##### Table of Contents














SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q/A




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

(Mark One)



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

For the quarterly period ended
                        July 4,
 1999

OR



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

For the transition period from
                        to



|                                   |                              
|---------------------------------- | -----------------------------
|For the Quarter ended July 4, 1999 | Commission File Number 1-9434

PICTURETEL CORPORATION

(Exact name of Registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|Delaware                                                        |  | 04-2835972                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|                                        
|                                        
|                                        
|                                        
|100 Minuteman Road, Andover, MA          |  | 01810     
|(Address of Principal Executive Offices) |  | (Zip Code)

Registrants telephone number:  978-292-5000

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

Yes
[X]          No
 [  ]

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

As of August 6, 1999, there were outstanding 40,402,469
shares of common stock of the registrant.



---






---

TABLE OF CONTENTS



|                                                                                     |                                       |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------ | ------------------------------------- |  |  |  |  |  |  | 
|FRONT COVER                                                                         
|                                                                                     | CONSOLIDATED BALANCE SHEETS          
|                                                                                     | CONSOLIDATED STATEMENTS OF OPERATIONS
|                                                                                     | CONSOLIDATED STATEMENTS OF CASH FLOWS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                          
|MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Part II Other Information                                                          
|Item1.   Legal Proceedings                                                          
|Item4.   Submission of Matters to a Vote of Security Holders                        
|Item6.   Exhibits and Reports on Form8-K                                            
|SIGNATURE                                                                           
|EX-10.19.1 Credit Agreement                                                         
|EX-10.23 Equity Plan                                                                
|EX-10.24 Foreign Subsidiary Employee Stock Plan                                     
|EX-10.3.2 Non-Employee Directors Stock Option Plan                                  
|Ex-10.4.1 Amendment to 1994 Employee Stock Plan                                     
|EX-27.1 Financial Data Schedule                                                     



---



PICTURETEL CORPORATION




FORM 10-Q/A




INDEX




|                                                                                                 |                                            |                                                            |       |      |   | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------------------------------------------------------- | ----- | ---- | - | 
|                                                                                                 |                                            | Page                                                      
|                                                                                                 |                                            |                                                           
|PART I. CONSOLIDATED FINANCIAL INFORMATION                                                       |                                            |                                                            |       |     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 1.  Consolidated Financial Statements:                                                      |                                            |                                                            |       |     
|                                                                                                 | Consolidated Balance Sheets                |                                                            |       |      |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                            | July 4, 1999 and December 31, 1998                         |       |      | 3 | 
|                                                                                                 | Consolidated Statements of Operations      |                                                            |       |      |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                            | Three and six months ended July 4, 1999 and June 28,
	1998 |       |      | 4 | 
|                                                                                                 | Consolidated Statements of Cash Flows      |                                                            |       |      |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                            | Six months ended July 4, 1999 and June 28, 1998            |       |      | 5 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Notes to Consolidated Financial Statements |                                                            |       | 6-11 |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 2.  Managements Discussion and Analysis
	 of Financial Condition and Results of Operations |                                            |                                                            | 12-22 |     
|PART II.  OTHER INFORMATION                                                                      |                                            |                                                            |       |     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 1.  Legal Proceedings                                                                       |                                            |                                                            | 23    |     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 4.  Submission of Matters to a Vote of
	Security Holders                                    |                                            |                                                            | 24    |     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 6.  Exhibits and Reports on Form 8-K                                                        |                                            |                                                            | 25    |     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Signature                                                                                        |                                            |                                                            | 26    |     




2



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##### Table of Contents



PICTURETEL CORPORATION




CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)





|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |         |         | 
|------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | ------- | ------- | 
|                                                                   |                                                                                                                                                                     | July 4,                                                                 |        | December 31,
|                                                                   |                                                                                                                                                                     | 1999                                                                    |        | 1998        
|                                                                   |                                                                                                                                                                     |                                                                         |        |             
|                                                                   |                                                                                                                                                                     | (unaudited)                                                             |        |             
|                                                                   |                                                                                                                                                                     | Restated                                                                |        |             
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ASSETS                                                            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current assets:                                                    |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Cash and cash equivalents                                                                                                                                           |                                                                         | $      | 44,944       |         |  | $      | 62,642  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Restricted cash                                                                                                                                                     |                                                                         |        | 5,000        |         |  |        |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Marketable securities                                                                                                                                               |                                                                         |        | 43,800       |         |  |        | 38,078  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts receivable, less allowance for doubtful accounts of
	$6,433 and $5,392 at July 4, 1999 and December 31,
	1998, respectively                                |                                                                         |        | 71,723       |         |  |        | 78,995  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Inventories                                                                                                                                                         |                                                                         |        | 36,130       |         |  |        | 30,256  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Insurance recovery receivable                                                                                                                                       |                                                                         |        | 9,450        |         |  |        |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other current assets                                                                                                                                                |                                                                         |        | 8,708        |         |  |        | 8,692   |        
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                   |                                                                                                                                                                     | Total current assets                                                    |        |              | 219,755 |  |        |         | 218,663 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Property and equipment, net                                        |                                                                                                                                                                     |                                                                         | 90,876 |              |         |  | 95,655 |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Capitalized software costs, net                                    |                                                                                                                                                                     |                                                                         | 15,913 |              |         |  | 20,484 |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Goodwill, net                                                      |                                                                                                                                                                     |                                                                         | 4,789  |              |         |  | 5,336  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other assets                                                       |                                                                                                                                                                     |                                                                         | 11,108 |              |         |  | 12,856 |        
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                   |                                                                                                                                                                     | Total assets                                                            |        | $            | 342,441 |  |        | $       | 352,994 | 
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS
	 EQUITY
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current liabilities:                                               |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Short-term borrowings                                                                                                                                               |                                                                         | $      |             |         |  | $      | 881     |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts payable                                                                                                                                                    |                                                                         |        | 22,231       |         |  |        | 32,777  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accrued compensation and benefits                                                                                                                                   |                                                                         |        | 8,483        |         |  |        | 11,214  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accrued expenses                                                                                                                                                    |                                                                         |        | 40,606       |         |  |        | 35,316  |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accrued litigation settlement                                                                                                                                       |                                                                         |        | 12,000       |         |  |        |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Current portion of capital lease obligations                                                                                                                        |                                                                         |        | 2,057        |         |  |        | 3,537   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred revenue                                                                                                                                                    |                                                                         |        | 26,934       |         |  |        | 22,616  |        
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                   |                                                                                                                                                                     | Total current liabilities                                               |        |              | 112,311 |  |        |         | 106,341 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Capital lease obligations                                          |                                                                                                                                                                     |                                                                         | 55,509 |              |         |  | 56,411 |        
|Commitments and contingencies (Notes 5 and 8)                      |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Redeemable convertible, preferred stock, $.01 par value;
	15,000,000 shares authorized; 4,478,708 shares outstanding at
	July 4, 1999                               |                                                                         |        | 30,500       |         |  |        |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stockholders equity:                                              |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Common stock, $.01 par value; 80,000,000 shares authorized;
	40,400,269 shares outstanding at July 4, 1999 and 40,067,771
	 shares outstanding at December 31, 1998 |                                                                         |        | 404          |         |  |        | 400     |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Treasury stock, 70,000 shares                                                                                                                                       |                                                                         |        | (556         | )       |  |        |        |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Additional paid-in capital                                                                                                                                          |                                                                         |        | 224,827      |         |  |        | 222,230 |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated deficit                                                                                                                                                 |                                                                         |        | (88,057      | )       |  |        | (30,254 | )      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated other comprehensive income (loss)                                                                                                                       |                                                                         |        | 7,503        |         |  |        | (2,134  | )      
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                   |                                                                                                                                                                     | Total stockholders equity                                              |        |              | 144,121 |  |        |         | 190,242 | 
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        
|                                                                   |                                                                                                                                                                     | Total liabilities, redeemable preferred stock and
	stockholders equity |        | $            | 342,441 |  |        | $       | 352,994 | 
|                                                                   |                                                                                                                                                                     |                                                                         |        |              |         |  |        |        




