PICTURETEL CORP, 10-Q, 1998-08-12

PICTURETEL CORP
10-Q, 1998-08-12
TELEPHONE & TELEGRAPH APPARATUS

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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 JUNE 28, 1998

[ ] 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 JUNE 28, 1998

COMMISSION FILE NUMBER 1-9434

PICTURETEL CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 04-2835972
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

100 MINUTEMAN ROAD, ANDOVER, MA. 01810
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

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.

Yes [X] 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 3, 1998, there were issued and outstanding 38,349,793 shares of
common stock of the registrant.
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<PAGE> 2

PICTURETEL CORPORATION

FORM 10-Q

INDEX

<TABLE>
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets
June 28, 1998 and December 31, 1997............... 3

Consolidated Statements of Operations
Three and six months ended June 28, 1998 and
June 29, 1997..................................... 4

Consolidated Statements of Cash Flows
Six months ended June 28, 1998 and
June 29, 1997..................................... 5

Notes to Consolidated Financial Statements............. 6-10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11-18

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................... 19

Item 4. Submission of Matters to a Vote of Security
Holders............................................. 20

Item 5. Other Information................................... 20

Item 6. Exhibits and Reports on Form 8-K.................... 21

Signatures.................................................. 22
</TABLE>

2
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PICTURETEL CORPORATION

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 28, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 33,638 $ 49,859
Marketable securities.................................. 52,545 32,152
Accounts receivable less allowance for doubtful
accounts of $5,956 in 1998 and $6,315 in 1997......... 95,954 108,729
Inventories, net (Note 3).............................. 36,651 44,901
Deferred taxes, net.................................... 15,615 15,615
Other current assets................................... 9,732 6,803
-------- --------
Total current assets.............................. 244,135 258,059
Deferred taxes, net......................................... 20,273 16,106
Property and equipment, net................................. 58,724 69,103
Capitalized software costs, net............................. 4,176 2,368
Other assets................................................ 9,500 9,415
-------- --------
Total assets...................................... $336,808 $355,051
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 7)......................... $ -- $ 186
Accounts payable....................................... 26,096 30,169
Accrued compensation and benefits...................... 12,486 10,551
Accrued expenses....................................... 30,767 37,207
Current portion of capital lease obligations........... 3,304 3,426
Deferred revenue....................................... 21,965 23,547
-------- --------
Total current liabilities......................... 94,618 105,086
Capital lease obligations................................... 20,731 22,000
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity:
Preference stock, $.01 par value; 15,000,000 shares
authorized; none issued............................... -- --
Common stock, $.01 par value; 80,000,000 shares
authorized; 38,338,225 and 38,040,363 shares issued
and outstanding in 1998 and 1997, respectively........ 383 380
Additional paid-in capital............................. 206,182 204,242
Retained earnings...................................... 16,571 25,425
Cumulative translation adjustment...................... (1,676) (2,077)
Unrealized loss on marketable securities, net.......... (1) (5)
-------- --------
Total stockholders' equity........................ 221,459 227,965
-------- --------
Total liabilities and stockholders' equity........ $336,808 $355,051
======== ========
</TABLE>

3
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PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- ---------- -------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
Product revenues.............................. $89,365 $105,986 $176,305 $216,384
Service revenues.............................. 15,217 11,980 29,323 23,517
------- -------- -------- --------
Total revenues........................... 104,582 117,966 205,628 239,901
Cost of revenues:
Product cost of revenues...................... 52,761 56,869 96,110 110,941
Service cost of revenues...................... 11,548 9,402 23,358 18,528
------- -------- -------- --------
Total cost of revenues................... 64,309 66,271 119,468 129,469
------- -------- -------- --------
Gross margin....................................... 40,273 51,695 86,160 110,432

Operating expenses:
Selling, general and administrative........... 36,185 38,650 68,994 74,915
Research and development...................... 14,617 20,424 31,517 41,358
------- -------- -------- --------
Total operating expenses................. 50,802 59,074 100,511 116,273
------- -------- -------- --------
Loss from operations............................... (10,529) (7,379) (14,351) (5,841)
Interest income, net............................... 553 686 1,001 1,577
Other income (expense), net........................ 5 (210) 329 194
------- -------- -------- --------
Loss before income tax benefit..................... (9,971) (6,903) (13,021) (4,070)
Income tax benefit................................. (3,283) (2,003) (4,167) (1,181)
------- -------- -------- --------
Net loss................................. $(6,688) $ (4,900) $ (8,854) $ (2,889)
======= ======== ======== ========
Net loss per common share -- basic................. $ (0.17) $ (0.13) $ (0.23) $ (0.08)
======= ======== ======== ========
Net loss per common share -- diluted............... $ (0.17) $ (0.13) $ (0.23) $ (0.08)
======= ======== ======== ========
Weighted average shares outstanding -- basic....... 38,308 37,636 38,200 37,589
======= ======== ======== ========
Weighted average shares outstanding -- diluted..... 38,308 37,636 38,200 37,589
======= ======== ======== ========
</TABLE>

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

4
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PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
1998 1997
-------- ----------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(8,854) $(2,889)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 13,527 15,526
Provisions to write down inventory and capitalized
software to net realizable value...................... 2,843 --
Write down of long-lived assets........................ 4,210 --
Bad debt provision..................................... 700 --
Deferred taxes, net.................................... (4,167) (689)
Other non-cash items................................... 885 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 11,494 21,411
Inventories............................................ 4,943 (19,976)
Other current assets................................... (3,178) (11,355)
Accounts payable....................................... (3,739) (16,890)
Accrued expenses....................................... (2,196) 1,948
Deferred revenue....................................... (1,495) (3)
------- -------
Net cash provided by (used in) operating activities......... 14,973 (12,917)
Cash flows from investing activities:
Purchase of marketable securities......................... (76,519) (16,011)
Proceeds from marketable securities....................... 56,126 32,871
Additions to property and equipment....................... (7,783) (14,784)
Capitalized software costs................................ (3,397) (3,743)
Purchase of other assets.................................. (268) (758)
------- -------
Net cash used in investing activities....................... (31,841) (2,425)
Cash flows from financing activities:
Proceeds from (payment to) foreign lines of credit........ (186) 1,427
Payments on long-term borrowings.......................... -- (7,788)
Principal payments under capital lease obligations........ (1,372) (1,781)
Proceeds from exercise of stock options................... 1,044 1,206
Proceeds from stock purchase plan......................... 879 1,099
------- -------
Net cash provided by (used in) financing activities......... 365 (5,837)
Adjustment to conform fiscal year of MultiLink.............. -- 394
Effect of exchange rate changes on cash..................... 282 432
------- -------
Net decrease in cash and cash equivalents................... (16,221) (20,353)
Cash and cash equivalents at beginning of period............ 49,859 63,333
------- -------
Cash and cash equivalents at end of period.................. $33,638 $42,980
======= =======
</TABLE>

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

5
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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. MANAGEMENT'S REPRESENTATION

As permitted by the rules of the Securities and Exchange Commission
applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do
not contain all the disclosures required by generally accepted accounting
principles. Reference should be made to the consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission on March 31, 1998.

In the opinion of the management of PictureTel Corporation, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting of normal, recurring adjustments, except as discussed in Note 2 to
Notes to Consolidated Financial Statements) necessary to present fairly the
Company's financial position at June 28, 1998, the results of operations for the
three and six months ended June 28, 1998 and changes in cash flows for the six
months ended June 28, 1998.

The results disclosed in the Consolidated Balance Sheets at June 28, 1998
and the Consolidated Statements of Operations and Consolidated Statements of
Cash Flows for the three and six months ended June 28, 1998 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 that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and also affect the reported amounts of revenues and expenses during
the reporting period. The financial statements include significant estimates of
the net realizable value of accounts receivable, inventory and capitalized
software as well as the future tax benefit of deferred tax assets and the amount
of certain contingent liabilities. Actual results could differ from those
estimates.

