<PAGE>   1
 
===============================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
 
(MARK ONE)
 
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 (AMENDED)
 
                  FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
 
                                       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 APRIL 4, 1999                COMMISSION FILE NUMBER 1-9434
 
                             PICTURETEL CORPORATION
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      04-2835972
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)

       100 MINUTEMAN ROAD, ANDOVER, MA                             01810
  (Address of Principal Executive Offices)                      (Zip Code)
</TABLE>
 
                  REGISTRANT'S TELEPHONE NUMBER:  978-292-5000
 
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.

                           Yes [X]            No [  ]
 
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
 
As of May 7, 1999, there were outstanding 40,302,942 shares of common stock of
the registrant.
 
===============================================================================
<PAGE>   2
 
                             PICTURETEL CORPORATION
 
                                   FORM 10-Q
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I.  CONSOLIDATED FINANCIAL INFORMATION

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

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

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

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

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

PART II. OTHER INFORMATION

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

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

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

Signatures..................................................     21
</TABLE>
 
                                        2
<PAGE>   3
 
                             PICTURETEL CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                              APRIL 4,    DECEMBER 31,
                                                                1999          1998
                                                              --------    ------------
<S>                                                           <C>         <C>
                                        ASSETS
Current assets:
     Cash and cash equivalents..............................  $ 59,908      $ 62,642
     Marketable securities..................................    51,782        38,078
     Accounts receivable, less allowance for doubtful
      accounts of $6,405 and $5,392 at April 4, 1999 and
      December 31, 1998, respectively.......................    71,227        78,995
     Inventories, net.......................................    37,614        30,256
     Other current assets...................................     8,980         8,692
                                                              --------      --------
          Total current assets..............................   229,511       218,663
Property and equipment, net.................................    94,356        95,655
Capitalized software costs, net.............................    18,199        20,484
Goodwill, net...............................................     5,063         5,336
Other assets................................................    11,585        12,856
                                                              --------      --------
          Total assets......................................  $358,714      $352,994
                                                              ========      ========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Short-term borrowings..................................  $     --      $    881
     Accounts payable.......................................    23,107        32,777
     Accrued compensation and benefits......................     8,218        11,214
     Accrued expenses.......................................    37,244        35,316
     Current portion of capital lease obligations...........     2,775         3,537
     Deferred revenue.......................................    27,953        22,616
                                                              --------      --------
          Total current liabilities.........................    99,297       106,341
Capital lease obligations...................................    55,895        56,411
Commitments and contingencies (Notes 5 and 8)
Stockholders' equity:
     Convertible, preferred stock, $.01 par value;
      15,000,000 shares authorized; 4,478,708 shares
      outstanding at April 4, 1999..........................        45            --
     Common stock, $.01 par value; 80,000,000 shares
      authorized; 40,282,961 shares outstanding at April 4,
      1999 and 40,067,771 shares outstanding at December 31,
      1998..................................................       403           400
     Treasury stock, 70,000 shares..........................      (556)           --
     Additional paid-in capital.............................   254,374       222,230
     Accumulated deficit....................................   (56,224)      (30,254)
     Accumulated other comprehensive income (loss)..........     5,480        (2,134)
                                                              --------      --------
          Total stockholders' equity........................   203,522       190,242
                                                              --------      --------
          Total liabilities and stockholders' equity........  $358,714      $352,994
                                                              ========      ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

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

                                        4
<PAGE>   5
 
                             PICTURETEL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                              ---------------------
                                                              APRIL 4,    MARCH 29,
                                                                1999        1998
                                                              --------    ---------
<S>                                                           <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $(25,970)    $(2,165)
  Adjustments to reconcile net income to net cash provided
  by (used in) operating activities:
     Depreciation and amortization..........................     9,299       5,741
     Bad debt reserves......................................     1,401          --
     Inventory reserves.....................................       810          --
     Other non-cash items...................................       128         616
  Changes in operating assets and liabilities:
     Accounts receivable....................................     5,393       7,184
     Inventories............................................    (8,364)        327
     Other current assets...................................      (173)     (1,192)
     Accounts payable.......................................    (9,428)     (2,419)
     Accrued compensation and benefits and accrued
      expenses..............................................      (710)       (315)
     Deferred revenue.......................................     5,560      (1,441)
                                                              --------     -------
Net cash provided by (used in) operating activities.........   (22,054)      6,336
Cash flows from investing activities:
  Purchase of marketable securities.........................   (41,606)    (36,615)
  Proceeds from marketable securities.......................    36,333      25,221
  Additions to property and equipment.......................    (4,974)     (4,620)
  Capitalized software costs................................        --      (1,457)
  Purchase of other assets..................................        --         (99)
                                                              --------     -------
Net cash used in investing activities.......................   (10,247)    (17,570)
Cash flows from financing activities:
  Net proceeds from foreign lines of credit.................        --         748
  Payments on short-term/long-term borrowings...............      (850)         --
  Principal payments under capital lease obligations........    (1,284)       (418)
  Common stock repurchase...................................      (556)         --
  Proceeds from preferred stock issuance....................    30,500          --
  Proceeds from exercise of stock options...................       902         624
  Proceeds from stock purchase plan.........................       790         878
                                                              --------     -------
Net cash provided by financing activities...................    29,502       1,832
Effect of exchange rate changes on cash.....................        65      (1,544)
                                                              --------     -------
Net decrease in cash and cash equivalents...................    (2,734)    (10,946)
Cash and cash equivalents at beginning of period............    62,642      49,859
                                                              --------     -------
Cash and cash equivalents at end of period..................  $ 59,908     $38,913
                                                              ========     =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        5
<PAGE>   6
 
                             PICTURETEL CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  MANAGEMENT'S REPRESENTATION
 
     As permitted by the rules of the Securities and Exchange Commission
applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do
not contain all the disclosures required by generally accepted accounting
principles. Reference should be made to the consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission on March 31, 1999.
 