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

3



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##### Table of Contents



PICTURETEL CORPORATION




CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)


(unaudited)





|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |        |         | 
|--------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ---------------- | ------ | -------- | ------- | -------- | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                              |                                     |                          |         |                 
|                                              |                                     | Three Months Ended       |         | Six Months Ended
|                                              |                                     |                          |         |                 
|                                              |                                     | July 4,                  |         | June 28,         |        | July 4,  |         | June 28,
|                                              |                                     | 1999                     |         | 1998             |        | 1999     |         | 1998    
|                                              |                                     |                          |         |                  |        |          |         |         
|                                              |                                     | Restated                 |         |                  |        | Restated |         |         
|                                             
|                                             
|                                             
|                                             
|Revenues                                      |                                     | $                        | 85,962  |                  |        | $        | 104,582 |          |        | $ | 162,156 |        |         | $ | 205,628 |       
|                                             
|                                             
|                                             
|                                             
|Cost of revenues                              |                                     |                          | 58,937  |                  |        |          | 64,309  |          |        |   | 110,909 |        |         |   | 119,468 |       
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Gross margin                                  |                                     |                          | 27,025  |                  |        |          | 40,273  |          |        |   | 51,247  |        |         |   | 86,160  |       
|                                             
|                                             
|                                             
|                                             
|Operating expenses:                           |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|                                             
|                                             
|                                             
|                                             
|                                              | Selling, general and administrative |                          |         | 39,485           |        |          |         | 36,185   |        |   |         | 71,847 |         |   |         | 68,994 |        
|                                             
|                                             
|                                             
|                                             
|                                              | Research and development            |                          |         | 18,348           |        |          |         | 14,617   |        |   |         | 35,871 |         |   |         | 31,517 |        
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|                                              |                                     | Total operating expenses |         |                  | 57,833 |          |         |          | 50,802 |   |         |        | 107,718 |   |         |        | 100,511 | 
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Loss from operations                          |                                     |                          | (30,808 | )                |        |          | (10,529 | )        |        |   | (56,471 | )      |         |   | (14,351 | )     
|                                             
|                                             
|                                             
|                                             
|Interest income (expense), net                |                                     |                          | (363    | )                |        |          | 553     |          |        |   | (164    | )      |         |   | 1,001   |       
|                                             
|                                             
|                                             
|                                             
|Other income, net                             |                                     |                          | 375     |                  |        |          | 5       |          |        |   | 890     |        |         |   | 329     |       
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Loss before income tax expense (benefit)      |                                     |                          | (30,796 | )                |        |          | (9,971  | )        |        |   | (55,745 | )      |         |   | (13,021 | )     
|                                             
|                                             
|                                             
|                                             
|Income tax expense (benefit)                  |                                     |                          | 1,036   |                  |        |          | (3,283  | )        |        |   | 2,057   |        |         |   | (4,167  | )     
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Net loss                                      |                                     |                          | (31,832 | )                |        |          | (6,688  | )        |        |   | (57,802 | )      |         |   | (8,854  | )     
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |                                     |                          |        |                  |        |          |        |          |        |   | 5,612   |        |         |   |        |       
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Net loss applicable to common shareholders    |                                     | $                        | (31,832 | )                |        | $        | (6,688  | )        |        | $ | 63,414  |        |         | $ | (8,854  | )     
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Net loss per common share  basic             |                                     | $                        | (0.79   | )                |        | $        | (0.17   | )        |        | $ | (1.57   | )      |         | $ | (0.23   | )     
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Net loss per common share  diluted           |                                     | $                        | (0.79   | )                |        | $        | (0.17   | )        |        | $ | (1.57   | )      |         | $ | (0.23   | )     
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Weighted average shares outstanding  basic   |                                     |                          | 40,334  |                  |        |          | 38,308  |          |        |   | 40,276  |        |         |   | 38,200  |       
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       
|Weighted average shares outstanding  diluted |                                     |                          | 40,334  |                  |        |          | 38,308  |          |        |   | 40,276  |        |         |   | 38,200  |       
|                                              |                                     |                          |         |                  |        |          |         |          |        |   |         |        |         |   |         |       




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

4



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##### Table of Contents



PICTURETEL CORPORATION




CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


(unaudited)


|                                                    |                                                                                               |                                                        |         |          |         |   |         |         |        |  
|--------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------- | -------- | ------- | - | ------- | ------- | ------ | -
|                                                    |                                                                                               |                                                       
|                                                    |                                                                                               | Six Months Ended                                      
|                                                    |                                                                                               |                                                       
|                                                    |                                                                                               | July 4,                                                |         | June 28,
|                                                    |                                                                                               | 1999                                                   |         | 1998    
|                                                    |                                                                                               |                                                        |         |         
|Cash flows from operating activities:               |                                                                                               |                                                        |         |          |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net loss                                                                                      |                                                        | $       | (57,802  | )       |   | $       | (8,854  | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustments to reconcile net income to net cash provided by (used
	 in) operating activities: |                                                        |         |          |         |   |         |         |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Depreciation and amortization                          |         |          | 18,163  |   |         |         | 13,527 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Provision for doubtful accounts                        |         |          | 1,822   |   |         |         | 700    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Inventory provision                                    |         |          | 2,435   |   |         |         | 1,257  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Write-down of capitalized software                     |         |          |        |   |         |         | 1,586  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Write-down of long-lived assets                        |         |          |        |   |         |         | 4,210  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Deferred taxes, net                                    |         |          |        |   |         |         | (4,167 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Other non-cash items                                   |         |          | 102     |   |         |         | 885    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Changes in operating assets and liabilities:                                                  |                                                        |         |          |         |   |         |         |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Accounts receivable                                    |         |          | 4,136   |   |         |         | 11,494 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Inventories                                            |         |          | (8,362  | ) |         |         | 4,943  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Insurance recovery receivable                          |         |          | (9,450  | ) |         |         |       |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Other current assets                                   |         |          | (276    | ) |         |         | (3,178 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Accounts payable                                       |         |          | (10,213 | ) |         |         | (3,739 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Accrued compensation and benefits and accrued expenses |         |          | 3,011   |   |         |         | (2,196 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Accrued litigation settlement                          |         |          | 12,000  |   |         |         |       |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                               | Deferred revenue                                       |         |          | 4,633   |   |         |         | (1,495 | )
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        
|Net cash provided by (used in) operating activities |                                                                                               |                                                        | (39,801 | )        |         |   | 14,973  |        
|                                                   
|                                                   
|                                                   
|                                                   
|Cash flows from investing activities:               |                                                                                               |                                                        |         |          |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of marketable securities                                                             |                                                        |         | (73,718  | )       |   |         | (76,519 | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from marketable securities                                                           |                                                        |         | 77,601   |         |   |         | 56,126  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Additions to property and equipment                                                           |                                                        |         | (7,076   | )       |   |         | (7,783  | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Capitalized software costs                                                                    |                                                        |         |         |         |   |         | (3,397  | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of other assets                                                                      |                                                        |         |         |         |   |         | (268    | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from asset disposals                                                                 |                                                        |         | 13       |         |   |         |        |       
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        
|Net cash used in investing activities               |                                                                                               |                                                        | (3,180  | )        |         |   | (31,841 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Cash flows from financing activities:               |                                                                                               |                                                        |         |          |         |   |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Restricted cash                                                                               |                                                        |         | (5,000   | )       |   |         |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net payments from foreign lines of credit                                                     |                                                        |         |         |         |   |         | (186    | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Payments on short-term/long-term borrowings                                                   |                                                        |         | (842     | )       |   |         |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Principal payments under capital lease obligations                                            |                                                        |         | (2,395   | )       |   |         | (1,372  | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock repurchase                                                                       |                                                        |         | (556     | )       |   |         |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from preferred stock issuance                                                        |                                                        |         | 30,500   |         |   |         |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from exercise of stock options                                                       |                                                        |         | 1,811    |         |   |         | 1,044   |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from stock purchase plan                                                             |                                                        |         | 790      |         |   |         | 879     |       
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        
|Net cash provided by financing activities           |                                                                                               |                                                        | 24,308  |          |         |   | 365     |        
|                                                   
|                                                   
|                                                   
|                                                   
|Effect of exchange rate changes on cash             |                                                                                               |                                                        | 975     |          |         |   | 282     |        
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        
|Net decrease in cash and cash equivalents           |                                                                                               |                                                        | (17,698 | )        |         |   | (16,221 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Cash and cash equivalents at beginning of period    |                                                                                               |                                                        | 62,642  |          |         |   | 49,859  |        
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        
|Cash and cash equivalents at end of period          |                                                                                               | $                                                      | 44,944  |          |         | $ | 33,638  |        
|                                                    |                                                                                               |                                                        |         |          |         |   |         |        