The financial statements and footnotes included in this Form 10-Q reflect
the restatement of financial results described in Note 2 to Notes to
Consolidated Financial Statements.

2. RESTATEMENT OF FINANCIAL STATEMENTS

On September 19, 1997, after the Company's reexamination (with assistance
from its outside auditors) of leasing and other indirect channel transactions,
the Company announced that it would reverse revenue related to certain of these
transactions and, as a result, the Company intended to restate its financial
statements for the third and fourth quarters of 1996 and the first quarter of
1997. On November 13, 1997, after completion of its reexamination, the Company
announced that it would also restate the second quarter of 1997. The
restatements were required to reverse product sales recorded which contained
rights of return, contingent liabilities, payment contingencies, payment
uncertainties or product sales for which delivery did not occur at the end of
the period. The restatements were also required to record such product sales in
the period in which the rights of return lapsed, contingencies or uncertainties
were resolved, or delivery was completed. Certain transactions which were
reversed have not been re-recorded as revenues in later periods. The financial
statements and related Notes to Consolidated Financial Statements set forth in
this Form 10-Q reflect the restatements that were made on Form 10-Q/A for the
three and six month periods ended June 29, 1997 as filed with the Securities and
Exchange Commission on January 20, 1998. A summary of the impact of the
restatements for the three and six months ended June 29, 1997 is as follows (in
thousands except per share amounts):

6
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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 29, 1997
---------------------
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
<S> <C> <C>
Revenues.................................................... $119,304 $117,966
Gross margin................................................ 52,580 51,695
Loss before income taxes.................................... (5,617) (6,903)
Income tax benefit.......................................... (1,946) (2,003)
Net loss.................................................... $ (3,671) $ (4,900)
Net loss per common share -- basic.......................... $ (0.10) $ (0.13)
Net loss per common share -- diluted........................ $ (0.10) $ (0.13)
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 29, 1997
---------------------
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
<S> <C> <C>
Revenues.................................................... $242,922 $239,901
Gross margin................................................ 111,847 110,432
Loss before income taxes.................................... (1,854) (4,070)
Income tax benefit.......................................... (676) (1,181)
Net loss.................................................... $ (1,178) $ (2,889)
Net loss per common share -- basic.......................... $ (0.03) $ (0.08)
Net loss per common share -- diluted........................ $ (0.03) $ (0.08)
</TABLE>

<TABLE>
<CAPTION>
AS OF
JUNE 29, 1997
---------------------
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
<S> <C> <C>
Total assets................................................ $367,584 $363,035
Total liabilities........................................... $ 96,996 $ 98,321
Total stockholders' equity.................................. $270,588 $264,714
</TABLE>

3. INVENTORIES

Inventories (net) consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER
JUNE 28, 31,
1998 1997
---------- --------
<S> <C> <C>
Purchased parts............................................. $ 3,732 $ 2,983
Work in process............................................. 1,909 2,128
Finished goods.............................................. 31,010 39,790
-------- --------
$ 36,651 $ 44,901
======== ========
</TABLE>

7
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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. EARNINGS PER SHARE

The following table reconciles the numerator and the denominators of the
basic and diluted EPS computations shown on the Consolidated Statements of
Operations (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- ---------- -------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
Numerator:
Net loss..................................... $(6,688) $(4,900) $(8,854) $(2,889)
======= ======= ======= =======
Denominator:
Weighted average common shares outstanding... 38,308 37,636 38,200 37,589
======= ======= ======= =======
Basic EPS.................................... $ (0.17) $ (0.13) $ (0.23) $ (0.08)
======= ======= ======= =======

DILUTED EPS COMPUTATION:
Numerator:
Net loss..................................... $(6,688) $(4,900) $(8,854) $(2,889)
======= ======= ======= =======
Denominator:
Weighted average common shares outstanding... 38,308 37,636 38,200 37,589
Stock options................................ -- -- -- --
======= ======= ======= =======
Total shares................................. 38,308 37,636 38,200 37,589
======= ======= ======= =======
Diluted EPS.................................. $ (0.17) $ (0.13) $ (0.23) $ (0.08)
======= ======= ======= =======
</TABLE>

5. COMPREHENSIVE INCOME (LOSS)

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted the interim reporting requirements
in the first quarter of fiscal year 1998 and will adopt the annual reporting
requirements in the fourth quarter of fiscal year 1998. Total comprehensive loss
for the three month period ended June 28, 1998 was $4,740,000, and total
comprehensive loss for the comparable period in 1997 was $3,393,000. Total
comprehensive loss for the six month period ended June 28, 1998 was $8,449,000,
and total comprehensive loss for the comparable period in 1997 was $2,832,000.
The components of other comprehensive income are foreign currency translation
adjustments and unrealized gains and losses on marketable securities.

6. LITIGATION

A. Datapoint Litigation

In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleged that certain of PictureTel's products infringed patent rights allegedly
owned by Datapoint. Datapoint has been joined as plaintiff by John Frassanito
and David Monroe, two individuals who claim to have rights to Datapoint's
patents. The matter went to trial on March 16, 1998. On April 9, 1998 a jury
returned a verdict in favor of PictureTel finding that PictureTel did not
infringe the Datapoint patents and that the Datapoint patent claims raised
against PictureTel were invalid. Datapoint has, as a matter of course, appealed
these findings. The Company believes that it has meritorious defenses to the
appeal.

8
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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

B. Shareholder Litigation

Since September 23, 1997, seven class action shareholders' complaints have
been filed against the Company, Norman E. Gaut, Director and former Chairman and
Chief Executive Officer, and Les Strauss, the former Vice President and Chief
Financial Officer, in the United States District Court for the District of
Massachusetts. The plaintiffs, who brought these actions on behalf of themselves
and others similarly situated, are: (1) Faith Egli, Civil Action No.
97-12135-DPW; (2) Jerome H. Lipman, IRA, Civil Action No. 97-12238-DPW; (3)
Daniel Frucher, Civil Action No. 97-12310-DPW; (4) Edmond J. Proulx and James
Harris, Civil Action No. 97-12345-DPW; (5) Marvin Barab and Thomas J. Curley,
Civil Action No. 97-12338-DPW; (6) Mark Szen and Nancy Szen, Civil Action No.
97-12439-DPW; and (7) Michael D. Kugler, Civil Action No. 97-12537 PBS. These
plaintiffs filed a consolidated complaint on February 11, 1998, encaptioned In
re PictureTel Corporation Securities Litigation, Civil Action No. 97-12135-DPW.

The original Complaints were filed following the Company's announcement on
September 19, 1997 that it would restate its financial results for the first
quarter of fiscal 1997 and the last two quarters of fiscal 1996 and were amended
when the Company announced that it would also restate the second fiscal quarter
of 1997 on November 13, 1997. The consolidated Complaint alleges that the
defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act
of 1934 and Rule 10b-5, promulgated thereunder, during the period from October
17, 1996 through November 13, 1997, through the alleged preparation and
dissemination of materially false and misleading financial statements which
artificially inflated the prices of PictureTel common stock. The consolidated
Complaint seeks to recover an unspecified amount of damages, including
attorneys' and experts' fees and expenses.

On April 7, 1998, the Company filed a motion to dismiss the complaint. The
Plaintiffs filed an amended complaint in response to the Company's motion to
dismiss. No discovery has occurred and the Company expresses no opinion as to
the likely outcome.

