segment provides maintenance as well as professional consulting, integration and management services for videoconferencing products sold by the Company and its competitors. Second quarter 2000 revenue grew from $16,109 in 1999 to $18,208 in 2000, an increase of 13%. Significantly higher sales of spare parts accounted for 43% of the revenue increase. Professional service activity increased during the quarter particularly from the sale of custom integration services and hosting multi-point videoconference calls for customers. Maintenance revenue increased 1% from prior year levels.

      Segment operating income was $2,748 during 2000’s second quarter compared with operating income of $231 in the comparable prior year period. Increased profitability was due to higher business volume, improved gross margin and a 20% reduction in selling and administrative expenses.

      Audioconferencing (MultiLink). The audioconferencing segment develops, manufactures, markets and services multipoint audioconferencing control units. Segment revenue for the second quarter of 2000 totaled $7,093 compared with revenue of $4,015 during the second quarter of 1999. Sales of the new System 700 audio bridge, which was introduced in December of 1999, contributed to the increased revenue.

      Operating income increased from a loss of $3,459 in 1999’s second quarter to an operating income of $621 in the second quarter of 2000. The increase in operating income is primarily due to an increase in revenue, while operating expenses remained relatively flat.

  Six Months Ended July 1, 2000 Compared to Six Months Ended July 4, 1999

      Revenue. Total revenue of $126,490 decreased $35,666, or 22%, in the six months ended July 1, 2000 compared to the comparable six months of 1999. Videoconferencing products revenue was impacted by customer deferrals of orders, while awaiting the introduction of new products in the third quarter of 2000. Service revenue continued to grow during the first six months of 2000, as the result of increased sales of spare parts, customer integration services and hosting of multi-point videoconference calls. Audioconferencing (MultiLink) segment revenue during the first six months of 2000 and 1999 remained relatively flat between the two periods. Revenue from sales to foreign markets decreased 4% during the six months ended July 1, 2000 as compared to the same period in 1999, and represented 46% of total sales.

      Gross Margin. Overall gross margin declined $26,952 to $24,295 in the six months ended July 1, 2000 compared to the comparable period in 1999. Gross margin as a percentage of revenue declined to 19% from 32% for the period ended July 1, 2000 as compared to the comparable period in 1999. Lower revenue accounts for the dollar decline, while lower average selling prices for videoconferencing products, together with charges of $6,006 necessary to reduce inventory to net realizable value and an impairment charge of $5,020 to write-down purchased software, were primarily responsible for the decreased margin percentage.

13

      Operating Expenses. Operating expenses for the first six months of 2000 totaled $84,434, representing a decline of $23,284, or 22%, compared to the first six months of 1999. Based on continuing operating losses and a change in product strategy for a division of the Company’s videoconferencing products segment, impairment charges of $4,139 related to the write-down of goodwill, tradename and assembled workforce are included in operating expenses during the six-month period in 2000. Included in the comparable six-month period in 1999 were $6,976 of special charges related to headcount reductions and real estate consolidation actions. Without these charges, operating expenses declined $20,447, or 20%, during the six month period in 2000 compared to the comparable period in 1999.

      Income Taxes. The Company’s effective income tax rate for the six months ended July 1, 2000 was 2.7% as compared with 3.7% for the comparable period in 1999. The effective tax rate in both years relates to foreign and state taxes.

     Videoconferencing Products, Videoconferencing Services and Audioconferencing Segments

      Videoconferencing Products. Videoconferencing product revenue totaled $80,761 for the first six months of 2000, which represents a $38,915, or 33%, decrease from the first six months of 1999. Segment revenue for the six month period of 2000 was impacted by customer deferrals of orders, while awaiting the introduction of new products in the third quarter of 2000.

      Total videoconferencing system units increased 8% versus the prior year, while group system volume decreased by 31% and desktop/ personal system volume increased by 49%. Total units sold of larger group systems, Concordes and Venues, declined 28%, while sales of compact systems, Swiftsite II and TeamStation, decreased 20%.

      The videoconferencing products segment operating loss increased to $49,970 during the first six months of 2000 compared to $41,910 operating loss during the first six months of 1999. Declining revenue, together with a charge of $6,006 to reduce PC-based videoconferencing systems inventory to net realizable value, contributed to the increased operating loss. The inventory write-down is associated with lower than expected sales of PC-based videoconferencing systems, exacerbated by the Company’s transition to its next generation product line, PictureTel Series 900. An impairment charge of $9,159 related to the write-down of certain intangible assets also contributed to the increased operating loss for the first six months of 2000.

      Videoconferencing Services. Videoconferencing service revenue grew from $32,889 during the first six months of 1999 to $36,406 during the first six months of 2000, an 11%, increase. The revenue growth resulted from increased sales of spare parts, custom integration services, and hosting of multi-point videoconference calls for customers. Maintenance service revenue declined slightly in the first half of 2000 compared to the same period in the prior year.

      Segment operating income for the first six months of 2000 was $4,209 compared with $1,291 in the same prior year period, an increase of $2,918, or 226%. Service gross margins increased due to higher sales volume of spare parts. Approximately 75% of the increased profits resulted from a 16% decrease in selling, general and administrative expenses compared to the first half of 1999.

      Audioconferencing (MultiLink). Revenue for the first six months of 2000 totaled $9,323 and was relatively flat compared to $9,591 for the first six months of 1999.

      Operating income improved to a loss of $2,745 for the first six months of 2000 from an operating loss of $3,036 for the first six months of 1999, representing a 10% decrease.

Liquidity and Capital Resources

      At July 1, 2000, the Company had $21,033 in cash and cash equivalents. Operating activities used $17,340 of cash during the first half of 2000 compared with a $39,801 usage in the comparable period in 1999. Funding operating losses in excess of non-cash expense was a primary use of cash during both periods. The Company generated $11,192 of cash from working capital during the first half of 2000 compared to using $4,521 of cash for working capital in the first half of 1999. The Company paid $1,656 of accrued severance and

14

restructuring charges during the first six months of 2000 and had a remaining accrual in the amount of $1,289 for such items as of July 1, 2000 that will be paid over the next year and two months.

      Investing activities provided $34,331 of cash in the first half of 2000 compared with a $3,180 usage in the comparable prior year period. Changes in marketable securities balances are the principal reason for both results. In addition, first half 2000 capital expenditures of $3,465 were less than 50% of the comparable 1999 figure of $7,076, as the Company has sharply curtailed spending.

      Financing activities used $18,481 of cash in the first half of 2000, due to an increase in restricted cash balances in excess of proceeds from short-term borrowings. During the first half of 1999 the Company’s financing activities generated $24,308 of cash, primarily through issuance of $30,500 of preferred convertible stock to Intel Corporation.

      Cash utilization continues to be a major concern for the Company. During the six months ended July 1, 2000, net cash decreased $883 compared to a net cash decrease of $17,698 for the comparable period in 1999. The Company continues to benefit from cost reduction measures taken during 1999 in several areas including, reduced staffing, intensified programs to reduce working capital, and curtailed capital spending. However, without increased revenue and additional equity and debt financing, these actions alone will not return the Company to a cash positive position. The Company closed on a preferred stock sale on July 24, 2000 and expects to complete additional debt financing within the next few weeks.

      In May 2000, the Company amended its revolving credit agreement dated July 15,1999, which will now expire on May 17, 2001. The amended credit facility has provided $8,500 in working capital through a short-term loan and a $30,086 letter of credit facility. The Company has $29,587 of outstanding standby letters of credit issued under this agreement as of July 1, 2000. Fees for letters of credit outstanding against this facility are payable at 225 basis points per annum of the face amount. Interest for the term loan is payable at prime plus 3% and such rate shall increase by 1 1/2% on August 15, 2000 and on each ninetieth day anniversary of such date thereafter. The amended credit agreement is collateralized by all assets of the parent Company and certain stock of its subsidiaries. The Company is required to maintain cash collateral equal to 105% of outstanding letters of credit in an account held at the lender. Cash subject to the cash collateral requirement amounts to $31,066 as of July 1, 2000. The secured letters of credit expire between October 31, 2000 and June 1, 2001. The credit agreement also contains certain financial covenants, including net income (loss) and minimum working capital requirements. The Company has obtained a waiver on August 10, 2000 for not meeting its second quarter 2000 net income requirement.

      On July 24, 2000, the Company received, and accepted, a letter of commitment from Congress Financial Corporation for an asset based secured revolving line of credit with a limit of $35,000, based upon certain lending formulas. This facility replaces the credit facility amended in May 2000. This new facility will provide additional borrowing capacity of $26,500. This new facility also provides the Company with letter of credit capabilities, secured by the Company’s receivables and inventory pledged under this new debt facility and/or its cash. While there are no assurances, the Company expects to close on this facility, subject to satisfaction of closing conditions, within the next few weeks.

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

      Local lines of credit are available for short-term advances of up to $950 to certain of the Company’s foreign subsidiaries. The agreements require interest payable up to one quarter of one percent, per annum. Borrowings totaling $950 were outstanding against these local lines of credit at July 1, 2000.

15

      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 requirement for collateral under this agreement was terminated in June 2000. There are no remaining liabilities under this agreement.

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

      The 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 July 1, 2000, the remaining obligation under this operating lease was $7,634. After giving effect to expected sublease income, this obligation is $4,918. In addition, in June 1998, the Company subleased its property at 50 Minuteman Road for a ten-year term. After giving effect to expected sublease income, the remaining obligation under the capital lease was $16,694 at July 1, 2000.

      On June 26, 2000, the Company negotiated an option agreement with the landlord of its facility located at 200 Minuteman Road in Andover, Massachusetts, whereby the Company has agreed to vacate certain space in the 200 Minuteman facility during the third quarter in exchange for termination of the lease. The Company anticipates that under this option agreement, an $11,992 letter of credit would be drawn down by the landlord and an approximate $4,000 in deposits would be returned to the Company. Furthermore, an annual reduction of approximately $5,000 in rent and related costs would result from this consolidation.

      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. The Company repurchased 70,000 shares during the first quarter of 1999 at a cost of $556 (approximately $7.94 per share). There are no definitive plans to repurchase the additional shares under the plan.

Recently Issued Accounting Pronouncements

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

      In December 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain

16

Transactions” (“SOP 98-9”). SOP 98-9 amends SOP 97-2 to require recognition of revenue using the “residual method” in circumstances outlined in SOP 98-9. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by vendor specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. The Company has adopted SOP 98-9 and it has not had a significant impact on its results of operations or financial position.

      In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” (“SAB 101”) as amended by SAB 101B, which is effective no later than the year ending December 31, 2000. SAB 101 clarifies the Securities and Exchange Commission’s views regarding recognition of revenue. The Company will adopt SAB 101 in the fourth quarter of 2000. The Company has identified one series of transactions where the adoption of SAB 101 is expected to have a material effect on its 2000 financial position and results of operations but it has not yet completed its analysis.

      In March 2000, the Financial Accounting Standards Board released FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25.” FIN 44 provides guidance for certain issues that arise in applying Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.” The Company does not expect that the adoption of FIN 44 will have a significant impact on the Company’s results of operations or financial position.

Risk Factors Which May Affect Future Results

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

      New Products, Cost Reductions, Technological Change, and Evolving Markets. The Company is engaged in an industry that continues to innovate as a result of extensive research and development efforts and which brings to market new, more technologically advanced products introduced on an accelerated basis. Simultaneously, the larger telecommunications market is in a heightened competitive state due to deregulation throughout the world. In order to maintain its market share in this fast-paced emerging market, the Company must continue to introduce, through internal development or by acquisition, joint venture or other 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. On July 31, 2000, the Company announced that it would begin shipping the resulting product (known as the 900 Series) in mid August 2000. However, there can be no assurance that the products produced by this partnership will be accretive to the Company’s results of operations and financial condition. In addition to offering products that operate in an integrated service digital network (ISDN) environment, the Company and its competitors are exploring new technologies and networks, such as the Internet and corporate intranets or LANs, for delivering videoconferencing and data collaboration services. The industry standards for such new technologies and networks, however, are still in the early stages of development, which the Company believes has led to customer uncertainty and, accordingly, a slowdown in the growth of the general market for videoconferencing products. As a result of customer preferences, the Company continues to experience a shift in its sales model to videoconferencing systems with lower average selling prices. There can be no assurance that the Company will be successful in implementing cost reductions for all of its products or in developing and marketing suitable new products and related services

17

with attractive margins for these new technologies and networks. The possible transition, migration and/or convergence of technologies is difficult to predict and could have profound implications for the industry and the business of the Company. Further, there is significant risk that existing products could be rendered obsolete due to changing technology. The Company’s failure to develop and market new products on a timely basis or to enhance its existing products or to respond effectively to technological changes, new industry standards or product announcements by competitors could have a material adverse effect on the Company’s business, financial condition and results of operations. In April 2000, the Company announced the formation of its 1414c subsidiary. 1414c, Inc., a wholly-owned subsidiary, has the objective of providing application service providers (ASPs) access to a broad range of IP-based interactive communication solutions. These solutions will enable ASPs to provide rapid Web access to streaming, videoconferencing, Voice-over-IP, and other Web-enabled interactive solutions such as call scheduling and launching. There can be no assurance that 1414c will deliver these services in a manner acceptable to its custome rs.