     In the opinion of the management of PictureTel Corporation, the
accompanying unaudited consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position at April 4, 1999
and the results of operations and changes in cash flow for the three months
ended April 4, 1999.
 
     The results disclosed in the Consolidated Balance Sheet at April 4, 1999
and the Consolidated Statement of Operations and Consolidated Statement of Cash
Flows for the three months ended April 4, 1999 are not necessarily indicative of
the results to be expected for the full year.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and also affect the reported amounts of revenues and expenses during
the reporting period. The financial statements include significant estimates of
the net realizable value of accounts receivable, inventory and capitalized
software and the amount of certain contingent liabilities. Actual results could
differ from those estimates.
 
2.  INVENTORIES
 
     Inventories, net consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                           APRIL 4,   DECEMBER 31,
                                                             1999         1998
                                                           --------   ------------
<S>                                                        <C>        <C>
Purchased Parts..........................................  $ 2,054      $ 2,609
Work in Process..........................................    1,350        1,399
Finished Goods...........................................   34,210       26,248
                                                           -------      -------
                                                           $37,614      $30,256
                                                           =======      =======
</TABLE>
 
                                        6
<PAGE>   7
                             PICTURETEL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  EARNINGS PER SHARE
 
     The following table reconciles the numerator and the denominators of the
basic and diluted EPS computations shown on the Consolidated Statements of
Operations (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                         FOR THE THREE MONTHS ENDED
                                                         ---------------------------
                                                          APRIL 4,        MARCH 29,
                                                            1999            1998
                                                         ----------      -----------
<S>                                                      <C>             <C>
BASIC EPS COMPUTATION:
Numerator:
     Net loss..........................................   $(25,970)        $(2,165)
     Preferred stock accretion.........................      1,434              --
                                                          --------         -------
     Total.............................................   $(27,404)        $(2,165)
                                                          ========         =======
Denominator:
     Weighted average common shares outstanding........     40,218          38,092
                                                          ========         =======
Basic EPS..............................................   $  (0.68)        $ (0.06)
                                                          ========         =======
DILUTED EPS COMPUTATION:
Numerator:
     Net loss..........................................   $(25,970)        $(2,165)
     Preferred stock accretion.........................      1,434              --
                                                          --------         -------
     Total.............................................   $(27,404)        $(2,165)
                                                          ========         =======
Denominator:
     Weighted average common shares outstanding........     40,218          38,092
     Stock options, preferred stock, warrants..........         --              --
                                                          --------         -------
     Total Shares......................................     40,218          38,092
                                                          ========         =======
Diluted EPS............................................   $  (0.68)        $ (0.06)
                                                          ========         =======
</TABLE>
 
     Options to purchase shares of the Company's common stock of 7,373,874 and
5,972,190 were outstanding at April 4, 1999 and March 29, 1998, respectively,
but were not included in the computation of diluted EPS because they were
antidilutive due to the net losses sustained in 1999 and in 1998. Warrants for
the Company's common stock of 2,723 and 4,478,708 shares of the Company's
convertible, preferred stock were outstanding at April 4, 1999 but were not
included in the computation of diluted EPS because they were antidilutive due to
the loss sustained in 1999.
 
4.  COMPREHENSIVE LOSS
 
     The Company in fiscal year 1998 adopted FASB 130, Reporting Comprehensive
Income. The calculation of comprehensive income includes the loss as reported in
the Consolidated Statements of Operations for the first quarter of 1999 and
1998, the gains and losses on foreign currency translation adjustments and
unrealized gains and losses on marketable securities. Total comprehensive loss
for the three months ended April 4, 1999 was $18,356,000 and total comprehensive
loss for the comparable period in 1998 was $3,710,000. The change from December
31, 1998 to April 4, 1999 in accumulated other comprehensive income was a gain
of $8,423,000 in marketable securities and a loss of $809,000 in cumulative
translation adjustments.
 
                                        7
<PAGE>   8
                             PICTURETEL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  DEBT
 
     On August 12, 1998 and March 31, 1999, the Company amended certain
provisions of the amended and restated credit agreement which expires on October
4, 1999. This agreement requires interest payable at either the bank's base
rate, or the adjusted eurocurrency rate plus an applicable margin of two
percent. The commitment fees were also amended and are payable quarterly on any
unused portion at a rate per annum equal to 0.25%. The amended agreement
contains no demand feature and provides that the principal portion of the
borrowings be paid by the expiration date.
 
     At April 4, 1999, no borrowings were outstanding under this credit
agreement. In addition, the Company has $28,762,000 of outstanding standby
letters of credit under this agreement. Fees for letters of credit outstanding
against this revolving credit line were amended and are now payable at two and
one-eighth percent per annum of the face amount. The revolving credit agreement
is collateralized by cash and cash equivalents and contains certain financial
covenants, including the maintenance of certain financial ratios and minimum net
income (loss) requirements.
 
     At April 4, 1999, the Company was out of compliance with two of the debt
covenants. The Company received waivers from the banks regarding those covenants
and is retroactively in compliance. The Company's quarterly operating results
for the remainder of the agreement term are likely to be out of compliance with
the credit line's financial covenants. Effective March 26, 1999, the banks
informed the Company that they would not renew the Company's letters of credit,
outstanding under this agreement, as they come due. The letters of credit, which
relate to security for certain of the Company's facility leases, come due as
follows: $12,500,000 on June 24, 1999, $9,012,000 on July 31, 1999 and
$7,250,000 on September 12, 1999. In addition, effective May 19, 1999, the
respective banks have informed the Company that they will not provide additional
short-term lending under this agreement.
 
     The Company is considering alternatives for the letters of credit including
refinancing the loan, seeking alternative issuers of letters of credit or cash
collateral. In the event that such letters of credit expire and are not renewed,
the Company's cash would be reduced by the amount of the letters of credit.
 