C. NV Holdings, Inc.

On February 13, 1998, NV Holdings, Inc., filed a complaint in the State
District Court for Dallas County, Texas, NV Holdings, Inc. v. PictureTel
Corporation, Cause No. DF 98-01404, alleging against PictureTel tortious
interference with both business advantage and existing contracts as well as
business disparagement and slander. While the plaintiff has listed no specific
damages they are seeking an injunction and $20,000,000 in punitive damages. The
Company believes that it has meritorious defenses to the allegations of the
complaint filed against it and is vigorously defending against the lawsuit and
pursuing recovery under the following actions filed by it. The Company has filed
three separate actions against parties that are believed, by the Company, to be
related to NV Holdings, Inc.: (1) (PictureTel Corporation v. NV Technologies,
Inc. d/b/a NuVision Technologies, Inc., et al, Civil Action No. 98-337A, filed
February 17, 1998 in the Superior Court for Essex County, Massachusetts, for
False Advertising and Unfair Business Practices). On February 23, 1998, the
court issued a preliminary injunction against NuVision Technologies, Inc. and
all persons acting in concert, participation or combination with them,
prohibiting them from continuing to publish a certain advertisement that the
Company alleges is false and misleading. On July 14, 1998, the Company sought
leave of court to amend this complaint to include NV Holdings, Inc., and its
subsidiary NuVision Technologies, Inc., of Nevada; (2) (PictureTel Corporation
v. NV Technologies d/b/a NuVision Technologies. Inc. Civil action No.98-166-C,
filed January 23, 1998, in the Superior Court for Essex County, Massachusetts,
for Breach of Contract), seeking the repayment of approximately $4,000,000 from
NuVision Technologies, Inc.; and (3) (PictureTel Corporation v. Tandberg, ASA,
NV Holdings, Inc., et al, Civil Action No. 3-98CV1449-R, filed June 7, 1998, in
the United States District Court for the Northern District of Texas, for fraud,
fraudulent conveyance and breach of contract) seeking repayment of $4,000,000
and unspecified punitive damages.

9
<PAGE> 10
PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Discovery has begun with regard to these actions; however, the Company
expresses no opinion as to the likely outcome of any of these matters.

D. Revnet, Inc.

On June 2, 1998, the Company was served with a complaint from a former
distribution channel customer, Revnet, Inc., which has ceased operations.
(Revnet, Inc., v. PictureTel Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The complaint alleges
that the Company breached an oral contract. Revnet is seeking $200,000,000 in
damages. The Company believes that the Plaintiff's claim is without merit and
will vigorously defend against the lawsuit.

7. DEBT

The Company has available up to $40,000,000 under its revolving credit
agreement and approximately $4,400,000 available under local foreign guaranteed
lines of credit to certain of its foreign subsidiaries. At June 28, 1998, there
were no borrowed amounts outstanding under the revolving credit agreement and
$29,100,000 in standby letters of credit outstanding under the revolving credit
agreement. There were no borrowed amounts outstanding under the foreign lines of
credit. At June 28, 1998, the Company had $24,035,000 outstanding under various
leasing lines including the obligation for the lease of the facility at 50
Minuteman Road in Andover which was $20,534,000 at June 28, 1998. This facility
was subleased in June, 1998 for a ten-year term.

The revolving credit agreement is secured by cash and marketable securities
and contains certain financial covenants, including the maintenance of certain
ratios including total liabilities to tangible net worth and minimum net income
(loss) requirements. The Company was in compliance with, or compliance was
waived for, all covenants for the quarter ending June 28, 1998.

8. COMMITMENTS

In March 1997, the Company entered into an agreement to lease an additional
facility currently under construction at 200 Minuteman Road in Andover. Rental
payments are expected to begin early in the fourth quarter. The lease will be
accounted for as a capital lease when construction is completed. The Company is
considering alternatives other than occupancy, since current staffing levels do
not support the requirement for this facility.

9. SUBSEQUENT EVENT

On July 22, 1998, the Company announced it had signed a letter of intent to
purchase Starlight Networks, Inc., a leading provider of streaming media
solutions for enterprise communications. The Company intends to purchase
Starlight Networks primarily with common stock and cash. The acquisition is
expected to be completed in the fourth quarter, subject to completion of the
Company's registration statement on Form S-4 to be filed with the Securities and
Exchange Commission. When completed, the transaction is expected to be accounted
for under the purchase method of accounting.

10
<PAGE> 11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of revenues for certain items in the Company's Statement of Operations for each
period:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- ---------- -------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues...................................... 100% 100% 100% 100%
Cost of revenues.............................. 61.5 56.2 58.1 54.0
Gross margin.................................. 38.5 43.8 41.9 46.0
Selling, general and administrative........... 34.6 32.8 33.6 31.2
Research and development...................... 14.0 17.3 15.3 17.2
Total operating expenses...................... 48.6 50.1 48.9 48.4
Loss from operations.......................... (10.1) (6.3) (7.0) (2.4)
Interest income, net.......................... 0.6 0.6 0.5 0.7
Other income (expense), net................... 0.0 (0.2) 0.2 0.0
Loss before taxes............................. (9.5) (5.9) (6.3) (1.7)
Income tax benefit............................ (3.1) (1.7) (2.0) (0.5)
Net loss...................................... (6.4) (4.2) (4.3) (1.2)
</TABLE>

FORWARD-LOOKING STATEMENTS

This document includes forward-looking statements about the Company's
business, revenues 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 below ("Risk Factors Which May Affect
Future Results") and in related portions of this document, as well as in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 31, 1998.

BUSINESS DEVELOPMENTS

On September 19, 1997, after the Company's reexamination (with assistance
from its outside auditors) of leasing and other indirect channel transactions,
the Company announced that it would reverse revenue related to certain of these
transactions and, as a result, the Company intended to restate its financial
statements for the third and fourth quarters of 1996 and the first quarter of
1997. On November 13, 1997, after completion of its reexamination, the Company
announced that it would also restate the second quarter of 1997. The
restatements were required to reverse product sales recorded which contained
rights of return, contingent liabilities, payment contingencies, payment
uncertainties, or product sales for which delivery did not occur at the end of
the period. The restatements were also required to record such product sales in
the period in which the rights of return lapsed, contingencies or uncertainties
were resolved, or delivery was completed, if at all. Certain transactions, which
were reversed, have not been re-recorded as revenues in later periods. The
financial statements and related notes to consolidated financial statements set
forth in this Form 10-Q reflect the restatements that were made on Form 10-Q/A
for the three and six month periods ended June 29, 1997 as filed with the
Securities and Exchange Commission on January 20, 1998.

11
<PAGE> 12

RESULTS OF OPERATIONS

Three Months Ended June 28, 1998 Compared to Three Months Ended June 29, 1997

REVENUES. The Company's revenues decreased $13,384,000, or 11%, in the
three month period ended June 28, 1998 compared to the comparable period in
1997. The decrease was primarily a result of lower unit volumes and a reduction
in the total average selling price of desktop and bridge videoconferencing
systems compared with the comparable period in 1997. Sales of group and desktop
videoconferencing products accounted for 67% and 7%, respectively, of revenues
for the three month period ended June 28, 1998, compared with 68% and 9%,
respectively, for the comparable period in 1997. The average selling price for
group products increased over the comparable period in 1997 due to a favorable
change in the product mix. However, overall group product revenue decreased
because of lower unit sales. Desktop product revenue declined during the three
month period ended June 28, 1998 from the comparable period in 1997 due to a
reduction in average selling price and decreased unit sales. Sales of bridge
products accounted for approximately 11% and 13% of the Company's revenues for
the three month period ended June 28, 1998 and the comparable period in 1997,
respectively. Revenues from sales of bridge products decreased as a result of a
reduction in average selling prices and lower unit volumes. Revenues from
service and maintenance agreements increased 27% for the period ended June 28,
1998 compared with the comparable period in 1997 due to increased focus on the
professional services business which began in the second half of the last fiscal
year. Service revenues totaled 15% and 10% of total revenues for the period
ended June 28, 1998 and the comparable period in 1997, respectively.

The Company's revenues from sales to foreign markets totaled approximately
$43,924,000 for the three month period ended June 28, 1998 compared to
approximately $51,669,000 for the comparable period in 1997 representing 42% and
45% of total revenues, respectively. Asian markets were primarily responsible
for the decline. Fluctuations in the Asian currencies and general weakness in
the Asian economies may continue to impact future international revenues.

