PICTURETEL CORP, 10-Q, 1999-05-19

PICTURETEL CORP
10-Q, 1999-05-19
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE> 1

===============================================================================

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 APRIL 4, 1999

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

FOR THE TRANSITION PERIOD FROM TO

FOR THE QUARTER ENDED APRIL 4, 1999 COMMISSION FILE NUMBER 1-9434

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

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

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

REGISTRANT'S TELEPHONE NUMBER: 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 May 7, 1999, there were outstanding 40,302,942 shares of common stock of
the registrant.

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<PAGE> 2

PICTURETEL CORPORATION

FORM 10-Q

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
April 4, 1999 and December 31, 1998............... 3

Consolidated Statements of Operations
Three months ended April 4, 1999 and March 29,
1998.............................................. 4

Consolidated Statements of Cash Flows
Three months ended April 4, 1999 and March 29,
1998.............................................. 5

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

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

PART II. OTHER INFORMATION

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

Item 2. Changes in Securities.............................. 20

Item 6. Exhibits and Reports on Form 8-K................... 20

Signatures.................................................. 21
</TABLE>

2
<PAGE> 3

PICTURETEL CORPORATION

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 59,908 $ 62,642
Marketable securities.................................. 51,782 38,078
Accounts receivable, less allowance for doubtful
accounts of $6,405 and $5,392 at April 4, 1999 and
December 31, 1998, respectively....................... 71,227 78,995
Inventories, net....................................... 37,614 30,256
Other current assets................................... 8,980 8,692
-------- --------
Total current assets.............................. 229,511 218,663
Property and equipment, net................................. 94,356 95,655
Capitalized software costs, net............................. 18,199 20,484
Goodwill, net............................................... 5,063 5,336
Other assets................................................ 11,585 12,856
-------- --------
Total assets...................................... $358,714 $352,994
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................................. $ -- $ 881
Accounts payable....................................... 23,107 32,777
Accrued compensation and benefits...................... 8,218 11,214
Accrued expenses....................................... 37,244 35,316
Current portion of capital lease obligations........... 2,775 3,537
Deferred revenue....................................... 27,953 22,616
-------- --------
Total current liabilities......................... 99,297 106,341
Capital lease obligations................................... 55,895 56,411
Commitments and contingencies (Notes 5 and 8)
Stockholders' equity:
Convertible, preferred stock, $.01 par value;
15,000,000 shares authorized; 4,478,708 shares
outstanding at April 4, 1999.......................... 45 --
Common stock, $.01 par value; 80,000,000 shares
authorized; 40,282,961 shares outstanding at April 4,
1999 and 40,067,771 shares outstanding at December 31,
1998.................................................. 403 400
Treasury stock, 70,000 shares.......................... (556) --
Additional paid-in capital............................. 254,374 222,230
Accumulated deficit.................................... (56,224) (30,254)
Accumulated other comprehensive income (loss).......... 5,480 (2,134)
-------- --------
Total stockholders' equity........................ 203,522 190,242
-------- --------
Total liabilities and stockholders' equity........ $358,714 $352,994
======== ========
</TABLE>

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

3
<PAGE> 4

PICTURETEL CORPORATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
<S> <C> <C>
Revenues.................................................... $ 76,194 $101,045
Cost of revenues............................................ 51,972 55,158
-------- --------
Gross margin................................................ 24,222 45,887
Operating expenses:
Selling, general and administrative.................... 32,362 32,810
Research and development............................... 17,523 16,899
-------- --------
Total operating expenses.......................... 49,885 49,709
-------- --------
Loss from operations........................................ (25,663) (3,822)
Interest income, net........................................ 199 448
Other income, net........................................... 515 325
-------- --------
Loss before income tax expense (benefit).................... (24,949) (3,049)
Income tax expense (benefit)................................ 1,021 (884)
-------- --------
Net loss.................................................... (25,970) (2,165)
Preferred stock accretion................................... 1,434 --
-------- --------
Net loss applicable to common shareholders.................. $(27,404) $ (2,165)
======== ========
Net loss per common share -- basic.......................... $ (0.68) $ (0.06)
======== ========
Net loss per common share -- diluted........................ $ (0.68) $ (0.06)
======== ========
Weighted average shares outstanding -- basic................ 40,218 38,092
======== ========
Weighted average shares outstanding -- diluted.............. 40,218 38,092
======== ========
</TABLE>

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

4
<PAGE> 5

PICTURETEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(25,970) $(2,165)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 9,299 5,741
Bad debt reserves...................................... 1,401 --
Inventory reserves..................................... 810 --
Other non-cash items................................... 128 616
Changes in operating assets and liabilities:
Accounts receivable.................................... 5,393 7,184
Inventories............................................ (8,364) 327
Other current assets................................... (173) (1,192)
Accounts payable....................................... (9,428) (2,419)
Accrued compensation and benefits and accrued
expenses.............................................. (710) (315)
Deferred revenue....................................... 5,560 (1,441)
-------- -------
Net cash provided by (used in) operating activities......... (22,054) 6,336
Cash flows from investing activities:
Purchase of marketable securities......................... (41,606) (36,615)
Proceeds from marketable securities....................... 36,333 25,221
Additions to property and equipment....................... (4,974) (4,620)
Capitalized software costs................................ -- (1,457)
Purchase of other assets.................................. -- (99)
-------- -------
Net cash used in investing activities....................... (10,247) (17,570)
Cash flows from financing activities:
Net proceeds from foreign lines of credit................. -- 748
Payments on short-term/long-term borrowings............... (850) --
Principal payments under capital lease obligations........ (1,284) (418)
Common stock repurchase................................... (556) --
Proceeds from preferred stock issuance.................... 30,500 --
Proceeds from exercise of stock options................... 902 624
Proceeds from stock purchase plan......................... 790 878
-------- -------
Net cash provided by financing activities................... 29,502 1,832
Effect of exchange rate changes on cash..................... 65 (1,544)
-------- -------
Net decrease in cash and cash equivalents................... (2,734) (10,946)
Cash and cash equivalents at beginning of period............ 62,642 49,859
-------- -------
Cash and cash equivalents at end of period.................. $ 59,908 $38,913
======== =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6

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, 1998, as filed with the Securities and Exchange
Commission on March 31, 1999.

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 April 4, 1999
and the results of operations and changes in cash flow for the three months
ended April 4, 1999.