     Local lines of credit are available for short-term advances of up to
$5,300,000 to certain of the Company's foreign subsidiaries. Two of these lines
are guaranteed by the Company. The agreements require interest payable ranging
from the bank's prime lending rate plus up to one quarter of one percent per
annum. No borrowings were outstanding against these local lines of credit at
April 4, 1999.
 
6.  CAPITAL TRANSACTION
 
     On January 19, 1999, the Company announced it had entered into a
distribution and joint development agreement with Intel Corporation. On February
17, 1999, Intel invested $30.5 million in the Company, acquiring approximately
10% of the Company's equity through convertible preferred stock. The two
companies will develop videoconferencing and collaborative products based on a
common PC-based technology platform. Under terms of the agreement, Intel will
provide the Company with distribution rights to sell the Intel ProShare(R) Video
System 500 and exclusive worldwide distribution rights to sell and support the
Intel(R)TeamStation(TM) System.
 
     The convertible Preferred Stock issued to Intel Corporation is non-voting
and preferred with respect to dividend rights and liquidation preference to the
Company's Common Stock. Additionally, each share of the Preferred Stock has the
right to convert to one share of common stock.
 
     The terms of the convertible Preferred Stock are set forth in the Amendment
to the Certificate of Incorporation filed as Exhibit 3.1.1 to this 10-Q.
 
                                        8
<PAGE>   9
                             PICTURETEL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  SEGMENT INFORMATION
 
     The Company has determined that its reportable segments are
videoconferencing products, videoconferencing services and audioconferencing.
The videoconferencing products segment develops, manufactures and markets visual
communications systems and collaboration software. The videoconferencing
services segment provides services for the videoconferencing products. The
audioconferencing segment develops, manufactures, markets and services
multipoint control units.
 
<TABLE>
<CAPTION>
                                           VIDEO-         VIDEO-
                                        CONFERENCING   CONFERENCING      AUDIO-
                                          PRODUCTS       SERVICES     CONFERENCING    OTHER     TOTAL
                                        ------------   ------------   ------------   -------   --------
<S>                                     <C>            <C>            <C>            <C>       <C>
QUARTER ENDED APRIL 4, 1999:
Revenues from external customers......    $ 53,838       $16,780         $5,576      $    --   $ 76,194
Operating income (loss)...............    $(22,735)      $ 1,570         $  423      $(4,921)  $(25,663)
QUARTER ENDED MARCH 29, 1998:
Revenues from external customers......    $ 81,512       $13,853         $5,680      $    --   $101,045
Operating income (loss)...............    $ (2,616)      $ 1,041         $2,223      $(4,470)  $ (3,822)
</TABLE>
 
     The classification "Other" consists of corporate administrative functions,
which are excluded from the videoconferencing products, videoconferencing
services and audioconferencing segments for management decision making.
 
     The Company evaluates the performance of its segments based upon operating
income. There are no material intersegment revenues. Transfers of
videoconferencing products to the videoconferencing services segment are
recorded at standard cost and are not tracked for management reporting purposes.
Asset information by reportable segment has not been disclosed since the Company
does not produce such information internally.
 
8.  LITIGATION
 
  A.  Datapoint Litigation
 
     In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleged that certain of PictureTel's products infringed patent rights allegedly
owned by Datapoint. On April 9, 1998 a jury returned a verdict in favor of
PictureTel finding that PictureTel did not infringe the Datapoint patents and
that the Datapoint patent claims raised against PictureTel were invalid. On May
3, 1999 an appeals hearing took place with regards to this litigation. While
there can be no assurance that the outcome of the appeal will be in favor of the
Company, the Company believes that it presented meritorious defenses to the
appeal.
 
  B.  Shareholder Litigation
 
     Since September 23, 1997, seven class action shareholders' complaints have
been filed against the Company, Norman E. Gaut, Director and former Chairman of
the Board and Chief Executive Officer, and Les Strauss, the former Vice
President and Chief Financial Officer, in the United States District Court for
the District of Massachusetts. The plaintiffs filed a consolidated complaint on
February 11, 1998.
 
     The original complaints were filed following the Company's announcement on
September 19, 1997 that it would restate its financial results for the first
quarter of the fiscal year ending December 31, 1997 and the last two quarters of
the fiscal year ending December 31, 1996 and were amended when the Company
announced on November 13, 1997 that it would also restate the second quarter of
the fiscal year ending December 31, 1997. The consolidated complaint alleges
that PictureTel and Messrs. Gaut and Strauss violated Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder, during the period
from October 17, 1996 through November 13, 1997, through the alleged preparation
and dissemination of
                                        9
<PAGE>   10
                             PICTURETEL CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
materially false and misleading financial statements which artificially inflated
the price of PictureTel Common Stock. The consolidated complaint seeks to
recover an unspecified amount of damages, including attorneys' and experts' fees
and expenses.
 
     On April 7, 1998, the Company filed a motion to dismiss the complaint. On
October 28, 1998, the motion to dismiss Norman E. Gaut was granted and the
motion to dismiss PictureTel and Les Strauss was denied. Limited discovery has
occurred, and the Company expresses no opinion as to the likely outcome. The
outcome of this litigation may have a material impact on the Company's financial
position, results of operations and cash flows.
 
  C.  Revnet, Inc.
 
     On June 2, 1998, the Company was served with a complaint from a former
distribution channel customer, Revnet, Inc., which has ceased operations.
(Revnet, Inc., v. PictureTel Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The complaint alleges
that the Company breached an oral contract. Revnet is seeking $200,000,000 in
damages. Discovery has recently begun. The Company believes that the complaint
and the claim for damages are without merit and intends to vigorously defend
itself against them.
 