      Competition. The increased competition resulting from partnerships and acquisitions by and with our competitors, together with mergers among competitors and a slowdown in the growth of the general market for visual collaboration products, has led and may continue to lead to increases in the defection or dilution of PictureTel’s distribution channel partners to competitors, decreases in average selling prices and margins in both group and desktop visual collaboration systems, and a lower segment market share by PictureTel for products and services in the emerging area of network-based visual collaboration. In some cases, PictureTel competes with its channel partners for various services, which increases the complexity of channel management. In addition, competitors may offer network-based visual collaboration software solutions or incorporate standard algorithms into processor chips free of additional charge, which may reduce the value PictureTel technology provides to the market, especially in its lower end visual collaboration products. In addition, the prices which PictureTel is able to charge for its visual collaboration products and services may further decrease from historical levels as a result of new product introductions by competitors, price competition, technological advances, or otherwise. Any of these factors could have a material adverse effect on PictureTel’s business, financial condition and results of operations.

      Manufacturing. Certain key subassemblies and products are currently available only from one vendor and several vendors are smaller corporations with limited financial resources that could prove to be inadequate. In some cases components are sourced from only one vendor, even where multiple sources are available, to maintain quality control and enhance the working relationship with the vendor. In addition, the Company from time to time enters into development arrangements with third parties to develop and incorporate new features and functions into the Company’s products. Failure of these third parties to fulfill their respective obligations under these development arrangements could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s business could also be adversely affected by delays or interruptions in delivery, and poor quality of supplies, subassemblies or products from key 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 reported a 29% decrease in revenue for the second quarter of 2000 as compared to the second quarter of 1999. Losses from operations were $37,096 and $30,808 for the second quarter of 2000 and 1999, respectively, representing a 21% increase in losses from operations. For the first six months of 2000, the Company reported a 22% decrease in revenue as compared to the first six months of 1999. Losses from operations for the first six months of 2000 were $60,139 as compared with $56,471 for the first six months of 1999.

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

18

      Continued negative operating results could adversely impact the Company’s relationship with customers, vendors and employees, as well as its liquidity and ability to remain in compliance with covenants under its revolving credit agreement. The Company received a report from its independent accountants for the year ended December 31, 1999 containing an explanatory paragraph stating that our recurring losses and requirement for additional financing raise substantial doubt about our ability to continue as a going concern. Management’s plans to continue as a going concern rely heavily on forecasted revenue from new products being jointly developed with Intel Corporation, new multi-media applications services, and enhanced compact videoconferencing systems. On July 31, 2000, the Company announced that it would start shipping its new 900 Series products in mid August 2000, which are the first products resulting from the joint development effort with Intel Corporation. However, there can be no guarantee that such revenue increase will occur or will be sufficient to meet the Company’s needs. In addition to the revenue plan, on July 24, 2000, the Company raised additional equity by selling $21,845 of Convertible Series B Preferred Stock to Intel Corporation, State of Wisconsin Investors Board, Halpern Denny Fund II, L.P. and 12 directors and senior managers of the Company. Of the equity proceeds, $8,500 was used to pay off an $8,500 term loan. On July 25, 2000, the Company announced that it had received a commitment letter from Congress Financial Corporation to provide the Company with an asset-based secured revolving credit line with a limit of $35,000, which would provide the Company with an additional $26,500 in borrowing capacity. However, there is no guarantee that either of these two recent efforts will be sufficient to meet the Company’s needs.

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

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

      Potential Fluctuations of Quarterly Operating Results. The majority of the Company’s revenue in each quarter result from orders booked in that quarter, and a substantial portion of the Company’s orders and 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 revenue. 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 revenue 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 40% and 51% of total revenue for the quarters ended July 1, 2000 and July 4, 1999, respectively. Revenue related to international operations of the Company totaled approximately 46% and 50% of total revenue for the six-month period ended July 1, 2000 and July 4, 1999, respectively. Management of the

19

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

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

      Dependence on Key Personnel. On August 31, 1999, the Company announced that Dr. Norman Gaut had succeeded Bruce R. Bond as Chairman of the Board, CEO and President of the Company. In February 1998, Mr. Bond had earlier succeeded Dr. Gaut as Chief Executive Officer and President, and had been elected Chairman of the Board in June 1998. At that time, Dr. Gaut had retired as an active employee while remaining a member of the Board of Directors. Dr. Gaut accepted this 1999 position at a difficult time for the Company. On June 19, 2000, Mr. Lewis Jaffe became President and Chief Operating Officer of the Company, while Dr. Gaut remained Chairman and Chief Executive Officer. The Company appointed Mr. Ralph Takala, a principal of Altman and Associates as its interim Chief Financial Officer on June 15, 2000 following the resignation of its previous Chief Financial Officer. The Company depends on a limited number of key senior management personnel, including Norman Gaut; Lewis Jaffe; Ralph Takala; Amit Akkad, Vice President of Services; Timothy Duffy, Group Vice President and General Manager of Conferencing Products; Robert Byrnes, Group Vice President for Emerging Products; David Blandford, President and General Manager, MultiLink; and W. Robert Kellegrew, Jr., Vice President and General Counsel. 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

20

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 3.  Quantitative and Qualitative Disclosures about Market Risk

      There were no material changes in the Company’s exposure to market risk from December 31, 1999.

Part II — OTHER INFORMATION

Item 1.  Legal Proceedings

  A.  SEC Investigation

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

  B.  Revnet, Inc.

      On June 2, 1998, the Company was served with a complaint from a former distribution channel customer, Revnet, Inc., which has ceased operations. (Revnet, Inc., v. PictureTel Corporation. Civil Action 98092039, filed April 2, 1998, in the Circuit Court for Baltimore City, Maryland.) The complaint 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 outcome of this dispute will have a material adverse affect on its business, financial condition, results of operations or cash flows.

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

21

Item 2.  Changes in Securities and Use of Proceeds

      (a)  The rights of the Common Stock are materially limited or qualified by the issue of an aggregate of 8,738,000 shares of non-voting, convertible Series B Preferred Stock to Intel Corporation, State of Wisconsin Investment Board, Halpern Denny Fund II, L.P. and the other investors (twelve directors and senior management of PictureTel) listed on Schedule I (collectively the “Investors”) to the Stock Purchase and Investors Rights Agreement dated as of July 13, 2000, as amended, with respect to preferred dividend rights and the liquidation preference of said Series B Preferred Stock.

      On the date hereof each outstanding share of the Series B Preferred Stock has the right to convert to one share of Common; see the terms of the Series B Preferred Stock as set forth in the Certificate of Designation of the Series B, constituting an Amendment to the Certificate of Incorporation included as Exhibit 3.1.1 to this report.

      (b)  On July 24, 2000 the Company sold 8,738,000 shares of Series B Preferred Stock to the Investors for cash in the amount of $2.50 per share (aggregating $21.8 million) less a small amount of the purchase price allocated to the purchase of specified small minority interests in 1414c, Inc., a PictureTel subsidiary set up earlier this year to develop Internet-based communication products and services such as multi-port video conferencing and voice-over-IP. The Company used $8.5 million of the proceeds of this equity sale to pay off its $8.5 million Term Loan, incurred on May 17, 2000, and expects to use the balance of the proceeds for working capital and necessary operational expenses. The issue and sale of the securities was exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) as a private placement, accompanied by an investment representation by each purchaser.

      The shares of this series of non-voting Series B Preferred Stock, convertible initially into the same number of shares of PictureTel Common Stock (with anti-dilution protection as specified in the Certificate of Designation for the Series B), was established by vote of PictureTel’s Board of Directors on July 11, 2000 pursuant to its authority under the Company’s Certificate of Incorporation, as reported in the Company’s 8-K filing dated July 14, 2000. This represented on an as-converted basis, an investment in approximately 21% of PictureTel’s Common Stock. These securities were sold by PictureTel in consideration of the payment by the Investors of cash as described above (and allocated as described above).

      The Investors have certain ancillary rights to acquire additional securities of PictureTel, in order to maintain, subject to specified laws and conditions, their respective percentage ownership of PictureTel’s equity.

      In connection with the above-described $21.8 million equity financing, on July 11, 2000 the Board of Directors of the Company approved Amendment No. 2 to the Rights Agreement between the Company and Fleet National Bank (“Second Amendment”. The Second Amendment provides that Intel Corporation (“Intel”) will not be considered an “Acquiring Person” under the Rights Agreement so long as Intel and its affiliates and associates do not become the beneficial owner of greater than the number of shares of Common Stock of the Company equal to the sum of: (A) the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock of the Company purchased by Intel in connection with that certain Stock Purchase and Investors Rights Agreement dated as of January 18, 1999 (“1999 Stock Agreement”) by and among the Company and Intel; plus (B) the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock of the Company (“Series B Stock”) purchased by Intel in connection with a Stock Purchase and Investors Rights Agreement dated as of July 13, 2000 (“2000 Stock Agreement”) by and among the Company, Intel, the State of Wisconsin Investment Board (“SWIB”), Halpern Denny Fund II, L.P., and certain other investors; plus (C) the number of additional shares of Common Stock which may be purchased by Intel pursuant to certain provisions of the 1999 Stock Agreement and the 2000 Stock Agreement, each such number of shares as adjusted for stock splits.

      The Second Amendment also provides that the State of Wisconsin Investment Board (“SWIB”) will not be considered an Acquiring Person under the Rights Agreement so long as SWIB and its affiliates and associates do not become the beneficial owner of greater than that number of shares of Common Stock equal to the sum of: (A) 3,616,900 shares of Common Stock, plus (B) the number of shares of Common Stock

22

issuable upon conversion of the Series B Stock purchased by SWIB in connection with the 2000 Stock Agreement; plus (C) such number of additional shares of Common Stock which may be purchased by SWIB and which, when added to the number of shares of Common Stock in clauses (A) and (B) hereunder, shall result in the beneficial ownership at the time of less than 20% of the Common Stock; plus (D) the number of additional shares of Common Stock which may be purchased by SWIB pursuant to certain other provisions of the 2000 Stock Agreement, each such number of shares as adjusted for stock splits; provided, however, that at no time will SWIB and its affiliates and associates become the beneficial owner of 20% or more of the Common Stock of the Company.

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

      The Annual meeting of Stockholders of the Company was held on June 16, 2000. The Stockholders of the Company were asked to vote on the following items, and voted as follows:

      Proposal I:  Election of the Board of Directors

	For		Withheld
Norman E. Gaut		34,518,374		710,303
Robert T. Knight		34,513,001		715,676
David B. Levi		34,511,136		717,541
Enzo Torresi		34,520,863		707,814
Carl S. Ledbetter		34,518,710		709,967
Werner Schmucking		34,524,130		704,547

      Proposal II:  To ratify the election of PricewaterhouseCoopers LLP as the Company’s auditors for fiscal year 2000.

For	Against		Abstain
34,888,559		200,162		139,956

Item 5.  Other Information

      Subsequent to the end of the second quarter of 2000, PictureTel sold $21.8 million Series B Preferred Stock (an aggregate of 8,738,000 shares) to investors on July 24, 2000 and on July 25, 2000 PictureTel announced the receiving of a commitment letter from Congress Financial Corporation (“Commitment Letter”). The Commitment Letter provides for an asset based secured revolving credit agreement, with a limit of $35 million, subject to certain lending formulas, thereby providing additional borrowing capacity of $26.5 million.

      See information under Item 2 (Changes in Securities and Use of Proceeds) and elsewhere in this Report and see the Company’s Reports on Form 8-K dated July 14, 2000 and July 31, 2000 relating to the issuance of the Series B Preferred Stock.

Item 6.  Exhibits and Reports on Form 8-K

      (a)  Exhibits

3.1.1	Certificate of Designation, Preferences and Other Rights of the Series B Preference Stock of PictureTel Corporation, consisting of an Amendment to the Certificate of Incorporation filed as Exhibit 2 to Report on Form 8-K, dated July 31, 2000 and hereby incorporated by reference.
3.1.2	Certificate of Decrease to Designation relating to Series A Preference Stock, consisting of an Amendment to the Certificate of Incorporation filed herewith.
4.2.5	Stock Purchase and Investors Rights Agreement dated as of July 13, 2000 as amended by Amendment dated as of July 24, 2000, filed as Exhibit 1 to Report on Form 8-K, dated July 31, 2000 and hereby incorporated by reference.

23

10.19.2	Amendment No. 1 to the Credit Agreement among PictureTel Corporation and Congress Financial Corporation (New England) and AbleCo Finance LLC, dated May 17, 2000.
10.28	Employment agreement between PictureTel Corporation and Lewis Jaffe, dated June 19, 2000.
10.28.1	Change in Control Agreement by and between PictureTel Corporation and Lewis Jaffe, dated June 19, 2000.
27.1	Financial Data Schedule for the period ended July 1, 2000 as required by Item 601(c) of Regulation S-K.