The results disclosed in the Consolidated Balance Sheet at April 4, 1999
and the Consolidated Statement of Operations and Consolidated Statement of Cash
Flows for the three months ended April 4, 1999 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 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>
APRIL 4, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Purchased Parts.......................................... $ 2,054 $ 2,609
Work in Process.......................................... 1,350 1,399
Finished Goods........................................... 34,210 26,248
------- -------
$37,614 $30,256
======= =======
</TABLE>

6
<PAGE> 7
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>
FOR THE THREE MONTHS ENDED
---------------------------
APRIL 4, MARCH 29,
1999 1998
---------- -----------
<S> <C> <C>
BASIC EPS COMPUTATION:
Numerator:
Net loss.......................................... $(25,970) $(2,165)
Preferred stock accretion......................... 1,434 --
-------- -------
Total............................................. $(27,404) $(2,165)
======== =======
Denominator:
Weighted average common shares outstanding........ 40,218 38,092
======== =======
Basic EPS.............................................. $ (0.68) $ (0.06)
======== =======
DILUTED EPS COMPUTATION:
Numerator:
Net loss.......................................... $(25,970) $(2,165)
Preferred stock accretion......................... 1,434 --
-------- -------
Total............................................. $(27,404) $(2,165)
======== =======
Denominator:
Weighted average common shares outstanding........ 40,218 38,092
Stock options, preferred stock, warrants.......... -- --
-------- -------
Total Shares...................................... 40,218 38,092
======== =======
Diluted EPS............................................ $ (0.68) $ (0.06)
======== =======
</TABLE>

Options to purchase shares of the Company's common stock of 7,373,874 and
5,972,190 were outstanding at April 4, 1999 and March 29, 1998, respectively,
but were not included in the computation of diluted EPS because they were
antidilutive due to the net losses sustained in 1999 and in 1998. Warrants for
the Company's common stock of 2,723 and 4,478,708 shares of the Company's
convertible, preferred stock were outstanding at April 4, 1999 but were not
included in the computation of diluted EPS because they were antidilutive due to
the loss sustained in 1999.

4. COMPREHENSIVE LOSS

The Company in fiscal year 1998 adopted FASB 130, Reporting Comprehensive
Income. The calculation of comprehensive income includes the loss as reported in
the Consolidated Statements of Operations for the first quarter of 1999 and
1998, the gains and losses on foreign currency translation adjustments and
unrealized gains and losses on marketable securities. Total comprehensive loss
for the three months ended April 4, 1999 was $18,356,000 and total comprehensive
loss for the comparable period in 1998 was $3,710,000. The change from December
31, 1998 to April 4, 1999 in accumulated other comprehensive income was a gain
of $8,423,000 in marketable securities and a loss of $809,000 in cumulative
translation adjustments.

7
<PAGE> 8
PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. DEBT

On August 12, 1998 and March 31, 1999, the Company amended certain
provisions of the amended and restated credit agreement which expires on October
4, 1999. This agreement requires interest payable at either the bank's base
rate, or the adjusted eurocurrency rate plus an applicable margin of two
percent. The commitment fees were also amended and are payable quarterly on any
unused portion at a rate per annum equal to 0.25%. The amended agreement
contains no demand feature and provides that the principal portion of the
borrowings be paid by the expiration date.

At April 4, 1999, no borrowings were outstanding under this credit
agreement. In addition, the Company has $28,762,000 of outstanding standby
letters of credit under this agreement. Fees for letters of credit outstanding
against this revolving credit line were amended and are now payable at two and
one-eighth percent per annum of the face amount. The revolving credit agreement
is collateralized by cash and cash equivalents and contains certain financial
covenants, including the maintenance of certain financial ratios and minimum net
income (loss) requirements.

At April 4, 1999, the Company was out of compliance with two of the debt
covenants. The Company received waivers from the banks regarding those covenants
and is retroactively in compliance. The Company's quarterly operating results
for the remainder of the agreement term are likely to be out of compliance with
the credit line's financial covenants. Effective March 26, 1999, the banks
informed the Company that they would not renew the Company's letters of credit,
outstanding under this agreement, as they come due. The letters of credit, which
relate to security for certain of the Company's facility leases, come due as
follows: $12,500,000 on June 24, 1999, $9,012,000 on July 31, 1999 and
$7,250,000 on September 12, 1999. In addition, effective May 19, 1999, the
respective banks have informed the Company that they will not provide additional
short-term lending under this agreement.

The Company is considering alternatives for the letters of credit including
refinancing the loan, seeking alternative issuers of letters of credit or cash
collateral. In the event that such letters of credit expire and are not renewed,
the Company's cash would be reduced by the amount of the letters of credit.

Local lines of credit are available for short-term advances of up to
$5,300,000 to certain of the Company's foreign subsidiaries. Two of these lines
are guaranteed by the Company. The agreements require interest payable ranging
from the bank's prime lending rate plus up to one quarter of one percent per
annum. No borrowings were outstanding against these local lines of credit at
April 4, 1999.

6. CAPITAL TRANSACTION

On January 19, 1999, the Company announced it had entered into a
distribution and joint development agreement with Intel Corporation. On February
17, 1999, Intel invested $30.5 million in the Company, acquiring approximately
10% of the Company's equity through convertible preferred stock. The two
companies will develop videoconferencing and collaborative products based on a
common PC-based technology platform. Under terms of the agreement, Intel will
provide the Company with distribution rights to sell the Intel ProShare(R) Video
System 500 and exclusive worldwide distribution rights to sell and support the
Intel(R)TeamStation(TM) System.

The convertible Preferred Stock issued to Intel Corporation is non-voting
and preferred with respect to dividend rights and liquidation preference to the
Company's Common Stock. Additionally, each share of the Preferred Stock has the
right to convert to one share of common stock.

The terms of the convertible Preferred Stock are set forth in the Amendment
to the Certificate of Incorporation filed as Exhibit 3.1.1 to this 10-Q.

8
<PAGE> 9
PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
VIDEO- VIDEO-
CONFERENCING CONFERENCING AUDIO-
PRODUCTS SERVICES CONFERENCING OTHER TOTAL
------------ ------------ ------------ ------- --------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED APRIL 4, 1999:
Revenues from external customers...... $ 53,838 $16,780 $5,576 $ -- $ 76,194
Operating income (loss)............... $(22,735) $ 1,570 $ 423 $(4,921) $(25,663)
QUARTER ENDED MARCH 29, 1998:
Revenues from external customers...... $ 81,512 $13,853 $5,680 $ -- $101,045
Operating income (loss)............... $ (2,616) $ 1,041 $2,223 $(4,470) $ (3,822)
</TABLE>

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

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

8. LITIGATION

A. Datapoint Litigation

In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleged that certain of PictureTel's products infringed patent rights allegedly
owned by Datapoint. On April 9, 1998 a jury returned a verdict in favor of
PictureTel finding that PictureTel did not infringe the Datapoint patents and
that the Datapoint patent claims raised against PictureTel were invalid. On May
3, 1999 an appeals hearing took place with regards to this litigation. While
there can be no assurance that the outcome of the appeal will be in favor of the
Company, the Company believes that it presented 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 filed a consolidated complaint on
February 11, 1998.

The original complaints were filed following the Company's announcement on
September 19, 1997 that it would restate its financial results for the first
quarter of the fiscal year ending December 31, 1997 and the last two quarters of
the fiscal year ending December 31, 1996 and were amended when the Company
announced on November 13, 1997 that it would also restate the second quarter of
the fiscal year ending December 31, 1997. The consolidated complaint alleges
that PictureTel and Messrs. Gaut and Strauss violated Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder, during the period
from October 17, 1996 through November 13, 1997, through the alleged preparation
and dissemination of
9
<PAGE> 10
PICTURETEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Limited discovery has
occurred, and the Company expresses no opinion as to the likely outcome. The
outcome of this litigation may have a material impact on the Company's financial
position, results of operations and cash flows.

