PICTURETEL CORP, 10-Q, 1998-11-12

PICTURETEL CORP
10-Q, 1998-11-12
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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 SEPTEMBER 27, 1998

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

FOR THE TRANSITION PERIOD FROM TO

<TABLE>
<S> <C>
FOR THE QUARTER ENDED SEPTEMBER 27, 1998 COMMISSION FILE NUMBER 1-9434
</TABLE>

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 November 5, 1998, there were issued and outstanding 38,507,005 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
September 27, 1998 and December 31, 1997.......... 3
Consolidated Statements of Operations
Three and nine months ended September 27, 1998 and
September 28, 1997.................................. 4
Consolidated Statements of Cash Flows
Nine months ended September 27, 1998 and September
28, 1997............................................ 5
Notes to Consolidated Financial Statements............. 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10-19

PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 20
Item 5. Other Items......................................... 21
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>
SEPTEMBER 27, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 49,270 $ 49,859
Marketable securities.................................. 50,924 32,152
Accounts receivable less allowance for doubtful
accounts of $5,199 in 1998 and $6,315 in 1997......... 92,975 108,729
Inventories, net (Note 2).............................. 30,793 44,901
Deferred taxes, net.................................... 15,615 15,615
Other current assets................................... 11,047 6,803
-------- --------
Total current assets.............................. 250,624 258,059
Deferred taxes, net......................................... 19,508 16,106
Property and equipment, net................................. 56,909 69,103
Capitalized software costs, net............................. 6,190 2,368
Other assets................................................ 11,507 9,415
-------- --------
Total assets...................................... $344,738 $355,051
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 6)......................... $ 2,594 $ 186
Accounts payable....................................... 27,165 30,169
Accrued compensation and benefits...................... 13,932 10,551
Accrued expenses....................................... 31,211 37,207
Current portion of capital lease obligations........... 2,946 3,426
Deferred revenue....................................... 22,865 23,547
-------- --------
Total current liabilities......................... 100,713 105,086
Capital lease obligations................................... 20,167 22,000
Commitments and contingencies (Notes 5, 6 and 7)
Stockholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares
authorized; none issued............................... -- --
Common stock, $.01 par value; 80,000,000 shares
authorized; 38,497,621 and 38,040,363 shares issued
and outstanding in 1998 and 1997, respectively........ 384 380
Additional paid-in capital............................. 207,323 204,242
Retained earnings...................................... 18,195 25,425
Cumulative translation adjustment...................... (2,058) (2,077)
Unrealized gain (loss) on marketable securities, net... 14 (5)
-------- --------
Total stockholders' equity........................ 223,858 227,965
-------- --------
Total liabilities and stockholders' equity........ $344,738 $355,051
======== ========
</TABLE>

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

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PICTURETEL CORPORATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product revenues.................. $ 87,346 $ 96,530 $263,651 $312,914
Service revenues.................. 14,712 13,159 44,034 36,676
-------- -------- -------- --------
Total revenues............... 102,058 109,689 307,685 349,590
Cost of revenues:
Product cost of revenues.......... 45,407 56,534 141,517 167,476
Service cost of revenues.......... 10,890 10,339 34,248 28,866
-------- -------- -------- --------
Total cost of revenues....... 56,297 66,873 175,765 196,342
-------- -------- -------- --------
Gross margin........................... 45,761 42,816 131,920 153,248

Operating expenses:
Selling, general and
administrative.................. 30,214 45,222 99,207 120,137
Research and development.......... 14,451 19,250 45,968 60,608
-------- -------- -------- --------
Total operating expenses..... 44,665 64,472 145,175 180,745
-------- -------- -------- --------
Income (loss) from operations.......... 1,096 (21,656) (13,255) (27,497)
Interest income, net................... 721 460 1,722 2,037
Other income (expense), net............ 572 (2,355) 901 (2,161)
-------- -------- -------- --------
Income (loss) before income tax expense
(benefit)............................ 2,389 (23,551) (10,632) (27,621)
Income tax expense (benefit)........... 765 (6,836) (3,402) (8,017)
-------- -------- -------- --------
Net income (loss)............ $ 1,624 $(16,715) $ (7,230) $(19,604)
======== ======== ======== ========
Net income (loss) per common share --
basic................................ $ 0.04 $ (0.44) $ (0.19) $ (0.52)
======== ======== ======== ========
Net income (loss) per common share --
diluted.............................. $ 0.04 $ (0.44) $ (0.19) $ (0.52)
======== ======== ======== ========
Weighted average shares outstanding --
basic................................ 38,376 37,803 38,259 37,675
======== ======== ======== ========
Weighted average shares outstanding --
diluted.............................. 38,693 37,803 38,259 37,675
======== ======== ======== ========
</TABLE>

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

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PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (7,230) $(19,604)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 20,749 22,421
Provisions to write down inventory and capitalized
software to net realizable value...................... 3,392 --
Write down of long-lived assets........................ 4,210 --
Bad debt provision..................................... 1,200 --
Deferred taxes, net.................................... 3,402 --
Non-cash portion of other charges...................... -- 12,227
Other non-cash items................................... 915 (9,544)
Changes in operating assets and liabilities:
Accounts receivable.................................... 14,504 31,467
Inventories............................................ 11,609 (6,667)
Other current assets................................... (2,551) (11,049)
Accounts payable....................................... (2,989) (28,426)
Accrued expenses....................................... (9,321) 12,085
Deferred revenue....................................... (734) 179
-------- --------
Net cash provided by operating activities................... 37,156 3,089
Cash flows from investing activities:
Purchase of marketable securities......................... (94,703) (23,753)
Proceeds from marketable securities....................... 75,931 42,276
Additions to property and equipment....................... (13,340) (18,540)
Capitalized software costs................................ (5,162) (5,723)
Purchase of other assets.................................. (3,484) (4,691)
-------- --------
Net cash used in investing activities....................... (40,758) (10,431)
Cash flows from financing activities:
Proceeds from (payments to) foreign lines of credit....... 2,437 (519)
Payments on long-term borrowings.......................... -- (5,091)
Principal payments under capital lease obligations........ (2,292) (2,331)
Proceeds from exercise of stock options................... 793 643
Proceeds from stock purchase plan......................... 1,660 3,534
-------- --------
Net cash provided by (used in) financing activities......... 2,598 (3,764)
Adjustment to conform fiscal year of MultiLink.............. -- 394
Effect of exchange rate changes on cash..................... 415 338
-------- --------
Net decrease in cash and cash equivalents................... (589) (10,374)
Cash and cash equivalents at beginning of period............ 49,859 63,333
-------- --------
Cash and cash equivalents at end of period.................. $ 49,270 $ 52,959
======== ========
</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
necessary to present fairly the Company's financial position at September 27,
1998, the results of operations for the three and nine months ended September
27, 1998 and changes in cash flows for the nine months ended September 27, 1998.

The results disclosed in the Consolidated Balance Sheet at September 27,
1998 and the Consolidated Statement of Operations and Consolidated Statement of
Cash Flows for the three and nine months ended September 27, 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.

2. INVENTORIES

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

<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Purchased parts........................................ $ 4,283 $ 2,983
Work in process........................................ 1,492 2,128
Finished goods......................................... 25,018 39,790
------- -------
$30,793 $44,901
======= =======
</TABLE>

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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. 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 NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
Numerator:
Net income (loss)................. $ 1,624 $(16,715) $(7,230) $(19,604)
======= ======== ======= ========
Denominator:
Weighted average common shares
outstanding..................... 38,376 37,803 38,259 37,675
======= ======== ======= ========
Basic EPS......................... $ 0.04 $ (0.44) $ (0.19) $ (0.52)
======= ======== ======= ========
DILUTED EPS COMPUTATION:
Numerator:
Net income (loss)................. $ 1,624 $(16,715) $(7,230) $(19,604)
======= ======== ======= ========
Denominator:
Weighted average common shares
outstanding..................... 38,376 37,803 38,259 37,675
Stock options..................... 317 -- -- --
------- -------- ------- --------
Total shares...................... 38,693 37,803 38,259 37,675
======= ======== ======= ========
Diluted EPS....................... $ 0.04 $ (0.44) $ (0.19) $ (0.52)
======= ======== ======= ========
</TABLE>

4. 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
income for the three-month period ended September 27, 1998 was $1,257,000, and
total comprehensive loss for the comparable period in 1997 was $16,531,000.
Total comprehensive loss for the nine-month period ended September 27, 1998 was
$7,192,000, and total comprehensive loss for the comparable period in 1997 was
$19,363,000. The components of other comprehensive income are foreign currency
translation adjustments and unrealized gains and losses on marketable
securities.

5. LITIGATION

A. Datapoint Litigation

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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Datapoint patents and that the Datapoint patent claims raised against PictureTel
were invalid. Datapoint has appealed these findings, and there can be no
assurance that the outcome of the appeal will be in favor of PictureTel. The
Company believes that it has meritorious defenses to the appeal.

B. Shareholder Litigation

Since September 23, 1997, seven class action shareholders' complaints have
been filed against the Company, Norman E. Gaut, Director and former Chairman of
the Board and Chief Executive Officer, and Les Strauss, the former Vice
President and Chief Financial Officer, in the United States District Court for
the District of Massachusetts. The plaintiffs, 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 the fiscal year ending December 31, 1997 and the last two quarters of
the fiscal year ending December 31, 1996 and were amended when the Company
announced on November 13, 1997 that it would also restate the second quarter of
the fiscal year ending December 31, 1997. The consolidated complaint alleges
that PictureTel and Messrs. Gaut and Strauss violated Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder, during the period
from October 17, 1996 through November 13, 1997, through the alleged preparation
and dissemination of materially false and misleading financial statements which
artificially inflated the price of PictureTel Common Stock. The consolidated
complaint seeks to recover an unspecified amount of damages, including
attorneys' and experts' fees and expenses.

On April 7, 1998, the Company filed a motion to dismiss the complaint. On
October 28, 1998, the motion to dismiss Norman E. Gaut was granted and the
motion to dismiss PictureTel and Les Strauss was denied. 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. On September 16, 1998, NV Holdings, Inc.
voluntarily dismissed their action against PictureTel.

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. No discovery has occurred, and the Company expresses no opinion as to
the likely outcome.

In addition to the above, the Company has also been and is from time to
time subject to claims 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

8
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PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

above, could result in an outcome that will have a material adverse affect to
its business, financial condition, results of operations or cash flows.