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

5



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##### Table of Contents



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 July 4, 1999 and December 31, 1998,
results of operations for the three and six months ended
July 4, 1999 and June 28, 1998 and changes in cash flows for
 the six months ended July 4, 1999 and June 28, 1998.

The results disclosed in the Consolidated Balance Sheet at
July 4, 1999, the Consolidated Statement of Operations for
the three and six months ended July 4, 1999, and the
Consolidated Statement of Cash Flows for the six months ended
July 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. These estimates affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. 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 consist of the following (in thousands):

|                |  |         |        |              |  |   |        | 
|--------------- |  | ------- | ------ | ------------ |  | - | ------ | 
|                |  | July 4, |        | December 31,
|                |  | 1999    |        | 1998        
|                |  |         |        |             
|Purchased Parts |  | $       | 2,982  |              |  | $ | 2,609  | 
|               
|               
|               
|               
|Work in Process |  |         | 911    |              |  |   | 1,399  | 
|               
|               
|               
|               
|Finished Goods  |  |         | 32,237 |              |  |   | 26,248 | 
|                |  |         |        |              |  |   |        | 
|                |  | $       | 36,130 |              |  | $ | 30,256 | 
|                |  |         |        |              |  |   |        | 

6



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##### Table of Contents



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):




|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |        |  
|------------------------ | --------------------------------------------- | ------------- | ----- | ------------ | - | -------- | ----- | -------- | - | - | ----- | ------- | - | - | ----- | ------ | -
|                         |                                               |               |       |             
|                         |                                               | For the three |       | For the six 
|                         |                                               | months ended  |       | months ended
|                         |                                               |               |       |             
|                         |                                               | July 4,       |       | June 28,     |   | July 4,  |       | June 28,
|                         |                                               | 1999          |       | 1998         |   | 1999     |       | 1998    
|                         |                                               |               |       |              |   |          |       |         
|                         |                                               | Restated      |       |              |   | Restated |       |         
|                        
|                        
|                        
|                        
|Basic EPS Computation:   |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|Numerator:               |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|                         | Net loss                                      |               | $     | (31,832      | ) |          | $     | (6,688   | ) |   | $     | (57,802 | ) |   | $     | (8,854 | )
|                        
|                        
|                        
|                        
|                         | Preferred stock beneficial conversion feature |               |       |             |   |          |       |         |   |   |       | 5,612   |   |   |       |       |  
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                         | Total                                         |               | $     | (31,832      | ) |          | $     | (6,688   | ) |   | $     | (63,414 | ) |   | $     | (8,854 | )
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|Denominator:             |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|                         | Weighted average common shares outstanding    |               |       | 40,334       |   |          |       | 38,308   |   |   |       | 40,276  |   |   |       | 38,200 |  
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|Basic EPS                |                                               | $             | (0.79 | )            |   | $        | (0.17 | )        |   | $ | (1.57 | )       |   | $ | (0.23 | )     
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|Diluted EPS Computation: |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|Numerator:               |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|                         | Net loss                                      |               | $     | (31,832      | ) |          | $     | (6,688   | ) |   | $     | (57,802 | ) |   | $     | (8,854 | )
|                        
|                        
|                        
|                        
|                         | Preferred stock beneficial conversion feature |               |       |             |   |          |       |         |   |   |       | 5,612   |   |   |       |       |  
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                         | Total                                         |               | $     | (31,832      | ) |          | $     | (6,688   | ) |   | $     | (63,414 | ) |   | $     | (8,854 | )
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|Denominator:             |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                        
|                        
|                        
|                        
|                         | Weighted average common shares outstanding    |               |       | 40,334       |   |          |       | 38,308   |   |   |       | 40,276  |   |   |       | 38,200 |  
|                        
|                        
|                        
|                        
|                         | Stock options, preferred stock, warrants      |               |       |             |   |          |       |         |   |   |       |        |   |   |       |       |  
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|                         | Total Shares                                  |               |       | 40,334       |   |          |       | 38,308   |   |   |       | 40,276  |   |   |       | 38,200 |  
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       
|Diluted EPS              |                                               | $             | (0.79 | )            |   | $        | (0.17 | )        |   | $ | (1.57 | )       |   | $ | (0.23 | )     
|                         |                                               |               |       |              |   |          |       |          |   |   |       |         |   |   |       |       




Options to purchase shares of the Companys common stock of
6,406,873 and 5,970,571 were outstanding at July 4, 1999 and
 June 28, 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 2,723
shares of the Companys common stock and convertible
preferred stock of 4,478,708 shares were outstanding at
July 4, 1999, but were not included in the computation of
diluted EPS because they were antidilutive due to the loss
sustained in 1999.

7



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  Comprehensive Loss




The Company adopted FASB 130, Reporting Comprehensive Income, in
fiscal year 1998. The calculation of comprehensive income
includes the loss as reported in the Consolidated Statements of
Operations, the gains and losses on foreign currency translation
adjustments and unrealized gains and losses on marketable
securities. (in thousands)




|                                                          |  |                    |         |                  |  |         |        |          |  |   |         |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ------- | ------ | -------- |  | - | ------- | - |  | - | ------ | -
|                                                          |  |                    |         |                 
|                                                          |  | Three months ended |         | Six months ended
|                                                          |  |                    |         |                 
|                                                          |  | July 4,            |         | June 28,         |  | July 4, |        | June 28,
|                                                          |  | 1999               |         | 1998             |  | 1999    |        | 1998    
|                                                          |  |                    |         |                  |  |         |        |         
|Net loss                                                  |  | $                  | (31,832 | )                |  | $       | (6,688 | )        |  | $ | (57,802 | ) |  | $ | (8,854 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Foreign currency translations, net                        |  |                    | 871     |                  |  |         | 1,945  |          |  |   | 62      |   |  |   | 401    |  
|                                                         
|                                                         
|                                                         
|                                                         
|Unrealized gains and losses on marketable securities, net |  |                    | 1,150   |                  |  |         | 3      |          |  |   | 9,573   |   |  |   | 4      |  
|                                                          |  |                    |         |                  |  |         |        |          |  |   |         |   |  |   |        |  
|Comprehensive loss                                        |  | $                  | (29,811 | )                |  | $       | (4,740 | )        |  | $ | (48,167 | ) |  | $ | (8,449 | )
|                                                          |  |                    |         |                  |  |         |        |          |  |   |         |   |  |   |        |  

5.  Debt

On June 15, 1999, the Company entered into a new secured
revolving credit agreement, expiring June 15, 2001, with a
bank group led by Chase Manhattan Bank. The Company has up to
$35,000,000 available for borrowing under the new credit
agreement. This agreement requires interest payable at either the
 banks base rate or the adjusted eurocurrency rate, plus a
margin ranging from 75 basis points to 125 basis points, based
upon the financial performance of the Company. Facility fees are
also calculated on an annual basis, payable quarterly in advance,
 in accordance with the same ratio as the interest payable,
ranging from 20 basis points to 37.5 basis points. The agreement
contains no demand feature and provides that the principal
portion of the borrowings be paid by the expiration date.