      (b)  Reports on Form 8-K

1.	The Company filed a Report on Form 8-K dated July 14, 2000, relating to the signing of the Stock Purchase and Investor’s Rights Agreement dated as of July 13, 2000 as amended as of July 24, 2000.
2.	The Company filed a Report on Form 8-K dated July 31, 2000, relating to the issuance and sale of $21.8 million of Series B Preferred Stock (8,738,000 shares) pursuant to the previously announced Stock Purchase and Investors Rights Agreement and relating to an amendment of the PictureTel Rights Agreement, in order to permit the equity transaction.

24

SIGNATURE

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

PICTURETEL CORPORATION

/s/ RALPH J. TAKALA

Ralph J. Takala

Chief Financial Officer

(Principal Financial and Accounting Officer)

August 15, 2000

25

EXHIBIT INDEX

3.1.1	Certificate of Designation, Preferences and Other Rights of the Series B Preference Stock of PictureTel Corporation, consisting of an Amendment to the Certificate of Incorporation filed as Exhibit 2 to Report on Form 8-K, dated July 31, 2000 and hereby incorporated by reference.
3.1.2	Certificate of Decrease to Designation relating to Series A Preference Stock, consisting of an Amendment to the Certificate of Incorporation filed herewith.
4.2.5	Stock Purchase and Investors Rights Agreement dated as of July 13, 2000 as amended by Amendment dated as of July 24, 2000, filed as Exhibit 1 to Report on Form 8-K, dated July 31, 2000 and hereby incorporated by reference.
10.19.2	Amendment No. 1 to the Credit Agreement among PictureTel Corporation and Congress Financial Corporation (New England) and AbleCo Finance LLC, dated May 17, 2000.
10.28	Employment agreement between PictureTel Corporation and Lewis Jaffe, dated June 19, 2000.
10.28.1	Change in Control Agreement by and between PictureTel Corporation and Lewis Jaffe, dated June 19, 2000.
27.1	Financial Data Schedule for the period ended July 1, 2000 as required by Item 601(c) of Regulation S-K.

EX-3.1.2

   1
                                                                   EXHIBIT 3.1.2

                             CERTIFICATE OF DECREASE

                                     OF THE

                           SERIES A PREFERENCE STOCK

                                       OF

                             PICTURETEL CORPORATION

                        Pursuant to Section 151(g) of the

                        Delaware General Corporations Law

     Reference is made to the Certificate Of Designation, Preferences And Other
Rights of the Series A Preference Stock ("THE SERIES A CERTIFICATE OF
DESIGNATION") of PictureTel Corporation, a corporation organized and existing
under the laws of the State of Delaware (the "CORPORATION"), which certificate
was dated February 15, 1999 and was duly filed with the Secretary of State of
the State of Delaware on February 16, 1999.

     PictureTel Corporation hereby certifies that, pursuant to the Certificate
of Incorporation of the Corporation, as amended, and in accordance with Section
151(g) of the Delaware General Corporations Law, the Board of Directors of the
Corporation on July 11, 2000 duly adopted the following resolution, which
resolution remains in full force and effect as of the date hereof:

     "RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors and in accordance with the provisions of the Certificate of
Incorporation, the number of shares of Series A Preference Stock designated in
the Certificate Of Designation, Preferences And Other Rights ("THE SERIES A
CERTIFICATE OF DESIGNATION") of this Corporation is reduced, subject to the
filing of the Certificate of Decrease with the Secretary of State of the State
of Delaware, as set forth below:

     1.   Section 1 of the Certificate of Designation is amended by replacing
          the words "Six Million (6,000,000)" in the second sentence with the
          words "Four Million Five Hundred Thousand (4,500,000)".


            [The remainder of this page is intentionally left blank.]
   2
     IN WITNESS WHEREOF, the Corporation has caused this Certificate of Decrease
to be executed by a duly authorized officer on July 17, 2000.


                                       PICTURETEL CORPORATION


                                       By:    ______________________________

                                       Name:  ______________________________

                                       Title: ______________________________


Certif. of Desig. Series A. decrease

                                       2

EX-10.19.2

   1

                                                                 EXHIBIT 10.19.2

                       AMENDMENT NO. 1 TO CREDIT AGREEMENT


     THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT ("Amendment") is made this 17 day
of May, 2000 by and among Congress Financial Corporation (New England)
("Congress") and Ableco Finance LLC ("Ableco" and, with Congress, each a
"Lender" and collectively, "Lenders"); Congress Financial Corporation (New
England), as administrative and documentation agent for the Lenders (in such
capacity, "Agent"); PictureTel Corporation, a Delaware Corporation (the
"Company"); and each of the Subsidiaries of the Company that have joined with
the Company under the Credit Agreement dated June 15, 1999 (the "Credit
Agreement") as a "Borrower" thereunder (the "Subsidiary Borrowers" and,
collectively with the Company, the "Borrowers").

                                   BACKGROUND

     Congress, The Chase Manhattan Bank ("Chase") and the Borrowers entered into
the Credit Agreement on June 15, 1999 together with the notes, guarantees,
security agreements and other agreements, documents and instruments in
connection therewith or relating thereto (the "Loan Agreements"). On May 17,
2000, Chase assigned to Congress all of Chase's rights and interests under the
Credit Agreement, resigned as Agent and assigned its interests as Agent to
Congress. In connection with such assignment, Congress entered into an Indemnity
Agreement with Chase to indemnify Chase for Chase's exposure on certain
outstanding letters of credit issued by Chase. The Company has advised the Agent
and Lenders that Events of Default exist under Section 7.16 of the Credit
Agreement. The parties hereto have agreed pursuant to this Amendment to modify
certain terms and conditions of the Credit Agreement including the provisions of
Section 7.16 to eliminate the prior existing Events of Default. Capitalized
terms not otherwise defined in this Amendment shall have the respective meanings
ascribed thereto in the Credit Agreement.

     NOW THEREFORE, with the foregoing Background incorporated herein by
reference and made part hereof, the parties hereto, intending to be legally
bound hereby, promise and agree as follows:

     1. NEW DEFINITIONS. The following new definitions shall be added to Section
1 of the Credit Agreement and shall be applicable to the Credit Agreement, as
amended hereby:

          (a) "ABLECO" means Ableco Finance LLC, a Delaware limited liability
     company.

          (b) "ABLECO ASSIGNMENT" means the Assignment Agreement dated May 17,
     2000 between Congress and Ableco as the same may be amended, supplemented
     or otherwise modified from time to time.



   2

          (c) "AMENDMENT" means this Amendment No. 1 to Credit Agreement dated
     May 17, 2000 among the Lenders, Agent and Borrowers.

          (d) "AMENDMENT EFFECTIVE DATE" has the meaning given such term in
     Section 14 of the Amendment.

          (e) "BANK" means First Union National Bank and its successors and
     assigns.

          (f) "FACILITY PERCENTAGE" means the percentage which the Facility
     Share held by each Lender bears to the Total Credit Facility, as shown on
     Schedule 2.1A attached hereto (as it may be amended, supplemented or
     replaced).

          (g) "FACILITY SHARE" means the aggregate of (i) in the case of Letters
     of Credit, the maximum amount of the LC Obligations and (ii) in the case of
     the Term Loan, the original principal amount thereof, all as shown on
     Schedule 2.1A attached hereto (as it may be amended, supplemented and
     replaced).

          (h) "TERM LOAN" means the $8,500,000.00 term loan made by Ableco to
     the Borrowers pursuant to Section 2.1B of the Agreement.

          (i) "WORKING CAPITAL" shall mean as to any Person, at any time, in
     accordance with GAAP, on a Consolidated basis for such Person and its
     subsidiaries (if any), the amount equal to the difference between: (a) the
     aggregate net book value of all current assets of such Person and its
     subsidiaries (as determined in accordance with GAAP), calculating the book
     value of inventory for this purpose on a first-in-first-out basis, and (b)
     all current liabilities of such Person and its Subsidiaries (as determined
     in accordance with GAAP), PROVIDED, THAT, as to the Company, for purposes
     of Section 7.16(b), the liabilities of the Company and its Subsidiaries to
     Lenders under this Agreement shall not be considered current liabilities
     (whether or not classified as current liabilities in accordance with GAAP).

     2. MODIFIED DEFINITIONS. Section 1 of the Credit Agreement is further
modified in the following respects:

          (a) The term "ACH Facility" and definition thereof are deleted.

          (b) The term "Adjusted Eurocurrency Rate" and definition thereof are
     deleted.

          (c) The definition of "Agent" is modified by replacing the word
     "Chase" with the word "Congress".

          (d) The definition of "Agent Related Persons" is deleted in its
     entirety and replaced with the following:

               "AGENT RELATED PERSONS" means Congress and any successor agent
          under Section 9.9, together with its Affiliates and the officers,
          directors, employees, agents and attorneys-in-fact of such Persons and
          Affiliates.


                                       2
   3

          (e) The definition of "Applicable Letter of Credit Fee" is deleted and
     replaced with the following:

               "APPLICABLE LETTER OF CREDIT FEE" means a letter of credit fee at
          a rate equal to two and one quarter (2.25%) percent per annum".

          (f) The term "Applicable Margin" and the definition thereof are
     deleted.

          (g) The term "Alternative Currency" and definition thereof are
     deleted.

          (h) The term "Arranger" and definition thereof are deleted.

          (i) The definition of "Base Rate" is modified by replacing the word
     "Agent" with the word "Bank".

          (j) The definition of "Business Day" is modified to delete the words
     "and, if the applicable Business Day relates to any Eurocurrency Loan,
     means such day on which trading in dollars and Alternative Currency
     Deposits is carried on between banks in the applicable interlender market
     in which Agent regularly participates".

          (k) The definition of "Cash Collateral" is modified to replace the
     words "on deposit at or maintained in a depository account or" with the
     words "pledged to the Agent and maintained in the".

          (l) The definition of "Commitment" is deleted and replaced with the
     following:

               "COMMITMENT" means (i) with respect to Congress, its agreement
          under Section 2.5 to arrange for Letters of Credit to be issued up to
          an aggregate amount not to exceed the Congress Facility Commitment set
          forth on Schedule 2.1A, and (ii) with respect to Ableco, its agreement
          under Section 2.1B to make the Term Loan.

          (m) The term "Conversion/Continuation Date" and definition thereof are
     deleted.

          (n) The term "Dollar Equivalent" and the definition thereof are
     deleted.

          (o) The definition of "Eligible Assignee" is modified to add the
     following sentence to the end thereof: "Notwithstanding the foregoing, any
     Affiliate of Ableco or of Congress shall be deemed to be an Eligible
     Assignee".

          (p) The term "Eurocurrency Loan" and the definition thereof are
     deleted.

          (q) The term "Eurocurrency Reserve Percentage" and the definition
     thereof are deleted.

          (r) The definition of "FX Facilities" is deleted.


                                       3

   4

          (s) The definition of "Issuing Lender" is deleted and replaced with
     the following:

               "Issuing Lender" means Congress, in its capacity as indemnitor
          (i) of Chase under the Chase Letters of Credit outstanding on the
          Amendment Effective Date and (ii) of the Bank under the Letters of
          Credit issued by the Bank to replace the Chase Letters of Credit. The
          term "Issuing Lender" shall also include the Bank as issuer of the
          Letters of Credit.

          (t) The definition of "Interest Payment Date" is modified to delete
     the words "or converted into another Type of Loan".

          (u) The term "Interest Period" and definition thereof are deleted.

          (v) The term "Lending Office" is modified to delete the words "or
     "Domestic Lending Office" or "Eurocurrency Lending Office", as the case may
     be,"

          (w) The definition of "Loan" is modified to delete the words ", and
     may be a Base Rate Loan, or a Eurocurrency Loan (each, a "TYPE" of Loan)".
     The definition of "Loan" is modified further to add the words "and the Term
     Loan" after the words "Revolving Loan" and before the period.

          (x) The definition of "Maturity Date" is modified to replace the words
     "June 15, 2000" with "May 17, 2001".

          (y) The term "Notice of Conversion/Continuation" and definition
     thereof is deleted.

          (z) The definition of "Obligations" is modified by deleting the words
     "the FX Facilities and the ACH Facility,".

          (aa) The term "Pro Rata Share" and definition thereof is deleted. In
     each place where Pro Rata Share is used in the Agreement, the term Facility
     Share shall replace such term.

          (bb) The definition "Revolving Termination Date" and definition
     thereof are deleted.

          (cc) The definition of "Total Credit Facility" is modified to replace
     "$35,000,000" with "$38,586,815.00".