6. 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 September 27, 1998,
there were no borrowed amounts outstanding under the revolving credit agreement
and $28,762,000 in standby letters of credit outstanding under the revolving
credit agreement. There was $2,594,000 outstanding under the foreign lines of
credit. At September 27, 1998, the Company had $23,113,000 outstanding under
various leasing lines including the obligation for the lease of the facility at
50 Minuteman Road in Andover, Massachusetts, which was $20,407,000 at September
27, 1998. This facility was subleased in June, 1998 for a ten-year term.

The revolving credit agreement is fully 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 all covenants
for the quarter ending September 27, 1998.

7. COMMITMENTS

In March 1997, the Company entered into an agreement to lease an additional
facility at 200 Minuteman Road in Andover. The eighteen year lease began in
October, 1998 and will be accounted for as a capital lease. The Company is
considering alternatives other than occupancy for this building since current
staffing levels do not support the requirement for this facility.

8. SUBSEQUENT EVENT

On November 10, 1998, the Company completed its acquisition of Starlight
Networks, Inc., a leading provider of streaming media solutions for enterprise
communications. The acquisition will be accounted for under the purchase method
of accounting. The purchase consideration consists of approximately 1.5 million
shares of the Company's Common Stock and approximately $3,200,000 in cash, or
approximately $19,000,000 of consideration in total. The Company also assumed
debt and capital leases of approximately $4,000,000, which it paid off at
closing. The purchase price allocation is not yet complete; however, the
acquisition includes the purchase of technology, some of which may be incomplete
and may result in a charge to operations in the fourth quarter of fiscal 1998.

9
<PAGE> 10

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

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 (see "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 and the registration statement on Form S-4 filed with
the Securities and Exchange Commission on March 31, 1998 and October 5, 1998,
respectively.

BUSINESS DEVELOPMENTS

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues....................... 100% 100% 100% 100%
Cost of revenues............... 55.2 61.0 57.1 56.2
Gross margin................... 44.8 39.0 42.9 43.8
Selling, general and
administrative expenses...... 29.6 41.2 32.2 34.4
Research and development
expenses..................... 14.2 17.6 15.0 17.3
Total operating expenses....... 43.8 58.8 47.2 51.7
Income (loss) from
operations................... 1.0 (19.8) (4.3) (7.9)
Interest income, net........... 0.7 0.4 0.6 0.6
Other income (expense), net.... 0.6 (2.1) 0.3 (0.6)
Income (loss) before taxes..... 2.3 (21.5) (3.4) (7.9)
Income tax expense (benefit)... 0.7 (6.2) 1.1 (2.3)
Net income (loss).............. 1.6 (15.3) (2.3) (5.6)
</TABLE>

Three-Months Ended September 27, 1998 Compared to Three-Months Ended September
28, 1997

REVENUES. The Company's revenues decreased $7,631,000, or 7%, in the
three-month period ended September 27, 1998 compared to the comparable period in
1997. The decrease was primarily a result of lower unit volumes of group and
desktop videoconferencing products. The average selling price of
videoconferencing systems was consistent with the prior period. Sales of group
and desktop videoconferencing products

10
<PAGE> 11

accounted for 66% and 7%, respectively, of revenues for the three-month period
ended September 27, 1998, compared with 68% and 10%, respectively, for the
comparable period in 1997. Sales of video and audio bridge products accounted
for approximately 13% and 10% of the Company's revenues for the three-month
period ended September 27, 1998 and the comparable period in 1997, respectively.
Revenues from service and maintenance agreements increased 12% for the period
ended September 27, 1998 compared with the comparable period in 1997 due to
continued development of the professional services business. Service revenues
totaled 14% and 12% of total revenues for the period ended September 27, 1998
and the comparable period in 1997, respectively.

The Company's revenues from sales to foreign markets totaled approximately
$38,731,000 for the three-month period ended September 27, 1998 compared to
approximately $43,876,000 for the comparable period in 1997 and represented 38%
and 40% of total revenues in each period, 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 increased $2,945,000 or 7%, in
the three-month period ended September 27, 1998 compared to the comparable
period in 1997. The third quarter of 1997 included a $5,520,000 write-down of
excess and obsolete inventory. Gross margin as a percentage of revenues was 45%
for the three month period ended September 27, 1998 compared to 44% for the
comparable period in 1997 excluding the write-down. Favorable product mix is
responsible for the improvement.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $15,009,000 or 33% from the comparable period in 1997 and
decreased as a percentage of revenues from 41% to 30%. Selling, general and
administrative expenses for the period ended September 28, 1997 included charges
of approximately $9,200,000 related to an increase in the allowance for doubtful
accounts, costs associated with the acquisition of MultiLink, Inc. and severance
costs. Excluding the charges recorded in the third quarter of fiscal 1997,
selling, general and administrative expenses for the period ended September 27,
1998 decreased $5,800,000 compared to the comparable period in 1997 due to lower
head count and tight expense control.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$4,799,000, or 25% for the three-month period ended September 27, 1998 from the
comparable period in 1997 and represented 14% of revenues for the three-month
period ended September 27, 1998 compared to 18% for the comparable period in
1997. Research and development expenditures, prior to the capitalization of
software costs, were $16,465,000 for the three-month period ended September 27,
1998 and $21,230,000 for the comparable period in 1997 or 16% and 19% of
revenues, respectively. The Company capitalized software costs of $2,014,000 for
the three-month period ended September 27, 1998 and $1,980,000 for the
comparable period in 1997. Reduced research and development investment in
desktop systems and video network servers is primarily responsible for the
decrease in spending over the prior period. The Company continues to evaluate
the scope and direction of various research and development programs. There can
be no assurance that management's research and development initiatives will be
successful or that any technologies now in development will be ultimately
successfully commercialized.

NET INTEREST INCOME. Net interest income increased to $721,000 for the
three-month period ended September 27, 1998 from $460,000 for the comparable
period in 1997. The increase was primarily the result of higher cash balances in
the current period.

OTHER INCOME, NET. Other income, net of $572,000 for the three-month
period ended September 27, 1998 consists primarily of net gains on foreign
currency transactions. Other expenses, net of $2,355,000 for the three-month
period ended September 28, 1997, consists primarily of a $3 million write-off of
an equity investment offset by net gains on foreign currency transactions.

INCOME TAXES. The Company's effective tax rate for the three-month period
ended September 27, 1998 was 32% compared with 29% for the comparable period in
1997. The effective tax rate for the three-month period ended September 27, 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

11
<PAGE> 12

ended September 28, 1997 was lower than the federal statutory rate primarily due
to the benefits of the research and development credits, use of a foreign sales
corporation and a decrease in the valuation allowance. At September 27,1998,
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
upon generating enough taxable income in future periods to generate net tax
liabilities at least as great as the deferred tax asset. The amount of the net
deferred tax assets considered realizable for accounting purposes will also be
evaluated in conjunction with the Company's 1999 budgeting process and could be
significantly or completely reduced if management concludes that sufficient
taxable income is not expected in the near term.

Nine-Months Ended September 27, 1998 Compared to Nine-Months Ended September
28, 1997

REVENUES. The Company's revenues decreased $41,905,000, or 12%, in the
nine-month period ended September 27, 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 prices of
videoconferencing systems. Sales of group and desktop videoconferencing products
accounted for 67% and 7%, respectively, of revenues for the nine-month period
ended September 27, 1998, compared with 69% and 9%, respectively, for the
comparable period in 1997. Desktop product revenue declined during the
nine-month period ended September 27, 1998 from the comparable period in 1997
due to lower unit volumes and lower average selling prices. In addition, sales
of video and audio bridge products accounted for approximately 12% of the
Company's revenues for both the nine-month period ended September 27, 1998 and
the comparable period in 1997. Revenues from service and maintenance agreements
increased $7,358,000 or 20% for the nine-month period ended September 27, 1998
compared with the comparable period in 1997 due to continued development of the
professional services business. Service revenues totaled 14% and 10% of total
revenues for the nine-month period ended September 27, 1998, and the comparable
period in 1997, respectively.

The Company's revenues from sales to foreign markets totaled approximately
$130,793,000 for the nine-month period ended September 27, 1998 compared to
approximately $153,820,000 for the comparable period in 1997 and represented 43%
and 44%, respectively, of total revenues. Asian markets were primarily
responsible for the decline.

GROSS MARGIN. The Company's gross margin declined $21,328,000 or 14%, in
the nine-month period ended September 27, 1998 compared to the comparable period
in 1997. Gross margin as a percentage of revenues was 43% for the nine-month
period ended September 27, 1998 compared to 44% for the comparable period in
1997. Charges totaling $6,808,000 were recorded in the second quarter of fiscal
1998 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. This compares to charges totaling $5,520,000 for
the write down of excess and obsolete inventory recorded in the comparable
period in 1997. Excluding these charges, gross margin as a percentage of
revenues would have been 45% in both years.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $20,930,000 or 17% from the comparable period in 1997 and
decreased as a percentage of revenues to 32% from 34%. The dollar decrease
resulted primarily from continued efforts to reduce the Company's cost structure
which began during the last two quarters of 1997 offset by 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. Selling,
general and administrative expenses for the comparable period in 1997 included
charges of $9,200,000 as noted above. Excluding the charges, selling, general
and administrative expenses as a percentage of revenues would have been 31% and
32% for the period ended September 27, 1998 and the comparable period in 1997,
respectively.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$14,640,000, or 24% for the nine-month period ended September 27, 1998 from the
comparable period in 1997 and were 15% and 17%, respectively, of revenues for
the nine-month period ended September 27, 1998 and the comparable period in
1997. Research and development expenditures, prior to the capitalization of
software costs, were $51,379,000 for the nine-month period ended September 27,
1998 and $66,331,000 for the comparable period in 1997 or

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<PAGE> 13

17% and 19% of revenues, respectively. The Company capitalized software costs of
$5,411,000 for the nine-month period ended September 27, 1998 and $5,723,000 for
the comparable period in 1997.

NET INTEREST INCOME. Net interest income decreased to $1,722,000 for the
nine-month period ended September 27, 1998 from $2,037,000 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 $901,000 for the nine-month period
ended September 27, 1998 consists primarily of net gains on foreign currency
transactions. Other expenses, net of $2,161,000 for the comparable period in
1997 consists primarily of a $3 million write-off of an equity investment offset
by net gains on foreign currency transactions and net gains on sales of
securities.