C. 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. Discovery has recently begun. The Company believes that the complaint
and the claim for damages are without merit and intends to vigorously defend
itself against them.

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

10
<PAGE> 11

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 in "Risk Factors Which May Affect Future
Results" and in other related portions of this document.

BUSINESS DEVELOPMENTS

On January 19, 1999, the Company announced it had entered into a
distribution and joint development agreement with Intel Corporation. On February
18, 1999, Intel invested $30.5 million in the Company, acquiring approximately
10% of the Company's equity through convertible preferred stock. The two
companies will develop videoconferencing and collaborative products based on a
common PC-based technology platform. Under terms of the agreement, Intel will
provide the Company with distribution rights to sell the Intel ProShare(R) Video
System 500 and exclusive worldwide distribution rights to sell and support the
Intel(R) TeamStation(TM) System.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
<S> <C> <C>
Revenues................................................. 100% 100%
Cost of revenues......................................... 68.2 54.6
Gross margin............................................. 31.8 45.4
Selling, general and administrative...................... 42.5 32.5
Research and development................................. 23.0 16.7
Total operating expenses................................. 65.5 49.2
Income (loss) from operations............................ (33.7) (3.8)
Interest income, net..................................... 0.3 0.5
Other income, net........................................ 0.7 0.3
Income (loss) before taxes............................... (32.7) (3.0)
Income tax expense (benefit)............................. 1.4 (0.9)
Net income (loss)........................................ (34.1) (2.1)
Preferred stock accretion................................ (1.9) --
Net loss available to common shareholders................ (36.0) (2.1)
</TABLE>

THREE MONTHS ENDED APRIL 4, 1999 COMPARED TO THREE MONTHS ENDED MARCH 29, 1998

Revenues. The Company's first quarter 1999 revenues of $76,194,000
decreased $24,851,000, or 25%, from first quarter 1998 levels. Lower
videoconferencing products volume and lower average selling prices, as discussed
below in "Videoconferencing Products," account for the decline. Revenues from
sales to foreign markets were approximately 48% of total revenues in both
periods.

11
<PAGE> 12

Gross Margin. Overall gross margin declined $21,665,000, or 47%, in the
first quarter of 1999 compared to the first quarter of 1998. Gross margin as a
percentage of revenue was 32% versus 45% in the first quarters of 1999 and 1998,
respectively. The decrease was caused by lower average selling prices coupled
with higher per unit costs due to lower volume in videoconferencing products.

Operating Expenses. First quarter 1999 operating expenses of $49,885,000
were flat compared with the comparable prior year period. However, as a
percentage of revenue, operating expenses increased to 65.5% from 49.2% as a
result of the decline in revenue.

Selling, General and Administrative. First quarter 1999 selling, general,
and administrative expenses of $32,362,000 were approximately 1% lower than
first quarter 1998 due to cost reduction efforts partially offset by higher real
estate costs and a $900,000 gain associated with the collection of a previously
written-off receivable. However, as a percentage of revenue, selling, general
and administrative increased to 42.5% from 32.5% as a result of the decline in
revenue.

The Company expects to record a charge of approximately $2,500,000 in the
second quarter related to subleasing certain excess real estate.

Research and Development. First quarter 1999 research and development
expenses of $17,523,000 were approximately 4% higher than in the previous year.
New product development expenditures at Starlight, which was acquired in the
fourth quarter of last year, and in the audioconferencing segment, coupled with
decreased capitalization of software development costs, account for the higher
expenses. The Company capitalized $1,457,000 of software development costs in
the first quarter of 1998. No such costs were capitalized in the first quarter
of 1999 as no current projects in progress had achieved technological
feasibility.

Videoconferencing Products. First quarter 1999 revenues for this segment,
which develops, manufactures, and markets visual communications systems and
collaboration software totaled $53,838,000. This represents a $27,674,000, or
34%, decrease from first quarter 1998 levels. Lower unit volumes and lower
average selling prices were responsible. Average selling prices were lower
across all product lines versus 1998, with this trend expected to continue as
the Company adjusts its prices in response to competitive pressures.

Total videoconferencing system units decreased 18% versus the prior year,
with group system volume declining by 33% and desktop/personal system volume off
by 5%. Lower Concorde shipments and a decision to suspend distribution of
Swiftsite II, the Company's newly introduced compact system, until certain
software problems are resolved, accounted for the decreased group system volume.
The Company has deferred revenue recognition on all Swiftsite II shipments until
an improved version of the software is available, which is currently expected to
occur in the second quarter. As a result, nearly 40% of the revenue decline and
a major portion of the increase of finished goods inventory is associated with
this Swiftsite II revenue deferral.

The videoconferencing products segment generated an operating loss of
$22,735,000 during the quarter compared to a $2,616,000 operating loss in the
first quarter of 1998. Lower revenue and decreased gross margin as a percent of
revenue account for the profitability decrease. Compared with the previous
year's first quarter, gross margin as a percentage of revenue declined 16
percentage points to 32%. The primary reasons for the decreased gross margin
percentage were lower average sales prices, excess overhead absorption
associated with lower volumes and capitalized software amortization related to
Swiftsite II and completed technology purchased in the fourth quarter 1998
related to the Starlight acquisition. First quarter 1999 operating expenses
decreased 5% from prior year levels because of ongoing cost reduction efforts
partially offset by the Starlight acquisition's operating costs and a reduction
in internal software development capitalization.

Videoconferencing Services. The videoconferencing services segment provides
maintenance as well as professional consulting and management services for
videoconferencing products sold by the Company and its competitors. First
quarter 1999 revenues grew from $13,853,000 in 1998 to $16,780,000 in 1999, as
both maintenance and professional service revenues increased 21%.

Operating profits were $1,570,000 during 1999's first quarter compared with
$1,041,000 in the comparable prior year period. Revenue growth is the main
reason for the 50% improvement.

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<PAGE> 13

Audioconferencing. The audioconferencing segment develops, manufactures,
markets, and services multipoint audioconferencing control units. First quarter
1999 segment revenues totaled $5,576,000 and were essentially flat with
comparable 1998 results.

Operating income decreased from $2,223,000 in the first quarter of 1998 to
$423,000 in the first quarter of 1999, primarily because of increased research
and development spending on enhancing existing products and developing next
generation products.

Income Taxes. The Company's effective income tax rate was 4% in the first
quarter of 1999 compared with 29% in the comparable period in 1998. The decrease
in the effective tax rate is due to the Company's recording a full valuation
allowance against net deferred tax assets in the fourth quarter of 1998 and
continued uncertainty as to future realization of those assets. The effective
tax rate in 1999 relates to foreign and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

At April 4, 1999 the Company had $59,908,000 in cash and cash equivalents
and $51,782,000 in short-term marketable securities. The primary uses of cash
during the first quarter of 1999 were expenditures for normal operations, the
increase of inventory of $8,364,000 and the decrease in accounts payable of
$9,428,000. The principal sources of cash were the receipt of $30.5 million of
cash from the issuance of preferred stock and the decrease in trade receivables
of $5,393,000. The increase in marketable securities was due primarily to the
increase in value of one equity security.