At July 4, 1999, no borrowings were outstanding under this
credit agreement. However, the Company has $28,095,000 of
outstanding standby letters of credit issued under this
agreement, which reduces the amount available for borrowing on a
dollar for dollar basis. Fees for letters of credit outstanding
against this revolving credit line are payable at 125 basis
points per annum of the face amount. The revolving credit
agreement is collateralized by substantially all the assets of
the parent company and certain stock of its subsidiaries. The
credit agreement also contains certain financial covenants,
including minimum cash and net income (loss) requirements.
As of July 4, 1999, the Company was in compliance with all
covenants.

Local lines of credit are available for short-term advances of up
 to $825,000 to certain of the Companys foreign
subsidiaries. The agreement requires interest payable at the
banks prime lending rate plus one-quarter of one percent
per annum. No borrowings were outstanding against these local
lines of credit at July 4, 1999.

In June 1999, the Company entered into a short-term security
agreement with BankBoston. Under this agreement, the Company
pledged $5,000,000 of cash and cash equivalents to the bank as
collateral for obligations of the Company arising from cash
management and foreign exchange services.

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 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 the terms of the agreement, the Company has
distribution rights to sell the Intel ProShare® Video System
 500 and exclusive worldwide distribution rights to sell and
support the Intel® TeamStation System.

8



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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 Company has revised its consolidated financial statements for
 the year ended December 31, 1999. The adjustments were to
reclassify the presentation of the Series A Preferred Stock
into the mezzanine section of the balance sheet and to record the
 preferred stock beneficial conversion feature in the first
quarter of 1999 rather than over the first three quarters of
1999. The consolidated financial statements and related notes to
the consolidated financial statements in this Form 10Q/A
reflect all such revisions through July 4, 1999. These
revisions have no impact on total assets, total liabilities, or
cash flows. A summary of the impact of the adjustments for the
three months and six months ended July 4, 1999 is as
follows: (in thousands, except per share data)







|                                              |  |               |         |              |  |            |         |          |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------------- | ------- | ------------ |  | ---------- | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                              |  |               |         |             
|                                              |  | For the three |         | For the six 
|                                              |  | months ended  |         | months ended
|                                              |  | July 4, 1999  |         | July 4, 1999
|                                              |  |               |         |             
|                                              |  | As            |         |              |  | As         |         |         
|                                              |  | previously    |         | As           |  | previously |         | As      
|                                              |  | Reported      |         | Restated     |  | Reported   |         | Restated
|                                              |  |               |         |              |  |            |         |         
|Net loss                                      |  | $             | (31,832 | )            |  | $          | (31,832 | )        |  | $ | (57,802 | ) |  | $ | (57,802 | )
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |  |               | 2,837   |              |  |            |        |          |  |   | 4,271   |   |  |   | 5,612   |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |               | (34,669 | )            |  |            | (31,832 | )        |  |   | (62,073 | ) |  |   | (63,414 | )
|                                             
|                                             
|                                             
|                                             
|Net loss per common share  basic and diluted |  |               | (0.86   | )            |  |            | (0.79   | )        |  |   | (1.54   | ) |  |   | (1.57   | )







|                                       |  |              |         |          |  |   |         |  |  |  |  |  |  |  |  | 
|-------------------------------------- |  | ------------ | ------- | -------- |  | - | ------- |  |  |  |  |  |  |  |  | 
|                                       |  |              |         |          |  |  
|                                       |  | July 4, 1999 |         |          |  |  
|                                       |  |              |         |          |  |  
|                                       |  | As           |         |          |  |   |         | 
|                                       |  | previously   |         | As       |  |   |         | 
|                                       |  | Reported     |         | Restated |  |   |         | 
|                                       |  |              |         |          |  |   |         | 
|Redeemable convertible preferred stock |  | $            |        |          |  | $ | 30,500  |  |  |  |  |  |  |  |  | 
|                                      
|                                      
|                                      
|                                      
|Convertible preferred stock            |  |              | 45      |          |  |   |        |  |  |  |  |  |  |  |  | 
|                                      
|                                      
|                                      
|                                      
|Additional paid in capital             |  |              | 255,282 |          |  |   | 224,827 |  |  |  |  |  |  |  |  | 
|                                      
|                                      
|                                      
|                                      
|Total stockholders equity             |  |              | 174,621 |          |  |   | 144,121 |  |  |  |  |  |  |  |  | 




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 maintenance as well as professional, consulting,
 and management services for the videoconferencing products sold
by the Company and its competitors. The audioconferencing segment
 develops, manufactures, markets and services multipoint
audioconferencing control units. (in thousands)




|                                  |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|--------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------ | ----- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                  |  | Video-       |         | Video-       |  |              |        |       |  |      
|                                  |  | conferencing |         | conferencing |  | Audio-       |        |       |  |      
|                                  |  | Products     |         | Services     |  | conferencing |        | Other |  | Total
|                                  |  |              |         |              |  |              |        |       |  |      
|Three months ended July 4, 1999:  |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                 
|                                 
|                                 
|                                 
|Revenues from external customers  |  | $            | 65,838  |              |  | $            | 16,109 |       |  | $     | 4,015  |   |  |   |        |   |  | $ | 85,962  |  
|                                 
|                                 
|                                 
|                                 
|Operating income (loss)           |  | $            | (19,685 | )            |  | $            | 231    |       |  | $     | (3,459 | ) |  | $ | (7,895  | ) |  | $ | (30,808 | )
|                                 
|                                 
|                                 
|                                 
|Three months ended June 28, 1998: |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                 
|                                 
|                                 
|                                 
|Revenues from external customers  |  | $            | 84,158  |              |  | $            | 14,978 |       |  | $     | 5,446  |   |  |   |        |   |  | $ | 104,582 |  
|                                 
|                                 
|                                 
|                                 
|Operating income (loss)           |  | $            | 284     |              |  | $            | 2,600  |       |  | $     | 1,454  |   |  | $ | (14,867 | ) |  | $ | (10,529 | )

9



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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

|                                 |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|-------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------ | ----- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                 |  | Video-       |         | Video-       |  |              |        |       |  |      
|                                 |  | conferencing |         | conferencing |  | Audio-       |        |       |  |      
|                                 |  | Products     |         | Services     |  | conferencing |        | Other |  | Total
|                                 |  |              |         |              |  |              |        |       |  |      
|Six months ended July 4, 1999:   |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                
|                                
|                                
|                                
|Revenues from external customers |  | $            | 119,676 |              |  | $            | 32,889 |       |  | $     | 9,591  |   |  |   |        |   |  | $ | 162,156 |  
|                                
|                                
|                                
|                                
|Operating income (loss)          |  | $            | (41,910 | )            |  | $            | 1,291  |       |  | $     | (3,036 | ) |  | $ | (12,816 | ) |  | $ | (56,471 | )
|                                
|                                
|                                
|                                
|Six months ended June 28, 1998:  |  |              |         |              |  |              |        |       |  |       |        |   |  |   |         |   |  |   |         |  
|                                
|                                
|                                
|                                
|Revenues from external customers |  | $            | 165,670 |              |  | $            | 28,832 |       |  | $     | 11,126 |   |  |   |        |   |  | $ | 205,628 |  
|                                
|                                
|                                
|                                
|Operating income (loss)          |  | $            | (2,332  | )            |  | $            | 3,641  |       |  | $     | 3,677  |   |  | $ | (19,337 | ) |  | $ | (14,351 | )

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 regard to this
litigation. On July 15, 1999 the United States Court of
Appeals for the Federal Circuit issued a ruling in favor of
PictureTel. The Appellate Court found that all patent claims
raised against PictureTel were invalid. This decision effectively
 closes the lawsuit brought by Datapoint.