INCOME TAXES. The Company's effective tax rate for the nine-month period
ended September 27, 1998 was 32% compared with 29% for the comparable period in
1997. The effective tax rate for the nine-month period ended September 27, 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 nine-month period ended September 28, 1997 was lower than the federal
statutory rate primarily due to the benefits of the research and development
credits, use of a foreign sales corporation and a decrease in the valuation
allowance. At September 27, 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 upon generating enough taxable income in
future periods to generate net tax liabilities at least as great as the deferred
tax asset. The amount of the net deferred tax assets considered realizable for
accounting purposes will also be evaluated in conjunction with the Company's
1999 budgeting process and could be significantly or completely reduced if
management concludes that sufficient taxable income is not expected in the near
term.

LIQUIDITY AND CAPITAL RESOURCES

At September 27, 1998 the Company had $49,270,000 in cash and cash
equivalents and $50,924,000 in short-term marketable securities. During the
nine-month period ended September 27, 1998 the Company generated $37,156,000 in
cash from operating activities. The primary source of cash during the nine-month
period ended September 27, 1998 was the collection of accounts receivable and
the reduction of inventory. Cash used for investing activities was $40,758,000
as a result of excess cash being invested in marketable securities. The increase
in cash provided by financing activities over the prior period stems from
borrowings against the foreign lines of credit in Japan.

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 September 27, 1998,
there were no borrowed amounts outstanding under the revolving credit agreement
and $28,762,000 in standby letters of credit outstanding under the revolving
credit agreement. There was $2,594,000 outstanding under the foreign lines of
credit. At September 27, 1998, the Company had $23,113,000 outstanding under
various leasing lines including the obligation for the lease of the facility at
50 Minuteman Road in Andover, Massachusetts which was $20,407,000 at September
27, 1998. This facility was subleased in June 1998 for a ten-year term.

The revolving credit agreement is fully 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 all covenants for the quarter ending September
27, 1998.

In March 1997, the Company entered into an agreement to lease an additional
facility at 200 Minuteman Road in Andover. The eighteen year lease term began in
October, 1998. The lease will be accounted for as a capital lease. The Company
is considering alternatives other than occupancy for this building, since
current staffing levels do not support the requirement for this facility. The
Company exceeded the capital lease limitation in its revolving credit agreement
and is working with the bank to amend the agreement to provide for the lease.

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<PAGE> 14

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.

NEW PRODUCTS, COST REDUCTIONS, TECHNOLOGICAL CHANGE, AND EVOLVING
MARKETS. The Company is engaged in an industry that is still emerging as a
result of extensive research and development efforts and which continues to
bring to market new, more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications market is in a
heightened competitive state due to deregulation throughout the world. In order
to maintain its market share leadership role in this fast-paced emerging market,
the Company must continue to introduce through internal development or by
acquisition 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 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 has
also experienced over the past year 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

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<PAGE> 15

cost reductions for all of its products or in developing and marketing suitable
new products 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 failure of
the Company to develop and market new products on a timely basis or to enhance
its existing products or to respond effectively to technological changes, new
industry standards or product announcements by competitors could have a material
adverse effect on the Company's business, financial condition and results of
operations.

COMPETITION. 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 network-based videoconferencing systems
and compact systems, a number of corporations have begun to offer competitive
products. In addition, partnerships between corporations which compete with the
Company and corporations 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 the Company's distribution channel
partners to competitors, decreases in average selling prices and margins in both
group and desktop videoconferencing systems, and a lower segment market share by
the Company for products and services in the emerging area of network-based
visual collaboration. In some cases, the Company competes with its channel
partners for various services, which increases the complexity of channel
management. In addition, corporations such as Microsoft or Intel, respectively,
may offer network visual collaboration software solutions or incorporate
standard algorithms into processor chips free of additional charge, which may
reduce the value the Company's technology provides to the market, especially in
its lower end videoconferencing products. In addition, the prices which the
Company is able to charge for its videoconferencing 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 the Company'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.
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 impact product shipments and
materially and adversely affect the Company's business, financial condition or
results of operations.

RECENT HISTORY OF LOSSES. The Company's reported a five percent (5%)
decrease in revenues for the year ended December 31, 1997 as compared to
revenues for the year ended December 31, 1996, and a decrease in net income from
$32,172,000 for the year ended December 31, 1996 to a $39,398,000 net loss for
the year ended December 31, 1997. These results have been adjusted for the
restatement announced in September, 1997 and November, 1997 for the financial
results for the first and second quarters of the year ended December 31, 1997
and the third and fourth quarters of the year ended December 31, 1996. The
Company recorded other charges in the year ended December 31, 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 three quarters of the
year ending December 31, 1998, and the Company reported a net loss of $7,230,000
for the nine months ended September 27, 1998. Included in the results for the
nine months ended September 27,

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1998 were charges totaling $11,018,000 related to discontinuing a video network
server product line and the write-down of certain inventory and fixed assets.
Revenues and prospects for growth have been impacted by, among other things, the
decline in the average selling price for several 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 with respect to the compatibility of existing products of the
Company and its competitors with expected new multimedia videoconferencing
products utilizing the Internet and LAN systems. Continued lower operating
results could impact the Company's ability to remain in compliance with
covenants under its existing revolving credit agreement and could also adversely
impact the carrying value of deferred tax assets. Further, there can be no
assurance that the Company can return to the level of revenues or profits in
relation to net sales experienced in years prior to the year ended December 31,
1997.

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. See "Litigation."

POTENTIAL FLUCTUATIONS OF QUARTERLY OPERATING RESULTS. The majority of the
Company's revenues in each quarter result from orders booked in that quarter,
and a substantial portion of the Company's orders and shipments typically occur
during the last weeks of each quarter such that forecasting of revenue and
product mix is both complex and difficult. Unanticipated variations in the
timing of receipt of customer orders in any quarter may produce significant
fluctuations in quarterly revenues. As a result, a shortfall in revenue compared
to internal expectations may not evidence itself until late in the quarter and
any resulting impact on earnings may not be determinable until several weeks
after the end of the quarter. The Company's ability to maintain or increase net
revenues depends upon its ability to increase unit volume sales. There can be no
assurance that the Company will be able to increase or to maintain the current
level of unit volume sales. Other factors which may cause period-to-period
fluctuations in operational results include the timing of new product
announcements and introductions by the Company and its competitors, market
acceptance of new or enhanced versions of the Company's products, changes in the
product mix of sales, changes in the relative proportions of sales among
distribution channels or among customers within each distribution channel,
changes in manufacturing costs, and general economic factors such as the recent
decline of currency values in the Asian markets.

INTERNATIONAL OPERATIONS. Revenues related to international operations of
the Company totaled approximately 43%, 43%, 44% and 42% of total revenues for
the nine months ended September 27, 1998 and for the three years ended December
31, 1997, 1996 and 1995, respectively. Management of the Company expects
international revenues to continue to constitute a significant portion of total
revenues in future periods. However, there can be no assurance that the Company
will be able to maintain or increase international market demand for its
products and, to the extent the Company is unable to do so, its business,
financial condition, results of operations or cash flows could be materially
adversely affected. The Company's sales to international distributors are
denominated in U.S. dollars in order to minimize risks associated with
fluctuating foreign currency rates. An increase in the value of the U.S. dollar
relative to other currencies, however, could make the Company's product more
expensive and, therefore, potentially less competitive in foreign markets.

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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 revenues 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. In February, 1998, Bruce R. Bond succeeded
Dr. Norman Gaut as Chief Executive Officer and President. In June, 1998, Bruce
Bond was elected Chairman of the Board and Dr. Gaut retired as an active
employee while remaining a member of the Board of Directors. There can be no
assurance that the transition from Dr. Gaut to Bruce Bond will be successful. On
October 15, 1998, the Company announced the appointment of Gary Bond as Group
Vice President of Product Management and Engineering. On October 21, 1998,
Arthur Fatum was appointed as Vice President and Chief Financial Officer. The
Company depends on a limited number of key senior management personnel,
including Bruce 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; Richard Baker,
Vice President and Chief Technology Officer; Gary Bond, Group Vice President of
Product Management and Engineering; and Arthur Fatum, Vice President and Chief
Financial Officer. There has been 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, over the past year, 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 the Company 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, intended to
restate its financial statements for the third and fourth quarters of the fiscal
year ended December 31, 1996 and the first quarter of the fiscal year ended
December 31, 1997. On November 13, 1997, after completion of its reexamination,
the Company announced that it would also restate the second quarter of the
fiscal year ended December 31, 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 relevant 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.

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The Company has taken actions including personnel changes, new internal
control procedures and greater oversight by the Audit Committee of the Board of
Directors, which the Company believes will strengthen its internal controls to
the extent necessary to prevent the reoccurrence of the practices which led to
the Company's restated financial reporting in the earlier periods. There can be
no assurance, however, that these actions by the Company will be sufficient.

YEAR 2000 COMPLIANCE. The Company has formed an internal compliance team
to evaluate its internal information technology infrastructure and application
systems ("IT Systems") and other non-IT infrastructure systems ("Non-IT
Systems") to determine whether such systems will operate correctly with regard
to the import, export, and processing of date information, including correct
handling of leap years, in connection with the change in the calendar year from
1999 to 2000 (the "Year 2000 Issue"), and to evaluate the Year 2000 Issue with
respect to the systems of third party partners and suppliers with which the
Company has a material relationship ("Third Party Systems").

The Company expects to complete a comprehensive IT Systems inventory
analysis and risk assessment by February 15, 1999. As previously planned and
budgeted, the Company is actively upgrading its core domestic IT Systems to
incorporate additional desired features and functionality. The Company expects
to complete these upgrades by June 30, 1999. In connection with such upgrades,
the Company expects its core domestic IT Systems will be Year 2000 compliant.
The Company expects to complete its IT Systems initiative as planned. IT systems
at several foreign subsidiaries and at MultiLink will likely be replaced in 1999
in order to achieve Year 2000 compliance. The cost of these replacements is
estimated at between $750,000 and $1,000,000. In addition, the Company currently
estimates an additional $1,000,000 to $1,500,000 of 1999 IT system remediation
costs based on its assessment to date. To the extent, however, that such
upgrades are not completed in a timely manner, the Company's operations,
financial condition, results of operations or cash flows could be materially
adversely affected.