     In addition to the above, the Company has also been and is from time to
time subject to claims and suits incidental to the conduct of business. There
can be no assurance that the Company's insurance will be adequate to cover all
liabilities that may arise out of such claims. Further, although the Company
intends to defend itself vigorously against all such claims, the ultimate
outcome of the claims cannot be accurately predicted. The Company does not
believe that any claim of which it is aware, other than the claims listed above,
could result in an outcome that will have a material adverse affect to its
business, financial condition, results of operations or cash flows.
 
                                       10
<PAGE>   11
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING STATEMENTS
 
     This document includes forward-looking statements about the Company's
business, revenues and expenses, effective tax rate, and operating and capital
requirements. Forward-looking statements made or incorporated by reference
herein are not guarantees of future performance. In addition, forward-looking
statements may be included in various other PictureTel documents to be issued in
the future and in various oral statements by PictureTel representatives to
security analysts and investors from time to time. Any forward-looking
statements are subject to risks that could cause the actual results to vary
materially. Such risks are discussed in "Risk Factors Which May Affect Future
Results" and in other related portions of this document.
 
BUSINESS DEVELOPMENTS
 
     On January 19, 1999, the Company announced it had entered into a
distribution and joint development agreement with Intel Corporation. On February
18, 1999, Intel invested $30.5 million in the Company, acquiring approximately
10% of the Company's equity through convertible preferred stock. The two
companies will develop videoconferencing and collaborative products based on a
common PC-based technology platform. Under terms of the agreement, Intel will
provide the Company with distribution rights to sell the Intel ProShare(R) Video
System 500 and exclusive worldwide distribution rights to sell and support the
Intel(R) TeamStation(TM) System.
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, the percentage
of revenues for certain items in the Company's Statement of Operations for each
period:
 
<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                           -----------------------
                                                           APRIL 4,      MARCH 29,
                                                             1999          1998
                                                           --------      ---------
<S>                                                        <C>           <C>
Revenues.................................................     100%          100%
Cost of revenues.........................................    68.2          54.6
Gross margin.............................................    31.8          45.4
Selling, general and administrative......................    42.5          32.5
Research and development.................................    23.0          16.7
Total operating expenses.................................    65.5          49.2
Income (loss) from operations............................   (33.7)         (3.8)
Interest income, net.....................................     0.3           0.5
Other income, net........................................     0.7           0.3
Income (loss) before taxes...............................   (32.7)         (3.0)
Income tax expense (benefit).............................     1.4          (0.9)
Net income (loss)........................................   (34.1)         (2.1)
Preferred stock accretion................................    (1.9)           --
Net loss available to common shareholders................   (36.0)         (2.1)
</TABLE>
 
THREE MONTHS ENDED APRIL 4, 1999 COMPARED TO THREE MONTHS ENDED MARCH 29, 1998
 
     Revenues. The Company's first quarter 1999 revenues of $76,194,000
decreased $24,851,000, or 25%, from first quarter 1998 levels. Lower
videoconferencing products volume and lower average selling prices, as discussed
below in "Videoconferencing Products," account for the decline. Revenues from
sales to foreign markets were approximately 48% of total revenues in both
periods.
 
                                       11
<PAGE>   12
 
     Gross Margin. Overall gross margin declined $21,665,000, or 47%, in the
first quarter of 1999 compared to the first quarter of 1998. Gross margin as a
percentage of revenue was 32% versus 45% in the first quarters of 1999 and 1998,
respectively. The decrease was caused by lower average selling prices coupled
with higher per unit costs due to lower volume in videoconferencing products.
 
     Operating Expenses. First quarter 1999 operating expenses of $49,885,000
were flat compared with the comparable prior year period. However, as a
percentage of revenue, operating expenses increased to 65.5% from 49.2% as a
result of the decline in revenue.
 
     Selling, General and Administrative. First quarter 1999 selling, general,
and administrative expenses of $32,362,000 were approximately 1% lower than
first quarter 1998 due to cost reduction efforts partially offset by higher real
estate costs and a $900,000 gain associated with the collection of a previously
written-off receivable. However, as a percentage of revenue, selling, general
and administrative increased to 42.5% from 32.5% as a result of the decline in
revenue.
 
     The Company expects to record a charge of approximately $2,500,000 in the
second quarter related to subleasing certain excess real estate.
 
     Research and Development. First quarter 1999 research and development
expenses of $17,523,000 were approximately 4% higher than in the previous year.
New product development expenditures at Starlight, which was acquired in the
fourth quarter of last year, and in the audioconferencing segment, coupled with
decreased capitalization of software development costs, account for the higher
expenses. The Company capitalized $1,457,000 of software development costs in
the first quarter of 1998. No such costs were capitalized in the first quarter
of 1999 as no current projects in progress had achieved technological
feasibility.
 
     Videoconferencing Products. First quarter 1999 revenues for this segment,
which develops, manufactures, and markets visual communications systems and
collaboration software totaled $53,838,000. This represents a $27,674,000, or
34%, decrease from first quarter 1998 levels. Lower unit volumes and lower
average selling prices were responsible. Average selling prices were lower
across all product lines versus 1998, with this trend expected to continue as
the Company adjusts its prices in response to competitive pressures.
 
     Total videoconferencing system units decreased 18% versus the prior year,
with group system volume declining by 33% and desktop/personal system volume off
by 5%. Lower Concorde shipments and a decision to suspend distribution of
Swiftsite II, the Company's newly introduced compact system, until certain
software problems are resolved, accounted for the decreased group system volume.
The Company has deferred revenue recognition on all Swiftsite II shipments until
an improved version of the software is available, which is currently expected to
occur in the second quarter. As a result, nearly 40% of the revenue decline and
a major portion of the increase of finished goods inventory is associated with
this Swiftsite II revenue deferral.
 