     3. MODIFICATIONS TO SECTION 2.1. Section 2.1 is deleted and replaced with
the following:

          "2.1A. REVOLVING LOANS. Borrowers acknowledge and agree that Congress
     has no commitment or obligation to make any loans, including any loans of a
     revolving nature ("Revolving Loans") to Borrowers; provided, however,
     Congress may, in its sole and absolute discretion, make Revolving Loans to
     the Company for the


                                       4

   5

     purpose of paying interest, fees, costs and expenses, including Attorney
     Costs, incurred in connection with the Obligations or pursuant to the Loan
     Agreements and to preserve, protect or maintain the Collateral and the
     Agent's rights therein. Under the terms of the Ableco Assignment , Congress
     has agreed not to make any loans including Revolving Loans to Borrowers
     except for Revolving Loans to pay interest, fees, costs and expenses,
     including Attorney Costs, incurred in connection with the Obligations or
     pursuant to the Loan Agreements and to preserve, protect or maintain the
     Collateral and the Agent's rights therein. Congress' only commitment to
     Borrowers shall be to arrange for the issuance of Letters of Credit,
     subject to the terms of Section 2.5 hereof.

          2.1B TERM LOAN. On the Amendment Effective Date, Congress will make a
     loan to the Borrowers in the original principal amount of $8,500,000.00
     (the "Term Loan") and will immediately assign the Term Loan to Ableco
     pursuant to the Ableco Assignment. The Term Loan is (a) evidenced by the
     Term Promissory Note in such original principal amount duly executed and
     delivered by Borrowers to Ableco concurrently with the Amendment; (b) to be
     repaid, together with interest and other amounts, in accordance with this
     Agreement, the Term Promissory Note and other Loan Agreements, and (c)
     secured by all of the Collateral. The unpaid principal balance of the Term
     Loan and all accrued and unpaid interest thereon shall be due and payable
     on the Maturity Date." The Borrowers may, at any time or from time to time,
     upon not less than three (3) Business Days irrevocable notice to Agent and
     Ableco, prepay the Term Loan in whole or in part, without penalty or
     premium.

     4. MODIFICATION TO SECTION 2.3. Section 2.3 is deleted and replaced with
the following:

               "2.3 PROCEDURES FOR REVOLVING LOANS. Congress is authorized by
          Borrowers to make Revolving Loans at any time, in its discretion, to
          pay interest, fees, costs and expenses incurred with respect to the
          Obligations or pursuant to the Loan Agreements. All Revolving Loans
          shall be conclusively presumed to have been made to and at the request
          of and for the benefit of Borrowers, when deposited to the credit of
          Borrowers or otherwise disbursed in accordance with the terms of this
          Agreement."

     5. MODIFICATION TO SECTION 2.4. Section 2.4 is deleted and replaced with
the words: "Intentionally Deleted".

     6. MODIFICATIONS TO SECTION 2.5. Borrowers acknowledge and agree that
Congress, subject to the terms of Section 2.5, will arrange for Letters of
Credit to be issued by the Bank and that all references to Issuing Lender shall
mean and include both Congress and the Bank. Subsection 2.5(a)(i)(y)(ii) is
deleted and replaced with the following: "(ii) after giving effect to the
issuance of the requested Letter of Credit, the aggregate amount of outstanding
LC Obligations shall not exceed Congress' Facility Share and the market value as
determined by Agent, in its discretion, of Cash Collateral shall equal or exceed
105% of the aggregate amount of LC Obligations;". Subsection 2.5(a)(iii) is
modified to replace the fourth sentence thereof with the following: "Any payment
made on a Letter of Credit shall accrue interest from and after the date of the
Issuing Lender's payment under such Letter of Credit until payment in full at


                                       5

   6

the variable rate per annum in effect from time to time on the Revolving Loans
and such interest shall be payable on demand". Subsection 2.5(c) is modified to
replace the words "Revolving Termination Date" with the words "Maturity Date".
Subsections 2.5(b) and 2.5(d)(ii) are deleted and replaced with the words
"Intentionally Deleted".

     7. MODIFICATIONS TO SECTION 2.6. Section 2.6 is deleted and replaced with
"Intentionally Deleted".

     8. MODIFICATIONS TO SECTION 2.7. Section 2.7 is deleted and replaced with
"Intentionally Deleted".

     9. MODIFICATIONS TO SECTION 2.8. Section 2.8 is deleted and replaced with
the following:

          "The Company and Subsidiary Borrowers shall repay the Lenders on the
     Maturity Date the aggregate principal amount of Loans outstanding on such
     date and make provisions for all outstanding Letters of Credit as provided
     in Section 2.5(c)."

     10. MODIFICATIONS TO SECTION 2.9. Subsection 2.9(a) is deleted and replaced
with the following:

          "(a)(i) The Revolving Loans shall bear interest on the outstanding
     principal amount thereof at a rate per annum equal to the Base Rate plus
     1.00%.

          (a)ii The Term Loan shall bear interest on the outstanding principal
     amount thereof at a rate per annum equal to the Base Rate plus 3.00% and
     such rate shall increase by 1 1/2% on August 15, 2000 and on each ninetieth
     day anniversary of such date thereafter. In no event shall the Base Rate
     for purposes of this Subsection 2.9(a) for any day be less than 9.00%. To
     the extent that the Base Rate for any day is less than the foregoing
     minimum daily rate, the Base Rate for purposes of this Subsection 2.9(a)
     automatically shall be deemed increased to such minimum rate."

     11. MODIFICATIONS TO SECTION 2.10. Notwithstanding any provisions of this
Amendment or the Credit Agreement to the contrary, Ableco shall not have a share
of or have any interest in the Closing Fee, Agency Fees, Facility Fees or Letter
of Credit Fees payable pursuant to Sections 2.10(a) through (d). The second
sentence of Subsection 2.10(d) is modified to replace the word "quarter" with
the word "month". Section 2.10 is amended to add the following subsections(e)
and (f) thereto:

          "(e)TERM LOAN CLOSING FEE. The Company and Subsidiary Borrowers shall
     pay a term loan closing fee to Ableco in the amount of $1,000,000, which
     shall be fully earned as of and payable to Ableco on the Amendment
     Effective Date. Congress shall not have a share of or any interest in this
     term loan closing fee. In the event that Ableco completes its due
     diligence, approves a larger transaction (up to $17,500,000), in its sole
     discretion, and closes such transaction, this term loan closing fee shall
     be applied to satisfy in full the closing fee (but not


                                       6

   7

     other fees that may be charged) of such transaction. Borrowers acknowledge
     that such transaction has not been approved by Ableco and no agreement or
     commitment should be implied by the foregoing.

          (f) AMENDMENT FEE. The Company and Subsidiary Borrowers shall pay an
     amendment fee to Congress in the amount of $50,000, which shall be fully
     earned as of and payable to Congress on the Amendment Effective Date.
     Ableco shall not have a share of or any interest in this amendment fee."

     12. MODIFICATION TO SECTION 2.12. Section 2.12 is modified to replace "at
the Agent's Payment Office" with "the Payment Account (as defined in Section
7.17)".

     13. MODIFICATION TO SECTION 2.15. Section 2.15 is modified to delete the
words "the trademarks, patents, copyrights and applications therefor of the
Company and its Subsidiaries and".

     14. DELETION OF SECTION 2.17. Section 2.17 is deleted.

     15. MODIFICATION TO SECTION 6.2. Section 6.2 is modified to change
subsection "(d)" to "(e)" and to insert the following as a new subsection "(d)":

          "(d)Weekly, on the first Business Day of each calendar week, a report,
     in form and substance satisfactory to Agent and Lenders, showing the amount
     of sales and collections for the prior calendar week and the aggregate
     amount of accounts receivable as of the date of the report certified by a
     Responsible Officer as true, accurate and complete; and"

     16. MODIFICATION TO SECTION 6.13. Section 6.13 is modified to delete the
word "Agent" and to replace it with "Bank".

     17. MODIFICATION TO SECTION 7.1. Subsection 7.1(b) is modified to replace
the word "Document" with "Agreement". Subsection 7.1(i) is deleted and replaced
with the following:

          "(i) Liens incurred prior to the Amendment Effective Date on any
     equipment, capital assets or real property of the Company and its
     Subsidiaries securing purchase money Indebtedness incurred prior to the
     Amendment Effective Date provided that such Liens attach solely to the
     property acquired with such purchase money Indebtedness and the principal
     amount of the Indebtedness secured thereby does not exceed 100% of the cost
     of such property;".

          Subsection 7.1(n) is deleted and replaced with the following:

          "(n) cash collateral in an amount not to exceed $1,500,000 pledged to
     Chase to secure foreign exchange contracts and cash collateral not to
     exceed $150,000 pledged to BankBoston to secure the completion of an ACH
     facility."

     18. MODIFICATIONS TO SECTION 7.2. Section 7.2 is modified to replace
subsections (a), (b), (c) and (d) thereof with the following:


                                       7
   8


          "(a) sales of inventory in the ordinary course of business of the
     Company and its Subsidiaries."

     19. MODIFICATIONS TO SECTION 7.5. Section 7.5 is modified to replace
subsection (d) thereof with the following:

          "(d) Indebtedness secured by Liens permitted by subsection 7.1(i)
     provided that the aggregate principal amount thereof shall not exceed the
     sum of (i) the principal amount thereof on the Amendment Effective Date
     plus (ii) $1,000,000, less all payments made thereon; provided, further,
     that no prepayments shall be made on such Indebtedness and none of such
     Indebtedness shall be refinanced, modified or changed;"

     20. MODIFICATIONS TO SECTION 7.11. Subsection 7.11(b) is modified to delete
the words "; provided that so long as no Default or Event of Default exists or
has occurred and is continuing, the Company may purchase up to 1,000,000 shares
of its common stock at a price not in excess of $9.00 per share for the purpose
of reserving such shares aside for the Company's employee stock option plans".

     21. MODIFICATION TO SECTION 7.14. Section 7.14 is deleted and replaced with
the following:

          "7.14 SWAP TRANSACTIONS OR HEDGING AGREEMENTS. The Company shall not,
     or suffer or permit any Subsidiary to, enter into any SWAP Transactions or
     Hedging Agreements except for foreign exchange contracts with Chase or the
     Bank so long as the aggregate secured exposure thereon does not exceed
     $1,500,000 and unsecured foreign exchange contracts so long as the
     aggregate of such foreign exchange contracts do not exceed $12,500,000 and
     the daily exposure thereon does not exceed $2,500,000."

     22. MODIFICATIONS TO SECTION 7.16. Section 7.16 is deleted and replaced
with the following:

          "7.16 FINANCIAL COVENANTS.

          (a) MAXIMUM NEGATIVE QUARTERLY CONSOLIDATED NET INCOME (LOSS). The
     Company shall not permit its Consolidated Net Income (Loss) for each of the
     periods set forth below to be less than the amount corresponding to such
     periods:


              PERIOD                                   AMOUNT

         Fiscal Quarter ending                      -$25,000,000
             in June, 2000

         Fiscal Quarter ending in
             September, 2000                        -$12,000,000

       Each Fiscal Quarter ending
              Thereafter                                $1.00



                                       8

   9

          (b) WORKING CAPITAL. The Company shall not permit its Consolidated
     Working Capital at any time to be less than $40,300,000.00.

          (c) ACCOUNTS RECEIVABLE. The Company shall not permit the amount of
     its net accounts receivable after deducting all returns, discounts and
     allowances thereon and reserves relating thereto, as determined in
     accordance with GAAP, at any time to be less than $35,000,000.00.

          (d) CASH COLLATERAL. The Company shall maintain at all times Cash
     Collateral with a market value, as determined by Agent, in its discretion,
     equal to or in excess of 105% of the Revolving Loans and LC Obligations.

          (e) COLLECTIONS ON ACCOUNTS. The Company shall not permit collections
     on its accounts receivable for any period of fifteen (15) consecutive
     Business Days to be less than the outstanding principal amount of the Term
     Loan minus $1,000,000. In the event that the Company breaches this covenant
     the Company shall have the right to cure such breach within three (3)
     Business Days by prepaying the portion of the Term Loan in excess of such
     collections amount."

     23. ADDITION OF SECTION 7.18. The following is inserted as Section 7.18:

          "7.18 COLLECTION OF ACCOUNTS.

          (a) Borrowers shall establish and maintain, at their expense,
     lockboxes and related blocked accounts ( "Blocked Accounts") with such
     banks as are acceptable to Agent into which Borrowers shall promptly
     deposit and direct their account debtors to directly remit all payments on
     Accounts (as such term is defined in the Pledge and Security Agreements
     with the Borrowers) and all payments constituting proceeds of Inventory (as
     such term is defined in the Pledge and Security Agreements with the
     Borrowers) or other Collateral (as such term is defined in the Pledge and
     Security Agreements with the Borrowers) in the identical form in which such
     payments are made, whether by cash, check or other manner. The banks at
     which the Blocked Accounts are established shall enter into an agreement,
     in form and substance satisfactory to Agent, providing that all items
     received or deposited in the Blocked Accounts are the property of Agent,
     that the depository bank has no lien upon, or right to setoff against, the
     Blocked Accounts, the items received for deposit therein, or the funds from
     time to time on deposit therein and that the depository bank will wire, or
     otherwise transfer, in immediately available funds, on a daily basis, all
     funds received or deposited into the Blocked Accounts to such bank account
     of Agent as Agent may from time to time designate for such purpose
     ("Payment Account"). Borrowers agrees that all payments made to such
     Blocked Accounts or other funds received and collected by Agent, whether on
     the Accounts or as proceeds of Inventory or other Collateral or otherwise
     shall be the property of Agent for the benefit of the Lenders. So long as
     no Default or Event of Default exists or has occurred and is continuing,
     all such funds received and collected by Agent shall be applied first to
     repay the outstanding Revolving Loans, second to restore


                                       9

   10

     the Cash Collateral to the extent that the amount thereof is less than 105%
     of the outstanding Revolving Loans and LC Obligations and thereafter the
     balance will be transferred on each Business Day or as the Company may
     request to the Company's operating bank account at the cost of and pursuant
     to the instructions of the Company. If a Default or an Event of Default
     exists or has occurred and is continuing, the release of such funds to the
     Company shall be subject to the sole discretion of the Agent.