The Company also expects to complete a Non-IT Systems inventory analysis
and risk assessment by February 15, 1999. The costs of any remediation actions
required in order to be Year 2000 compliant have not been identified at this
time. As the Company believes the number of Non-IT Systems is relatively small,
the Company does not expect that any additional costs of addressing the Year
2000 Issue for Non-IT Systems will have a material adverse impact on its
operations or its financial position, results of operations or cash flows.

With the assistance of an independent Year 2000 solution provider, the
Company is in the process of creating a plan to complete a Third Party Systems
inventory and risk assessment. The Company expects to verify Year 2000
compliance of Third Party Systems using this independent Year 2000 solution
provider. As the Company believes the number of material Third Party Systems is
relatively small, the Company expects to be in a position to evaluate the risks
in a timely manner. Until Year 2000 compliance of all Third Party Systems is
ascertained and written assurances are received, the risk to the Company's
operations and any additional costs relating to such Third Party Systems is
unknown.

For the year ending December 31, 1998, the Company estimates it will spend
a total of $320,000 on inventory analysis and risk assessment. To date, the
Company has incurred $140,000 of expense relating to inventory analysis and risk
assessment. These Year 2000 expenditures are within the Company's planned
organizational budgets and include the cost of independent Year 2000 solution
providers. Year 2000 expenditures for IT Systems, Non-IT Systems and Third Party
Systems do not reflect the cost to the Company of internal resources working on
the Year 2000 Issue and do not reflect planned upgrades or planned replacement
systems which may have a positive impact on resolving the Year 2000 Issue. The
Company expects to complete its risk assessment and cost estimate relating to
the Year 2000 Issue no later than the end of February, 1999 and to establish a
contingency plan relating to the remediation and prioritization of its IT
Systems, Non-IT Systems and Third Party Systems shortly thereafter. As of
November 1, 1998, no IT Systems projects have been deferred due to problems
associated with the Year 2000 Issue.

The Company has also tested its products for Year 2000 compliance and had
determined that all PictureTel products currently available for sale have either
successfully passed Year 2000 compliance testing or are not subject to Year 2000
compliance because such products do not import, export or process date
information in any manner. Recently, it has come to the Company's attention that
two of its newly released

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products, which are supplied by a third party and whose prior versions passed
the Year 2000 compliance tests, are not Year 2000 compliant. The Company is
actively pursuing the third party supplier to provide fixes to these products. A
small number of the Company's installed base products do not meet Year 2000
compliance testing. For these older, non-compliant versions of products, the
Company has, with one exception, developed adequate workarounds that will be
made available to customers and that will permit the products to continue to
operate with full functionality.

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PART II -- OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS

A. Datapoint Litigation

In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleged that certain of PictureTel's products infringed patent rights allegedly
owned by Datapoint. 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 appealed these findings, and
there can be no assurance that the outcome of the appeal will be in favor of
PictureTel. The Company believes that it has meritorious defenses to the appeal.

B. Shareholder Litigation

On April 7, 1998, the Company filed a motion to dismiss the complaint. On
October 28, 1998, the motion to dismiss Norman E. Gaut was granted and the
motion to dismiss PictureTel and Les Strauss was denied. No discovery has
occurred, and the Company expresses no opinion as to the likely outcome.

C. NV Holdings, Inc.

D. Revnet, Inc.

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Company breached an oral contract. Revnet is seeking $200,000,000 in damages. No
discovery has occurred and the Company expresses no opinion as to the likely
outcome.

ITEM 5 -- OTHER ITEMS

Under the Company's By-laws, stockholders who wish to make a proposal at
the 1999 Annual Meeting -- other than one that will be included by the Board of
Directors in the Company's proxy material -- must notify the Company no earlier
than 120 days before the 1999 Annual Meeting and no later than 75 days prior to
the 1999 Annual Meeting. Under recent changes to Federal proxy rules, if a
stockholder who wishes to present such a proposal fails to notify the Company by
75 days prior to the 1999 Annual Meeting, then the proxies that management
solicits for the 1999 Annual Meeting will include discretionary authority to
vote on the stockholder's proposal, in the event it is properly brought before
the meeting notwithstanding the Company's By-laws.

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

<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
10.1 Amended 1992 Non-Employee Directors' Stock Option Plan dated
February 27, 1998.
10.2 Employment agreement between PictureTel Corporation and Gary
L. Bond dated September 1, 1998.
10.3 Amended Equity Incentive Plan dated October 18, 1996.
27.1 Financial Data Schedule for the period ended September 27,
1998, as required by Item 601(c) of Regulation S-K.
27.2 Financial Data Schedule for the period ended September 28,
1997, as required by Item 601(c) of Regulation S-K.
27.3 Financial Data Schedule for the period ended September 28,
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/ Arthur L. Fatum
------------------------------------
Arthur L. Fatum
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)

November 11, 1998

<PAGE> 1

EXHIBIT 10.1

PICTURETEL CORPORATION

1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN, AS AMENDED

( AS AMENDED THROUGH FEBRUARY 27, 1998 )

1. PURPOSE. The purpose of this 1992 Non-Employee Directors' Stock Option
Plan (the "Plan") is to advance the interests of PictureTel Corporation (the
"Company") by enhancing the ability of the Company to attract and retain
non-employee directors who are in a position to make significant contributions
to the success of the Company and to reward directors for such contributions
through ownership of shares of the Company's Common Stock (the "Stock").

2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") of the Board of Directors (the "Board") of the Company designated
by the Board for that purpose. Unless and until a Committee is appointed, the
Plan shall be administered by the entire Board, and references in the Plan to
the "Committee" shall be deemed references to the Board. The Committee shall
have authority, not inconsistent with the express provisions of the Plan (a) to
issue options granted in accordance with the formula set forth in this Plan and
also for non-automatic options as provided below to Eligible Directors as
defined below; (b) to prescribe the form or forms of instruments evidencing
awards and any other instruments required under the Plan and to change such
forms from time to time; (c) to adopt, amend and rescind rules and regulations
for the administration of the Plan; and (d) to interpret the Plan and to decide
any questions and settle all controversies and disputes that may arise in
connection with the Plan. Such determinations of the Committee shall be
conclusive and shall bind all parties.

3. ELIGIBILITY OF DIRECTORS FOR STOCK OPTIONS. Directors of the Company who
are not employees of or consultants to the Company or any subsidiary of the
Company shall be eligible to participate in the Plan ("Eligible Directors").

4. AUTOMATIC GRANT OF OPTIONS; NON-AUTOMATIC GRANT OF OPTIONS: EXERCISE
PRICE; OPTION TERM.

(a) AUTOMATIC GRANT OF OPTIONS. On the date an individual is first elected
as a Director of the Company, such director, if an Eligible Director, shall be
automatically granted an option to purchase 20,000 shares of Common Stock of the
Company (subject to adjustment as provided in Sections 5 and 10) (the "Initial
Grant"). Formerly, the Initial Grant was 40,000 shares (after giving effect to
the two-for-one stock split in November, 1995).

On August 1, 1996, an Eligible Director who has served as a Director for
more than two years prior to such date, shall be automatically granted an option
to purchase 20,000 shares of Common Stock of the Company (subject to adjustment
as provided in Sections 5 and 10) (the "Secondary Grant"), so long as such
individual is serving as a Director on the August 1, 1996 date.

On August 1 of each year, commencing August 1, 1997, an Eligible Director
shall automatically be granted an option to purchase 5,000 shares of Common
Stock of the Company (subject to adjustment as provided in Sections 5 and 10)
(the "Annual Grant"), so long as such individual is serving as a Director on the
applicable August 1 date, provided, however, that no such Annual Grant shall be
granted to an Eligible Director who first became an Eligible Director of the
Company within less than six months prior to August 1 of said year.

<PAGE> 2

(b) NON-AUTOMATIC GRANTS. In addition to the automatic grants provided
above, the board may grant non-automatic stock options (the "Non-Automatic
Grants") under the Plan to Eligible Directors from time to time not exceeding
60,000 shares of Common Stock in the aggregate (subject to adjustment in
Sections 5 and 10).

(c) EXERCISE PRICE AND OPTION TERM. All option grants shall be at an
exercise price equal to the Fair Market Value of the Common Stock on the
effective date of the grant. All options shall expire ten years after the
effective date of the grant.

Options shall be non-incentive options or, if subsequently permitted by the
Internal Revenue Code of 1986, as amended, incentive or other options entitled
to special tax treatment.

5. NUMBER OF SHARES. The number of shares of Stock of the Company which may
be issued upon the exercise of Options granted under the Plan, including shares
forfeited pursuant to Section 7, shall not exceed 430,000 in the aggregate
(options for 160,000 shares in the aggregate having been granted prior to April
10, 1996, after giving effect to the two-for-one stock split in November, 1995),
subject to increase under Section 10, which increases and appropriate
adjustments as a result thereof shall be made by the Committee, whose
determination shall be binding on all persons.

6. STOCK TO BE DELIVERED. Shares of Stock to be delivered pursuant to an
Option granted under this Plan may constitute an original issue of authorized
Stock or may consist of previously issued Stock acquired by the Company, as
shall be determined by the Board. The Board and the proper officers of the
Company shall take any appropriate action required for such delivery. No
fractional shares shall be delivered under the Plan.

The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan (a) until all conditions of the Option have been satisfied, (b)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulation have been complied with, (c) if the outstanding Stock is at
the time listed on NASDAQ or any other stock exchange, until the shares to be
delivered have been listed or authorized to be listed on NASDAQ or such other
exchange upon official notice of notice of issuance, and (d) until all other
legal matters in connection with the issuance and delivery of such shares have
been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Options, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.

If an Option is exercised by the Eligible Director's legal representative,
the Company will be under no obligation to deliver Stock pursuant to such
exercise until the Company is satisfied as to the authority of such
representative.

7. EXERCISABILITY; EXERCISE; PAYMENT OF EXERCISE PRICE. All Initial Grant
and Secondary Grant Options granted under the Plan shall become exercisable 25%
after one year from the effective date of the grant and 6-1/4% after the end of
each quarter thereafter so that the Options are 100% exercisable four years from
the effective date of the grant. All Annual Grants and all Non-Automatic Grants
granted under the Plan shall become exercisable 100% after one year from the
effective date of the grant.

Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (a) any documents
required by the Committee and (b) payment in full as provided below for the
number of shares for which the Option is exercised.