     The videoconferencing products segment generated an operating loss of
$22,735,000 during the quarter compared to a $2,616,000 operating loss in the
first quarter of 1998. Lower revenue and decreased gross margin as a percent of
revenue account for the profitability decrease. Compared with the previous
year's first quarter, gross margin as a percentage of revenue declined 16
percentage points to 32%. The primary reasons for the decreased gross margin
percentage were lower average sales prices, excess overhead absorption
associated with lower volumes and capitalized software amortization related to
Swiftsite II and completed technology purchased in the fourth quarter 1998
related to the Starlight acquisition. First quarter 1999 operating expenses
decreased 5% from prior year levels because of ongoing cost reduction efforts
partially offset by the Starlight acquisition's operating costs and a reduction
in internal software development capitalization.
 
     Videoconferencing Services. The videoconferencing services segment provides
maintenance as well as professional consulting and management services for
videoconferencing products sold by the Company and its competitors. First
quarter 1999 revenues grew from $13,853,000 in 1998 to $16,780,000 in 1999, as
both maintenance and professional service revenues increased 21%.
 
     Operating profits were $1,570,000 during 1999's first quarter compared with
$1,041,000 in the comparable prior year period. Revenue growth is the main
reason for the 50% improvement.
 
                                       12
<PAGE>   13
 
     Audioconferencing. The audioconferencing segment develops, manufactures,
markets, and services multipoint audioconferencing control units. First quarter
1999 segment revenues totaled $5,576,000 and were essentially flat with
comparable 1998 results.
 
     Operating income decreased from $2,223,000 in the first quarter of 1998 to
$423,000 in the first quarter of 1999, primarily because of increased research
and development spending on enhancing existing products and developing next
generation products.
 
     Income Taxes. The Company's effective income tax rate was 4% in the first
quarter of 1999 compared with 29% in the comparable period in 1998. The decrease
in the effective tax rate is due to the Company's recording a full valuation
allowance against net deferred tax assets in the fourth quarter of 1998 and
continued uncertainty as to future realization of those assets. The effective
tax rate in 1999 relates to foreign and state taxes.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At April 4, 1999 the Company had $59,908,000 in cash and cash equivalents
and $51,782,000 in short-term marketable securities. The primary uses of cash
during the first quarter of 1999 were expenditures for normal operations, the
increase of inventory of $8,364,000 and the decrease in accounts payable of
$9,428,000. The principal sources of cash were the receipt of $30.5 million of
cash from the issuance of preferred stock and the decrease in trade receivables
of $5,393,000. The increase in marketable securities was due primarily to the
increase in value of one equity security.
 
     At April 4, 1999, no borrowings were outstanding under the Company's credit
agreement with its banks. However, the Company has $28,762,000 of outstanding
standby letters of credit under this agreement. Fees for letters of credit
outstanding against this revolving credit line were amended and are now payable
at two and one-eighth percent per annum of the face amount. The revolving credit
agreement is collateralized by cash and cash equivalents and contains certain
financial covenants, including the maintenance of certain financial ratios and
minimum net income (loss) requirements.
 
     At April 4, 1999, the Company was out of compliance with two of the debt
covenants. The Company received waivers from the banks regarding those covenants
and is retroactively in compliance. The Company's quarterly operating results
for the remainder of the agreement term are likely to be out of compliance with
the credit line's financial covenants. Effective March 26, 1999, the banks
informed the Company that they would not renew the Company's letters of credit,
outstanding under this agreement, as they come due. The letters of credit, which
relate to security for certain of the Company's facility leases, come due as
follows: $12,500,000 on June 24, 1999, $9,012,000 on July 31, 1999 and
$7,250,000 on September 12, 1999. In addition, effective May 19, 1999, the
respective banks have informed the Company that they will not provide additional
short-term lending under this agreement.
 
     The Company is considering alternatives for the letters of credit including
refinancing the loan, seeking alternative issuers of letters of credit or cash
collateral. In the event that such letters of credit expire and are not renewed,
the Company's cash would be reduced by the amount of the letters of credit.
 
     Local lines of credit are available for short-term advances of up to
$5,300,000 to certain of the Company's foreign subsidiaries. Two of these lines
are guaranteed by the Company. The agreements require interest payable ranging
from the bank's prime lending rate plus up to one quarter of one percent per
annum. No borrowings were outstanding against these local lines of credit at
April 4, 1999.
 
     The Company has operating leases for various rented properties. The Company
signed an agreement to sublease the facility at Riverside Drive in Andover in
May, 1999 as part of its space consolidation efforts. As of April 4, 1999, the
remaining obligation under this operating lease was $8,900,000. After giving
effect to expected sublease income, this obligation is $5,500,000. As a result
of lease obligations in excess of sublease income over the term of the sublease
and other charges related to the transaction, the Company expects to record a
charge of approximately $2,500,000 in the second quarter of 1999.
 
                                       13
<PAGE>   14
 
     In October 1998, the Board of Directors authorized a plan to repurchase up
to 1,000,000 shares of the Company's Common Stock in open market, privately
negotiated or other transactions. During the three month period ended April 4,
1999, the Company repurchased 70,000 shares at a cost of $556,000. The Company
has no definitive plans to repurchase the remainder of the shares.
 
     The Company believes that funds from operations, equipment lease financing
and existing cash, cash equivalents and marketable securities will be sufficient
to meet the Company's operating, investing and financing requirements for the
foreseeable future.
 
RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS
 
     The following risk factors relating to the business of PictureTel and
certain forward looking statements contained herein, should be considered by
current and prospective investors of PictureTel stock. These factors should be
considered in conjunction with other information contained in this document.
 