At April 4, 1999, no borrowings were outstanding under the Company's credit
agreement with its banks. However, the Company has $28,762,000 of outstanding
standby letters of credit under this agreement. Fees for letters of credit
outstanding against this revolving credit line were amended and are now payable
at two and one-eighth percent per annum of the face amount. The revolving credit
agreement is collateralized by cash and cash equivalents and contains certain
financial covenants, including the maintenance of certain financial ratios and
minimum net income (loss) requirements.

The Company has operating leases for various rented properties. The Company
signed an agreement to sublease the facility at Riverside Drive in Andover in
May, 1999 as part of its space consolidation efforts. As of April 4, 1999, the
remaining obligation under this operating lease was $8,900,000. After giving
effect to expected sublease income, this obligation is $5,500,000. As a result
of lease obligations in excess of sublease income over the term of the sublease
and other charges related to the transaction, the Company expects to record a
charge of approximately $2,500,000 in the second quarter of 1999.

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<PAGE> 14

In October 1998, the Board of Directors authorized a plan to repurchase up
to 1,000,000 shares of the Company's Common Stock in open market, privately
negotiated or other transactions. During the three month period ended April 4,
1999, the Company repurchased 70,000 shares at a cost of $556,000. The Company
has no definitive plans to repurchase the remainder of the shares.

The Company believes that funds from operations, equipment lease financing
and existing cash, cash equivalents and marketable securities will be sufficient
to meet the Company's operating, investing and financing requirements for the
foreseeable future.

RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS

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

New Products, Cost Reductions, Technological Change, and Evolving
Markets. The Company is engaged in an industry that is still emerging as a
result of extensive research and development efforts and which continues to
bring to market new, more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications market is in a
heightened competitive state due to deregulation throughout the world. In order
to maintain its market share 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 November 1998, the Company acquired all of the common
stock of Starlight Networks, Inc. Starlight develops, manufactures and markets
streaming video that enables live, interactive multicast video-on-demand. There
can be no assurance that the integration of Starlight will be successful or
produce products which will be accretive to the Company's results of operations
and financial condition. In January 1999, the Company entered into a
distribution and joint product development agreement with Intel Corporation. The
two companies will develop videoconferencing and collaborative products based on
a common PC-based technology platform. There can be no assurance that the
partnership will be successful or produce products which will be accretive to
the Company's results of operations and financial condition. In addition to
offering products that operate in an integrated service digital network (ISDN)
environment, the Company and its competitors are exploring continued development
of products and services for new technologies and networks, such as the Internet
and corporate intranets or LANs. 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 cost reductions
for all of its products or in developing and marketing suitable new products and
related services 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 and desktop/personal
videoconferencing products, the Company competes with a number of corporations,
such as Polycom, RSI Systems, Sony, Tandberg, VTEL and VCON. In the developing
businesses of network-based videoconferencing systems and audioconferencing
systems, a number of corporations such as Lucent and Cisco 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
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<PAGE> 15

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/personal videoconferencing products, 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, competitors 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
Corporation. The failure to obtain adequate supplies or the requirement to
redesign and source supplies from another manufacturer may take substantial time
and result in significant expense, each of which could impact product shipments
and materially and adversely affect the Company's business, financial condition
or results of operations.

Recent History of Losses. The Company reported a 25% decrease in revenues
for the quarter ended April 4, 1999 as compared to revenues for the quarter
ended March 29, 1998 and an increase in net loss from $2,165,000 to $25,970,000.

The Company had revenues of $406,152,000 and $466,425,000 for the year
ended December 31, 1998 and December 31, 1997, respectively, and net losses of
$55,679,000 and $39,398,000, respectively. Included in the results for the year
ended December 31, 1998 were charges totaling $9,957,000 related to
discontinuing a video network server product line and the write-down of certain
inventory and fixed assets and a valuation allowance for deferred taxes of
$35,141,000. 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. 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, a slowdown
in the general market for videoconferencing products, a suspension of Swiftsite
II distribution, as discussed in the results of operations above, and also 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 will impact the Company's ability
to remain in compliance with covenants under its existing revolving credit
agreement. 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

15
<PAGE> 16

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 48% of revenue for both periods ended April 4,
1999 and March 29, 1998 and 43% of total revenues for both the years ended
December 31, 1998 and 1997, respectively. Management of the Company expects
international revenues to continue to constitute a significant portion of total
revenues in future periods. However, there can be no assurance that the Company
will be able to maintain or increase international market demand for its
products and, to the extent the Company is unable to do so, its business,
financial condition, results of operations or cash flows could be materially
adversely affected. The Company's sales to international distributors are
denominated in U.S. dollars in order to minimize risks associated with
fluctuating foreign currency rates. An increase in the value of the U.S. dollar
relative to other currencies, however, could make the Company's product more
expensive and, therefore, potentially less competitive in foreign markets. Sales
by the Company's foreign subsidiaries are generally made in the foreign
subsidiary's local currency, in which case fluctuations in the value of the U.S.
dollar relative to such other currencies could have a material adverse effect on
the operating results of the Company. Currently, the Company employs various
currency hedging strategies to reduce these risks. In addition, a significant
portion of the Company's revenue is derived from Asian markets. Given the
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

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<PAGE> 17

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 and General Manager of Products. 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 and General Manager of Services; David Goselin,
Vice President, Operations; Lawrence Bornstein, Vice President, Human Resources;
Gary Bond; Arthur Fatum; Frazer Hamilton, Group Vice President of Worldwide
Sales; and John Nye, Vice President, MultiLink. 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.

Year 2000 Readiness Disclosure. 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 in the second quarter of 1999 a
comprehensive IT Systems inventory analysis and risk assessment. As previously
planned and budgeted, the Company completed the upgrade of its core domestic IT
Systems to incorporate additional desired features and functionality and is now
testing the Year 2000 compliance of the customizations to the software. The
Company expects to complete this process as planned by June 30, 1999. IT systems
at several foreign subsidiaries will be converted to the IT systems used
domestically by the end of July, 1999. Systems supporting MultiLink will likely
be replaced in 1999 in order to achieve Year 2000 compliance. The Company
currently estimates an additional $1,200,000 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 in the second quarter of 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 mission critical 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 mission critical 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.

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<PAGE> 18

The Company estimates it will spend a total of $433,000 on inventory
analysis and risk assessment. To date, the Company has incurred $288,000 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 May, 1999 and to develop a high-level contingency plan
relating to the remediation and prioritization of its IT Systems, Non-IT Systems
and Third Party Systems shortly thereafter. As of April 4, 1999, 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 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.

Euro. On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and established the euro, making the euro their common
legal currency on that date. Based on a recent assessment, the euro conversion
has not had and is not anticipated to have a material impact on the Company's
business.

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<PAGE> 19

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. On April 9, 1998 a jury returned a verdict in favor of
PictureTel finding that PictureTel did not infringe the Datapoint patents and
that the Datapoint patent claims raised against PictureTel were invalid. On May
3, 1999 an appeals hearing took place with regard to this litigation. While
there can be no assurance that the outcome of the appeal will be in favor of the
Company, the Company believes that it presented meritorious defenses to the
appeal.