<PAGE> 3

The exercise price of Stock purchased on exercise of an Option must be paid
for as follows: (a) in cash or by check (acceptable to the Company in accordance
with guidelines established for this purpose), bank draft or money order payable
to the order of the Company or (b) through the delivery of shares of Stock which
have been outstanding for at least six months and which have a Fair Market Value
on the last business day preceding the date of exercise equal to the exercise
price, or (c) by delivery of a promissory note of the Option holder to the
Company, with a maturity of five years (or earlier termination of service as a
director), interest at prime (or the equivalent) announced by Bank of Boston on
the exercise date and on such other terms as are customary for notes accepted
under other stock plans of the Company (provided that, if the Stock delivered
upon exercise of the Option is an original issue of authorized Stock, at least
so much of the exercise price as represents the par value of such Stock must be
paid in cash), or (d) by delivery of an unconditional and irrevocable
undertaking by a broker to deliver promptly to the Company sufficient funds to
pay the exercise price, or (e) by any combination of the permissible forms of
payment.

To the extent shares of Stock covered under an Option are not delivered
because the Option lapses or is terminated, such forfeited shares may be
regranted in another Option within the limits set forth in Section 5.

8. TERMINATION OF OPTIONS.

(a) DEATH OR PERMANENT DISABILITY. If an Eligible Director ceases to be a
director by reason of death or total and permanent disability (as determined by
the Committee), the following will apply:

All Options held by the Eligible Director that are not exercisable on the
thirtieth day after termination of the Eligible Director's status as a director
will terminate as of such date. All Options that are exercisable as of said
thirtieth day will continue to be exercisable until the earlier of (i) the first
anniversary of the date on which the Eligible Director's status as a director
ended or (ii) the date on which the Option would have terminated had the
Eligible Director remained a director. If the Eligible Director has died or is
totally or permanently disabled, the Option may be exercised within such limits
by the Eligible Director's legal representative.

(b) TERMINATION FOR REASONS OTHER THAN DEATH OR DISABILITY. If an Eligible
Director's service with the Company terminates for any reason other than death
or incapacity as provided above, all options held by the director that are not
then exercisable shall terminate. Options that are exercisable on the date of
such termination (other than termination upon a removal for cause, in which
event all Options shall immediately terminate) shall continue to be exercisable
until the earlier of (i) three months thereafter or (ii) the date on which the
Option would have terminated had the director remained an Eligible Director, and
after completion of that period, such Options shall terminate to the extent not
previously exercised, expired or terminated.

(c) CERTAIN CORPORATE TRANSACTIONS. In the event of a consolidation or
merger in which the Company is not the surviving corporation or which results in
the acquisition of substantially all the Company's outstanding Stock by a single
person or entity or by a group of persons and/or entities acting in concert, or
in the event of the sale or transfer of substantially all the Company's assets
or a dissolution or liquidation of the Company (a "covered transaction"), all
outstanding Options under the Plan will terminate as of the effective date of
the covered transaction, provided that each such outstanding Option not
otherwise exercisable shall become immediately exercisable in full 20 days prior
to the effective date thereof.

<PAGE> 4

9. GENERAL PROVISIONS

(a) DOCUMENTATION OF OPTIONS. Options will be evidenced by written
instruments prescribed by the Committee from time to time. Such instruments may
be in the form of agreements, to be executed by both an Eligible Director and
the Company, or certificates, letters or similar instruments, which need not be
executed by an Eligible Director but acceptance of which will evidence agreement
to the terms thereof.

(b) RIGHTS AS A STOCKHOLDER. An option holder shall not have the rights of
a stockholder with respect to Options under the Plan except as to Stock actually
received by him or her under the Plan.

(c) TAX WITHHOLDING. The Eligible Director or other appropriate person
shall remit to the Company an amount sufficient to satisfy the withholding
requirements, or make other arrangements satisfactory to the Committee with
regard to such requirements, prior to the delivery of any Stock. If and to the
extent that such withholding is required, the Committee may permit the Eligible
Director such other person to elect at such time and in such manner as the
Committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Stock having a value calculated to
satisfy the withholding requirement.

(d) NONTRANSFERABILITY OF OPTIONS. No Option may be transferred other than
by will or by the laws of descent and distribution, and during a director's
lifetime an Option may be exercised only by the director (or, in the event of
the director's incapacity, the person or persons legally appointed to act on the
director's behalf).

10. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.

(a) In the event of a stock dividend, stock split or combination of shares,
recapitalization or other change in the Company's capitalization, or other
distribution to common stockholders other than normal cash dividends, the
Committee will make any appropriate adjustments to the maximum number of shares
that may be delivered under the Plan under Section 5 above.

(b) In any event referred to in paragraph (a), the Committee will also make
any appropriate adjustments to the number and kind of shares of stock or
securities subject to Options then outstanding or subsequently granted, exercise
prices relating to Options and any other provision of Options affected by such
change. The Committee may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.

11. FAIR MARKET VALUE. For purposes of the Plan, Fair Market Value of a
share of Stock on any date will be the average of the bid and asked prices in
the over-the-counter market with respect to such Stock, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System or
such other similar system then in use (or by the appropriate equivalent closing
price if the Stock is then listed on any stock exchange); or, if on any such a
date such Stock is not quoted by any such organization, the average of the
closing bid and asked prices with respect to such Stock, as furnished by a
professional market maker making a market in such Stock selected by the
Committee; or if such prices are not available, the fair market value of such
Stock as of such date as determined in good faith by the Committee.

<PAGE> 5

12. EFFECTIVE DATE AND TERM. This Plan has an effective date of October 23,
1992, having been adopted by the Board of Directors on October 14, 1992 and
approved by the vote of stockholders at the Annual Meeting on June 10, 1993.
Options granted under the Plan prior to the date of such stockholder approval on
June 10, 1993 became effective on the effective date of grant. No Options may be
awarded under this Plan after October 1, 2002, but the Plan shall continue
thereafter while previously awarded Options remain subject to the Plan.

13. EFFECT OF TERMINATION, AND AMENDMENT. Neither adoption of the Plan nor
the grant of Options to an Eligible Director shall confer upon any person any
right to continued status as a director with the Company or any subsidiary or
affect in any way the right of the Company or subsidiary to terminate a director
relationship at any time or shall affect the Company's right to grant to such
director options or other stock awards that are not subject to the Plan, to
issue to such director stock as a bonus or otherwise, or to adopt other plans or
arrangements under which stock may be issued to directors. The Committee may at
any time terminate the Plan as to any further grants of Options. The Committee
may at any time or times amend the Plan for any purpose which may at the time be
permitted by law, but in no event (except to comply with the provisions of the
Internal Revenue Code, the Employee Retirement Income Security Act or the rules
thereunder) more than once in any six-month period.

February 27, 1998

<PAGE> 1
EXHIBIT 10.2

September 1, 1998

Mr. Gary L. Bond
40 Downs Lake Circle
Dallas, Texas 75230

Dear Gary:

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

The cash compensation in the offered position will contain 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 $9,615.38 (the equivalent of $250,000.00 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 an Officer and Vice President 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% - 40% of base
salary for full performance in meeting the objectives for the year, but may
range up to 80% 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 amount of $65,000.00;
paid as follows: $35,000.00 within thirty (30) days of your hire date; and
$30,000.00 on the first anniversary of your hire date.

The Company shall provide you with a temporary special living allowance of up to
$3,500.00 per month ("Living Allowance") commencing within thirty (30) days of
your hire date and continuing through the first anniversary of your hire date.
Immediately prior to the first anniversary of the first anniversary of your hire
date, the Living Allowance shall reviewed and a decision made as to whether it
should be extended, the length of such extension, if any or whether another
course of action should be pursued.

In addition, we will recommend to the Compensation Committee of the Board of
Directors your participation in PictureTel's Equity Incentive Plan. The
recommendation presented will be for you to be granted an option to purchase
200,000 shares of the Common Stock of the Company ("Option"). The Option will
vest over a four (4) year period, with the first twenty-five (25) percent of the
Option vesting one (1) year 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
no less than 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. Certain other restrictions may apply to your option
grant as are set forth in the Equity Incentive Plan. As a Vice President,
additional option grants are subject to the annual total compensation review
discussed above.

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 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

<PAGE> 2

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 specifically covered in
PictureTel's Equity Incentive Plan 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.

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 Allmerica Health Insurance, 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 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,

Bruce R. Bond
Chairman, President and
Chief Executive Officer

ACCEPTED: ____________________________ Date: ____________

SS#: ________________ Anticipated Start Date: ________________

<PAGE> 1
EXHIBIT 10.3

PICTURETEL CORPORATION

EQUITY INCENTIVE PLAN

(AS AMENDED THROUGH OCTOBER 18, 1996)

1. PURPOSE

The purpose of this Equity Incentive Plan (the "Plan") is to advance
the interests of Picturetel Corporation (the "Company") by enhancing its ability
to (a) attract and retain employees who are in a position to make significant
contributions to the success of the Company and its subsidiaries: (b) reward
employees for such contributions: (c) encourage employees to take into account
the long-term interests of the Company through ownership of shares of the
Company's common stock ("Stock"); and (d) attract other persons or entities who
are in a position to make a significant contribution to the success of the
Company.

The Plan is intended to accomplish these goals by enabling the
Company to grant Awards to eligible employees. Awards may be in the form of
Options, Stock Appreciation Rights (as described in Section 6.2), Restricted
Stock or Unrestricted Stock Awards (as described in Section 6.3), Deferred Stock
Awards (as described in Section 6.4), Performance Awards (as described in
Section 6.5), Loans or Supplemental Grants (as described in Section 6.6), or
combinations thereof.

2. ADMINISTRATION

The Plan will be administered by a committee of at least two persons
(the "Committee") appointed by the Board of Directors of the Company (the
"Board"), all of the members of which Committee must be disinterested persons
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the
"1934 Act"). Alternatively, the Board may serve as the Committee so long as a
majority of the members of the Board are disinterested persons within the
meaning of Rule 16b-3.