     New Products, Cost Reductions, Technological Change, and Evolving
Markets. The Company is engaged in an industry that is still emerging as a
result of extensive research and development efforts and which continues to
bring to market new, more technologically advanced products introduced on an
accelerated basis. Simultaneously, the larger telecommunications market is in a
heightened competitive state due to deregulation throughout the world. In order
to maintain its market share leadership role in this fast-paced emerging market,
the Company must continue to introduce, through internal development or by
acquisition, significant innovative, technologically leading and
cost-competitive products. There can be no assurance that such new products will
be introduced by the Company, or if introduced, will be accepted by the market
and its customers. In November 1998, the Company acquired all of the common
stock of Starlight Networks, Inc. Starlight develops, manufactures and markets
streaming video that enables live, interactive multicast video-on-demand. There
can be no assurance that the integration of Starlight will be successful or
produce products which will be accretive to the Company's results of operations
and financial condition. In January 1999, the Company entered into a
distribution and joint product development agreement with Intel Corporation. The
two companies will develop videoconferencing and collaborative products based on
a common PC-based technology platform. There can be no assurance that the
partnership will be successful or produce products which will be accretive to
the Company's results of operations and financial condition. In addition to
offering products that operate in an integrated service digital network (ISDN)
environment, the Company and its competitors are exploring continued development
of products and services for new technologies and networks, such as the Internet
and corporate intranets or LANs. The industry standards for such new
technologies and networks, however, are still in the early stages of
development, which the Company believes has led to customer uncertainty and,
accordingly, a slowdown in the growth of the general market for
videoconferencing products. As a result of customer preferences, the Company has
also experienced over the past year a shift in its sales model to
videoconferencing systems with lower average selling prices. There can be no
assurance that the Company will be successful in implementing cost reductions
for all of its products or in developing and marketing suitable new products and
related services with attractive margins for these new technologies and
networks. The possible transition, migration and/or convergence of technologies
is difficult to predict and could have profound implications for the industry
and the business of the Company. Further, there is significant risk that
existing products could be rendered obsolete due to changing technology. The
failure of the Company to develop and market new products on a timely basis or
to enhance its existing products or to respond effectively to technological
changes, new industry standards or product announcements by competitors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
     Competition. In its established businesses of group and desktop/personal
videoconferencing products, the Company competes with a number of corporations,
such as Polycom, RSI Systems, Sony, Tandberg, VTEL and VCON. In the developing
businesses of network-based videoconferencing systems and audioconferencing
systems, a number of corporations such as Lucent and Cisco have begun to offer
competitive products. In addition, partnerships between corporations, which
compete with the Company, and corporations which develop and market network
products, as well as mergers among competitors, are intensifying competition in
the marketplace. This increased competition, together with a slowdown in the
growth of the
                                       14
<PAGE>   15
 
general market for videoconferencing products, has led and may continue to lead
to increases in the defection or dilution of the Company's distribution channel
partners to competitors, decreases in average selling prices and margins in both
group and desktop/personal videoconferencing products, and a lower segment
market share by the Company for products and services in the emerging area of
network-based visual collaboration. In some cases, the Company competes with its
channel partners for various services, which increases the complexity of channel
management. In addition, competitors may offer network visual collaboration
software solutions or incorporate standard algorithms into processor chips free
of additional charge, which may reduce the value the Company's technology
provides to the market, especially in its lower end videoconferencing products.
In addition, the prices which the Company is able to charge for its
videoconferencing products and services may further decrease from historical
levels as a result of new product introductions by competitors, price
competition, technological advances, or otherwise. Any of these factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
     Manufacturing. Certain key subassemblies and products are currently
available only from one vendor and several vendors are smaller corporations with
limited financial resources that could prove to be inadequate. In some cases
components are sourced from only one vendor, even where multiple sources are
available, to maintain quality control and enhance the working relationship with
the vendor. In addition, the Company from time to time enters into development
arrangements with third parties to develop and incorporate new features and
functions into the Company's products. Failure of these third parties to fulfill
their respective obligations under these development arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's business could also be adversely affected
by delays or interruptions in delivery, and poor quality of supplies,
subassemblies or products from key vendors. In addition, the Company designs and
procures certain circuits, components and subassemblies from
non-videoconferencing divisions of its competitors, such as Sony and Panasonic
Corporation. The failure to obtain adequate supplies or the requirement to
redesign and source supplies from another manufacturer may take substantial time
and result in significant expense, each of which could impact product shipments
and materially and adversely affect the Company's business, financial condition
or results of operations.
 
     Recent History of Losses. The Company reported a 25% decrease in revenues
for the quarter ended April 4, 1999 as compared to revenues for the quarter
ended March 29, 1998 and an increase in net loss from $2,165,000 to $25,970,000.
 
     The Company had revenues of $406,152,000 and $466,425,000 for the year
ended December 31, 1998 and December 31, 1997, respectively, and net losses of
$55,679,000 and $39,398,000, respectively. Included in the results for the year
ended December 31, 1998 were charges totaling $9,957,000 related to
discontinuing a video network server product line and the write-down of certain
inventory and fixed assets and a valuation allowance for deferred taxes of
$35,141,000. The Company recorded other charges in the year ended December 31,
1997 to bring expenses into line with its lower level of revenues and a lower
expected rate of growth. Revenues and prospects for growth have been impacted
by, among other things, the decline in the average selling price for several
PictureTel products, a decline in the profitability of the industry, a slowdown
in the general market for videoconferencing products, a suspension of Swiftsite
II distribution, as discussed in the results of operations above, and also in
part resulting from the perceived uncertainty of customers with respect to the
compatibility of existing products of the Company and its competitors with
expected new multimedia videoconferencing products utilizing the Internet and
LAN systems. Continued lower operating results will impact the Company's ability
to remain in compliance with covenants under its existing revolving credit
agreement. Further, there can be no assurance that the Company can return to the
level of revenues or profits in relation to net sales experienced in years prior
to the year ended December 31, 1997.
 