GROSS MARGIN. The Company's gross margin decreased $11,422,000 or 22%, in
the three month period ended June 28, 1998 compared to the comparable period in
1997. Gross margin as a percentage of revenues was 39% for the three month
period ended June 28, 1998 compared to 44% for the comparable period in 1997.
Gross margin as a percentage of revenues decreased as a result of the charges
that were recorded in the quarter, totaling $6,808,000, as well as a reduction
in the average selling price of videoconferencing systems. Of these charges,
$5,457,000 related to the write down of inventory and capitalized software to
their net realizable value and other costs associated with the discontinuation
of one of the Company's product lines. In addition, inventory provisions of
$1,351,000 were recorded to write down certain inventories to their net
realizable value.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $2,465,000 or 6% from the comparable period in 1997 but
increased as a percentage of revenues to 35% from 33%. The dollar decrease
resulted primarily from efforts to reduce the Company's cost structure which
began during the last two quarters of fiscal 1997. Included in selling, general
and administrative expenses is a charge of approximately $4,210,000 for
unrecoverable leasehold improvements and furniture and fixtures related to the
facility at 50 Minuteman Road in Andover. The Company subleased this facility in
June, 1998. Excluding the charge, selling, general & administrative expenses as
a percentage of revenues would have been 30%.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$5,807,000, or 28% for the three month period ended June 28, 1998 from the
comparable period in 1997 and were 14% of revenues for the three month period
ended June 28, 1998 compared to 17% for the comparable period in 1997. Research
and development expenditures, prior to the capitalization of software costs,
were $16,558,000 for the three month period ended June 28, 1998 and $22,327,000
for the comparable period in 1997 or 16% and 19% of revenues, respectively. The
Company capitalized software costs of $1,941,000 for the three month period
ended June 28, 1998 and $1,903,000 for the comparable period in 1997. The
Company reduced the level of research and development investment during the
three month period ended June 28, 1998 from the comparable period in 1997 and
continues to evaluate the scope and direction of various programs. There can be
no assurance that management's initiatives to focus its efforts on the costs of
research and development will be successful or that any technologies will be
ultimately successfully commercialized.

12
<PAGE> 13

OPERATING LOSS. The Company posted an operating loss of $10,529,000 for
the three month period ended June 28, 1998 compared with an operating loss of
$7,379,000 for the comparable period in 1997. The operating loss results
primarily from the lower revenues and the charges discussed above. Excluding the
charges, the Company would have generated over $1.0 million in operating income
for the period.

NET INTEREST INCOME. Net interest income decreased to $553,000 for the
three month period ended June 28, 1998 from $686,000 for the comparable period
in 1997. The decrease was primarily the result of higher interest expense
resulting from capital lease obligations.

OTHER INCOME, NET. Other income, net of $5,000 for the three month period
ended June 28, 1998 consists primarily of net gains on sales of equipment. Other
expenses, net of $210,000 for the three month period ended June 29, 1997,
consists primarily of net losses on foreign currency transactions.

INCOME TAXES. The Company's effective tax rate for the three month period
ended June 28, 1998 was 33% compared with 29% for the comparable period in 1997.
The effective tax rate for the three month period ended June 28, 1998 differs
from the federal statutory rate due primarily to state taxes offset by foreign
taxes and research and development tax credits. The effective tax rate for the
three month period ended June 29, 1997 was lower than the federal statutory rate
primarily due to the benefits of the research and development credits, the
foreign sales corporation and a decrease in the valuation allowance. At June
28,1998, management believes it is more likely than not that the deferred tax
asset will be realized. However, the realization of the net deferred tax asset
is dependent on generating sufficient taxable income in future periods. The
amount of the net deferred tax assets considered realizable could be
significantly or completely reduced if taxable income is not generated in the
near term.

Six Months Ended June 28, 1998 Compared to Six Months Ended June 29, 1997

REVENUES. The Company's revenues decreased $34,273,000, or 14%, in the six
month period ended June 28, 1998 compared to the comparable period in 1997. The
decrease was primarily a result of decreased videoconferencing system unit
shipments and a reduction in the average selling price of videoconferencing
systems. Sales of group and desktop videoconferencing products accounted for 68%
and 7%, respectively, of revenues for the six month period ended June 28, 1998,
compared with 69% and 10%, respectively, for the comparable period in 1997.
Desktop product revenue declined during the six month period ended June 28, 1998
from the comparable period in 1997 due to lower average selling prices. In
addition, sales of bridge products accounted for approximately 11% of the
Company's revenues for the six month period ended June 28, 1998 and 12% for the
comparable period in 1997. Revenues from service and maintenance agreements
increased $5,806,000 or 25% for the six month period ended June 28, 1998
compared with the comparable period in 1997 due to increased focus on the
professional services business which began in the second half of the last fiscal
year. Service revenues totaled 14% and 10% of total revenues for the six month
period ended June 28, 1998, and the comparable period in 1997, respectively.

The Company's revenues from sales to foreign markets totaled approximately
$92,533,000 for the six month period ended June 28, 1998 compared to
approximately $109,578,000 for the comparable period in 1997 representing 45%
and 46%, respectively, of total revenues. Asian markets were primarily
responsible for the decline. Fluctuations in the Asian currencies and general
weakness in the Asian economies may continue to impact future international
revenues.

GROSS MARGIN. The Company's gross margin declined $24,272,000 or 22%, in
the six month period ended June 28, 1998 compared to the comparable period in
1997. Gross margin as a percentage of revenues was 42% for the six month period
ended June 28, 1998 compared to 46% for the comparable period in 1997. Gross
margin as a percentage of revenues decreased as a result of the charges recorded
in the second quarter of fiscal 1998 and a reduction in the average selling
price of videoconferencing systems.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $5,921,000 or 8% from the comparable period in 1997 but
increased as a percentage of revenues to 34% from 31%. The dollar decrease
resulted primarily from efforts to reduce the Company's cost structure which
began during the last two quarters of 1997. Selling, general and administrative
expenses as a percentage of revenues increased as

13
<PAGE> 14

a result of the charge recorded in the second quarter of fiscal 1998. Excluding
this charge, selling, general and administrative expenses as a percentage of
revenues would have been 31%.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$9,841,000, or 24% for the six month period ended June 28, 1998 from the
comparable period in 1997 and were 15% and 17%, respectively, of revenues for
the six month period ended June 28, 1998 and the comparable period in 1997.
Research and development expenditures, prior to the capitalization of software
costs, were $34,914,000 for the six month period ended June 28, 1998 and
$45,101,000 for the comparable period in 1997 or 17% and 19% of revenues,
respectively. The Company capitalized software costs of $3,397,000 for the six
month period ended June 28, 1998 and $3,743,000 for the comparable period in
1997. The Company reduced the level of research and development investment
during the first six months of fiscal 1998 from the comparable period in 1997
and continues to evaluate the scope and direction of various programs. There can
be no assurance that management's initiatives to focus its efforts on the costs
of research and development will be successful or that any technologies will be
ultimately successfully commercialized.

OPERATING LOSS. The Company posted an operating loss of $14,351,000 for
the six month period ended June 28, 1998, compared with an operating loss of
$5,841,000 for the comparable period in 1997. The operating loss results
primarily from the lower revenues and the charges discussed above. Excluding the
charges, the Company generated an operating loss of approximately $2.7 million.

NET INTEREST INCOME. Net interest income decreased to $1,001,000 for the
six month period ended June 28, 1998 from $1,577,000 for the comparable period
in 1997. The decrease was primarily the result of higher interest expense
resulting from capital lease obligations.

OTHER INCOME, NET. Other income, net of $329,000 for the six month period
ended June 28, 1998 consists primarily of net gains on foreign currency
transactions. Other income, net of $194,000 for the comparable period in 1997
consists primarily of net gains on foreign currency transactions and net gains
on sales of securities.