The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award: (d) determine the terms
and conditions of each Award; (e) waive compliance by a Participant (as defined
below) with any obligations to be performed by the Participant under an Award
and waive any term or condition of an Award; (f) with the consent of the
Participant, cancel an existing Award in whole or in part and grant the
Participant another Award in its place; (g) prescribe the form or forms of
instruments that are required under the Plan, including any written notices and
elections required of Participants, or are deemed appropriate by the Committee,
and change such forms from time to time; (h) adopt, amend and rescind rules and
regulations for the administration of the Plan; and (i) interpret the Plan and
decide any questions and settle all

1A
<PAGE> 2
controversies and disputes that may arise in connection with the Plan. Such
determinations and actions of the Committee, and all other determinations and
actions of the Committee made or taken under authority granted by any provision
of the Plan, will be conclusive and will bind all parties. A majority of the
members of the Committee will constitute a quorum, and all determinations of the
Committee must be made by a majority of its members.

3. EFFECTIVE DATE AND TERM OF PLAN

The Plan will become effective on the date on which it is approved by
the stockholders of the Company. Grants of Awards under the Plan may be made
prior to that date (but after Board adoption of the Plan), subject to such
approval of the Plan.

No Award may be granted under the Plan after November 14, 1999, but
Awards previously granted may extend beyond that date.

4. SHARES SUBJECT TO THE PLAN

Subject to adjustment as provided in Section 8.6 below, the aggregate
number of shares of Stock that may be delivered under the Plan will be
9,000,000. If any Award requiring exercise by the Participant for delivery of
Stock terminates without having been exercised in full, or if any Award payable
in Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
will be available for future grants.

Subject to adjustment as provided in Section 8.6 below, no one
individual participating in the Plan may be granted stock options for more than
500,000 shares of Stock in the aggregate in any fiscal year.

Stock delivered under the Plan may be either authorized but unissued
stock or previously issued Stock acquired by the Company and held in treasury.
No fractional shares of stock will be delivered under the Plan.

5. ELIGIBILITY AND PARTICIPATION

Those eligible to receive Awards under the Plan will be (i) persons
in the employ of the Company or any of its subsidiaries ("Employees") who, in
the opinion of the Committee, are in a position to make a significant
contribution to the success of the Company or its subsidiaries, and (ii) such
other persons or entities who, in the opinion of the Committee or the Board, are
in a position to make a significant contribution to the success of the Company
or its Subsidiaries ("Participants"). A "subsidiary" for purposes of the Plan
will be a corporation in which the Company owns directly or indirectly, stock
possessing 50% or more of the total combined voting power of all classes of
stock.

2A
<PAGE> 3

6. TYPES OF AWARDS

6.1 OPTIONS.

(a) Nature of Options. An Option is an Award entitling the recipient
on exercise thereof to purchase Stock at a specified exercise price.

Both "incentive stock options," as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and Options that are not
incentive stock options, may be granted under the Plan. Any Option intended to
qualify as an incentive stock option will be referred to in the Plan as an
"ISO." Instruments evidencing ISOs must contain such provisions as are required
under applicable provisions of the Code. Once an ISO has been granted, no action
by the Committee that would cause the Option to lose its status under the Code
as an incentive stock option will be effective without the consent of the Option
holder.

(b) Exercise Price. The exercise price of an Option will be
determined by the Committee subject to the following:

(1) The exercise price of an Option which is not an ISO may be either
(i) any amount which is not less than 50% of the fair market value (as defined
in Section 8.8) per share of the Stock at the time the Option is granted or (ii)
the par value per share of the Stock.

(2) The exercise price of an ISO may not be less than 100% (110% in
the case of an ISO granted to a ten-percent shareholder) of the fair market
value per share of the Stock at the time the Option is granted. A "ten-percent
shareholder" is any person who at the time of grant owns directly or indirectly,
or is deemed to own by reason of the attribution rules of section 425(d) of the
Code, Stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any of its subsidiaries.

(3) In no case may the exercise price paid for Stock which is part of
an original issue of authorized Stock be less than the par value per share of
the Stock.

(4) The committee may reduce the exercise price of an Option at any
time after the time of grant with the consent of the Participant, but the Option
will be treated as a new Option granted on the date of the reduction.

(c) Duration of Options. The latest date on which an Option may be
exercised will be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent shareholder) of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Committee at the time the Option was granted.

3A
<PAGE> 4
(d) Exercise of Options. An option will become exercisable at such
time or times, and on such conditions, as the Committee may specify. The
committee may at any time accelerate the time at which all or any part of the
Option may be exercised. Any exercise of an Option must be in writing, signed by
the proper person and delivered or mailed to the Company, accompanied by (1) any
documents required by the Committee and (2) payment in full in accordance with
paragraph (e) below or the number of shares for which the Option is exercised.

(e) Payment for Stock. Stock purchased on exercise of an Option must
be paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (2) if so permitted by the
instrument evidencing the Option (or in the case of an Option which is not an
ISO, by the Committee at or after grant of the Option, (i) through the delivery
of shares of Stock which have been outstanding for at least six months (unless
the Committee expressly approves a shorter period) and which have a fair market
value on the last business day preceding the date of exercise equal to the
exercise price, or (ii) by delivery of a promissory note of the Option holder to
the Company, payable on such terms as are specified by the Committee (provided
that, if the Stock delivered upon exercise of the Option is an original issue of
authorized Stock, at least so much of the exercise price as represents the par
value of such Stock must be paid in cash), or (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or (iv) by any combination
of the permissible forms of payment.

(f) Discretionary Payments. If the market price of shares of Stock
subject to an Option (other than an Option which is in tandem with a Stock
Appreciation Right as described in Section 6.2 below) exceeds the exercise price
of the Option at the time of its exercise, the Committee may cancel the Option
and cause the Company to pay in cash or in shares of Common Stock (at a price
per share equal to the fair market value per share) to the person exercising the
Option an amount equal to the difference between the fair market value of the
Stock which would have been purchased pursuant to the exercise (determined on
the date the Option is canceled) and the aggregate exercise price which would
have been paid. The Committee may exercise its discretion to take such action
only if it has received a written request from the person exercising the Option,
but such a request will not be binding on the Committee.

6.2. STOCK APPRECIATION RIGHTS.

(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right
is an Award entitling the recipient on exercise of the Right to receive an
amount, in cash or Stock or a combination thereof (such form to be determined by
the Committee), determined in whole or in part by reference to appreciation in
Stock value.

In general, a Stock Appreciation Right entitles the Participant to
receive, with respect to each share of Stock as to which the Right is exercised,
the excess of the share's fair market value on the date of exercise over its
fair market value on the date the Right was granted. However, the Committee may
provide at the time of grant

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that the amount the recipient is entitled to receive will be adjusted upward or
downward under rules established by the Committee to take into account the
performance of the Stock in comparison with the performance of other stocks or
an index of other stocks.

(b) Grant of Stock of Appreciation Rights. Stock Appreciation Rights
may be granted in tandem with, or independently of, Options granted under the
Plan. A Stock Appreciation Right granted in tandem with an Option which is not
an ISO may be granted either at or after the time the Option is granted. A Stock
Appreciation Right granted in tandem with an ISO may be granted only at the time
the Option is granted.

(c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights
are granted in tandem with Options, the following will apply:

(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is exercisable and
will be exercisable in accordance with the procedure required for exercise of
the related Option.

(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except that
a Stock Appreciation Right granted with respect to less than the full number of
shares covered by an Option will not be reduced until the number of shares as to
which the related Option has been exercised or has terminated exceeds the number
of shares not covered by the Stock Appreciation Right.

(3) The Option will terminate and no longer to exercisable upon the
exercise of the related Stock Appreciation Right.

(4) The Stock Appreciation Right will be transferable only with the
related Option.

(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the market price of the Stock subject to the Option exceeds
the exercise price of such option.

(d) Exercise of Independent Stock Appreciation Rights. A Stock
Appreciation Right not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Committee may specify. The
Committee may at any time accelerate the time at which all or any part of the
Right may be exercised.

Any exercise of an independent Stock Appreciation Right must be in
writing, signed by the proper person and delivered or mailed to the Company,
accompanied by any other documents required by the Committee.

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6.3. RESTRICTED AND UNRESTRICTED STOCK.

(a) Nature of Restricted Stock Award. A Restricted Stock Award
entitles the recipient to acquire shares of Stock subject to the restrictions
described in paragraph (d) below ("Restricted Stock") for a price which may be
either (i) any amount which is not less than 50% of the fair market value of the
Stock at the time of purchase or (ii) the par value per share of the Stock.

(b) Acceptance of Award. A Participant who is granted a Restricted
Stock Award will have no rights with respect to such Award unless, within 60
days (or such shorter period as the Committee may specify) following the date of
the Award, the Participant accepts the Award by written instrument delivered or
mailed to the Company accompanied by payment in full of the specified purchase
price, if any, of the shares covered by the Award. Payment may be by certified
or bank check or other instrument acceptable to the Committee.

(c) Rights as a Stockholder. A Participant who receives Restricted
Stock will have all the rights of a stockholder with respect to the Stock,
including voting and dividend rights, subject to the restrictions described in
paragraph (d) below and any other conditions imposed by the Committee at the
time of grant. Unless the Committee otherwise determines, certificates
evidencing shares of Restricted Stock Restricted Stock will remain in the
possession of the Company until such shares are free of all restrictions under
the Plan.

(d) Restrictions. Except as otherwise specifically provided by the
Plan, until these restrictions lapse, Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of, and if
the Participant ceases to be an Employee for any reason, must be offered to the
Company for purchase for the amount of cash paid for the Stock, or forfeited to
the Company if no cash was paid. The restrictions will lapse at such time or
times, and on such conditions, as the Committee may specify. The Committee may
at any time accelerate the time at which the restrictions on all or any part of
the shares will lapse.

(e) Notice of Election. Any Participant making an election under
Section 83(b) of the Code with respect to Restricted Stock must provide a copy
thereof to the Company within 10 days of the filing of such election with the
Internal Revenue Service.

(f) Other Awards Settled with Restricted Stock.. The Committee may,
at the time any Award described in this Section 6 is granted, provide that any
or all the Stock delivered pursuant to the Award will be Restricted Stock.

(g) Unrestricted Stock. The Committee may, in its sole discretion,
sell to any Participant shares of Stock free of restrictions under the Plan for
a price which may be either (i) any amount which is not less than 50% of the
fair market value of the Stock at the time of purchase or (ii) the par value per
share of the Stock.

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6.4 DEFERRED STOCK.

(a) Nature of Deferred Stock Award. A Deferred Stock Award entitles
the recipient to receive shares of Deferred Stock, which is Stock to be
delivered in the future. Delivery of the Stock will take place at such time or
times, and on such conditions, as the Committee may specify. The Committee may
at any time accelerate the time at which delivery of all or any part of the
Stock will take place.