     Product Protection and Intellectual Property. The Company's success depends
in part on its proprietary technology. The Company attempts to protect its
proprietary technology through patents, copyrights, trademarks, trade secrets
and license agreements. In absence of broad patent protection, which is not
likely, and despite the Company's reliance upon its proprietary confidential
information, competitors of the Company have been able to use algorithms or
other features similar to those used by the Company to design and manufacture
products that are directly competitive with the Company's products. The Company
believes that due to the rapid pace of technological change in the visual
collaboration industry, legal protection for its

                                       15
<PAGE>   16
 
products is less significant than factors such as the Company's use,
implementation and enhancement of standards-based open architecture and the
Company's ongoing efforts in product innovation.
 
     Although the Company does not believe that its products infringe the
proprietary rights of any third parties, third parties have asserted
infringement and other claims against the Company from time to time. There can
be no assurance that third parties will not assert such claims against the
Company in the future or that such claims will not be successful. The Company
could incur substantial costs and diversion of management resources with respect
to the defense of any claims relating to proprietary rights, which in turn could
have a material adverse effect on the Company's business, financial condition
and result of operations. See "Litigation."
 
     Potential Fluctuations of Quarterly Operating Results. The majority of the
Company's revenues in each quarter result from orders booked in that quarter,
and a substantial portion of the Company's orders and shipments typically occur
during the last weeks of each quarter such that forecasting of revenue and
product mix is both complex and difficult. Unanticipated variations in the
timing of receipt of customer orders in any quarter may produce significant
fluctuations in quarterly revenues. As a result, a shortfall in revenue compared
to internal expectations may not evidence itself until late in the quarter and
any resulting impact on earnings may not be determinable until several weeks
after the end of the quarter. The Company's ability to maintain or increase net
revenues depends upon its ability to increase unit volume sales. There can be no
assurance that the Company will be able to increase or to maintain the current
level of unit volume sales. Other factors which may cause period-to-period
fluctuations in operational results include the timing of new product
announcements and introductions by the Company and its competitors, market
acceptance of new or enhanced versions of the Company's products, changes in the
product mix of sales, changes in the relative proportions of sales among
distribution channels or among customers within each distribution channel,
changes in manufacturing costs, and general economic factors such as the recent
decline of currency values in the Asian markets.
 
     International Operations. Revenues related to international operations of
the Company totaled approximately 48% of revenue for both periods ended April 4,
1999 and March 29, 1998 and 43% of total revenues for both the years ended
December 31, 1998 and 1997, respectively. Management of the Company expects
international revenues to continue to constitute a significant portion of total
revenues in future periods. However, there can be no assurance that the Company
will be able to maintain or increase international market demand for its
products and, to the extent the Company is unable to do so, its business,
financial condition, results of operations or cash flows could be materially
adversely affected. The Company's sales to international distributors are
denominated in U.S. dollars in order to minimize risks associated with
fluctuating foreign currency rates. An increase in the value of the U.S. dollar
relative to other currencies, however, could make the Company's product more
expensive and, therefore, potentially less competitive in foreign markets. Sales
by the Company's foreign subsidiaries are generally made in the foreign
subsidiary's local currency, in which case fluctuations in the value of the U.S.
dollar relative to such other currencies could have a material adverse effect on
the operating results of the Company. Currently, the Company employs various
currency hedging strategies to reduce these risks. In addition, a significant
portion of the Company's revenue is derived from Asian markets. Given the
current general weakness in the Asian markets, there can be no assurance that
the Company will be able to sustain current revenue levels or growth in such
markets. There can be no assurance that the above factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on its business, financial condition, results of operations or
cash flows.
 
     Volatility of Stock Price. As is frequently the case with the stocks of
high technology corporations, the market price of PictureTel Common Stock has
been, and may continue to be, volatile. Factors such as quarterly fluctuations
in results of operations, increased competition, the introduction of new
products by the Company and by its competitors, changes in the mix of products
and sales channels, the timing of significant customer orders, and macroeconomic
conditions generally, may have a significant adverse effect on the market price
of the Company's stock in any given period. In addition, the stock market has,
from time to time, experienced extreme price and volume fluctuations, which have
particularly affected the market price for many high technology corporations and
which, on occasion, have appeared to be unrelated to the operating performance
of such corporations. Past financial performance should not be considered a
reliable indicator of future performance and investors should not use historical
trends to anticipate results or trends in future

                                       16
<PAGE>   17
 
periods. Any shortfall in revenue or earnings from the levels anticipated by
securities analysts could have an immediate and significant adverse effect on
the market price of PictureTel Common Stock in any given period.
 
     Dependence on Key Personnel. In February, 1998, Bruce R. Bond succeeded Dr.
Norman Gaut as Chief Executive Officer and President. In June, 1998, Bruce Bond
was elected Chairman of the Board and Dr. Gaut retired as an active employee
while remaining a member of the Board of Directors. There can be no assurance
that the transition from Dr. Gaut to Bruce Bond will be successful. On October
15, 1998, the Company announced the appointment of Gary Bond as Group Vice
President and General Manager of Products. On October 21, 1998, Arthur Fatum was
appointed as Vice President and Chief Financial Officer. The Company depends on
a limited number of key senior management personnel, including Bruce Bond; David
Grainger, Group Vice President and General Manager of Services; David Goselin,
Vice President, Operations; Lawrence Bornstein, Vice President, Human Resources;
Gary Bond; Arthur Fatum; Frazer Hamilton, Group Vice President of Worldwide
Sales; and John Nye, Vice President, MultiLink. There has been considerable
turnover in the Company's senior management team over the past several years,
and the loss of the services of one or more of the Company's senior management
team or the inability to attract, retain, motivate and manage additional key
personnel could have a material adverse effect on the business, financial
condition or operating results of the Company. In addition, over the past year,
the Company has experienced an increase in voluntary employee attrition from
engineering and other departments. There is no assurance, given the competitive
nature of the current job market, that the Company will be able to adequately
fill the open positions.
 