INCOME TAXES. The Company's effective tax rate for the six month period
ended June 28, 1998 was 32% compared with 29% for the comparable period in 1997.
The effective tax rate for the six month period ended June 28, 1998 differs from
the federal statutory rate due primarily to state taxes offset by foreign taxes
and research and development tax credits. The effective tax rate for the six
month period ended June 29, 1997 was lower than the federal statutory rate
primarily due to the benefits of the research and development credits, the
foreign sales corporation and a decrease in the valuation allowance. At June
28,1998, management believes it is more likely than not that the deferred tax
asset will be realized. However, the realization of the net deferred tax asset
is dependent on generating sufficient taxable income in future periods. The
amount of the net deferred tax assets considered realizable could be
significantly or completely reduced if taxable income is not generated in the
near term.

LIQUIDITY AND CAPITAL RESOURCES

At June 28, 1998 the Company had $33,638,000 in cash and cash equivalents
and $52,545,000 in short-term marketable securities. During the six month period
ended June 28, 1998 the Company generated $14,973,000 in cash from operating
activities. The primary source of cash during the six month period ended June
28, 1998 was the collection of accounts receivable and the reduction of
inventory. Cash used for investing activities increased as a result of excess
cash being invested in marketable securities.

14
<PAGE> 15

The revolving credit agreement is secured by cash and marketable securities
and contains certain financial covenants, including the maintenance of certain
financial ratios and minimum net income (loss) requirements. The Company was in
compliance with, or compliance was waived for, all covenants for the quarter
ending June 28, 1998.

On July 22, 1998, the Company announced it had signed a letter of intent to
purchase Starlight Networks, Inc. The Company intends to purchase Starlight
Networks primarily with common stock and cash. The acquisition is expected to be
completed in the fourth quarter, subject to completion of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission. When completed the transaction is expected to be accounted for under
the purchase method of accounting and is expected to consume between $10 million
and $15 million in cash in the first nine months after completion.

The Company believes that funds from operations, equipment lease financing,
available borrowings under its various credit agreements and existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
near term operating and capital requirements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131(SFAS 131), "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about their operating segments. SFAS 131, which is based on
the management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and material geographic locations
in which the entity holds assets and reports revenues. The Company will adopt
SFAS 131 for its fiscal year ending December 31, 1998. The Company is currently
evaluating the effects of this change on its reporting of segment and geographic
information but does not expect the statement to have a material impact on its
financial position or results of operations as the statement requires only
additional disclosure.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. 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 results of operations or
its financial position.

In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for certain
derivative and other financial instruments. The Company adopted the enhanced
accounting policy disclosure requirements in the fourth quarter of the fiscal
year ending December 31, 1997. The Company will begin furnishing the qualitative
and quantitative disclosures of market risk in the Company's Annual Report on
Form 10-K for the year ending December 31, 1998.

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 common stock. These factors
should be considered in conjunction with other information contained in this
document.

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<PAGE> 16

NEW PRODUCTS, COST REDUCTIONS, TECHNOLOGICAL CHANGE, AND EVOLVING
MARKETS. The Company is engaged in an industry that is still emerging as a
result of extensive research and development efforts which continue to bring to
market new, more technologically advanced products introduced on an accelerated
basis. Simultaneously, the larger telecommunications market is in a heightened
competitive state due to deregulation throughout the world. In order to maintain
its market share leadership role in this fast-paced emerging market, the Company
must introduce through internal development or by acquisition significant
innovative, technologically leading and competitively leading new products.
There is no assurance that such new products will be introduced by the Company,
or if introduced, be accepted by its customers. In addition to products
operating in an ISDN environment, new technologies and networks for delivering
videoconferencing and data collaboration services, such as the Internet and
corporate intranets or LANs, have opened new delivery mediums and opportunities
for videoconferencing. Industry standards for such new technologies are still
being developed and in the meantime, there has been a slowdown in the growth of
the general market for videoconferencing products due to customer uncertainty.
There can be no assurance that the Company will be successful in obtaining cost
reductions or in developing and marketing suitable new products with attractive
margins for these new technologies and networks that are competitive and
accepted by the marketplace. The possible transition, migration and/or
convergence of technologies is difficult to predict and could have profound
implications for the industry. Furthermore there is risk that some existing
products could be rendered obsolete due to changing technology.

COMPETITION. In its established businesses of group systems and desktop
systems, the Company competes with a number of larger corporations, such as Sony
and Intel, which have greater financial and marketing resources than the
Company. In the developing businesses of videoconferencing over networks such as
the Internet and LANs, and compact systems, a number of new companies have begun
to offer competitive products. In addition, alliances between companies which
compete with the Company and companies which develop and market network products
as well as mergers among competitors are intensifying competition in the
marketplace. This increased competition, together with a slowdown in the growth
of the general market for videoconferencing products, has led and may continue
to lead to 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 videoconferencing systems or a lower Company segment
market share for newer products and services in the emerging areas of
network-based videoconferencing products and services. In some cases, PictureTel
competes with its channel partners for various services which increases the
complexity of channel management. In addition, other companies such as Microsoft
or Intel may respectively offer network videoconferencing 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 products. Some of PictureTel's competitors have
introduced a new sales model consisting of leasing all videoconferencing
equipment and videoconferencing services on a monthly basis. In addition, future
prices the Company is able to obtain for its products and services may further
decrease from historical levels as a result of new product introductions by
others, price competition, technological change, or otherwise. These factors may
impact the Company's growth and operating results.

MANUFACTURING. Some key subassemblies and products are currently available
only from one vendor and some vendors are smaller companies 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 other 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 results of operations. The Company's
business could be adversely affected by delays or interruptions in delivery, and
poor quality of supplies, subassemblies or products from such key vendors.
Additionally, the Company designs and procures certain circuits, components and
subassemblies from non-videoconferencing divisions of PictureTel's competitors
such as Sony. Failure to obtain adequate supplies or having to redesign and
source supplies from another manufacturer may take substantial time and expense
which could impact product shipments and could materially and adversely affect
the Company's business, financial condition or results of operations.

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<PAGE> 17

PRODUCT PROTECTION AND INTELLECTUAL PROPERTY. PictureTel's success depends
in part on its proprietary technology. PictureTel 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 PictureTel's reliance upon its proprietary confidential
information, competitors of PictureTel have been able to use algorithms or other
features similar to those used by PictureTel to design and manufacture products
that are directly competitive with PictureTel's products. The Company believes
that due to the rapid pace of technological change in the videoconferencing
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 PictureTel does not believe that its products infringe the
proprietary rights of any third parties, third parties have asserted
infringement and other claims against PictureTel from time to time, and there
can be no assurance that third parties will not assert such claims against
PictureTel in the future or that such claims will not be successful. PictureTel
could incur substantial costs and diversion of management resources with respect
to the defense of any claims relating to proprietary rights which could have a
material adverse effect on PictureTel business, financial condition or result of
operations. (See "Litigation" for details regarding current intellectual
property litigation.)

RECENT HISTORY OF LOSSES. PictureTel reported a 5% decrease in revenues
for 1997 as compared to revenues for 1996 and a decrease in net income from
$32,172,000 net income in 1996 to $39,398,000 net loss in 1997. These results
have been adjusted for the restatement announced in the third quarter of 1997
for the financial results for the first and second quarters of 1997 and the
third and fourth quarters of 1996. PictureTel recorded significant other charges
in 1997 to bring expenses into line with its lower level of revenues and a lower
expected rate of growth. The decrease in revenues continued in the first and
second quarters of 1998, and the Company reported a net loss of $8,854,000 for
the six months ended June 28, 1998. Revenues and prospects for growth have been
impacted by the decline in the average selling price for many PictureTel
products, a decline in the profitability of the industry, and by a slowdown in
the general market for videoconferencing products, in part resulting from the
perceived uncertainty of customers as to how the existing products of the
Company and its competitors will fit in with expected new multimedia
videoconferencing products utilizing the Internet and LAN systems. Continued
lower operating results may impact the Company's ability to remain in compliance
with covenants the Company has agreed to with banks in its revolving credit
agreement. There can be no assurance that PictureTel can return to the level of
profit in relation to net sales experienced in years prior to 1997.