(b) Other Awards Settled with Deferred Stock. The committee may at
the time any Award described in this Section 6 is granted, provide that, at the
time Stock would otherwise be delivered pursuant to the Award, the Participant
will instead receive an instrument evidencing the Participant's right to future
delivery of Deferred Stock.

6.5 PERFORMANCE AWARDS; PERFORMANCE GOALS

(a) Nature of Performance Awards. A Performance Award entitles the
recipient to receive, without payment, an amount, in cash or Stock or a
combination thereof (such form to be determined by the Committee), following the
attainment of Performance Goals. Performance Goals may be related to personal
performance, corporate performance, departmental performance or any other
category of performance deemed by the Committee to be important to the success
of the Company. The Committee will determine the Performance Goals, the period
or period during which performance is to be measured and all other terms and
conditions applicable to the Award.

6.6 LOANS AND SUPPLEMENTAL GRANTS.

(a) Loans. The Company may make a loan to a Participant ('Loan"),
either on the date of or after the grant of any Award to the Participant. A Loan
may be made either in connection with the purchase of Stock under the Award or
with the payment of any Federal, state and local income tax with respect to
income recognized as a result of the Award. The Board will have full authority
to decide whether to make a Loan and to determine the amount, terms and
conditions of the Loan, including the interest rate (which may be zero), whether
the Loan is to be secured or unsecured or with or without recourse against the
borrower, the terms on which the Loan is to be repaid and the conditions, if
any, under which it may be forgiven. However, no Loan may have a term (including
extensions) exceeding ten years in duration.

(b) Supplemental Grants. In connection with any Award, the Committee
may at the time such Award is made or at a later date, provide for and grant a
cash award to the Participant ("Supplemental Grant") not to exceed an amount
equal to (1) the amount of any federal, state and local income tax on ordinary
income for which the Participant will be liable with respect to the Award, plus
(2) an additional amount on a grossed-up basis necessary to make the Participant
whole after tax, discharging all the Participant's income tax liabilities
arising from all

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payments under this Section 6. Any payments under this subsection (c) will be
made at the time the Participant incurs Federal income tax liability with
respect to the Award.

7. EVENTS AFFECTING OUTSTANDING AWARDS

7.1 RETIREMENT.

The following will apply if a Participant ceases to be an Employee by
reason of retirement with consent of the Company (a) after attainment of age 65,
(b) prior to attainment of age 65 in the case of ISOs or (c) prior to attainment
of age 65 in the case of all other Awards only if the Committee so specifies at
or prior to such retirement.

(a) Subject to paragraph (c) below each Option and Stock Appreciation
Right held by the Participant when the Participant's employment ended will
immediately become exercisable in full and will continue to be exercisable until
the earlier of (1) the first anniversary of the date on which such employment
ended or (2) the date on which the Award would have terminated had the
Participant remained an Employee. If the Participant dies after such
Participant's employment has ended, the Award may be exercised within such
limits by the Participant's executor or administrator or by the person or
persons to whom the Award is transferred by will or the applicable laws descent
and distribution (the Participant's "legal representative").

(b) Subject to paragraph (c) below are each share of Restricted Stock
held by the Participant when the Participant's employment ended will immediately
become free of the restrictions.

(c) If when the Participant's employment ended the exercise of an
Option or Stock Appreciation Right or lapse of restrictions on Restricted Stock
was subject to performance or other conditions (other than conditions relating
to the mere passage of time and continued employment) which had not been
satisfied at such time, the Committee may remove or modify such conditions or
provide that the Participant will receive the benefit of the Award if and when
the conditions are subsequently satisfied. If the Committee does not take such
action, however, such Award will terminate as of the date on which the
Participant's employment ended.

(d) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant has not become irrevocably
entitled will be forfeited and the Award canceled as of the date on which the
Participant's employment ended unless otherwise provided in the instrument
evidencing the Award or otherwise agreed to by the Committee.

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7.2 DEATH AND DISABILITY.

If a Participant ceases to be an Employee by reason of death or total
and permanent disability (as determined by the Committee), the following will
apply:

(a) All Options then held by the Participant that are not otherwise
exercisable, shall have the exercise rights thereto accelerated so that for each
full year of service with the Company, no less than twenty-five (25) percent of
the aggregate number of shares granted and outstanding shall be exercisable as
of the termination date (not to exceed one hundred (100) percent of the
aggregate number of shares); all option shares not accelerated under the
foregoing formula terminate as of the termination date. Any Awards that are so
exercisable will continue to be exercisable until the earlier of (1) the first
anniversary of the date on which the Participant's employment ended or (2) the
date on which the Award would have terminated had the Participant remained an
Employee. If the Participant has died, the Award may be exercised within such
limits by the Participant's legal representative.

(b) All Stock Appreciation Rights held by the Participant that are
not exercisable on the thirtieth day after the termination of the Participant's
employment will terminate as of such date. Any Awards that are so exercisable
will continue to be exercisable until the earlier of (1) the first anniversary
of the date on which the Participant's employment ended or (2) the date on which
the Award would have terminated had the Participant remained an Employee. If the
Participant has died, the Award may be exercised within such limits by the
Participant's legal representative.

(c) All Restricted Stock held by the Participant when the
Participant's employment ended must be transferred to the Company (and, in the
event the certificates representing such Restricted Stock are held by the
Company, such Restricted Stock will be so transferred without any further action
by the Participant) in accordance with Section 6.3 above.

(d) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant has not become irrevocably
entitled will be forfeited and the Award canceled as of the date on which the
Participant's employment ended, unless otherwise provided in the instrument
evidencing the Award or otherwise agreed to by the Committee.

7.3 OTHER TERMINATION OF EMPLOYMENT

If a Participant ceases to be an Employee for any reason other than
those specified in Sections 7.1 or 7.2 above, the following will apply:

(a) All Options and Stock Appreciation Rights held by the Participant
that were not exercisable when his or her employment ended will then terminate.
Any Awards that were so exercisable will continue to be exercisable

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until the earlier of (1) the date which is three months after the date on which
his or her employment ended and (2) the date on which the Award would have
terminated had the Participant remained an Employee, unless employment was
terminated for cause, in which event any Awards that were so exercisable shall
then terminate. The Committee may, in its discretion, extend the exercise period
beyond such three-month period.

(b) All Restricted Stock held by the Participant when the
Participant's employment ended must be transferred to the Company (and, in the
event the certificates representing such Restricted Stock are held by the
Company, such Restricted Stock will be so transferred without any further action
by the Participant) in accordance with Section 6.3 above.

(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant has not become irrevocably
entitled will be forfeited and the Award canceled as of the date of such
termination of employment unless otherwise provided in the instrument evidencing
the Award or otherwise agreed to by the Committee.

For purposes of this Section 7.3, an Employee's employment will not
be considered to have ended (1) in the case of sick leave or other bona fide
leave of absence proved for purposes of the Plan by the committee, so long as
the Employee's right to reemployment is guaranteed either by statute or by
contract, or (2) in the case of a transfer of employment between the company and
a subsidiary or between subsidiaries, or to the employment of a corporation (or
a parent or subsidiary corporation of such corporation) issuing or assuming an
Award in a transaction to which section 425(a) of the Code applies.

7.4 A CHANGE IN CONTROL PROVISION

As used herein, a Change in Control and related definitions shall
have the meanings as set forth in Section 7.4 C below.

Immediately prior to the occurrence of a Change in Control:

(a) Each Option and Stock Appreciation Right shall automatically
become fully exercisable unless the Committee shall otherwise expressly provide
at the time of grant.

(b) Restrictions and conditions on Restricted Stock, Deferred Stock,
Performance Units and Other Stock-based Awards shall automatically be deemed
waived to the extent, if any, specified (whether at or after time of grant) by
the Committee.

In addition to the foregoing and Sections 6.1(d), 6.2(c) and (d),
6.3(d) and 6.4(a), the Committee may at any time prior to or after a Change in
Control accelerate the exercisability of any Options and Stock Appreciation

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Rights and may waive restrictions, limitations and conditions on Restricted
Stock, Deferred Stock, Performance Units and Other Stock-based Awards to the
extent it shall in its sole discretion determine.

7.4 B CERTAIN CORPORATE TRANSACTIONS.

(a) In the event of a consolidation or merger in which the Company is
not the surviving corporation or which results in the acquisition of
substantially all the Company's outstanding Stock by a single person or entity
or by a group of persons and/or entities acting in concert, or in the event of
the complete liquidation of the Company or the sale or transfer of substantially
all of the Company's assets (a "Covered Transaction"), all outstanding Options
will terminate as of the effective date of the Covered Transaction, provided
that at least twenty (20) days prior to the effective date of any such merger,
consolidation, liquidation or sale of assets, but subject to Paragraphs (c) and
(d) below, the Committee shall make all outstanding Options exercisable
immediately prior to consummation of such Covered Transaction (to the extent
that such Options are not exercisable immediately prior to the consummation of
the Covered Transaction pursuant to Section 7.4 A).

(b) Subject to Paragraphs (c) and (d) below, the Committee may, in
its sole discretion, prior to the effective date of the Covered Transaction, (1)
remove the restrictions from each outstanding share of Restricted Stock, (2)
cause the Company to make any payment and provide any benefit under each
outstanding Deferred Stock Award, Performance Award, and Supplemental Grant
which would have been made or provided with the passage of time had the
transaction not occurred and the Participant remained an employee, and (3)
forgive all or any portion of the principal of or interest on a loan.

(c) If an outstanding Option or Other Award is subject to performance
or other conditions (other than conditions relating the mere passage of time and
continued employment) which will not have been satisfied at the time of the
Covered Transaction, the Committee may, in its sole discretion, remove such
conditions. If it does not do so however, such Option or Other Award will
terminate, because the conditions have not been satisfied, as of the date of the
Covered Transaction notwithstanding Paragraph (a) and (b) above.