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 alleged that
PictureTel and Messrs. Gaut and Strauss violated
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder, during the period from
October 17, 1996 through November 13, 1997, through the
 alleged preparation and dissemination of materially false and
misleading financial statements which artificially inflated the
price of PictureTel Common Stock. The consolidated complaint
seeks to recover an unspecified amount of damages, including
attorneys and experts fees and expenses.

On April 7, 1998, the Company filed a motion to dismiss the
complaint. On October 28, 1998, the motion to dismiss Norman
 E. Gaut was granted and the motion to dismiss PictureTel and Les
 Strauss was denied.

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##### Table of Contents



PICTURETEL CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

On June 17, 1999 the Company announced that it had entered
into a settlement agreement with the Plaintiffs. The Settlement
provides that the claim against PictureTel and Mr. Straus
will be dismissed. In agreeing to the proposed settlement, the
Company and Mr. Strauss specifically deny any wrongdoing.
The settlement provides for a cash payment of $12 million by
 the Company, plus interest, after the settlement is final. More
than 75% of the settlement amount will be covered by the
Companys insurance. Accordingly, the Company recorded a
liability for the litigation settlement of $12 million and an
insurance recovery receivable, of approximately $9.5 million,
which are included in the consolidated balance sheet at July 4,
1999. The settlement is subject to certain customary conditions,
including preliminary and final approval by the United States
District court for the District of Massachusetts, and notice to
the class. Once the court gives preliminary approval to this
settlement, formal notices with details of the settlement will be
 sent to the purported class members by the Plaintiffs
counsel.

In May 1999, the Company was informed that the Securities and
Exchange Commission (SEC) had initiated a formal investigation of
 matters related to the Companys 1997 restatement of its
earnings. PictureTel has been cooperating with the SEC and will
continue to do so. The Company expresses no opinion as to the
likely outcome. The Company believes that the investigation will
not have a material impact on the day-to-day business, nor the
present or future prospects of the Company or its subsidiaries.

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
allegedly seeking $200,000,000 in damages. Discovery is in
process. The Company believes that the complaint and the claim
for damages are without merit and intends to vigorously defend
against them.

In addition 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.

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##### Table of Contents






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. Use of a single architecture is expected to reduce both
 product and associated support costs. Under the terms of the
agreement, the Company has distribution rights to sell the Intel
ProShare®Video System 500 and exclusive worldwide
distribution rights to sell and support the Intel®
TeamStation System.

In mid June 1999, the Company resumed shipping Swiftsite II,
after resolving performance issues that resulted in suspension of
 shipments in the first quarter of 1999. Substantially all of the
 related Swiftsite II revenue deferred in the first quarter of
1999 was recognized during the second quarter of 1999. The
availability of Swiftsite II provides the Company with a
videoconferencing product offering in the fastest growing portion
 of the market.

In the second quarter of 1999, the Company introduced its Visual
Collaboration for the Net (VCN) strategy. In June of
1999, the first two initiatives of this strategy, PictureTel
eVideo Application Server and eVideo Services, were introduced.
The Company expects the new strategy to make a material
contribution to revenues beginning in the year 2000.

The Intel initiative and VCN are anticipated to have material,
long-term positive impacts on the Company. In addition, the
Company has been restructuring and reallocating its resources
with the goal of reducing its cost of doing business and
returning to a profitable position in the year 2000.

The loss of $34,669,000, or $0.86 per share, for the second
quarter of 1999 was an increase from a loss of $6,688,000, or
$0.17 per share, in the second quarter of 1998. The loss of
$62,073,000, or $1.54 per share, for the six months ended
July 4, 1999 was an increase from a loss of $8,854,000, or
$0.23 per share, for the six months ended June 28, 1998.
Price erosion, as the Company adjusted its prices downward to
meet competition, and a shift to lower end systems were the
largest contributing factors to the increased loss for the
quarter and six month periods.

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##### Table of Contents



Results of Operations

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




|                                              |  |              |       |            |  |          |       |          |  |  |       |   |  |  |      |  
|--------------------------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | -------- |  |  | ----- | - |  |  | ---- | -
|                                              |  |              |       |           
|                                              |  | Three Months |       | Six Months
|                                              |  | Ended        |       | Ended     
|                                              |  |              |       |           
|                                              |  | July 4,      |       | June 28,   |  | July 4,  |       | June 28,
|                                              |  | 1999         |       | 1998       |  | 1999     |       | 1998    
|                                              |  |              |       |            |  |          |       |         
|                                              |  | Restated     |       |            |  | Restated |       |         
|                                             
|                                             
|                                             
|                                             
|Revenues                                      |  |              | 100%  |            |  |          | 100%  |          |  |  | 100%  |   |  |  | 100% |  
|                                             
|                                             
|                                             
|                                             
|Cost of revenues                              |  |              | 68.6  |            |  |          | 61.5  |          |  |  | 68.4  |   |  |  | 58.1 |  
|                                             
|                                             
|                                             
|                                             
|Gross margin                                  |  |              | 31.4  |            |  |          | 38.5  |          |  |  | 31.6  |   |  |  | 41.9 |  
|                                             
|                                             
|                                             
|                                             
|Selling, general and administrative           |  |              | 45.9  |            |  |          | 34.6  |          |  |  | 44.3  |   |  |  | 33.6 |  
|                                             
|                                             
|                                             
|                                             
|Research and development                      |  |              | 21.3  |            |  |          | 14.0  |          |  |  | 22.1  |   |  |  | 15.3 |  
|                                             
|                                             
|                                             
|                                             
|Total operating expenses                      |  |              | 67.2  |            |  |          | 48.6  |          |  |  | 66.4  |   |  |  | 48.9 |  
|                                             
|                                             
|                                             
|                                             
|Loss from operations                          |  |              | (35.8 | )          |  |          | (10.1 | )        |  |  | (34.8 | ) |  |  | (7.0 | )
|                                             
|                                             
|                                             
|                                             
|Interest income (expense), net                |  |              | (0.4  | )          |  |          | 0.6   |          |  |  | (0.1  | ) |  |  | 0.5  |  
|                                             
|                                             
|                                             
|                                             
|Other income, net                             |  |              | 0.4   |            |  |          | 0.0   |          |  |  | 0.5   |   |  |  | 0.2  |  
|                                             
|                                             
|                                             
|                                             
|Loss before income tax expense (benefit)      |  |              | (35.8 | )          |  |          | (9.5  | )        |  |  | (34.4 | ) |  |  | (6.3 | )
|                                             
|                                             
|                                             
|                                             
|Income tax expense (benefit)                  |  |              | 1.2   |            |  |          | (3.1  | )        |  |  | 1.2   |   |  |  | (2.0 | )
|                                             
|                                             
|                                             
|                                             
|Net loss                                      |  |              | (37.0 | )          |  |          | (6.4  | )        |  |  | (35.6 | ) |  |  | (4.3 | )
|                                             
|                                             
|                                             
|                                             
|Preferred stock beneficial conversion feature |  |              |      |            |  |          |      |          |  |  | 3.5   |   |  |  |     |  
|                                             
|                                             
|                                             
|                                             
|Net loss applicable to common shareholders    |  |              | (37.0 | )          |  |          | (6.4  | )        |  |  | (39.1 | ) |  |  | (4.3 | )




Three Months Ended July 4, 1999 Compared to Three Months
Ended June 28, 1998

Revenues.Total revenues for the three months ended
July 4, 1999 decreased $18,620,000, or 18%, to $85,962,000
from the comparable period in 1998. Lower average selling prices
and changes in the product sales mix to sales of products at the
lower end of the product line account for the decline, as
discussed below in Videoconferencing Products.
Revenues from sales to foreign markets increased 9 percentage
points to 51% in the second quarter of 1999 over the comparable
period in 1998.