POTENTIAL FLUCTUATIONS OF QUARTERLY OPERATING RESULTS. The majority of the
Company's revenues in each quarter result from orders booked in that quarter and
a substantial portion of the Company's orders and shipments typically occur
during the last weeks of each quarter so that forecasting of revenue and product
mix is both complex and difficult. Unanticipated variations in the timing of
receipt of customer orders in any quarter may produce significant fluctuations
in quarterly revenues. As a result, a shortfall in revenue compared to internal
expectations may not evidence itself until late in the quarter and any resulting
impact on earnings may not be determinable until some weeks after the end of the
quarter. The Company's ability to maintain or increase net revenues depend upon
its ability to increase unit volume sales. There can be no assurance that the
Company will increase unit sales volumes. Other factors which may cause
operational results to fluctuate 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.

VOLATILITY OF STOCK PRICE. As is frequently the case with the share price
of high technology companies, the market price of PictureTel's 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 PictureTel and by its competitors, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant adverse effect on the market price of PictureTel's stock
in any given period. In addition, the stock market has, from time to time,
experienced extreme price and

17
<PAGE> 18

volume fluctuations, which have particularly affected the market price for many
high-technology companies and which, on occasion, have appeared to be unrelated
to the operating performance of such companies.

DEPENDENCE ON KEY PERSONNEL. In February 1998, Bruce Bond succeeded Dr.
Norman Gaut as Chief Executive Officer. In June 1998, Mr. Bond was elected
Chairman of the Board and Mr. Gaut retired as an active employee while remaining
a director. There can be no assurance that the transition from Dr. Gaut to Mr.
Bond will be successful. In July 1998, Richard Goldman, Vice President and Chief
Financial Officer, announced his resignation. Mr. Goldman's employment will
terminate September 11, 1998. No successor has yet been named. PictureTel
depends on a limited number of key management personnel, including Mr. Bond;
David Grainger, Group Vice President of Field Operations; David Goselin, Vice
President, Operations; Stephen Chambers, Vice President, Marketing; Lawrence
Bornstein, Vice President, Human Resources; and Richard Baker, Vice President
and Chief Technology Officer. There has been considerable change in the
PictureTel management team since late 1996, and the loss of the services of one
or more of PictureTel's key personnel or the inability to attract, retain,
motivate and manage additional key personnel could have a material adverse
effect on the business or operating results of PictureTel. In addition, in
recent months, the Company has experienced 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 PictureTel will be able
to adequately fill the open positions.

INTERNAL ACCOUNTING CONTROLS. On September 19, 1997, after the Company's
reexamination (with assistance from its outside auditors) of leasing and other
indirect channel transactions, the Company announced that it would reverse
revenue related to certain of these transactions and, as a result, the Company
announced that it intended to restate its financial statements for the third and
fourth quarters of 1996 and the first quarter of 1997. On November 13, 1997,
after completion of its reexamination, the Company announced it would also
restate the second quarter of 1997. The restatements were required to reverse
product sales recorded which contained rights of return, contingent liabilities,
payment contingencies, payment uncertainties, or product sales for which
delivery did not occur until the end of the period. The restatements were also
required to record such product sales in the period in which the rights of
return lapsed, contingencies or uncertainties were resolved, or delivery was
completed. Certain transactions which were reversed have not been re-recorded as
revenues in later periods.

The Company has taken actions including personnel changes, new procedures
and greater oversight by the Audit Committee of the Board of Directors. The
Company believes these actions will strengthen its internal controls so that the
practices which led to the Company's restated financial reporting in the earlier
periods will not reoccur. However, there can be no assurance that these actions
by the Company will be sufficient.

YEAR 2000 COMPLIANCE. PictureTel has formed an internal Year 2000
compliance team to evaluate its internal information systems purchased from
PictureTel's suppliers. PictureTel's internal team is in the process of
completing the inventory of all internal applications and infrastructure to
determine Year 2000 compliance. PictureTel will require its suppliers to resolve
any compliance failures and ensure a detailed implementation plan for its
products in order to achieve Year 2000 compliance in a timely manner. Since Year
2000 compliance of products used by PictureTel depends upon the supplier's
cooperation, unresolved failures remain a possibility. In the event PictureTel
does not achieve full Year 2000 compliance in its internal information systems
prior to December 31, 1999, PictureTel could experience disruption, delays and
use of incorrect data which could have a material adverse impact on its
operations.

PictureTel has tested its products for Year 2000 compliance and has
determined that all PictureTel products currently available for sale have either
successfully passed Year 2000 compliance testing or have been deemed Year 2000
not-applicable by virtue of the fact that they do not process dates in any
manner. A small number of PictureTel's installed base products do not pass Year
2000 compliance testing. For these non-compliant older versions of PictureTel
products, PictureTel has, with one exception, generated simple workarounds that
are planned to be made available to customers and which will allow the systems
to operate with full functionality.

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<PAGE> 19

PART II -- OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS

A. Datapoint Litigation

B. Shareholder Litigation

C. NV Holdings, Inc.

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<PAGE> 20

certain advertisement that the Company alleges is false and misleading. On July
14, 1998, the Company sought leave of court to amend this complaint to include
NV Holdings, Inc., and its subsidiary NuVision Technologies, Inc., of Nevada;
(2) (PictureTel Corporation v. NV Technologies d/b/a NuVision Technologies. Inc.
Civil action No. 98-166-C, filed January 23, 1998, in the Superior Court for
Essex County, Massachusetts, for Breach of Contract), seeking the repayment of
approximately $4,000,000 from NuVision Technologies, Inc.; and (3) (PictureTel
Corporation v. Tandberg, ASA, NV Holdings, Inc., et al, Civil Action No.
3-98CV1449-R, filed June 7, 1998, in the United States District Court for the
Northern District of Texas, for fraud, fraudulent conveyance and breach of
contract) seeking repayment of $4,000,000 and unspecified punitive damages.

Discovery has begun with regard to these actions; however, the Company
expresses no opinion as to the likely outcome of any of these matters.

D. Revnet, Inc.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company was held on June 17,
1998. The Stockholders of the Company elected members of the Board of Directors
and ratified the selection of PricewaterhouseCoopers LLP as the Company's
auditors for fiscal year 1998. The number of affirmative, negative and abstained
votes cast with respect to each of the matters voted on were as follows:

The tabulation of votes for the nominees for directors were as follows:

COMMON STOCK

<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Norman E. Gaut.............................................. 32,860,297 611,910
Robert T. Knight............................................ 32,894,487 577,720
David Levi.................................................. 32,884,540 587,667
Enzo Torresi................................................ 32,982,440 489,767
Bruce R. Bond............................................... 33,009,891 462,316
</TABLE>

Other matters considered:

<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE ABSTAINED
VOTES VOTES VOTES
----------- -------- ---------
<S> <C> <C> <C>
Selection of PricewaterhouseCoopers LLP as auditors.... 33,298,456 88,093 85,658
</TABLE>

ITEM 5 -- OTHER INFORMATION

On July 22, 1998, the Company announced the resignation of Richard B.
Goldman, Vice President and Chief Financial Officer. Mr. Goldman will remain at
PictureTel during a transition period through September 11, 1998. No successor
has yet been named.

20
<PAGE> 21

ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

<S> <C>
(a) Exhibits

10.1 Amended employment agreement between PictureTel Corporation
and Richard B. Goldman dated July 13, 1998.

27.1 Financial Data Schedule for the period ended June 28, 1998,
as required by Item 601(c) of Regulation S-K.

27.2 Financial Data Schedule for the period ended June 29, 1997,
as required by Item 601(c) of Regulation S-K.

27.3 Financial Data Schedule for the period ended June 29, 1996,
as required by Item 601(c) of Regulation S-K.

(b) Reports on Form 8-K
None
</TABLE>

21
<PAGE> 22

SIGNATURE

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

PICTURETEL CORPORATION

By: /s/ Richard B. Goldman
------------------------------------
Richard B. Goldman
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)

August 12, 1998.