          (b) Borrowers and all of their respective affiliates, subsidiaries,
     shareholders, directors, employees or agents shall, acting as trustee for
     Agent , receive, as the property of Lender, any monies, checks, notes,
     drafts or any other payment relating to and/or proceeds of Accounts or
     other Collateral which come into their possession or under their control
     and immediately upon receipt thereof, shall deposit or cause the same to be
     deposited in the Blocked Accounts, or remit the same or cause the same to
     be remitted, in kind, to Agent. In no event shall the same be commingled
     with any Borrower's own funds. Borrowers agree to reimburse Agent and
     Lenders on demand for any amounts owed or paid to any bank at which a
     Blocked Account is established or any other bank or person involved in the
     transfer of funds to or from the Blocked Accounts arising out of Agent's or
     Lender's payments to or indemnification of such bank or person. The
     obligation of Borrowers to reimburse Agent and Lenders for such amounts
     pursuant to this Section 6.3 shall survive the termination or non-renewal
     of this Agreement.

          (c) All Obligations shall be payable to the Payment Account as
     provided in this Section 7.18 or such other place as Agent may designate
     from time to time. Agent may apply payments received or collected from
     Borrowers or for the account of Borrowers (including the monetary proceeds
     of collections or of realization upon any Collateral) to such of the
     Obligations, whether or not then due, in such order and manner as Agent
     determines; provided that the Agent shall not apply such payments to prepay
     the principal amount of the Term Loan except upon notice from the Company
     or at the Agent's and Lenders' election upon and during the continuance of
     an Event of Default. At Agent's option, all principal, interest, fees,
     costs, expenses and other charges provided for in this Agreement or the
     other Loan Agreements may be charged directly to the loan account(s) of
     Borrowers. If after receipt of any payment of, or proceeds of Collateral
     applied to the payment of, any of the Obligations, Agent or any Lender is
     required to surrender or return such payment or proceeds to any Person for
     any reason, then the Obligations intended to be satisfied by such payment
     or proceeds shall be reinstated and continue and this Agreement shall
     continue in full force and effect as if such payment or proceeds had not
     been received. Borrowers shall be liable to pay to Agent and Lenders, and
     does hereby indemnify and hold Agent and Lenders harmless for the amount of
     any payments or proceeds surrendered or returned. This Section 7.18 shall
     remain effective notwithstanding any contrary action which may be taken by
     Agent or Lenders in reliance upon such payment or proceeds. This Section
     7.18 shall survive the payment of the Obligations and the termination of
     this Agreement."

     24. MODIFICATIONS TO SECTION 9.8. Section 9.8 is deleted and replaced with
the following:


                                       10

   11

          "9.8AGENT IN INDIVIDUAL CAPACITY. Congress and its Affiliates may make
     loans to, issue letters of credit for the account of, accept deposits from,
     acquire equity interests in and generally engage in any kind of banking,
     trust, financial advisory, underwriting or other business with the Company
     and its Subsidiaries and Affiliates as though Congress were not the Agent
     hereunder and without notice to or consent of the Lenders. The Lenders
     acknowledge that, pursuant to such activities, Congress or its Affiliates
     may receive information regarding the Company or its Affiliates (including
     information that may be subject to confidentiality obligations in favor of
     the Company or such Subsidiary) and acknowledge that the Agent shall be
     under no obligation to provide such information to them. With respect to
     its Loans, Congress shall have the same rights and powers under this
     Agreement as any other Lender and may exercise the same as though it were
     not the Agent and the terms "Lender" and "Lenders" include Congress in its
     individual capacity."

     25. MODIFICATIONS TO SECTION 10.4. Section 10.4(a) is modified to replace
the words "Chase (including in its capacity as Agent) and Congress (including in
its capacity as Documentation Agent)" with the words "Agent and each Lender".
Section 10.4(a) is further amended to insert the words "including reasonable
Attorney Costs" after the words "for all costs and expenses".

     26. MODIFICATIONS TO SECTION 10.8. Section 10.8(a) is modified to add the
following sentence at the end thereof: "The foregoing minimum amount of
$5,000,000 and processing fee of $2,500 will not be applicable to assignments to
Affiliates of Eligible Assignees".

     27. MODIFICATIONS TO SECTION 10.11. Section 10.11 is modified to add the
words "or with Bank" in the fourth line thereof after the words "any deposit
account of the Company with Agent".

     28. MODIFICATIONS TO SCHEDULE 2.1. Schedule 2.1 to the Credit Agreement is
deleted and replaced with the Schedule 2.1A attached to the Amendment.

     29. MODIFICATIONS TO SCHEDULE 10.2. Schedule 10.2 to the Credit Agreement
is deleted and replaced with the Schedule 10.2A attached to the Amendment.

     30. MODIFICATIONS TO EXHIBITS A, B AND F. Exhibits A, B and F to the Credit
Agreement are deleted.

     31. MODIFICATIONS TO SCHEDULE 2 TO EXHIBIT C. Schedule 2 to Exhibit C is
modified to replace the words "Section 7.16(b) Minimum Cash Equivalents and
Marketable Securities" with the words "Section 7.16(b) Working Capital".

     32. MODIFICATIONS TO EXHIBIT E. Exhibit E is modified to replace the words
"The Chase Manhattan Bank" with the words "Congress Financial Corporation (New
England)". Schedule 1 Notice of Assignment and Acceptance is replaced with the
Schedule 1A Notice of Assignment and Acceptance attached to the Amendment.



                                       11

   12

     33. REPRESENTATIONS AND WARRANTIES.

     To induce Agent and Lenders to enter into this Amendment, the Company, each
Subsidiary Borrower and each Subsidiary Guarantor warrants, represents and
covenants to the Lender and Agent that:

          (a) ORGANIZATION AND QUALIFICATION. The Company, each Subsidiary
     Borrower and each Subsidiary Guarantor is a corporation duly incorporated,
     validly existing and in good standing under the laws of the jurisdiction of
     its incorporation. The Company, each Subsidiary Borrower and each
     Subsidiary Guarantor is duly qualified or is authorized to do business and
     is in good standing as a foreign corporation or limited liability company
     in all states and jurisdictions in which the failure of such entity to be
     so qualified would have a material adverse effect on the financial
     condition, business or properties of such entity.

          (b) CORPORATE POWER AND AUTHORITY. The Company, each Subsidiary
     Borrower and each Subsidiary Guarantor is duly authorized and empowered to
     enter into, execute, deliver and perform this Amendment and each of the
     Loan Agreements to which it is a party. The execution, delivery and
     performance of this Amendment and each of the other Loan Agreements have
     been duly authorized by all necessary corporate action and do not and will
     not (i) require any consent or approval of the shareholders or members of
     the Company, any Subsidiary Borrower or any Subsidiary Guarantor; (ii)
     contravene the Company's, any Subsidiary Borrower's or any Subsidiary
     Guarantor's charter, by-laws or operating agreement; (iii) violate, or
     cause the Company, any Subsidiary Borrower or any Subsidiary Guarantor to
     be in default under, any provision of any law, rule, regulation, order,
     writ, judgment, injunction, decree, determination or award in effect having
     applicability to the Company, any Subsidiary Borrower or any Subsidiary
     Guarantor; (iv) result in a breach of or constitute a default under any
     indenture or loan or credit agreement or any other agreement, lease or
     instrument to which the Company, any Subsidiary Borrower or any Subsidiary
     Guarantor is a party or by which the Company's, any Subsidiary Borrower's
     or any Subsidiary Guarantor's properties may be bound or affected; or (v)
     result in, or require, the creation or imposition of any Lien (other than
     Permitted Liens) upon or with respect to any of the properties now owned or
     hereafter acquired by the Company, each Subsidiary Borrower and each
     Subsidiary Guarantor.

          (c) LEGALLY ENFORCEABLE AGREEMENT. This Amendment and each of the
     other Loan Agreements when delivered under this Amendment will be, a legal,
     valid and binding obligation of the Company, each Subsidiary Borrower and
     each Subsidiary Guarantor, enforceable against the Company, each Subsidiary
     Borrower and each Subsidiary Guarantor in accordance with its respective
     terms.

          (d) NO MATERIAL ADVERSE CHANGE. Since the date of the last financial
     statements provided by the Company to the Lenders, there has been no
     material adverse change in the condition, financial or otherwise, of the
     Company, any Subsidiary Borrower or any Subsidiary Guarantor as shown on
     the Consolidated balance sheet as of such date and no change in the
     aggregate value of the Collateral, except changes in the



                                       12

   13

     ordinary course of business, none of which individually or in the aggregate
     has been materially adverse.

          (e) CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES. Each
     representation and warranty contained in the Credit Agreement and the other
     Loan Agreements remains (after giving effect to this Amendment) accurate,
     complete and not misleading in any material respect on the date of this
     Amendment, except for representations and warranties that explicitly relate
     to an earlier date and changes in the nature of the Company, any Subsidiary
     Borrower's, or any Subsidiary Guarantor's business or operations, so long
     as such changes are disclosed in the amended Exhibits attached hereto or
     Lenders have consented to such changes in writing or such changes are
     expressly permitted by the Loan Agreement.

     34. CONDITIONS PRECEDENT.

     Notwithstanding any other provision of this Amendment or any of the other
Loan Agreements, and without affecting in any manner the rights of Agent and
Lenders under the other sections of this Amendment, this Amendment shall not be
effective as to Agent and Lenders unless and until each of the following
conditions has been and continues to be satisfied (the "Amendment Effective
Date"):

          (a) DOCUMENTATION. Lenders shall have received, in form and substance
     satisfactory to Lenders and their counsel, a duly executed copy of this
     Amendment, together with such additional documents, instruments, opinions
     of Company's counsel and certificates as Lender and their respective
     counsel shall require in connection therewith, all in form and substance
     satisfactory to Lenders and their counsel.

          (b) ASSIGNMENT FROM CHASE. Chase and Congress shall have duly executed
     and delivered an assignment and assumption agreement whereby Chase shall
     have assigned to Congress its interests in the credit facilities under the
     Loan Agreements including its rights as Agent thereunder, Congress shall
     have accepted such assignment and been appointed the Agent and Chase shall
     have executed all instructions and assignments of collateral security and
     delivered to Congress all stock certificates and other collateral in its
     possession.

          (c) ASSIGNMENT TO ABLECO. Ableco and Congress shall have duly executed
     and delivered the Ableco Assignment attached hereto and all conditions to
     the effectiveness thereof shall have been satisfied.

          (d) ISSUANCE OF TERM NOTE. The Company and Subsidiary Borrowers shall
     have issued to Ableco a $8,500,000 Term Note.

          (e) CONTROL AGREEMENT. The Company shall have entered into the Amended
     and Restated Control Agreement attached hereto and Agent and Lenders shall
     have verified that an amount of Cash Collateral at least equal to 105% of
     the outstanding Revolving Loans (if any) and LC Obligations is subject to
     the Control Account.


                                       13

   14

          (f) NO DEFAULT. After giving effect to this Amendment, no Default or
     Event of Default shall exist except as previously disclosed to and
     consented to by Lenders in writing.

          (g) NO LITIGATION. Except as previously disclosed to and consented to
     by Lenders in writing, no action, proceeding, investigation, regulation or
     legislation shall have been instituted, threatened or proposed before any
     court, governmental agency or legislative body to enjoin, restrain or
     prohibit, or to obtain damages in respect of, or which is related to or
     arises out of the Loan Agreement or this Amendment or the consummation of
     the transactions contemplated thereby or hereby.

          (h) PATENT, TRADEMARK AND COPYRIGHT SEARCHES. The Agent and Lenders
     shall have received searches on all patents, trademarks, copyrights and
     applications therefor of the Company and its Subsidiaries and such searches
     shall be satisfactory to the Agent and Lenders.

          (i) ADDITIONAL DOCUMENTS AND DELIVERIES. Company, Subsidiary Borrowers
     and Subsidiary Guarantors shall have executed and/or delivered each of the
     items listed on the Document Checklist attached hereto except as set forth
     in Section 35.