B. Shareholder Litigation

C. Revnet, Inc.

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<PAGE> 20

ITEM 2. CHANGES IN SECURITIES

(a) The rights of the common stock are materially limited or qualified by
the issue of non-voting, convertible Series A Preferred Stock to Intel
Corporation with respect to preferred dividend rights and liquidation preference
of said Series A Preferred Stock.

On the date hereof each outstanding share of the Series A Preferred has the
right to convert to one share of common, see the terms of the Series A Preferred
Stock as set forth in the Amendment to the Certificate of Incorporation filed as
Exhibit 3.1.1 to this Report.

(b) On February 17, 1999, the Company sold 4,478,708 shares of Series A
Preferred Stock to Intel Corporation for cash of $30,500,000. The Company
expects to use the proceeds to accelerate growth of videoconferencing worldwide,
especially in the use of videoconferencing products. The securities were exempt
from registration under the Securities Act of 1933 by virtue of Section 4(2) as
a private placement, accompanied by an investment representation by Intel
Corporation.

The shares of this series of non-voting Series A Preferred Stock,
convertible into the same number of shares of PictureTel Common Stock (with
anti-dilution protection for stock splits and the like), was established by vote
of PictureTel's Board of Directors pursuant to its authority under the Company's
Certificate of Incorporation as reported in the Company's January 18, 1999 8-K
filing. This represented on an as-converted basis, an investment in
approximately 10% of PictureTel Common Stock. This security was sold by
PictureTel in consideration of the payment by Intel of cash as described above
and Intel's entering into a Distribution and Joint Product Development Agreement
with PictureTel. Under the Stock Purchase and Investor Rights Agreement Intel
has certain ancillary rights to acquire additional securities of PictureTel in
order to maintain, subject to the specified terms and conditions, its percentage
ownership of PictureTel's equity.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<S> <C>
3.1.1 Certificate of designation, preferences and other rights of
the Series A Preferred Stock of PictureTel Corporation,
consisting of an Amendment to the Certificate of
Incorporation.
10.1 Employment agreement between PictureTel Corporation and
Frazer Hamilton dated June 16, 1998.
10.2 Change in control agreement between PictureTel Corporation
and Frazer Hamilton dated June 22, 1998.
10.3 Consultant agreement between PictureTel Corporation and Enzo
Torresi dated January 5, 1999.
27.1 Financial Data Schedule for the period ended April 4, 1999
as required by Item 601(c) of Regulation S-K.
</TABLE>

(b) Reports on Form 8-K

On January 22, 1999, the Company filed a report on Form 8-K to announce it
had entered into a distribution and joint development agreement with Intel
Corporation. On February 18, 1999, Intel invested $30.5 million in the Company,
acquiring approximately 10% of the Company's equity through convertible
preferred stock. The two companies will develop videoconferencing and
collaborative products based on a common PC-based technology platform. Under
terms of the agreement, Intel will provide the Company with distribution rights
to sell the Intel ProShare(R) Video System 500 and exclusive worldwide
distribution rights to sell and support the Intel(R)TeamStation(TM) System.

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<PAGE> 21

SIGNATURE

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

PICTURETEL CORPORATION

/s/ ARTHUR L. FATUM
--------------------------------------------
ARTHUR L. FATUM
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

May 19, 1999.

<PAGE> 1
EXHIBIT 3.1.1

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND OTHER RIGHTS

OF THE

SERIES A PREFERRED STOCK

PICTURETEL CORPORATION

Pursuant to Section 151(g) of the

Delaware General Corporations Law

Picturetel Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "CORPORATION"), hereby certifies that,
pursuant to the authority conferred upon the Board of Directors of the
Corporation (the "BOARD OF DIRECTORS") by the Certificate of Incorporation of
the Corporation, as amended (the "CERTIFICATE OF INCORPORATION"), and in
accordance with Section 151(g) of the Delaware General Corporations Law, the
Board of Directors on January 18, 1999 duly adopted the following resolution,
which resolution remains in full force and effect as of the date hereof:

RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors and in accordance with the provisions of the Certificate of
Incorporation, there is hereby created and authorized a series of Preferred
Stock, par value $0.01 per share, of the Corporation, and the designation and
amount thereof and the powers, preferences and rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are as
follows:

SERIES A PREFERRED STOCK

SECTION 1. DESIGNATION. The series of Preferred Stock hereby created
shall be designated and known as the "SERIES A PREFERRED STOCK." The number of
shares constituting such series shall be Six Million (6,000,000).

SECTION 2. LIQUIDATION RIGHTS.

2.1 In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, each holder of shares of Series
A Preferred Stock shall be entitled to receive on the date of payment of any
liquidation amount to the holders of the Corporation's common stock, par value
$0.01 per share ("COMMON STOCK"), a payment equal to the purchase price
originally paid for the Series A Preferred Stock upon issuance (the "PURCHASE
PRICE") together with any declared but unpaid dividends therein, before any
payment is made to the holders of common stock (the "PREFERENCE AMOUNT"). After
the full Preference Amount on all outstanding shares of the Series A Preferred
Stock has been paid,

<PAGE> 2

any remaining funds and assets of the Corporation legally available for
distribution to stockholders shall be distributed pro rata among the holders of
the Common Stock. If the Corporation has insufficient assets to permit payment
of the Preference Amount in full to all Series A Preferred Stock stockholders,
then the assets of the Corporation shall be distributed ratably to the holders
of the Series A Preferred Stock in proportion to the Preference Amount each such
holder would otherwise be entitled to receive.

2.2 A merger or consolidation of the Corporation, or sale of the
Corporation's Common Stock (including, without limitation, pursuant to a tender
offer) in any single transaction or series of related transactions, in any such
case in which its stockholders do not retain a majority of the voting power in
the surviving corporation, or a sale of all or substantially all the
Corporation's assets, shall each be deemed to be a liquidation, dissolution or
winding up of the Corporation.

SECTION 3. CONVERSION.

3.1. VOLUNTARY CONVERSION. Each share of Series A Preferred Stock will
be convertible, at the option of the holder thereof, at the office of the
Corporation or any transfer agent for such shares, into Common Stock. The number
of shares of Common Stock into which each share of Series A Preferred Stock will
be converted will be equal to the Purchase Price of such share divided by the
Conversion Price (as hereinafter defined) of such share. The initial Conversion
Price for each share of Series A Preferred Stock shall be an amount equal to the
Purchase Price of such share. The Conversion Price shall be subject to
adjustment as provided in Section 3.3.