Gross Margin.Overall gross margin declined $13,248,000,
or 33%, in the second quarter of 1999 compared to the second
quarter of 1998. Gross margin as a percentage of revenues was
31.4% in the second quarter of 1999 compared to 38.5% in the
second quarter of 1998. The decrease, as a percent of gross
margin, was caused by lower average selling prices coupled with
an increase in the sales mix of lower margin products and higher
fixed costs, including increased amortization of higher software
capitalization costs. Gross margin as a percentage of revenues
was approximately equal to the first quarter of 1999.

Selling, General and Administrative. These expenses
increased $3,300,000, or 9%, to 45.9% of sales in the second
quarter of 1999 from 34.6% of sales in the second quarter of
1998.

Increased expenses in the second quarter of 1999 resulted from
charges for restructuring and severance costs, real estate
consolidation costs, and a settlement of the consolidated
securities class action lawsuit. Restructuring and severance
costs of approximately $1.6 million (including
$0.3 million in gross margin) resulted from the elimination
of approximately 80 positions. At July 4, 1999, the Company
had an accrued restructuring balance of $1.3 million for
these costs, which is expected to be paid within the next six
months. Real estate consolidation costs of $2.8 million
consisted of $1.8 million of net operating lease costs
offset by probable sublease income as applicable, and
$1 million for the write-off of fixed assets. The settlement
 of the consolidated securities class action lawsuit was for
$2.6 million, net of expected insurance proceeds. These
charges more than offset savings that began to be realized from
cost reduction programs the Company implemented.

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##### Table of Contents



Selling, general and administrative expenses in the quarter ended
 July 4, 1999 were $7,123,000 higher than the prior quarter
due to real estate consolidation expenses, the shareholder
lawsuit and restructuring and severance costs.

Research and Development. Research and development
expenses increased $3,731,000, or 26%, to $18,348,000 from the
comparable period in 1998. Higher costs to resolve Swiftsite II
performance issues, combined with decreased capitalization of
software development costs, the addition of Starlight and higher
audioconferencing product development costs contributed to the
increase in expenses.

The Company capitalized $1,940,000 of software development costs
in the second quarter of 1998. No such costs were capitalized in
the second quarter of 1999 as no current projects in progress had
 achieved technological feasibility.

Research and development expenses in the quarter ended
July 4, 1999 were $825,000 higher than the prior quarter,
but decreased to 21% from 23% as a percentage of revenues.

Income Taxes. The Companys effective income tax rate
 was 3.4% in the second quarter of 1999 compared with a 33% tax
benefit in the comparable period in 1998. The decrease in the
effective tax rate was 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.

Videoconferencing Products, Videoconferencing
Services and Audioconferencing Segments

The Company is in transition with its products and allocating its
 assets to support these products. It is investing in its
audioconferencing business (MultiLink), new products being
developed with Intel and a new strategic direction to VCN, while
at the same time maintaining existing systems. Since the
beginning of 1999, the Company has eliminated over 190 positions
from the videoconferencing products business while adding 63
positions in MultiLink and the services business. Restructuring
and severance costs affected all segments of the Company with
videoconferencing products absorbing the majority of this type of
 charge. Real estate consolidation charges also affected several
segments with the majority of this type of charge affecting the
audioconferencing segment.

Videoconferencing Products. The videoconferencing products
 segment develops, manufactures, and markets visual
communications systems and collaboration software. Second quarter
 1999 revenues totaled $65,838,000, which represents a
$18,320,000, or 22%, decrease from second quarter 1998. Second
quarter 1999 revenues increased $12,000,000, or 22% from the
first quarter of 1999.

The revenue decrease in second quarter of 1999 from second
quarter of 1998 was caused by lower average selling prices and
changes in product sales mix from larger to smaller group
systems. Average selling prices were lower across all product
lines versus 1998. This trend in lower selling prices is expected
 to continue as the Company adjusts its prices in response to
competitive pressures.

Total videoconferencing system units sold were flat versus the
prior year. Group system volume increased by 60% as a result of
Swiftsite II and TeamStation sales, while desktop/personal system
 volume decreased by 39%. Total units sold of larger group
systems, Concordes and Venues, were essentially flat from the
first quarter of 1999.

Swiftsite II, a compact system targeted for the fastest growing
part of the videoconferencing market, was introduced by the
Company in the first quarter of 1999. Approximately
$10 million of Swiftsite II product revenue that had been
deferred from the first quarter, pending an improved version of
its software, was recognized in the second quarter of 1999
following the release of the improved software.

The videoconferencing products segment generated an operating
loss of $19,685,000 during the second quarter of 1999 compared to
 a $284,000 operating income in the second quarter of 1998. The
primary reasons for the increased loss from the second quarter of
 1998 to the second quarter of 1999 were lower average sales
prices, the $1.6 million restructuring and severance cost
charge, decreased software capitalization, capitalized software
amortization related to Swiftsite II and amortization of
completed technology purchased in the

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##### Table of Contents





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. Second quarter 1999 segment
revenues increased $1,131,000, or 7.6%, to $16,109,000, from
second quarter 1998. Revenue in the second quarter 1999 was less
than the first quarter of 1999, largely due to the deferral of
one large sale of approximately $830,000 that is expected to be
realized in the third quarter of 1999.

Operating income declined from 17.4% to 1.4% of revenues for the
second quarter of 1999 from the second quarter of 1998. The
decline was caused by increased headcount, higher costs for
contracted services, increased provision for spare parts
obsolescence and the cost of developing two startup service
offerings, which are not yet revenue producing. The Company
anticipates service business operating margins will improve in
the third quarter as the cost structure is adjusted to match
revenue projections.

Audioconferencing (MultiLink).The audioconferencing
segment develops, manufactures, markets, and services multipoint
audioconferencing control units. Two major sources of
audioconferencing revenues are sales to service bureaus, which
are companies that provide use of the equipment to third parties,
 and enterprise product sales to end-users. Second quarter
revenues declined $1,431,000, or 26%, from the second quarter of
1998. Additionally, MultiLink revenue decreased $1,561,000, or
28%, from the first quarter of 1999. Reduced sales to service
bureaus are responsible for these decreases. A new generation
product, targeted specifically for service bureaus, is currently
scheduled for beta testing during the third quarter of 1999.

Management believes that progress was made during the quarter in
penetrating enterprise and international markets. Enterprise
domestic and international revenue increased 25% over the first
quarter of 1999 and also increased over second quarter of 1998.
This growth partially offset the decline in service bureau
product sales. MultiLink is expected to return to a growth track
in the fourth quarter of 1999 as technology developments are
completed.

Operating income decreased $4,913,000 to a loss of $3,459,000 in
the second quarter of 1999 from the second quarter of 1998,
primarily due to real estate consolidation charges of
$2.5 million, decreased sales levels, increased research and
 development spending on enhancing existing products and
developing next generation products and increased personnel to
support these activities.

Six Months Ended July 4, 1999 Compared to Six Months
Ended June 28, 1998

Revenues.Total revenues of $162,156,000 decreased
$43,472,000, or 21%, in the six months ended July 4, 1999
compared to the comparable period in 1998. Lower average selling
prices and changes in the product sales mix to sales of products
at the lower end of the product line account for the decline, as
discussed below in Videoconferencing Products.
Revenues from sales to foreign markets increased 5 percentage
points during the six months ended July 4, 1999 as compared
to the same period in 1998 and were 50% of total sales.

Gross Margin.Overall gross margin declined $34,913,000 to
 $51,247,000 in the six months ended July 4, 1999 compared
to the comparable period in 1998. Gross margin as a percentage of
 revenues declined to 31.6% from 41.9% for the period ended
July 4, 1999 as compared to the comparable period in 1998.
The decrease was caused by lower average selling prices coupled
with unfavorable mix variance in videoconferencing products.