     35. ADDITIONAL CONDITIONS AND COVENANTS.

     The Company, Subsidiary Borrowers and Subsidiary Guarantors covenant and
agree to perform or satisfy or cause to be performed or satisfied each of the
following conditions and covenants and that the failure of any of the following
conditions or covenants to timely occur or be performed by the specified dates
shall constitute an Event of Default under the Credit Agreement, without any
action or notice by Agent or Lenders of any kind, time being of the essence:

          (a) TRANSFER OF CASH COLLATERAL. Within five (5) Business Days of the
     Amendment Effective Date, Company and Subsidiary Borrowers will cause to be
     transferred to the Agent all of the Cash Collateral and such Cash
     Collateral shall thereafter be held by the Agent for the benefit of the
     Lenders pursuant to a cash collateral agreement in form and substance
     satisfactory to the Agent and Lenders. Agent will arrange for payment of
     interest on such cash collateral transferred to the Agent and held by Agent
     at a rate equal to the Base Rate less 3.5%.

          (b) LOCKBOX AND BLOCKED ACCOUNTS. Within five (5) Business Days of the
     Amendment Effective Date, Borrowers shall have established the lockbox and
     blocked accounts satisfying the requirements of Section 7.17 of the Credit
     Agreement with banks as are acceptable to Agent and pursuant to terms and
     conditions satisfactory to Agent.

          (c) UK COLLATERAL. Within seven (7) Business Days of the Amendment
     Effective Date, PictureTel UK Limited shall have granted to the Agent a
     first priority charge on substantially all of its assets and a first
     priority share charge on all of the capital stock thereof and shall deliver
     to Agent a legal opinion thereon in form and substance satisfactory to
     Agent.


                                       14

   15

          (d) LANDLORD AGREEMENTS. Within twenty (20) consecutive Business Days
     of the Amendment Effective Date, the Borrowers will obtain and deliver to
     Agent Landlord Agreements, in form and substance satisfactory to Agent,
     from the landlords of each location leased by the Borrowers or Guarantors
     where Collateral is located (other than for sales offices where de minimus
     items of Collateral is located)

          (e) CORPORATE DOCUMENTS FOR NON-US ENTITIES. Within twenty (20)
     consecutive Business Days of the Amendment Effective Date, Borrower will
     deliver to Agent, certified charter documents, bylaws, resolutions and
     legal existence and good standing certificates for each non-U.S. Borrower
     and Guarantor in form and substance satisfactory to Agent.

     36. ACKNOWLEDGMENT OF OBLIGATIONS.

     The Company, each Subsidiary Borrower and each Subsidiary Guarantor hereby
(1) reaffirms and ratifies all of the promises, representations, warranties,
agreements, covenants and obligations to Lenders under or in respect of the
Credit Agreement and other Loan Agreements as amended hereby and (2)
acknowledges that it is unconditionally liable for the punctual and full payment
of all Obligations, including, without limitation, all charges, fees, expenses
and costs (including reasonable attorneys' fees and expenses) under the Loan
Agreements, as amended hereby, and that it has no defenses, counterclaims or
setoffs with respect to full, complete and timely payment and performance of all
Obligations.

     37. CONFIRMATION OF LIENS.

     The Company, each Subsidiary Borrower and each Subsidiary Guarantor
acknowledges, confirms and agrees that the Loan Agreements, as amended hereby,
are effective to grant to Agent and to Lenders duly perfected, valid and
enforceable first priority security interests and liens in the Collateral
described therein and that the locations for such Collateral specified in the
Loan Agreements have not changed. The Company and each Subsidiary Borrower
further acknowledges and agrees that all Obligations are and shall be secured by
the Collateral.

     38. IP COLLATERAL.

     Agent and Lenders agree that in the event the Company proposes to enter
into a merger or other acquisition transaction and the Agent and Lenders consent
to such transaction, in their sole and absolute discretion, the Agent and
Lenders will not require that the entity(ies) to the transaction, other than the
Borrowers or Guarantors or other Affiliates, grant a security interest to the
Agent and Lenders in its trademarks, patents or copyrights or applications
therefore.

     39. MISCELLANEOUS.

     Except as set forth herein, the undersigned confirm and agree that the Loan
Agreements remain in full force and effect without amendment or modification of
any kind. The Company and each Subsidiary Borrower hereby acknowledges its
obligation to pay the Lenders'


                                       15

   16

and Agent's reasonable attorneys' fees and costs incurred in connection with
this Amendment, as set forth in the Loan Agreement (and a $50,000 good faith
deposit has been made to Ableco with respect to Ableco's fees and expenses). The
execution and delivery of this Amendment by Lenders and Agent shall not be
construed as a waiver by Lenders of any Default or Event of Default under the
Loan Agreements. This Amendment, together with the Loan Agreement and other Loan
Agreements, constitutes the entire agreement between the parties with respect to
the subject matter hereof and supersedes all prior dealings, correspondence,
conversations or communications between the parties with respect to the subject
matter hereof. This Amendment and the transactions hereunder shall be deemed to
be consummated in the Commonwealth of Massachusetts and shall be governed by and
interpreted in accordance with the laws of that state. This Amendment and the
agreements, instruments and documents entered into pursuant hereto or in
connection herewith shall be "Loan Agreements" under and as defined in the
Credit Agreement.


                  [Remainder of Page Left Intentionally Blank]






                                       16


   17


                Executed under seal on the date set forth above.

                                          COMPANY:

                                          PICTURETEL CORPORATION


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          SUBSIDIARY BORROWERS:

                                          PICTURETEL (SCHWIEZ) AG

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          PICTURETEL SECURITIES CORPORATION

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          PICTURETEL TECHNOLOGY CORPORATION

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          PICTURETEL UK LIMITED

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          STARLIGHT NETWORKS, INC.

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------



                                       17


   18

                                          PICTURETEL AUSTRALIA PTY, LTD.

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          PICTURETEL COMPANY, LTD. (JAPAN)

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          PICTURETEL GMBH

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          SUBSIDIARY GUARANTORS:

                                          PICTURETEL INTERNATIONAL CORPORATION

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          MULTILINK, INC.

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          PICTURETEL SCANDINAVIA AB

                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                       18

   19



Accepted in Boston, Massachusetts

CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND), as Agent and as a Lender


By:
    -------------------------------------------
     Name:
           ------------------------------------
     Title:
            -----------------------------------

ABLECO FINANCE LLC, as a Lender


By:
    -------------------------------------------
     Name:
           ------------------------------------
     Title:
            -----------------------------------







                                       19

   20




                                  SCHEDULE 2.1A
                   FACILITIES, COMMITMENTS AND FACILITY SHARES



LENDER                           FACILITY COMMITMENTS            FACILITY SHARE

Congress Financial Corporation   100% of LC Obligations              78.25%
(New England)                    (Letters of Credit with
                                 face amount of
                                 $30,086,815.00)*

Ableco Finance LLC               100% of $8,500,000.00               21.75%
                                 Term Loan

TOTAL                            $38,586,815.00                        100%



* In addition, Congress will hold 100% of the Revolving Loans, without any
commitment to make Revolving Loans.





                                 Section 2.1A-1

   21


                                 SCHEDULE 10.2A
                              ADDRESSES FOR NOTICES



FOR CONGRESS:

Congress Financial Corporation
  (New England)
One Post Office Square
Boston, MA 02109

Attention:        Marc Swartz
                  Senior Vice President
                  Telephone:  617-338-1998
                  Fax Number: 617-338-1497


FOR ABLECO:

Ableco Finance LLC
450 Park Avenue, 28th Floor
New York, NY 10022

Attention:  Daniel Wolf
               Vice President
               Telephone:  212-891-2121
               Fax Number: 212-891-1541


FOR COMPANY AND ALL SUBSIDIARY BORROWERS:

PictureTel Corporation
100 Minuteman Road M/S 720
Andover, MA 01810

Attention:        Arthur Fatum
                  Vice President and Chief Financial Officer
                  Telephone:  978-292-5372
                  Fax Number: 978-292-3334





                                 Schedule 10.2A


   22


                                   SCHEDULE 1A
                       NOTICE OF ASSIGNMENT AND ACCEPTANCE

                                                          _______________, 200__
Congress Financial Corporation
  (New England)
One Post Office Square, Suite 3600
Boston, MA 02109

PictureTel Corporation
100 Minuteman Road, M/S 720
Andover, MA  01810

Ladies and Gentlemen:

     We refer to the Credit Agreement dated as of June 15, 1999 (as amended,
restated, modified, supplemented or renewed from time to time the "CREDIT
AGREEMENT") among PictureTel Corporation (the "COMPANY"), the Lenders referred
to therein and Congress Financial Corporation (New England), as agent for the
Lenders (the "AGENT"). Terms defined in the Credit Agreement are used herein as
therein defined.

     1. We hereby give you notice of, and request your consent to, the
assignment by __________________ (the "ASSIGNOR") to _______________ (the
"ASSIGNEE") of _____% of the right, title and interest of the Assignor in and to
the Credit Agreement (including, without limitation, the right, title and
interest of the Assignor in and to the Commitments of the Assignor[,] [and] all
outstanding Loans made by the Assignor [and the Assignor's participation in the
Letters of Credit]) pursuant to the Assignment and Acceptance Agreement attached
hereto (the "ASSIGNMENT AND ACCEPTANCE"). Before giving effect to such
assignment the Assignor's Commitment is $ ___________[,] [and] the aggregate
amount of its outstanding Loans is $_____________[, and its participation in LC
Obligations is $_____________].

     2. The Assignee agrees that, upon receiving the consent of the Agent and,
if applicable, PictureTel Corporation to such assignment, the Assignee will be
bound by the terms of the Credit Agreement as fully and to the same extent as if
the Assignee were the Lender originally holding such interest in the Credit
Agreement.

     3. The following administrative details apply to the Assignee:

(A)                                   Notice Address:


  Assignee name:                      --------------------------------
  Address:
                                      --------------------------------

                                      --------------------------------


                                 Schedule 1A-1


   23

  Attention:
                                      --------------------------------
  Telephone:                         (   )
                                      --- ----------------------------
  Telecopier:                        (   )
                                      --- ----------------------------

  Telex (Answerback):
                                      --------------------------------

(B)                             Payment Instructions:


  Account No.:
                                      ---------------------------------
  At:
                                      ---------------------------------

                                      ---------------------------------

  Reference:                          ---------------------------------

  Attention:                          ---------------------------------

     4. You are entitled to rely upon the representations, warranties and
covenants of each of the Assignor and Assignee contained in the Assignment and
Acceptance.



                  [Remainder of Page Intentionally Left Blank]





                                 Schedule 1A-2
   24



     IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice
of Assignment and Acceptance to be executed by their respective duly authorized
officials, officers or agents as of the date first above mentioned.


                                          [NAME OF ASSIGNOR]


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          [NAME OF ASSIGNEE]


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------
                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------

                                          ACKNOWLEDGED AND ASSIGNMENT
                                          CONSENTED TO:

                                          PICTURETEL CORPORATION


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------


                                          CONGRESS FINANCIAL CORPORATION
                                          (NEW ENGLAND), as Agent


                                          By:
                                              -------------------------------
                                          Title:
                                                 ----------------------------





                                  Schedule 1A-3

EX-10.28

   1
                                                                   EXHIBIT 10.28

               EMPLOYMENT AGREEMENT BETWEEN PICTURETEL CORPORATION
                                 AND LEWIS JAFFE







June 19, 2000


Mr. Lewis Jaffe
47 Gerald Road
Marblehead, MA 01945

Dear Lew:

On behalf of PictureTel Corporation (the "Company"), I am very pleased to offer
you an opportunity to immediately join our Company as the President and Chief
Operating Officer and a Corporate Officer of the Company reporting directly to
me.

The cash compensation in the offered position will be composed of two elements:
an annual base salary and an annual bonus opportunity under PictureTel's
Management Incentive Plan. The base salary for the position will be paid at the
biweekly rate of $10,769.23 (the equivalent of $280,000.00 annually based on 26
biweekly pay periods in the year). The offered base salary will be the minimum
paid while employed with the Company. As President and an Officer of the
Company, a full performance and compensation (salary, bonus, and equity) review
is completed by the Compensation Committee of the Board during the quarter
immediately following the close of each fiscal year and recommendations acted
upon as appropriate.

The payment of a bonus under the Management Incentive Plan is predicated on the
Company's achievement of the annual revenue and profitability objectives
established at the start of the fiscal year and your performance in meeting your
Individual Goals for the year. The bonus opportunity will be 0%-60% of base
salary for full performance in meeting the objectives for the year, but may
range up to 120% of base salary for performance in excess of the plan. The
bonus, if any, is determined and paid in the first quarter following the close
of the fiscal year.

The Company will offer you a cash sign-on bonus in the aggregate amount of
$100,000.00; to be paid as follows: $50,000.00 on July 1, 2000; $50,000.00 on
January 1, 2001. If you voluntarily terminate your employment with the Company
before the payment of all the sign-on bonus installments, those installments
remaining to be paid will be forfeited.