<PAGE> 1

Exhibit 10.1

[PICTURETEL LOGO]

July 13, 1998

Mr. Richard B. Goldman
90 Westerly Road
Weston, MA 02193

Dear Dick:

Reference: (1.) The Employment Agreement (the "Employment Agreement") by and
between you and PictureTel Corporation (the "Company") dated
December 5, 1997; and (2.) Your letter to Bruce Bond (the "Letter")
dated June 22, 1998; copies of which are attached hereto as Exhibits
A and B, respectively.

This letter will hereinafter set forth and reduce to writing the
Amendment to the Employment Agreement between you and the Company concerning
your employment with the Company and the cessation of such employment.

As you are aware, the terms of your employment with the Company and
your Proprietary Information and Inventions Agreement ("Confidentiality
Agreement"), a copy of which is attached hereto as Exhibit C, obligate you,
among other things, not to disclose or use any confidential or proprietary
information of the Company ("Confidential Information") acquired as a result
of your employment with the Company. By way of illustration, but not limitation,
Confidential Information includes trade secrets, processes, formulae, data and
know-how, improvements, inventions, techniques, marketing plans, strategies,
forecasts, customer lists, and employee lists, except to the extent the same are
publicly known from sources who have neither misappropriated such information
nor breached any obligation of confidentiality to the Company. Further, such
information, knowledge and know-how possessed by you prior to your entering
employment with the Company shall be excluded from the definition of
Confidential Information.

You hereby confirm that you have complied and will continue to comply
with the foregoing provisions of the Confidentiality Agreement.

In addition to its confidentiality provisions, the Confidentiality
Agreement provides that for a period of one year after termination, you will not
directly or indirectly solicit or cause others to solicit Company employees for
competitive employment. The Confidentiality Agreement provides that you will
return to the Company all documents and data of any nature pertaining to your
work, and that you will take no copies of Confidential Information with you upon
your departure. You hereby confirm that you have complied and will continue to
comply with these provisions of the Confidentiality Agreement.

The complete terms and conditions of your separation are set forth in
the Employment Agreement, as amended by this Agreement. The employment provided
for under the Employment Agreement shall terminate September 11, 1998 (the
"Separation Date") and you shall cease your employment with the company as of
that date (the "Separation Date"). In exchange for the release contained in
Paragraph 10., your departure on the Separation Date will be considered to be
for "Good Reason" pursuant to Section 4.2 (a.) of the Employment Agreement and
the Company will provide certain Enhanced Separation Benefits provided below. If
prior to the Separation Date you are terminated by the Company for a reason
other than cause, death or disability, the Company will provide you with the
same Enhanced Separation Benefits commencing on the Separation Date and will
prior thereto, continue to pay to you your current bi-weekly base salary of
$7,692.31 (equal to $200,000.00 annualized at twenty-six (26) pay periods per
year) ("Base Salary") up through the Separation Date. If prior to the
Separation Date you terminate your employment for Good Reason pursuant to
Section 4.2 (a.) (it being understood that the change in your responsibilities
prior to the date hereof, as discussed in the Letter, shall not constitute "Good
Reason" for a termination prior to the Separation Date) ("New Good Reason
Separation Date"), the Company will

<PAGE> 2

provide you with the same Enhanced Separation Benefits commencing on the New
Good Reason Separation Date. If you terminate your employment for some other
reason prior to the Separation Date ("Voluntary Separation Date"), the Company
shall pay to you your current Base Salary and shall maintain the benefits
provided under Section 3.4 of the Employment Agreement in each case for the
period up to and inclusive of the Voluntary Separation Date, except that no
bonus not previously paid will be payable to you in respect to service by prior
to such Voluntary Separation Date.

1. You agree to resign as an Officer of the Company and your position
as Vice President, Chief Financial Officer effective as of the Separation Date
or, if applicable, New Good Reason Separation Date or Voluntary Separation Date.
From the date of this Agreement through the Separation Date or, if applicable,
New Good Reason Separation Date or Voluntary Separation Date (the "Transition
Employment Period"), you will continue to be paid your Base Salary. In return
for the compensation provided to you during the Transition Employment Period,
you agree to assist me in effecting an orderly transfer of your job
responsibilities.

2. Notwithstanding Section 5.5 of the Employment Agreement and in lieu
thereof, from and after the Separation Date or, if applicable, New Good Reason
Separation Date, you will continue to be paid, as severance, your Base Salary
for a consecutive 32.2 bi-weekly period ("Severance Period"). This is
equivalent to fifteen (15) months pay. In addition, notwithstanding Section
5.5 of the Employment Agreement and in lieu thereof, from and after the
Separation Date or, if applicable, New Good Reason Separation Date, you will
receive $40,000 (equal to fifty (50) percent of your target 1998 Management
Incentive Bonus of $80,000) paid in $1,242.24 bi-weekly increments over the
Severance Period (the "Enhanced Separation Benefits").

3. Vacation hours will not be accrued beyond the Separation Date or, if
applicable, New Good Reason Separation Date or Voluntary Separation Date.
However, the hours which accrued pursuant to Company Policy and which remain
unused at the Separation Date or, if applicable, New Good Reason Separation Date
or Voluntary Separation Date will be paid to you in a lump sum as soon as
possible following the Separation Date or, if applicable, New Good Reason
Separation Date or Voluntary Separation Date.

4. With respect to the stock options granted to you under the
PictureTel Corporation Equity Incentive Plan, all vesting will cease as of the
Separation Date or, if applicable, New Good Reason Separation Date or Voluntary
Separation Date and the rights to exercise those option shares vested as of the
Separation Date or, if applicable, New Good Reason Separation Date or Voluntary
Separation Date will terminate three (3) months after such Separation Date or,
if applicable, New Good Reason Separation Date or Voluntary Separation Date.

5. All outstanding claims for business expenses incurred should be
submitted to me immediately prior to the Separation Date or, if applicable, New
Good Reason Separation Date or Voluntary Separation Date. Immediately prior to
the Separation Date or, if applicable, New Good Reason Separation Date or
Voluntary Separation Date, you will return all Company office keys, access
cards, credit cards and other Company property in your possession to Larry
Bornstein.

6. Effective as of the Separation Date or, if applicable, New Good
Reason Separation Date or Voluntary Separation Date, your participation and
eligibility for life, disability and accident insurance benefits under Company
plans will cease. 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 for participation in such
plans at the same levels as active employees. If you wish to continue your
medical and dental insurance coverage beyond the Separation Date or, if
applicable, New Good Reason Separation Date or Voluntary Separation Date and 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"). During the month immediately
following the Separation Date or, if applicable, New Good Reason Separation Date
or Voluntary Separation Date, you will receive the materials and information
necessary to enroll in the COBRA coverage. If you elect to continue coverage
beyond the Severance Period or your Voluntary Separation Date, you will be
responsible for paying the full cost of the coverage.

<PAGE> 3

7. Effective as of the Separation Date or, if applicable, New Good
Reason Separation Date or Voluntary Separation Date, your participation in the
PictureTel 401(k) Retirement Plan will cease. During the month following the
Separation Date or, if applicable, New Good Reason Separation Date or Voluntary
Separation Date, you will receive detailed information relative to the
distribution of your current fund balances.

8. Effective as of the Separation Date or, if applicable, New Good
Reason Separation Date or Voluntary Separation Date, pursuant to the provisions
of the PictureTel Corporation Employee Stock Purchase Plan ("ESPP"), your
participation in the ESPP will cease. If the Separation Date or, if applicable,
New Good Reason Separation Date or Voluntary Separation Date is prior to the
close of an Option Period, all your withholdings up to the Separation Date or,
if applicable, New Good Reason Separation Date or Voluntary Separation Date
shall be returned to you, without interest, immediately following the Separation
Date or, if applicable, New Good Reason Separation Date or Voluntary Separation
Date. For purposes of the ESPP, an "Option Period" is any of the six month
periods beginning any September 1 or March 1.