Selling, General and Administrative. Selling, general and
administrative expenses increased $2,853,000, or 4%, from the
comparable six months in 1998. Second quarter 1999 charges for
restructuring and severance, real estate consolidation, and
settlement of the consolidated securities class action lawsuit
primarily account for the increase. In addition, the 1998
Starlight acquisition and excess real estate costs contributed to
 the unfavorable comparison. The Company expects to realize the
full benefits of its real estate consolidation efforts beginning
in fourth quarter of 1999. These charges more than offset savings
 that began to be realized from cost reduction programs the
Company had implemented.

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Research and Development. Research and development
expenses increased $4,354,000, or 13.8%, from the comparable six
months in 1998. New product development expenditures at
Starlight, which was acquired in the fourth quarter of 1998, and
in the audioconferencing segment, plus the effect of decreased
capitalization of software development costs account for the
higher expenses. The Company capitalized $3,397,000 of software
development costs in the first six months of 1998. No such costs
were capitalized in 1999 as no current projects in progress had
achieved technological feasibility.

Income Taxes. The Companys effective income tax rate
 for the six months ended July 4, 1999 was 3.7% as compared
with a 32% tax benefit for the comparable period in 1998. The
decrease in the effective tax rate was 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.

Videoconferencing Products, Videoconferencing
Services and Audioconferencing Segments

Videoconferencing Products. Videoconferencing product
revenues totaled $119,676,000 for the first six months 1999,
which represents a $45,994,000, or 28%, decrease from the first
six months of 1998. Lower average selling prices and changes in
product sales mix from larger to smaller group systems were
responsible for the decrease. 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
customer requirements.

Total videoconferencing system units decreased 8% versus the
prior year, with group system volume increasing by 11% and
desktop/personal system volume decreasing by 24%. Total units
sold of larger group systems, Concordes and Venues, declined 25%,
 while sales of smaller systems, Swiftsite II and TeamStation,
increased 62%.

High-end video systems as a market are off significantly as
customers expressed a stronger preference for more compact
systems. Moreover, the Company did not have a current product in
that area of the market at the beginning of 1999. To counter this
 trend, Swiftsite II, a compact system targeted for the fastest
growing part of the videoconferencing market, was introduced by
the Company in the first quarter of 1999 but shipments were
suspended and not resumed until late in the second quarter. Also
to address the changing market conditions, on January 19, 1999
the Company entered into a joint distribution and joint
development agreement with Intel Corporation as is described
above. Under this agreement, the Company is developing a new
range of products to address both current and future market
needs.

The videoconferencing products segment operating loss increased
$39,583,000 to $41,914,000 during the first six months of 1999
compared to the first six months of 1998. The primary reasons for
 the decrease were lower average sales prices, unfavorable change
 in sales mix, the $1.6 million restructuring and severance
charge, the combined effect of decreased software capitalization
and increase in software amortization charges and excess overhead
 associated with lower volumes.

Videoconferencing Services.The first six months 1999
videoconferencing service revenues totaled $32,889,000, which
represents a $4,057,000, or 14%, increase from the first six
months of 1998. Maintenance services grew 12% and professional
services 18% in the first six months of 1999 over the comparable
period in 1998. The increases in both areas were due to higher
renewal rates and new customers.

Operating income as a percentage of revenues declined 8.7
percentage points to 3.9% for the six months ended July 4,
1999 compared to the six months ended June 28, 1998. The
decline in operating income for the six months ended July 4, 1999
 over the comparable period of 1998 are for the same reasons as
detailed above in Videoconferencing Services three
months ended 1999.

Audioconferencing (MultiLink).The first six months 1999
audioconferencing revenues totaled $9,591,000, which represents a
 $1,535,000, or 13.8%, decrease from the first six months of
1998.

The decline in revenue for the first six months ended 1999 over
the comparable period of 1998 are for the same reasons as
detailed above in Audioconferencing three months
ended 1999.

Operating income decreased from $3,677,000 in the second quarter
of 1998 to a loss of $3,036,000 in the second quarter of 1999,
primarily because of the $2,500,000 consolidation of facilities
charges, decreased sales and increased research and development
spending on enhancing existing products and developing next
generation products.

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Liquidity and Capital Resources

At July 4, 1999, the Company had $44,944,000 in cash and
cash equivalents and $43,800,000 in short-term marketable
securities. Net cash used by operating activities in the six
months ended July 4, 1999 increased by $54,744,000 over the
first six months of the prior year. The primary uses of cash
during the six months ended July 4, 1999 were to fund the
operating loss, increase inventory, and decrease accounts
payable. The principal source of cash was the receipt of $30.5
million of cash from the issuance of convertible preferred stock
to Intel Corporation.

Net cash used in operating activities was $39,801,000 for the six
 months ended July 4,1999. This amount represents net cash
used in the first three months of this period of $22,054,000 and
$17,747,000 in the second three months. This cash utilization is
of major concern to the Company. To reduce this usage, the
Company has restructured and consolidated several areas,
intensified programs to reduce inventory, receivables, and
capital expenditures and is using attrition, without replacement,
 plus selective layoffs to reduce headcount. Although the Company
 does not believe these programs will have enough impact during
1999 to eliminate cash usage, it does believe that these programs
 will have a significant impact.

The Company has a revolving credit agreement, expiring
June 15, 2001, with a bank group led by Chase Manhattan Bank
 as a source of funds. At July 4, 1999, no borrowings were
outstanding under this credit agreement. However, the Company has
 $28,095,000 of outstanding standby letters of credit issued
under this agreement which reduces the amount available for
borrowing on a dollar for dollar basis. Fees for letters of
credit outstanding against this revolving credit line are payable
 at 125 basis points per annum of the face amount. The revolving
credit agreement is collateralized by substantially all assets of
 the parent Company and certain stock of its subsidiaries. The
credit agreement also contains certain financial covenants,
including minimum cash and net income (loss) requirements.
As of July 4, 1999, the Company was in compliance with all
covenants.

Local lines of credit are available for short-term advances of up
 to $825,000 to certain of the Companys foreign
subsidiaries. The agreement requires interest payable at the
banks prime lending rate plus one-quarter of one percent
per annum. No borrowings were outstanding against these local
lines of credit at July 4, 1999.

In June 1999, the Company entered into a short-term security
 agreement with BankBoston. Under this agreement, the Company
pledged $5,000,000 of cash and cash equivalents to the bank as
collateral for obligations of the Company arising from cash
management and foreign exchange services.

The Company has operating leases for various rented properties.
The Company signed an agreement to sublease MultiLinks
former facility in Andover, MA in May 1999 as part of its
space consolidation efforts. As of July 4, 1999, the
remaining obligation under this operating lease was
$8.6 million. After giving effect to expected sublease
income, this obligation is $5.3 million. 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 recorded a charge of $2.5 million in the quarter
ended July 4, 1999.

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 six month period ended July 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, lines of credit,
 equipment lease financing and existing cash, cash equivalents
and marketable securities should be sufficient to meet the
Companys operating, investing and financing requirements
for the foreseeable future. The Company is also exploring
alternative sources of capital.

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.

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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 that will be
accretive to the Companys results of operations and
financial condition. In January 1999, the Company entered
into a distribution and joint product development agreement with
Intel Corporation. The two companies 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 that 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.

On June 9, 1999 the Company announced a new strategic
direction called VCN. There can be no assurance that the Company
will be successful in implementing this new strategy, or if the
strategy is implemented that the market will adopt the products
associated with the strategy to an extent to be accretive to the
Companys results of operations or financial condition.

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. 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.

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 that compete with the Company and
corporations that develop and market network products, as well as
 mergers among competitors, are intensifying competition in the
marketplace. This increased competition, together with a slowdown
 in the growth of the general market for videoconferencing
products, has led and may continue to lead to increases in the
defection or dilution of the Companys distribution channel
partners to competitors, decreases in average selling prices and
margins in both group and desktop/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

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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 received
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 21%
decrease in revenues for the six months ended July 4, 1999
as compared to revenues for the six months ended June 28,
1998 and an increase in net loss from $8,854,000 to $57,802,000.