3.2. MECHANICS OF CONVERSION. No fractional shares of Common Stock shall
be issued upon conversion of Series A Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then fair market value of one
share of Common Stock, as reasonably determined in good faith by the Board of
Directors. Before any holder of Series A Preferred Stock shall be entitled to
receive certificates for the shares of Common Stock issued upon conversion, such
holder shall surrender the certificate or certificates for the shares of Series
A Preferred Stock being converted, duly endorsed, at the principal office of the
Corporation and shall state therein its name or the name, or names, of its
nominees in which it wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Series A Preferred Stock or
to such holder's nominee or nominees, a certificate or certificates for the
number of shares of Common Stock to which such holder or such holder's nominee
shall be entitled as aforesaid, together with cash in lieu of any fraction of a
share of Common Stock. Subject to the foregoing, such conversion shall be deemed
to have been made immediately and upon surrender of the certificate representing
the shares of Series A Preferred Stock to be converted in the case of a
voluntary conversion pursuant to Section 3.1. The Person or Persons entitled to
receive the shares of Common Stock issuable upon conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date.

2
<PAGE> 3

3.3 ADJUSTMENTS TO CONVERSION PRICE. If the Corporation shall issue
shares of Common Stock to the holders of Common Stock as a dividend or stock
split, or in the event that the Corporation reduces the number of outstanding
shares of Common Stock in a reverse stock split or stock combination, then the
Conversion Price shall be adjusted such that the holders of shares of Series A
Preferred Stock shall receive, upon conversion of the Series A Preferred Stock,
that number of shares of Common Stock that such holder would have owned
following such dividend, stock split, reverse stock split or stock combination
if such conversion had occurred immediately prior to the record date for such
stock split, stock dividend, reverse stock split or stock combination of the
Common Stock, as the case may be. If the Corporation shall issue shares of
Series A Preferred Stock to the holders of Series A Preferred Stock as a stock
dividend or stock split, or in the event that the Corporation reduces the number
of outstanding shares of Series A Preferred Stock in a reverse stock split or
stock combination, then the Conversion Price shall be adjusted such that the
holder of shares of Series A Preferred Stock shall receive, upon conversion of
the Series A Preferred Stock, the number of shares of Common Stock that such
holder would have owned if such conversion had occurred immediately prior to the
record date for such stock split, stock dividend, reverse stock split or stock
combination of the Series A Preferred Stock, as the case may be. In the event of
a reclassification or other similar transaction as a result of which shares of
Common Stock are converted into another security, then the Conversion Price
shall be determined such that the holders of shares of Series A Preferred Stock
shall receive, upon conversion of such Series A Preferred Stock, the number of
such securities that such holder would have owned following such conversion of
the Common Stock into another security if such conversion had occurred
immediately prior to the record date of such reclassification or other similar
transaction. No adjustments with respect to dividends (other than stock
dividends) shall be made upon conversion of any share of Series A Preferred
Stock; PROVIDED, HOWEVER, that if a share of Series A Preferred Stock shall be
converted subsequent to the record date for the payment of a dividend (other
than a stock dividend) or other distribution on shares of Series A Preferred
Stock but prior to such payment, then the registered holder of such share at the
close of business on such record date shall be entitled to receive the dividend
(other than a stock dividend) or other distribution payable on such share on
such date notwithstanding the conversion thereof or the Corporation's default in
payment of the dividend (other than a stock dividend) due on such date.

3.4. COMMON STOCK RESERVED. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall, at all times, be sufficient for conversion of all
outstanding Series A Preferred Stock.

SECTION 4. DIVIDEND RIGHTS.

4.1 GENERALLY. Until February 18, 2004, the holders of shares of Series
A Preferred Stock will be entitled to receive, if (but only if), when and as
declared by the Board of Directors, out of any funds legally available therefor,
noncumulative dividends at the rate of 6% of the Purchase Price per share per
annum (appropriately adjusted for stock splits and combinations) for each share
of Series A Preferred Stock then held by them. Such dividends may be payable
quarterly or otherwise as the Board of Directors

3
<PAGE> 4

may from time to time determine. Dividends may be declared and paid upon shares
of Common Stock or any other senior series of preferred stock in any fiscal year
of the Corporation, but only if dividends are also concurrently declared and
paid on the Series A Preferred Stock in an amount per share equal to: (a) in the
case of a dividend declared on the Common Stock, the amount per share declared
on each such share of Common Stock, (b) in the case of a dividend declared on
senior preferred stock convertible into Common Stock, the amount determined by
dividing the aggregate amount of the dividend declared and paid on all
outstanding shares of such senior preferred stock, divided by the number of
shares of Common Stock such outstanding shares of senior preferred stock are
convertible into as of the record date for such dividend, and (c) in the case of
senior preferred stock that is not convertible into Common Stock, in an amount
determined by the Board of Directors in good faith such that the holders of
Series A Preferred Stock receive an equivalent dividend in such circumstances.
The record date for any such dividend shall be the same record date as set for
holders of Common Stock or senior preferred stock, as the case may be. No right
shall accrue to holders of Series A Preferred Stock by reason of the fact that
dividends on said shares are not declared in any prior year, nor shall any
undeclared or unpaid dividends bear or accrue interest.

4.2 PARTICIPATION WITH COMMON. If any dividend or other distribution
payable in property other the cash is declared on the Common Stock (excluding
any dividend or other distribution for which adjustment to the Conversion Price
is provided by Section 3.3), each holder of Series A Preferred Stock on the
record date for such dividend or distribution shall be entitled to receive on
the date of payment or distribution of such dividend or other distribution the
same property that such holder would have received if on such record date such
holder was the holder of record of the number (including for purposes of this
Section 4 any fraction) of shares of Common Stock into which the shares of
Series A Preferred Stock then held by such holder are convertible.

SECTION 5. VOTING RIGHTS.

5.1. GENERALLY. The holders of shares of Series A Preferred Stock shall
have no voting rights except as otherwise provided in the Corporation's
Certificate of Incorporation or by law.

5.2. OTHER RIGHTS. In addition to any other rights provided by law or in
the Certificate of Incorporation, so long as any shares of Series A Preferred
Stock shall be outstanding, the Corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of the Series A Preferred Stock, take any
action (including, without limitation, any repeal, amendment or modification to
the Certificate of Incorporation or the Bylaws of the Corporation) that alters
or changes any of the rights, privileges and preferences of the Series A
Preferred Stock.

SECTION 6. RESERVATION OF RIGHTS. Pursuant to the authority vested in it
by the Certificate of Incorporation, the Board of Directors reserves the right
to create and designate from time to time one or more additional series of

4
<PAGE> 5

Preferred Stock with powers, designations, preferences and rights that, subject
to the provisions of Section 4.1, are senior, pari passu or junior to the Series
A Preferred Stock.

SECTION 7. SERIES A PREFERRED STOCK. The Series A Preferred Stock shall
not be redeemable.

SECTION 8. NOTICES. In addition to any other notices to which the holders
of Series A Preferred Stock may be entitled pursuant to the Certificate of
Incorporation, the Bylaws of the Corporation, law, contract or otherwise, the
Corporation shall cause to be sent to each holder all written communications
sent generally to the holders of Common Stock. In addition, within two business
days following the public announcement of the establishment of a record date
with respect to any vote, right or other matter relating to holders of the
Corporation's Common Stock, the Corporation shall send, by first class mail, to
each holder of record of Series A Preferred Stock, written notice setting forth
such record date, the vote, right or other matter to which that matter relates,
and all other material facts relating thereto. The Corporation shall cause such
communications to be sent to holders of Series A Preferred Stock concurrently
with, and in the same manner as, the sending of such communications to the
holders of Common Stock.