Effective immediately, the Company will put in place a special Executive Bonus
Program. You and the executive team will be eligible for bonus payments (the
amounts to be determined) for enhancing shareholder value by increasing the
Company's stock price to or above $10.00 per share for a period of no less than
thirty (30) consecutive trading days.

In addition, we will recommend to the Compensation Committee of the Board of
Directors that you be granted an option to purchase 300,000 shares of the Common
Stock of the Company ("Option"). The Option will vest over a four (4) year
period, with the first twelve and one-half (12.50) percent of the Option vesting
six (6) months following the date the option grant is approved and six and one-
quarter (6.25) percent of the Option vesting each full three (3) month period
thereafter. The purchase price of the Option will be determined by the
Compensation Committee on the day your option grant is approved and will be the
closing price as quoted on the National Market System of NASDAQ on that date.
Vesting shall be conditional on your continued full-time employment with the
company. All other conditions applicable to the Option shall be set forth in a
Stock Option Agreement representing the Option (which shall follow the terms of
the 1999 PictureTel Equity Plan) and such Stock Option Agreement shall be
delivered immediately following the day the Option is approved. As President,
additional option grants are subject to the annual total compensation review
discussed above.



   2


In the event that your employment with the Company is involuntarily terminated
for any reason other than for Cause, you will be entitled to receive a
continuation of your then current base salary plus 50% of the then current
annual bonus target for a period of twelve (12) months ("Severance Period"). For
purposes of this letter, "Cause" shall be defined as and be limited to
conviction of a felony or willful misconduct or gross negligence in the
performance of duties which result in material harm to PictureTel. During the
Severance Period, the Company will maintain your eligibility to participate in
the Company's group medical and dental plans and will continue to contribute its
share of the costs of such plans at the same level as active employees. If you
wish to continue your medical and dental insurance coverage beyond the Severance
Period, you may do so for up to a total of eighteen (18) months (inclusive of
the Severance Period) pursuant to your rights under the Consolidated Budget
Reconciliation Act ("COBRA"). If you elect to continue coverage beyond the
Severance Period, you will be responsible for paying the full cost of the
coverage.

Further, the Company will enter into a separate Change in Control Agreement
("CIC Agreement") which will provide you with certain benefits in the event of
an involuntary termination due to a change in control. The CIC Agreement will
include certain triggering events and provide, but not be limited to, severance
equal to the sum of (a) your then current base salary, plus (b) the highest
bonus paid in the three years preceding the triggering events, paid over a
consecutive twenty-four (24) month period. The full acceleration of all unvested
stock options in the event of a change in control is to be specifically covered
in the Stock Option Agreement and will not be included in the CIC Agreement. The
CIC Agreement will be executed concurrently with your acceptance of our
employment offer and the commencement of work with the Company. In the event any
deal is concluded before the end of the calendar year 2000, the provisions of
the CIC Agreement will apply.

As an employee of the Company you will be entitled to participate in our medical
insurance benefit programs. We offer two options: (1) a competitive medical and
dental plan through Blue Cross Blue Shield of Massachusetts, or (2) membership
in the Harvard - Pilgrim Community Health Plan, a Health Maintenance
Organization. You will be responsible for a portion of the premium cost, with
payment arranged through payroll deductions. A Section 125 reimbursement plan to
help with daycare and non-reimbursed medical expenses is available at your
election, also through payroll deductions. In addition, the Company provides
long-term disability, accidental death and dismemberment, and life insurance
coverage (life benefit equal to two (2) times your annual salary). The premiums
for the disability and life insurance are paid one hundred (100) percent by the
Company. Finally, the Company offers a 401(k) Retirement Plan and a Section 423
Employee Stock Purchase Plan to all employees upon their becoming service
eligible. You will be entitled to paid holidays and vacation in accordance with
Company Policy.

This offer is contingent on your providing proof of eligibility for employment.
On your first day of employment, please bring with you either: (a) a valid U.S.
Passport, or (b) a birth certificate and a driver's license, or (c) an original
Social Security card and a driver's license.

Please indicate your acceptance of this offer and your anticipated start date by
completing and signing the enclosed copy of this letter, the PictureTel
Application for Employment, and the Proprietary Information Agreement. Please
return all signed documents to Larry Bornstein as soon as practical.

If you have any questions regarding this offer, please do not hesitate to call
Larry or me. We look forward to your joining and being an important member of
our team.

Sincerely,


Norman Gaut
Chairman, President and
Chief Executive Officer

ACCEPTED: ____________________________ Date: ____________
SS#: ________________ Anticipated Start Date: ________________

EX-10.28.1

   1
                                                                 EXHIBIT 10.28.1

                  EXECUTIVE OFFICER CHANGE IN CONTROL AGREEMENT


     THIS AGREEMENT dated June 19, 2000 is made by and between PictureTel
Corporation, a Delaware Corporation, (the "Company") and Lewis Jaffe, 47 Gerald
Road, Marblehead, MA 01945 ("Executive").

     WHEREAS the Company considers it essential to the best interests of the
Company, its shareholders, and its employees generally to foster the continuous
employment of key management personnel; and

     WHEREAS the Board of Directors of the Company (the "Board") recognizes
that, as is the case with many publicly held corporations, the possibility of a
Change in Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions that it may raise among the
Company's management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders; and

     WHEREAS the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially DISRUPTING circumstances arising from the
possibility of a Change in Control;

     NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, the Company and the
Executive hereby agree as follows:

     1.0 DEFINED TERMS. The definition of capitalized terms used in this
Agreement is provided in the last Section hereof.

     2.0 TERM OF AGREEMENT. This Agreement shall commence on the date hereof and
shall continue in effect through December 31, 2001; provided, however, that
commencing on December 1, 2000 and each December 1st thereafter, the term of
this Agreement shall automatically be extended for one additional year unless,
not later than September 30th preceding that December 1st, the Company or the
Executive shall have given notice not to extend this Agreement or a Change in
Control shall have occurred prior to such September 30th; provided, however, if
a Change in Control shall have occurred during the term of this Agreement, this
Agreement shall continue in effect for a period of not less than thirty-six (36)
months beyond the date such Change in Control occurred.

     3.0 COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4.0 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the "Severance Payments"
described in Section 6.1 hereof and the other payments and benefits described
herein in the event the Executive's employment with the Company is terminated
following a Change in Control and during the term of this Agreement. No amount
or benefit shall be payable under this Agreement unless there shall have been
(or, under the terms hereof, there shall be deemed to have been) a termination
of the Executive's employment with the Company following a Change in Control.
This Agreement shall not be construed as creating an express or implied contract
of employment prior to the date of a Change in Control and, except as otherwise
agreed in writing between the Executive and the Company, including the
Employment Agreement dated November 9, 1999, the Executive shall not have any
right to be retained in the employ of the Company.

     4.0 THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (A) a date which is six (6) months
from the date of such Potential Change of Control, (B) the date of a Change in
Control, (C) the date of termination by the Executive of the Executive's
employment for Good Reason (determined by treating the Potential Change in
Control as a Change in Control in applying the definition of Good Reason), by
reason of death or Disability, or (D) the termination by the Company of the
Executive's employment for any reason.


   2

     5.0 COMPENSATION OTHER THAN SEVERANCE PAYMENTS.

     5.1 Following a Change in Control during the term of this Agreement, during
any period that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.

     5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company prior to the Date of
Termination.

     5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control during the term of this Agreement, the Company
shall pay the Executive's normal post-termination compensation and benefits to
the Executive as such payments become due. Such post-termination compensation
and benefits shall be determined under, and paid in accordance with, the
Company's retirement, insurance and other compensation or benefit plans,
programs and arrangements; provided however, that the Severance Payments under
Section 6.0 of this Agreement shall be the only severance paid following a
Change in Control during the term of this Agreement.

     6.0 SEVERANCE PAYMENTS.

     6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the
payments described in this Section 6.1 ("Severance Payments") upon the
termination of the Executive's employment following a Change in Control during
the term of this Agreement, in addition to the payments and benefits described
in Section 5.0 hereof, unless such termination is (A) by the Company for Cause,
(B) by reason of death or Disability, or (C) by the Executive without Good
Reason. The Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason if the Executive's employment is terminated prior to a Change
in Control without Cause at the direction (or action which constitutes a
direction) of a Person who has entered into an agreement with the Company the
consummation of which will constitute a Change in Control or if the Executive
terminates his employment with Good Reason prior to a Change in Control
(determined by treating a Potential Change in Control as a Change in Control in
applying the definition of Good Reason) if the circumstance or event which
constitutes Good Reason occurs at the direction (or action which constitutes a
direction) of such Person.

     (i) Subsequent to the Date of Termination, the Company shall make cash
     severance payments to the Executive over a twenty-four (24) month period in
     substantially equal bi-weekly installments, in an amount equal to two (2)
     times the sum of (a) the higher of the Executive's annual base salary in
     effect immediately prior to the occurrence of the event or circumstance
     upon which the Notice of Termination is based or in effect immediately
     prior to the Change in Control, and (b) the higher of the highest annual
     bonus paid to the Executive in the three years preceding the year in which
     the Date of Termination occurs or paid in the three years preceding the
     year in which the Change in Control occurs.

     (ii) For a twenty-four (24) month period after the Date of Termination, the
     Company shall arrange to provide the Executive with medical and dental
     insurance benefits substantially similar to those which the Executive is
     receiving immediately prior to the Notice of Termination (without giving
     effect to any reduction in such benefits subsequent to a Change in Control
     which reduction constitutes Good Reason). Benefits otherwise receivable by
     the Executive pursuant to this Section 6.1(ii) shall be reduced to the
     extent comparable benefits are actually received by or made available to
     the Executive without cost during the twenty-four (24) month period
     following the Executive's termination of employment (and any such benefits
     actually received by the Executive shall be reported to the Company by the
     Executive). If the benefits provided to the Executive under this Section
     6.1(ii) shall result in a decrease, pursuant to Section 6.2, in the Change
     in Control Payments and these Section 6.1(ii) benefits are thereafter
     reduced pursuant to the immediately preceding sentence because of the
     receipt of comparable benefits, the Company shall, at the time of such
     reduction, pay to the Executive the lesser of (a) the amount of the
     decrease made in the Severance Payments pursuant to Section 6.2, or (b) the
     maximum amount which can be paid to the




   3

     Executive without being, or causing any other payment to be, nondeductible
     by reason of section 28OG of the Code.

     6.2 Notwithstanding any other provisions of this Agreement, in the event
that any payment or benefit received or to be received by the Executive in
connection with a Change in Control or the termination of the Executive' s
employment (whether or not received pursuant to the terms of this Agreement)
(all such payments and benefits, including but not limited to the Severance
Payments, being hereinafter called the "Total Payments") would be subject in
whole or in part to the Excise Tax, then the Severance Payments shall be reduced
to the extent, but only to the extent, necessary so that no portion of the Total
Payments is subject to the Excise Tax; provided, that no such reduction shall be
effected unless the net amount of the Total Payments after such reduction in the
Severance Payments and after deduction of the net amount of federal, state and
local income taxes on such reduced Total Payments would be greater than the
excess of (a) the net amount of the Total Payments without such reduction in the
Severance Payments but after deduction of the net amount of federal, state and
local income taxes (other than the Excise Tax) on such unreduced Total Payments,
over (b) the Excise Tax to which the Total Payments are subject. The
determination as to whether a reduction in Severance Payments is to be made
under this Section 6.2 and, if so, the amount of any such reduction shall be
made by the Company's auditors or by such other firm of certified public
accountants, benefits consulting firm or legal counsel as the Board may
designate prior to the Change in Control.

     The Company shall provide the executive with its calculations of the
amounts referred to in this Section 6.2 and such supporting materials as are
reasonably necessary for the Executive to evaluate the Company's calculations.

     6.3 The Company also shall pay to the Executive all legal fees and expenses
incurred by the Executive as a result of a termination which entitles the
Executive to the Severance Payments (including all such fees and expenses, if
any, incurred in disputing any such termination or in seeking in good faith to
obtain or enforce any benefit or right provided by this Agreement or in
connection with any tax audit or proceeding to the extent attributable to the
application of section 4999 of the Code to any payment or benefit provided
hereunder). Such payments shall be made within five (5) business days after
delivery of the Executive's written requests for payment accompanied with such
evidence of fees and expenses incurred as the Company reasonably may require.

     7.0 TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.

     7.1 NOTICE OF TERMINATION. After a Change in Control and during the term of
this Agreement, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 10.0
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

     7.2 DATE OF TERMINATION. "Date of Termination", with respect to any
purported termination of the Executive's employment after a Change in Control
during the term of this Agreement, shall mean:

     (A) If the Executive's employment is terminated for Disability, thirty (30)
     days after Notice of Termination is given (provided that the Executive
     shall not have returned to the full-time performance of the Executive's
     duties during such thirty (30) day period), and

     (B) If the Executive's employment is terminated for any other reason, the
     date specified in the Notice of Termination (which, in the case of a
     termination by the Company, shall not be less than thirty (30) days (except
     in the case of a termination for Cause) and, in the case of a termination
     by the Executive, shall not be less than fifteen (15) days nor more than
     sixty (60) days, respectively, from the date such Notice of Termination is
     given).