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, 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 could impact the Companys ability to
remain in compliance with covenants under its existing revolving
credit agreement or to maintain an adequate cash position to
adequately fund its operations. While the Company plans to
preserve cash and marketable securities by reducing working
capital, capital expenditures and operating expenses, it is not
certain that such plans will be adequate to meet operating needs
if losses continue at recent levels.

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

Although the Company does not believe that its products infringe
the proprietary rights of any third parties, third parties have
asserted infringement and other claims against the Company from
time to time. There can be no assurance that third parties will
not assert such claims against the Company in the future or that
such claims will not be successful. The Company could incur
substantial costs and diversion of

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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 50%
 and 45% of revenues for the periods ended July 4, 1999 and
June 28, 1998, 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 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. On
October 15, 1998, the

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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 third 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
November 30, 1999. IT systems at several foreign
subsidiaries will be converted to the IT systems used
domestically by the end of September, 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.

PictureTel completed an assessment of desktops and related Third
Party systems and is beginning to develop a remediation plan for
the inventory that is not compliant. The Company does not expect
the cost of addressing areas of non-compliance will have a
material adverse impact on its operations or its financial
position, results of operations or cash flows.

The Company also expects to complete a Non-IT Systems inventory
analysis and risk assessment in the third 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 has performed an Independent Validation and
 Verification (IV&V) process, evaluating the inventory and
assessment work to date. The IV&V report identified the Year
2000 project on track as compared with other companies. The
assessment identified areas of risk and related recommendations.
The team is actively addressing the recommendations. Another
IV&V process will be scheduled towards the end of the year,
evaluating remediation and test activities and contingency
planning preparedness.

The Company estimates that it has spent a total of $600,000 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

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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. 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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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. On July 15, 1999 the United States Court of
Appeals for the Federal Circuit issued a ruling in favor of
PictureTel. The Appellate Court found that all patent claims
against PictureTel were invalid. This decision effectively closes
 the lawsuit brought by Datapoint.

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 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.

On June 17, 1999 the Company announced that it had entered
into a settlement agreement with the Plaintiffs. The Settlement
provides that the claim against PictureTel and Mr. Straus
will be dismissed. In agreeing to the proposed settlement, the
Company and Mr. Strauss specifically deny any wrongdoing.
The settlement provides for a cash payment of $12 million by
 the Company, plus interest, after the settlement is final. More
than 75% of the settlement amount will be covered by the
Companys insurance. The settlement is subject to certain
customary conditions, including preliminary and final approval by
 the United States District court for the District of
Massachusetts, and notice to the class. Once the court gives
preliminary approval to this settlement, formal notices with
details of the settlement will be sent to the purported class
members by the Plaintiffs counsel.

In May 1999, the Company was informed that the Securities and
Exchange Commission (SEC) had initiated a formal investigation of
 matters related to the Companys 1997 restatement of its
earnings. PictureTel has been cooperating with the SEC and will
continue to do so. The Company expresses no opinion as to the
likely outcome. The Company believes that the investigation will
not have a material impact on the day-to-day business, nor the
present or future prospects of the Company or its subsidiaries.

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

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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.




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

The Annual meeting of Stockholders of the Company was held on
June 17, 1999. The Stockholders of the Company were asked to
 vote on the following items, and voted as follows:

Proposal I:  Election of the Board of Directors

|                 |  |     |            |          |  |  |           | 
|---------------- |  | --- | ---------- | -------- |  |  | --------- | 
|                 |  | For |            | Withheld
|                 |  |     |            |         
|Bruce R. Bond    |  |     | 34,729,163 |          |  |  | 1,085,875 | 
|                
|                
|                
|                
|Norman E. Gaut   |  |     | 34,712,002 |          |  |  | 1,103,036 | 
|                
|                
|                
|                
|Robert T. Knight |  |     | 34,728,241 |          |  |  | 1,086,797 | 
|                
|                
|                
|                
|David B. Levi    |  |     | 34,515,522 |          |  |  | 1,299,516 | 
|                
|                
|                
|                
|Enzo Torresi     |  |     | 34,731,658 |          |  |  | 1,083,380 | 

Proposal II:  Adoption of the 1999 Equity Plan under
which 3,000,000 shares of Common Stock may be delivered from time
 to time.

|    |            |         |  |         |           |                 |  |  |         |  |  |  |            | 
|--- | ---------- | ------- |  | ------- | --------- | --------------- |  |  | ------- |  |  |  | ---------- | 
|For |            | Against |  | Abstain |           | Broker Non-Vote
|    |            |         |  |         |           |                
|    | 13,500,769 |         |  |         | 7,761,561 |                 |  |  | 195,110 |  |  |  | 14,357,598 | 

Proposal III:  Authorizing the amendment of the
PictureTel 1994 Employee Stock Purchase Plan to increase the
number of shares of Common Stock which may be delivered under the
 plan (subject to the adjustment provisions therein) from
1,000,000 to 2,000,000.

|    |            |         |  |         |           |                 |  |  |         |  |  |  |            | 
|--- | ---------- | ------- |  | ------- | --------- | --------------- |  |  | ------- |  |  |  | ---------- | 
|For |            | Against |  | Abstain |           | Broker Non-Vote
|    |            |         |  |         |           |                
|    | 16,793.537 |         |  |         | 4,477,102 |                 |  |  | 186,801 |  |  |  | 14,357,598 | 

Proposal IV:  To adopt the 1999 Foreign Subsidiary
Employee Stock Purchase Plan under which 500,000 shares of Common
 Stock may be delivered from time to time.

|    |            |         |  |         |           |                 |  |  |         |  |  |  |            | 
|--- | ---------- | ------- |  | ------- | --------- | --------------- |  |  | ------- |  |  |  | ---------- | 
|For |            | Against |  | Abstain |           | Broker Non-Vote
|    |            |         |  |         |           |                
|    | 16,788,886 |         |  |         | 4,476,284 |                 |  |  | 192,270 |  |  |  | 14,357,598 | 

Proposal V:  To ratify the election of
PricewaterhouseCoopers LLP as the Companys auditors for
fiscal year 1999.

|    |            |         |  |         |         |  |  |  |         | 
|--- | ---------- | ------- |  | ------- | ------- |  |  |  | ------- | 
|For |            | Against |  | Abstain
|    |            |         |  |        
|    | 35,036,569 |         |  |         | 672,592 |  |  |  | 105,877 | 

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Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits




|        |  |                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19.1 |  | $35,000,000 Credit Agreement among PictureTel Corporation and the
	 Chase Manhattan Bank as Agent, and Congress Financial
	Corporation (New England) as Documentation Agent, and the Other
	Financial Institutions party hereto dated June 15, 1999.
|10.23   |  | 1999 Equity Plan authorizing 3,000,000 shares of Common Stock to
	be delivered from time to time.                                                                                                                                                   
|10.24   |  | 1999 Foreign Subsidiary Employee Stock Purchase Plan under which
	500,000 shares of Common Stock may be delivered from time to
	time.                                                                                                               
|10.3.2  |  | 1992 Non-Employee Directors Stock Option Plan as amended through
	June 17, 1999.                                                                                                                                                                    
|10.4.1  |  | Amendment to PictureTels 1994 Employee Stock Purchase Plan
	increasing the number of shares of Common Stock which may be
	delivered under the plan from 1,000,000 to 2,000,000.                                                                    
|27.1    |  | Financial Data Schedule for the period ended July 4, 1999 as
	required by Item 601(c) of Regulation S-K.                                                                                                                                            




(b)  Reports on Form 8-K

None.

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SIGNATURE




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






| |                                             
| | --------------------------------------------
| | PICTURETEL CORPORATION                      
|
|
| | /s/  RALPH J. TAKALA                        
|
|
| |                                             
|
|
| | Ralph J. Takala                             
|
|
| | Chief Financial Officer,                    
|
| | (Principal Financial and Accounting Officer)
|
| | August 14, 2000                             
|

26