[The remainder of this page is intentionally left blank.]

5
<PAGE> 6

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Other Rights to be executed by a duly authorized
officer on January 18, 1999.

PICTURETEL CORPORATION

By: /s/ A.L. Fatum
-----------------------------------
Name: A.L. Fatum
-----------------------------------
Title: Vice President and CFO
-----------------------------------

<PAGE> 1
EXHIBIT 10.1

June 16, 1998

Mr.Frazer Hamilton
16 Garden Close
Hook
Hampshire
RG27 9QZ
U.K.

Dear Frazer:

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,
Quality reporting directly to me.

Initially, you will be based in the United Kingdom, but you will be expected to
travel to and spend appropriate work periods at the Company's headquarters in
Andover, Massachusetts. While based in the U.K., you will an employee of
PictureTel International Corporation, and for administrative, pay and benefit
purposes, you will be placed on the United Kingdom subsidiary payroll. You will
be eligible for all benefits and other emoluments provided U.K. employees in
similar positions and circumstances as yours, including but not limited to, the
health scheme, pension contributions, death in service benefits (life insurance)
and participation in the subsidiary's prevailing automobile scheme.

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 monthly
rate of P10,000. ( this the equivalent of P120,000. annually based on 12 monthly
pay periods in the year ). The offered base salary will be the minimum paid
while employed with the Company. As Vice President, Quality a full personal
performance and total compensation ( salary, bonus, and equity ) review is
completed by the Compensation Committee of the Board during the quarter
immediately following the close of the 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 P75,000.; paid
as follows: P30,000. thirty ( 30 ) days following your employment start date;
P15,000. on January 1, 1999 and P30,000. on July 1, 1999.

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
70,000 shares of the Common Stock of the Company ( "Option" ). The Option will
vest over a four year period, with the first twenty-five ( 25 ) percent of the
aggregate number of shares vesting one ( 1 ) year following the date the option
grant is approved and six and one quarter ( 6.25 ) percent of the aggregate
number of shares vesting each quarter 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.

<PAGE> 2

Inasmuch as you will be expected to travel to and spend appropriate work periods
at the Company's headquarters in Andover, Massachusetts while based in the U.K,
the Company will provide you with appropriate local housing and an automobile
during such periods of time. You will have eighteen months following the
commencement of work with the Company to make a decision to relocate to the
United States. If you decide to relocate, PictureTel will provide you with full
relocation assistance from Hook, Hampshire, U.K. to the Andover, Massachusetts
area. Details will be specified at the time you decide to effect your relocation
and will be in accordance with standard Company Relocation Policy. After
relocation, you will given one annual home leave trip to the U.K. for you and
your spouse, any additional home leave trips will be decided between you and
Bruce Bond. However, in the event that you voluntarily terminate your employment
within eighteen ( 18 ) months of the relocation, the relocation expenses paid up
to the termination date shall be subject to repayment to the Company pro-rata
for your service with the company.

In the event that you are involuntarily terminated by the Company for any reason
other than for Cause, you would be entitled to receive a continuation of your
then current base salary for a period of twelve ( 12 ) months. During the twelve
months that you receive salary payments from the Company, you will remain
eligible for the same continued benefit coverage provided employees in similar
positions and circumstances as yours. Further, if such termination occurs after
you have relocated to the U.S., the Company will fully "repatriate" you back to
the U.K.. For purposes of this letter, "Cause" shall be defined as and be
limited to conviction of a felony or willful misconduct or gross negligence in
the performance of duties which result in material harm to PictureTel.

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 ( i ) your then current base salary, plus ( ii ) the highest
bonus paid in the three years preceding the triggering events, paid over a
twelve ( 12 ) month period. Additionally, if such termination occurs after you
have relocated to the U.S., the Company will fully "repatriate" you back to the
U.K.. 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.

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 Bond
President and
Chief Executive Officer

ACCEPTED:_____________________________________ Date:_____________
SS#:___________________ Anticipated Start Date:_________________

<PAGE> 1
EXHIBIT 10.2

KEY VICE PRESIDENT CHANGE IN CONTROL AGREEMENT

THIS AGREEMENT dated as of June 22, 1998 is made by and between PictureTel
Corporation, a Delaware Corporation, (the "Company") and Frazer Hamilton, 16
Garden Close, Hook, Hampshire, RG 27 9QZ, United Kingdom ("Executive").

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

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

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

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

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

2.0 TERM OF AGREEMENT. This Agreement shall commence on the date hereof
and shall continue in effect through November 30, 2000; provided, however, that
commencing on December 1, 1998 and each December 1st thereafter, the term of
this Agreement shall automatically be extended for one additional year unless,
not later than September 30th preceding that December 1st, the Company or the
Executive shall have given notice not to extend this Agreement or a Change in
Control shall have occurred prior to such September 30th; provided, however, if
a Change in Control shall have occurred during the term of this Agreement, this
Agreement shall continue in effect for a period of not less than twenty-four
(24) months beyond the date on which such Change in Control occurred.

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

4.0 THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (A) a

<PAGE> 2

date which is six (6) months from the date of such Potential Change of Control,
(B) the date of a Change in Control, (C) the date of termination by reason of
death or Disability, or (D) the termination by the Company of the Executive's
employment for any reason.

5.0 COMPENSATION OTHER THAN SEVERANCE PAYMENTS.

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

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

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

6.0 SEVERANCE PAYMENTS.

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

(i) Subsequent to the Date of Termination, the Company shall make cash
severance payments to the Executive over a twelve (12) month period in
substantially equal monthly installments, in an amount equal to one
(1) times the sum of (a) the higher of the Executive's annual base
salary in effect immediately prior to the occurrence of the event or
circumstance upon which the Notice of Termination is based or in
effect immediately prior to the Change in Control, and (b) the higher
of the highest annual bonus paid to the Executive in the three years
preceding the year in which the Date of Termination occurs or paid in
the three years preceding the year in which the Change in Control
occurs.

(ii) For a twelve- (12) month period after the Date of Termination,
the Company shall arrange to provide the Executive with medical and
dental insurance benefits substantially similar to those that the
Executive is receiving immediately prior to the Notice of Termination.
Benefits otherwise receivable by the Executive pursuant to this
Section 6.1(ii) shall be reduced to the extent comparable benefits are
actually received by or made available to the Executive without cost
during the twelve (12)

<PAGE> 3

month period following the Executive's termination of employment (and
any such benefits actually received by the Executive shall be reported
to the Company by the Executive).

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

7.0 TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.

7.1 NOTICE OF TERMINATION. After a Change in Control and during the term
of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 10.0 hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.

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

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

(B) if the Executive's employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a
termination by the Company, shall not be less than thirty (30) days (except
in the case of a termination for Cause).

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

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

<PAGE> 4

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

9.0 SUCCESSORS; BINDING AGREEMENT.

9.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and / or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
In any event this agreement shall be binding upon the Company and any successors
or assignee.