   4

     7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after any
Notice of Termination is given, or, if later, prior to the Date of Termination
(as determined without regard to this Section 7.3), the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the dispute
is finally resolved, either by mutual written agreement of the parties, by
arbitrator's award, or, to the extent permitted by Section 14.0, by a final
judgment, order or decree of a court of competent jurisdiction on the
arbitrator's award (which is not appealable or with respect to which the time
for appeal therefrom has expired and no appeal has been perfected); provided
further that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence.

     7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the term of this Agreement and such
termination is disputed in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.

     8.0 NO MITIGATION. The Company agrees that, if the Executive's employment
by the Company is terminated during the term of this Agreement, the Executive is
not required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Section 6.0 or
Section 7.4. Further, the amount of any payment or benefit provided for in
Section 6.0 (other than Section 6.1(ii)) or Section 7.4 shall not be reduced by
any compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.

     9.0 SUCCESSORS; BINDING AGREEMENT.

     9.1 In addition to any obligations imposed by law upon any successor to the
Company, the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and / or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive were to
terminate the Executive's employment for Good Reason after a Change in Control,
except that, for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination. In
any event this agreement shall be binding upon the Company and any successors or
assignee.

     9.2 This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.

     10.0 NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered in hand or when delivered or
mailed by United States certified mail, return receipt requested, postage
prepaid, addressed to the respective addresses set forth below, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:



   5


                             To the Company:

                             PictureTel Corporation
                             100 Minuteman Road
                             Andover, Massachusetts 01810
                             Attention: General Counsel

                             To the Executive:

                             Lewis Jaffe
                             47 Gerald Road
                             Marblehead, MA 01945

     11.0 MISCELLANEOUS. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The laws of
the Commonwealth of Massachusetts shall govern the validity, interpretation,
construction and performance of this Agreement and the Agreement shall be an
instrument under seal. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law and any additional
withholding to which the Executive has agreed. The obligations of the Company
and the Executive under Sections 6.0, 7.0, 8.0 and 14.0 shall survive the
expiration of the term of this Agreement.

     12.0 VALIDITY. The invalidity or unenforceability or any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect. In addition, if
any provision of this Agreement is held invalid or unenforceable by a court of
competent jurisdiction, then such provision shall be deemed modified to the
extent necessary to enable such provision to be valid and enforceable.

     13.0 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

     14.0 SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the Executive for
benefits under this Agreement shall be directed to the Board and shall be in
writing. Any denial by the Board of a claim for benefits under this Agreement
shall be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Board then shall afford a reasonable opportunity to the Executive for
a review of the decision denying a claim and shall further allow the Executive
to appeal to the Board a decision of the Board within sixty (60) days after
notification by the Board that the Executive's claim has been denied. Any
further dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Boston, Massachusetts
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to seek
specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement in such arbitration or by a proceeding in the
federal court in Boston or the Massachusetts state court in Essex County.

     15.0 DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings indicated below:

     (A) "Base Amount" shall have the meaning defined in section 28OG(b)(3) of
     the Code.

     (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under
     the Exchange Act.

     (C) "Board" shall mean the Board of Directors of the Company.

   6

     (D) "Cause" for termination by the Company of the Executive's employment,
     after any Change in Control, shall mean:

          (i) the willful and continued failure by the Executive to
          substantially perform the Executive's duties with the Company (other
          than any such failure resulting from the Executive's incapacity due to
          physical or mental illness or any such actual or anticipated failure
          after the issuance of a Notice of Termination for Good Reason by the
          Executive pursuant to Section 7.1) after a written demand for
          substantial performance is delivered to the Executive by the Board,
          which demand specifically identifies the manner in which the Board
          believes that the Executive has not substantially performed the
          Executive's duties, or

          (ii)the willful engaging by the Executive in conduct which is
          demonstrably and materially injurious to the Company or its
          subsidiaries, monetarily or otherwise.

     For purposes of clauses (i) and (ii) of this definition, no act, or failure
     to act, on the Executive's part shall be deemed "Willful" unless done, or
     omitted to be done, by the Executive not in good faith and without
     reasonable belief that the Executive's act, or failure to act, was in the
     best interest of the Company.

     (E) A "Change in Control", shall be deemed to have occurred if the
     conditions set forth in any one of the following paragraphs shall have been
     satisfied:

          (i) any Person is or becomes the Beneficial Owner, directly or
          indirectly, of securities of the Company representing twenty-five (25)
          percent or more of the combined voting power of the Company's then
          outstanding securities; or

          (ii)during any period of not more than two consecutive years (not
          including any period prior to the execution of this Agreement),
          individuals who at the beginning of such period constitute the Board
          and any new director (other than a director designated by a Person who
          has entered into an agreement with the Company to effect a transaction
          described in clause (i), (ii) or (iii) of this Section 15(E)) whose
          election by the Board or nomination for election by the Company's
          stockholders was approved by a vote of at least two-thirds (2/3) of
          the directors then still in office who either were directors at the
          beginning of the period or whose election or nomination for election
          was previously so approved, cease for any reason to constitute a
          majority thereof; or

          (iii) the shareholders of the Company approve a merger or
          consolidation of the Company with any other corporation, other than
          (a) a merger or consolidation which would result in the voting
          securities of the Company outstanding immediately prior thereto
          continuing to represent (either by remaining outstanding or by being
          converted into voting securities of the surviving entity) sixty (60)
          percent or more of the combined voting power of the voting securities
          of the Company or such surviving entity outstanding immediately after
          such merger or consolidation, or (b) a merger or consolidation
          effected to implement a recapitalization of the Company (or similar
          transaction) in which no Person acquires twenty-five (25) percent or
          more of the combined voting power of the Company's then outstanding
          securities; or

          (iv)the shareholders of the Company approve a plan of complete
          liquidation of the Company or an agreement for the sale or disposition
          by the Company of all or substantially all the Company's assets.

     (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from
     time to time.

     (G) "Company" shall mean PictureTel Corporation and any successor to its
     business and/or assets which assumes and agrees to perform this Agreement
     by operation of law, or otherwise (except in determining, under Section
     15(E) hereof, whether or not any Change in Control of the Company has
     occurred in connection with such succession).

     (H) "Date of Termination" shall have the meaning stated in Section 7.2
     hereof.


   7

     (I) "Disability" shall be deemed the reason for the termination by the
     Company of the Executive's employment, if, as a result of the Executive's
     incapacity due to physical or mental illness, the Executive shall have been
     absent from the full-time performance of the Executive's duties with the
     Company for a period of six (6) consecutive months, the Company shall have
     given the Executive a Notice of Termination for Disability, and, within
     thirty (30) days after such Notice of Termination is given, the Executive
     shall not have returned to the full-time performance of the Executive's
     duties.

     (J) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
     amended from time to time.

     (K) "Excise Tax" shall mean any excise tax imposed under section 4999 of
     the Code.

     (L) "Executive" shall mean the individual named in the first paragraph of
     this Agreement.

     (M) "Good Reason" for termination by the Executive of the Executive's
     employment shall mean the occurrence (without the Executive's express
     written consent) of any one of the following acts by the Company, or
     failures by the Company to act, unless, in the case of any act or failure
     to act described in paragraph (i), (v), (vi), or (vii), below, such act or
     failure to act is corrected prior to the Date of Termination specified in
     the Notice of Termination given in respect thereof:

          (i) the assignment to the Executive of any duties inconsistent with
          the Executive's status as a senior executive officer of the Company or
          a substantial adverse alteration in the nature or status of the
          Executive's responsibilities from those in effect immediately prior to
          the Change in Control;

          (ii) a reduction by the Company in the Executive's annual base salary
          as in effect on the date hereof or as the same may be increased from
          time to time;

          (iii) the relocation of the Company's principal executive offices to a
          location more than thirty (30) miles] from the location of such
          offices immediately prior to the Change in Control or the Company's
          requiring the Executive to be based anywhere other than the Company's
          principal executive offices, except for required travel on the
          Company's business to an extent substantially consistent with the
          Executive's present business travel obligations;

          (iv)the failure by the Company, without the Executive's consent, to
          pay to the Executive any portion of the Executive's current
          compensation, or to pay to the Executive any portion of an installment
          of deferred compensation under any deferred compensation program of
          the Company, within seven (7) days of the date such compensation is
          due;

          (v) the failure by the Company to continue in effect any compensation
          plan in which the Executive participates immediately prior to the
          Change in Control which is material to the Executive's total
          compensation, including but not limited to the Company's Equity
          Incentive Plan and Employee Stock Purchase Plan or any substitute
          plans adopted prior to the Change in Control, unless an equitable
          arrangement (embodied in an ongoing substitute or alternative plan)
          has been made with respect to such plan, or the failure by the Company
          to continue the Executive's participation therein (or in such
          substitute or alternative plan) on a basis not materially less
          favorable, both in terms of the amount of benefits provided and the
          level of the Executive's participation relative to other participants,
          as existed at the time of the Change in Control;

          (vi)the failure by the Company to continue to provide the Executive
          with benefits substantially similar to those enjoyed by the Executive
          under any of the Company's pension, life insurance, medical, health
          and accident, or disability plans in which the Executive was
          participating at the time of the Change in Control, the taking of any
          action by the Company which would directly or indirectly materially
          reduce any of such benefits or deprive the Executive of any material
          fringe benefit enjoyed by the Executive at the time of the Change in
          Control, or the failure by the Company to provide the Executive with
          the number of paid vacation days to which the Executive is entitled on
          the basis of years of service with the Company in accordance with the
          Company's normal vacation policy in effect at the time of the Change
          in Control; or

   8

          (vii) any purported termination of the Executive's employment that is
          not effected pursuant to a Notice of Termination satisfying the
          requirements of Section 7.1; for purposes of this Agreement, no such
          purported termination shall be effective.

          The Executive's right to terminate the Executive's employment for Good
          Reason shall not be affected by the Executive's incapacity due to
          physical or mental illness. The Executive's continued employment shall
          not constitute consent to, or a waiver of rights with respect to, any
          act or failure to act constituting Good Reason hereunder.

     (N) "Notice of Termination" shall have the meaning stated in Section 7.1
     hereof.

     (O) "Person" shall have the meaning given in Section 3(a)(9) of the
     Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof;
     however, a Person shall not include:

          (i) the Company,

          (ii)a trustee or other fiduciary holding securities under an employee
          benefit plan of the Company, or

          (iii) a Corporation owned, directly or indirectly, by the stockholders
          of the Company in substantially the same proportions as their
          ownership of stock of the Company.

     (P) "Potential Change in Control', shall be deemed to have occurred if the
     conditions set forth in any one of the following paragraphs shall have been
     satisfied:

          (i) the Company enters into an agreement, the consummation of which
          would result in the occurrence of a Change in Control;

          (ii)the Company or any Person publicly announces an intention to take
          or to consider taking actions which, if consummated, would constitute
          a Change in Control;

          (iii) the Board adopts a resolution to the effect that, for purposes
          of this Agreement, a Potential Change in Control has occurred.

     (Q) "Severance Payments" shall mean those payments described in Section 6.1
     hereof.

     (R) "Total Payments" shall mean those payments described in Section 6.2
     hereof.


                                        PictureTel Corporation


                                        By
                                           ------------------------------------
                                        Name: Norman E. Gaut
                                        Title: Chairman of the Board of
                                               Directors, President and
                                               Chief Executive Officer


                                           ------------------------------------
                                           Lewis Jaffe

EX-27

 

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURE
TEL'S BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED JULY 1, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING.

<MULTIPLIER> 1,000
<CURRENCY> US$

                             
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               JUL-01-2000
<EXCHANGE-RATE>                                      1
<CASH>                                          52,099
<SECURITIES>                                         0
<RECEIVABLES>                                   53,016
<ALLOWANCES>                                   (2,872)
<INVENTORY>                                     32,837
<CURRENT-ASSETS>                               116,657
<PP&E>                                         216,814
<DEPRECIATION>                               (135,747)
<TOTAL-ASSETS>                                 236,295
<CURRENT-LIABILITIES>                          102,004
<BONDS>                                              0
<PREFERRED-MANDATORY>                           30,500
<PREFERRED>                                          0
<COMMON>                                           411
<OTHER-SE>                                      49,740
<TOTAL-LIABILITY-AND-EQUITY>                   236,295
<SALES>                                        126,490
<TOTAL-REVENUES>                               126,490
<CGS>                                          102,195
<TOTAL-COSTS>                                  102,195
<OTHER-EXPENSES>                                84,434
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               2,498
<INCOME-PRETAX>                               (60,185)
<INCOME-TAX>                                     1,630
<INCOME-CONTINUING>                           (61,815)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (61,815)
<EPS-BASIC>                                     (1.52)
<EPS-DILUTED>                                   (1.52)