(d) With respect to an outstanding Option or Other Award held by the
participant who, following the Covered Transaction, will be employed by a
corporation which is a surviving or acquiring corporation in such transaction or
an affiliate of such a corporation, the Committee may, in lieu of the action of
the Committee described in Paragraphs (a) or (b) above or in addition to any
Option being exercisable immediately prior to consummation of the Covered
Transaction pursuant to Section 7.4A above, arrange to have such surviving or
acquiring corporation or affiliate assume the Option or Other Award or grant to
the Participant a replacement Option or other Award which, in the judgment of
the Committee, is substantially equivalent to the Option or Other Award. In the
case of an assumed or substitute Option intended to be an Incentive Stock
Option, the requirements of Section 424 (a) of the Code shall be satisfied
except as otherwise provided by the Committee.

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7.4 C CHANGE IN CONTROL AND RELATED DEFINITIONS.

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:

(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities; or

(b) during any period of not more than two consecutive years (not
including any period prior to October 26, 1994), 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 (a), (b), or (c) of Section
7.4 C) 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

(c) the shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than

(1) 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 being converted into voting
securities of the surviving entity) 60% 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

(2) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires 25% or more of the combined voting power of the Company's then
outstanding securities; or

(d) 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.

"Person" shall have the meaning given in Section 3 (a) (9) of the
Securities Exchange Act of 1934, as modified and used in Sections 13 9D and 14
(d) thereof; however, a Person shall not include

(1) the Company,

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

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(3) a corporation or other entity owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company.

"Beneficial Owner" shall have the meaning defined in Rule 13d-3 under
the Securities Exchange Act of 1934 as amended from time to time.

7.5 OTHER TERMINATION EVENTS.

If a Participant, other than an Employee Participant, ceases to be
affiliated with the Company by reason of the termination of the agreement or
other arrangement with the Company pursuant to which such Participant provides
services or products or otherwise is making a contribution to the Company, then

(a) Unless otherwise provided in the instrument evidencing the Award
granted to the Participant, all Options and Stock Appreciation Rights held by
the Participant that were not exercisable when such arrangement terminated or
expired will then terminate, and any of such Awards that were so exercisable
shall continue to be exercisable until the earlier of (1) the date which is
three months after the date on which such arrangement terminated or (2) the date
on which such Award would have terminated had the Participant remained
affiliated with the Company pursuant to the agreement or other arrangement. The
Committee may, in its discretion, in the granting instrument or at any later
time, extend the exercise period beyond such three-month period.

(b) Unless otherwise provided in the instrument evidencing the Award
granted to the Participant, all Restricted Stock held by the Participant when
the arrangement with the Participant ended must be transferred to the Company
(and, in the event the certificates representing such Restricted Stock are held
by the Company, such Restricted Stock will be so transferred without any further
action by the Participant) in accordance with Section 6.3 above.

(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant has not become irrevocably
entitled will be forfeited and the Award canceled as of the date of such
termination unless otherwise provided in the instrument evidencing the Award or
otherwise agreed to be the Committee.

8. GENERAL PROVISIONS

8.1 DOCUMENTATION OF AWARDS.

Awards will be evidenced by written instruments prescribed by the
Committee from time to time. Such instruments may be in the form of agreements,
to be executed by both the Participant and the Company, or

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certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.

8.2 RIGHTS AS A STOCKHOLDER: DIVIDEND EQUIVALENTS.

Except as specifically provided by the Plan, the receipt of an Award
will not give a Participant rights as a stockholder: the Participant will obtain
such rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.

8.3 CONDITIONS ON DELIVERY OF STOCK.

The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove restriction from shares previously delivered
under the Plan (a) until all conditions of the Award have been satisfied or
removed. (b) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulation have been complied with, (c) if the
outstanding Stock is at the time listed on any stock exchange, until the shares
to be delivered have been listed or authorized to be listed on such exchange
upon official notice of notice of issuance, and (d) until all other legal
matters in connection with the issuance and delivery of such shares have been
approved by the Company's counsel. If the sale of Stock has not been registered
under the Securities Act of 1933, as amended, the Company may require, as a
condition to exercise of the Award, such representations or agreements as
counsel for the Company may consider appropriate to avoid violation of such Act
and may require that the certificates evidencing such Stock bear an appropriate
legend restricting transfer.

If an Award is exercised by the Participant's legal representative,
the Company will be under no obligation to deliver Stock pursuant to such
exercise until the Company is satisfied as to the authority of such
representative.

8.4 TAX WITHHOLDING.

The Company will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local withholding
tax requirements (the "withholding requirements").

In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such

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requirements, prior to the delivery of any Stock. If and to the extent that such
withholding is required, the Committee may permit the Participant or such other
person to elect at such time and in such manner as the Committee provides to
have the Company hold back from the shares to be delivered, or to deliver to the
Company, Stock having a value calculated to satisfy the withholding requirement.

If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition (within the meaning of section 425(c) of the
Code) of Stock received upon exercise, and (b) to give such security as the
Committee deems adequate to meet the potential liability of the Company for the
withholding requirements and to augment such security from time to time in any
amount reasonably deemed necessary by the Committee to preserve the adequacy of
such security.

8.5 NONTRANSFERABILITY OF AWARDS.

No Award (other than an Award in the form of an outright transfer of
cash or unrestricted Stock) may be transferred other than by will or by the laws
of descent and distribution, and during an employee's lifetime an Award
requiring exercise may be exercised only by the Participant (or in the event of
the Participant's incapacity, the person or persons legally appointed to act on
the Participant's behalf).

8.6 ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.

(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends, the
Committee will make any appropriate adjustments to the maximum number of shares
that may be delivered under the Plan under Section 4 above.

(b) In any event referred to in paragraph (a), the Committee will
also make any appropriate adjustments to the number and kind of shares of stock
or securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change. The Committee may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.

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8.7. EMPLOYMENT RIGHTS.

Neither the adoption of the plan nor the grant of Awards will confer
upon any person any right to continued employment with the Company or any
subsidiary or affect in any way the right of the Company or subsidiary to
terminate an employment relationship at any time. Except as specifically
provided by the Committee in any particular case, the loss of existing or
potential profit in Awards granted under the Plan will not constitute an element
of damages in the event of termination of an employment relationship even if the
termination is in violation of an obligation of the Company to the Employee.

8.8. FAIR MARKET VALUE.

For purposes of the Plan, fair market value of a share of Stock on
any date will be the average of the bid and asked prices in the over-the-counter
market with respect to such Stock, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System or such other similar
system then in use; or, if on any such date such Stock is not quoted by any such
organization, the average of the closing bid and asked prices with respect to
such Stock, as furnished by a professional market maker making a market in such
Stock selected by the Committee; or if such prices are not available, the fair
market value of such Stock as of such date as determined in good faith by the
Committee; or, where necessary in order to achieve the intended Federal income
tax result, the value of a share of Stock as determined by the Committee in
accordance with the applicable provisions of the Code.

8.9 DEFERRAL OF PAYMENTS.

The Committee may agree at any time, upon request of the Participant,
to defer the date on which any payment under an Award will be made.

8.10. PAST SERVICES AS CONSIDERATION.

Where a Participant purchases Stock under an Award for a price equal
to the par value of the Stock the Committee may determine that such price has
been satisfied by past services rendered by the Participant.

9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION

Neither adoption of the Plan nor the grant of Awards to a Participant
will affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock be issued to
Employees.

16A
<PAGE> 17
The Committee may at any time discontinue granting Awards under the
Plan. The Board may at any time or times amend the Plan or any outstanding Award
for any purpose which may at the time be permitted by law, or may at any time
terminate the Plan as to any further grants of Awards, provided that (except to
the extent expressly required or permitted by the Plan) no such amendment will,
without the approval of the stockholders of the Company, (a) increase the
maximum number of shares available under the Plan, (b) change the group of
persons eligible to receive Awards under the Plan, (c) extend the time within
which Awards may be granted, or (d) amend the provisions of this Section 9, and
no amendment or termination of the Plan may adversely affect the rights of any
Participant (without the Participant's consent) under any Award previously
granted.

REVISION DATE: 10/18/96

17A

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM PICTURETEL
CORPORATION'S BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED SEPTEMBER
27, 1998 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-27-1998
<EXCHANGE-RATE> 1
<CASH> 49,270
<SECURITIES> 50,924
<RECEIVABLES> 98,174
<ALLOWANCES> 5,199
<INVENTORY> 30,793
<CURRENT-ASSETS> 250,624
<PP&E> 15,104
<DEPRECIATION> 100,195
<TOTAL-ASSETS> 344,738
<CURRENT-LIABILITIES> 100,713
<BONDS> 0
0
0
<COMMON> 384
<OTHER-SE> 223,474
<TOTAL-LIABILITY-AND-EQUITY> 223,858
<SALES> 307,685
<TOTAL-REVENUES> 307,685
<CGS> 175,765
<TOTAL-COSTS> 175,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,734
<INCOME-PRETAX> (10,632)
<INCOME-TAX> (3,402)
<INCOME-CONTINUING> (7,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,230)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S
BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED SEPTEMBER 28, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-28-1997
<EXCHANGE-RATE> 1
<CASH> 52,959
<SECURITIES> 29,513
<RECEIVABLES> 115,849
<ALLOWANCES> 8,079
<INVENTORY> 53,908
<CURRENT-ASSETS> 262,603
<PP&E> 146,621
<DEPRECIATION> 77,998
<TOTAL-ASSETS> 367,846
<CURRENT-LIABILITIES> 95,614
<BONDS> 0
0
0
<COMMON> 380
<OTHER-SE> 249,673
<TOTAL-LIABILITY-AND-EQUITY> 250,053
<SALES> 349,590
<TOTAL-REVENUES> 349,590
<CGS> 196,342
<TOTAL-COSTS> 196,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,098
<INCOME-PRETAX> (27,621)
<INCOME-TAX> (8,017)
<INCOME-CONTINUING> (19,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,604)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S
BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED SEPTEMBER 28, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 51,276
<SECURITIES> 17,144
<RECEIVABLES> 132,740
<ALLOWANCES> 2,150
<INVENTORY> 35,039
<CURRENT-ASSETS> 245,497
<PP&E> 95,367
<DEPRECIATION> 53,572
<TOTAL-ASSETS> 339,880
<CURRENT-LIABILITIES> 91,659
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 237,497
<TOTAL-LIABILITY-AND-EQUITY> 237,778
<SALES> 351,530
<TOTAL-REVENUES> 351,530
<CGS> 178,310
<TOTAL-COSTS> 178,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 421
<INCOME-PRETAX> 35,063
<INCOME-TAX> 11,571
<INCOME-CONTINUING> 23,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,492
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59

</TABLE>