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

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

To the Company:

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

To the Executive:

Mr. Frazer Hamilton
16 Garden Close
Hook
Hampshire RG27 9QZ
United Kingdom

11.0 MISCELLANEOUS. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either

<PAGE> 5

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

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

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

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

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

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

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

(i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other
than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure
after the issuance of a Notice of Termination for Good Reason by the
Executive pursuant to Section 7.1) after a written demand for
substantial

<PAGE> 6

performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that
the Executive has not substantially performed the Executive's duties,
or

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

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

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

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

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

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

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

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

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

(G) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the
Company for a period of six (6) consecutive months, the

<PAGE> 7

Company shall have given the Executive a Notice of Termination for
Disability, and, within thirty (30) days after such Notice of Termination
is given, the Executive shall not have returned to the full-time
performance of the Executive's duties.

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

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

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

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

(i) the Company,

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

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

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

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

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

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

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

PictureTel Corporation
By ________________________________
Name: Bruce R. Bond
Title: Chairman of the Board of Directors,
President and
Chief Executive Officer

--------------------------------
Frazer Hamilton

<PAGE> 1
EXHIBIT 10.3

CONSULTANT AGREEMENT

THIS CONSULTANT AGREEMENT (the "Agreement"), made as of the 5th day of
January, 1999, is entered into by PictureTel Corporation a duly organized
Delaware Corporation with its principal place of business at 100 Minuteman Road,
Andover, Massachusetts 01810 (the "Company") and Enzo Torresi, 211 Tourney Loop,
Los Gatos, CA 95032 (the "Consultant").

WHEREAS, the Company is engaged in the design, development, manufacture,
marketing, sale and service of advanced video collaboration solutions worldwide;
and

WHEREAS, Consultant possesses extensive executive management experience in
the development of high technology businesses producing low cost (hardware and
software) products with high volume distribution worldwide; and

WHEREAS, the Company is desirous of engaging the Consultant to oversee the
development of a business which will provide the company with low cost video
collaboration products and high volume distribution; and

WHEREAS, Consultant is willing to perform such work for the Company.

NOW, THEREFORE, in consideration of the mutual convenants herein
contained, the parties hereto agree as follows:

1. TERM OF AGREEMENT
-----------------

This Agreement shall be in force for a period of three (3) months
commencing January 1, 1999 and continuing through March 31,1999 (the "Consulting
Period"). The Consulting Period shall be subject to extension by mutual written
consent thirty (30) calendar days prior to the end of the Consulting Period (the
"Extended Consulting Period"), or / unless the Agreement is terminated in
accordance with Section 6. hereof.

2. STATEMENT OF WORK
-----------------

Consultant shall perform such work as is necessary to develop and produce a
business plan to assist the Company establish a "SOHO" retail business complete
with products and distribution strategy, and provide such other ancillary
services as may be mutually agreed from time to time (the "Consulting
Services").

3. CONSULTING FEES & EXPENSES
--------------------------

The Company agrees to pay the Consultant a fee of $2,000 per day for not
less than five (5) days nor more than ten (10) days of Consulting Services in
each month of the Consulting Period (the "Consulting Fee"). The Consulting Fee
shall be promptly paid at the end of each month of the Consulting Period upon
the Consultant's submission of an invoice for the Consulting Services provided
during that month.

During any Extended Consulting Period, the Company agrees to deliver to the
Consultant, in lieu of the cash Consulting Fee above, 600 shares of the
Company's Common Stock per day for not less than five (5) days nor more than ten
(10) days of Consulting Services in each month of the Extended Consulting Period
upon the Consultant's submission of an invoice for the Consulting Services
provided during that month.

The Company agrees to reimburse the Consultant for all actual and
reasonable travel, living and other expenses incurred during the performance of
the Consulting Services. For purposes of determining such expenses, Mountain
View, California shall be established as the site from which the Consulting
Services shall be performed (actual office location to be determined). Payment
shall be made promptly upon submission of the appropriate receipts for any
incurred expenses.

<PAGE> 2

4. EMPLOYMENT RELATIONSHIP
-----------------------

The Company does not intend to establish an Employee / Employer
relationship by the execution of this Agreement. The sole relationship between
the Consultant and the Company shall be as an independent contractor. As such,
Consultant shall not be eligible to participate in any employee benefit programs
of the Company nor shall the Company make any federal or state income tax
withholdings. It shall be the Consultant's sole responsibility for any income
tax liabilities.

5. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
------------------------------------------------

Consultant agrees to sign the PictureTel Proprietary Information and
Inventions Agreement, a copy of which is attached. The signed copy will be
annexed to and become part of this Agreement.

6. TERMINATION
-----------

The Company or Consultant may terminate this Agreement without cause, at
any time, upon either party giving a thirty (30) calendar day written notice of
termination. If the Consultant gives the termination notice, the Consultant
shall immediately cease to incur expenses under this Agreement and the Company
shall have no further obligation to pay Consulting Fees after the termination
date. If the Company gives the termination notice, the Consultant shall
immediately cease to incur expenses under this Agreement and Consultant shall be
paid Consulting Fees for the minimum consulting days remaining in the Consulting
Period.

7. NOTICE
------

Any notice required to be given under the terms of this Agreement shall be
in writing, and sent by registered or certified mail, postage prepaid, return
receipt requested, to the respective addresses stated herein.

8. COMPLETE AGREEMENT
------------------

This Agreement supersedes all prior agreements and understandings between
the parties and may not be changed unless mutually agreed upon in writing by
both parties.

9. ASSIGNMENT
----------

This Agreement is personal to the Consultant who shall not assign this
Agreement or any interest therein, without prior written consent of the Company.

10. GOVERNING LAW
-------------

The laws of the Commonwealth of Massachusetts shall govern this Agreement.

11. ENFORCEABILITY
--------------

In the event any provision of this Agreement is found to be legally
unenforceable by a court of competent jurisdiction, such unenforceability shall
not prevent enforcement of any other provision of the Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first written above.

- ------------------------------- ----------------------------
Enzo Torresi Bruce Bond
Consultant Chairman, President and
Chief Executive Officer

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S
BALANCE SHEET AND INCOME STATEMENT FOR THE PERIOD ENDED APRIL 4, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-04-1999
<EXCHANGE-RATE> 1
<CASH> 59,908
<SECURITIES> 51,782
<RECEIVABLES> 77,632
<ALLOWANCES> (6,405)
<INVENTORY> 37,614
<CURRENT-ASSETS> 229,511
<PP&E> 206,748
<DEPRECIATION> (112,392)
<TOTAL-ASSETS> 358,714
<CURRENT-LIABILITIES> 99,297
<BONDS> 0
0
45
<COMMON> 403
<OTHER-SE> 203,074
<TOTAL-LIABILITY-AND-EQUITY> 203,522
<SALES> 76,194
<TOTAL-REVENUES> 76,194
<CGS> 51,972
<TOTAL-COSTS> 51,972
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,169
<INCOME-PRETAX> (24,949)
<INCOME-TAX> 1,021
<INCOME-CONTINUING> (25,970)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,970)
<EPS-PRIMARY> (0.68)
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</TABLE>