9. As part of the Enhanced Separation Benefits, the Company will make
available the services of an approved Outplacement Consultant. The fees incurred
shall not exceed $10,000.00.

10. The provision of the Enhanced Separation Benefits is expressly
conditioned upon your signing this letter agreement, which includes the
following general release, and upon your continued compliance with all of the
provisions of this letter agreement:

In consideration of the Enhanced Separation Benefits, the adequacy of
which you hereby acknowledge, you hereby fully, forever, irrevocably and
unconditionally release, remise and discharge the Company, its officers,
directors, shareholders, agents, current and former employees (the "Releasees")
from any and all claims, charges, complaints, demands, actions, causes of
action, suits, rights, debts, sums of money, accounts, contracts, promises,
agreements, doings, omissions, damages, executions, liabilities, obligations,
and expenses including attorneys' fees and costs, of every kind and nature which
you ever had or now have against the Releasees arising out of or relating to
your employment, and its termination, including but not limited to all
employment discrimination claims under Title VII of the Civil Rights Act of
1964, 42 U.S.C. ss. 2000e et seq., the Age Discrimination in Employment Act, 29
U.S.C. ss. 621 et seq. and M.G.L.C. 151B ss. 1 et seq., the Employee Retirement
Income Security Act, and any and all damages arising out of all employment -
related claims or other wrongful discharge claims and damages, and claims under
the Age Discrimination in Employment Act.

11. Your termination does not impair or otherwise limit your rights
following the Separation Date or, if applicable, New Good Reason Separation Date
or Voluntary Separation Date to indemnification under the terms of the Indemnity
Agreement between you and the Company, the Company's articles of incorporation
or its bylaws.

12. Notwithstanding the provisions of paragraph 10., the release
contained herein shall not impair or otherwise limit your rights to enforce the
Company's agreements contained in this letter.

13. You have, and are entitled to, up to twenty-one (21) days
following the provision of this letter agreement to you to accept it, although
you need not use this period if in your sole and unlimited discretion you choose
not to do so. The Company encourages you to consult with an attorney before
signing this letter agreement. You are also entitled to rescind your acceptance
of the terms of this letter agreement by written notice to the Company at any
time within the seven day (7) period after you execute it.

14. Upon the expiration of seven (7) days after your execution of
this letter agreement, the Company will become contractually obligated to
provide the Separation Benefits, and you will be contractually bound to adhere
to the terms of this Agreement.

15. It is understood and agreed by the parties hereto that this letter
is a release agreement and does not constitute an admission of liability or
wrongdoing on the part of either party.

<PAGE> 4

16. This letter is executed in duplicate and shall be binding upon the
parties, and may not be abandoned, supplemented, changed, or modified in any
manner, except by an instrument in writing signed by a duly authorized
representative of the parties hereto.

17. Should any provision of this letter be declared or be determined by
any court of competent jurisdiction to be illegal or invalid, the validity of
the remaining parts, terms, or provisions shall not be affected thereby and such
illegal and invalid part, term, or provision shall be deemed not to be part of
this letter.

18. Both parties understand and agree that the terms and contents of
this letter, and the contents of the discussions and negotiations resulting in
this letter, shall be maintained as confidential. You further agree that you,
your agents and representatives shall maintain such confidentiality, and none of
the above shall be admissible for any purpose in any litigation in any forum,
nor shall it be disclosed to anyone except to the extent required by federal or
state law. Nothing contained herein shall prevent or restrict you from
disclosing such information to professionals who advise you with respect to
legal or financial matters, or to your spouse. You agree that in the event of
any breach by you of this letter, the Company may elect to terminate the
Separation Benefits, and seek damages or injunctive relief for any such breach
of confidentiality, or both.

19. You affirm that this letter contains and constitutes the entire
understanding and agreement between the parties hereto with respect to your
departure from the Company, and supersedes all other oral and written
negotiations, agreements, representations, commitments and writings in
connection therewith.

20. You affirm that no other promises or agreements of any kind have
been made to or with you by any person or entity whatsoever to cause you to sign
this letter, and that your signature indicates your full agreement with and
understanding of its terms. You acknowledge that you have had adequate
opportunity to review these terms and that you have been encouraged by the
Company to seek the benefit of legal counsel regarding the effect of same, and
that whether or not you have done so has been your decision. You further state
and represent that you have carefully read this letter, understand the contents
herein, freely and voluntarily assent to all of the terms and conditions hereof,
and sign your name of your own free act and deed.

If the above is acceptable to you, kindly sign the original and a copy
of this Agreement where indicated, and return the copy to me within twenty-one
(21) days of the provision of this Agreement to you. If you have any questions
regarding the this letter, please feel free to call me.

Sincerely,

PICTURETEL CORPORATION

/s/ Bruce Bond
- -------------------------------------
Bruce Bond
President and Chief Executive Officer

Accepted: /s/ Richard B. Goldman
--------------------------
Richard B. Goldman
Date: 7/14/98

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL
CORPORATION'S BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED JUNE 28,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-28-1998
<EXCHANGE-RATE> 1
<CASH> 33,638
<SECURITIES> 52,545
<RECEIVABLES> 101,910
<ALLOWANCES> (5,956)
<INVENTORY> 36,651
<CURRENT-ASSETS> 244,135
<PP&E> 147,228
<DEPRECIATION> 88,504
<TOTAL-ASSETS> 336,808
<CURRENT-LIABILITIES> 94,618
<BONDS> 0
0
0
<COMMON> 383
<OTHER-SE> 221,076
<TOTAL-LIABILITY-AND-EQUITY> 336,808
<SALES> 205,628
<TOTAL-REVENUES> 205,628
<CGS> 119,468
<TOTAL-COSTS> 119,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,208
<INCOME-PRETAX> (13,021)
<INCOME-TAX> (4,167)
<INCOME-CONTINUING> (8,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,854)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL
CORPORATION'S BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED JUNE 29,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-29-1997
<EXCHANGE-RATE> 1
<CASH> 42,980
<SECURITIES> 30,802
<RECEIVABLES> 125,538
<ALLOWANCES> (3,712)
<INVENTORY> 71,514
<CURRENT-ASSETS> 285,850
<PP&E> 122,504
<DEPRECIATION> (72,843)
<TOTAL-ASSETS> 363,035
<CURRENT-LIABILITIES> 93,815
<BONDS> 0
0
0
<COMMON> 378
<OTHER-SE> 264,336
<TOTAL-LIABILITY-AND-EQUITY> 363,035
<SALES> 239,901
<TOTAL-REVENUES> 239,901
<CGS> 129,469
<TOTAL-COSTS> 129,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688
<INCOME-PRETAX> (4,070)
<INCOME-TAX> (1,181)
<INCOME-CONTINUING> (2,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,889)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL
CORPORATION'S BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED JUNE 29,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 45,490
<SECURITIES> 15,478
<RECEIVABLES> 115,124
<ALLOWANCES> (1,813)
<INVENTORY> 36,390
<CURRENT-ASSETS> 224,541
<PP&E> 86,995
<DEPRECIATION> (51,284)
<TOTAL-ASSETS> 315,607
<CURRENT-LIABILITIES> 76,390
<BONDS> 0
0
0
<COMMON> 334
<OTHER-SE> 227,457
<TOTAL-LIABILITY-AND-EQUITY> 315,607
<SALES> 221,083
<TOTAL-REVENUES> 221,083
<CGS> 114,452
<TOTAL-COSTS> 114,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 23,844
<INCOME-TAX> 7,887
<INCOME-CONTINUING> 15,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,957
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.40

</TABLE>