     Year 2000 Readiness Disclosure. The Company has formed an internal
compliance team to evaluate its internal information technology infrastructure
and application systems ("IT Systems") and other non-IT infrastructure systems
("Non-IT Systems") to determine whether such systems will operate correctly with
regard to the import, export, and processing of date information, including
correct handling of leap years, in connection with the change in the calendar
year from 1999 to 2000 (the "Year 2000 Issue"), and to evaluate the Year 2000
Issue with respect to the systems of third party partners and suppliers with
which the Company has a material relationship ("Third Party Systems").
 
     The Company expects to complete in the second quarter of 1999 a
comprehensive IT Systems inventory analysis and risk assessment. As previously
planned and budgeted, the Company completed the upgrade of its core domestic IT
Systems to incorporate additional desired features and functionality and is now
testing the Year 2000 compliance of the customizations to the software. The
Company expects to complete this process as planned by June 30, 1999. IT systems
at several foreign subsidiaries will be converted to the IT systems used
domestically by the end of July, 1999. Systems supporting MultiLink will likely
be replaced in 1999 in order to achieve Year 2000 compliance. The Company
currently estimates an additional $1,200,000 of 1999 IT system remediation costs
based on its assessment to date. To the extent, however, that such upgrades are
not completed in a timely manner, the Company's operations, financial condition,
results of operations or cash flows could be materially adversely affected.
 
     The Company also expects to complete a Non-IT Systems inventory analysis
and risk assessment in the second quarter of 1999. The costs of any remediation
actions required in order to be Year 2000 compliant have not been identified at
this time. As the Company believes the number of mission critical Non-IT Systems
is relatively small, the Company does not expect that any additional costs of
addressing the Year 2000 Issue for Non-IT Systems will have a material adverse
impact on its operations or its financial position, results of operations or
cash flows.
 
     With the assistance of an independent Year 2000 solution provider, the
Company is in the process of creating a plan to complete a Third Party Systems
inventory and risk assessment. The Company expects to verify Year 2000
compliance of Third Party Systems using this independent Year 2000 solution
provider. As the Company believes the number of mission critical Third Party
Systems is relatively small, the Company expects to be in a position to evaluate
the risks in a timely manner. Until Year 2000 compliance of all Third Party
Systems is ascertained and written assurances are received, the risk to the
Company's operations and any additional costs relating to such Third Party
Systems is unknown.
 
                                       17
<PAGE>   18
 
     The Company estimates it will spend a total of $433,000 on inventory
analysis and risk assessment. To date, the Company has incurred $288,000 of
expense relating to inventory analysis and risk assessment. These Year 2000
expenditures are within the Company's planned organizational budgets and include
the cost of independent Year 2000 solution providers. Year 2000 expenditures for
IT Systems, Non-IT Systems and Third Party Systems do not reflect the cost to
the Company of internal resources working on the Year 2000 Issue and do not
reflect planned upgrades or planned replacement systems which may have a
positive impact on resolving the Year 2000 Issue. The Company expects to
complete its risk assessment and cost estimate relating to the Year 2000 Issue
no later than the end of May, 1999 and to develop a high-level contingency plan
relating to the remediation and prioritization of its IT Systems, Non-IT Systems
and Third Party Systems shortly thereafter. As of April 4, 1999, no IT Systems
projects have been deferred due to problems associated with the Year 2000 Issue.
 
     The Company has also tested its products for Year 2000 compliance and had
determined that all PictureTel products currently available for sale have either
successfully passed Year 2000 compliance testing or are not subject to Year 2000
compliance because such products do not import, export or process date
information in any manner. Recently, it has come to the Company's attention that
two of its newly released products, which are supplied by a third party and
whose prior versions passed the Year 2000 compliance tests, are not Year 2000
compliant. The Company is actively pursuing the third party supplier to provide
fixes to these products. A small number of the Company's installed base products
do not meet Year 2000 compliance testing. For these older, non-compliant
versions of products, the Company has, with one exception, developed adequate
workarounds that will be made available to customers and that will permit the
products to continue to operate with full functionality.
 
     Euro. On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and established the euro, making the euro their common
legal currency on that date. Based on a recent assessment, the euro conversion
has not had and is not anticipated to have a material impact on the Company's
business.
 
                                       18
<PAGE>   19
 
                          PART II -- OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
  A.  Datapoint Litigation
 
     In December 1993, PictureTel was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleged that certain of PictureTel's products infringed patent rights allegedly
owned by Datapoint. On April 9, 1998 a jury returned a verdict in favor of
PictureTel finding that PictureTel did not infringe the Datapoint patents and
that the Datapoint patent claims raised against PictureTel were invalid. On May
3, 1999 an appeals hearing took place with regard to this litigation. While
there can be no assurance that the outcome of the appeal will be in favor of the
Company, the Company believes that it presented meritorious defenses to the
appeal.
 
  B.  Shareholder Litigation
 
     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. Limited discovery has
occurred, and the Company expresses no opinion as to the likely outcome. The
outcome of this litigation may have a material impact on the Company's financial
position, results of operations and cash flows.
 
  C.  Revnet, Inc.
 
     On June 2, 1998, the Company was served with a complaint from a former
distribution channel customer, Revnet, Inc., which has ceased operations.
(Revnet, Inc., v. PictureTel Corporation. Civil Action 98092039, filed April 2,
1998, in the Circuit Court for Baltimore City, Maryland.) The complaint alleges
that the Company breached an oral contract. Revnet is seeking $200,000,000 in
damages. Discovery has recently begun. The Company believes that the complaint
and the claim for damages are without merit and intends to vigorously defend
itself against them.
 
     In addition to the above, the Company has also been and is from time to
time subject to claims and suits incidental to the conduct of business. There
can be no assurance that the Company's insurance will be adequate to cover all
liabilities that may arise out of such claims. Further, although the Company
intends to defend itself vigorously against all such claims, the ultimate
outcome of the claims cannot be accurately predicted. The Company does not
believe that any claim of which it is aware, other than the claims listed above,
could result in an outcome that will have a material adverse affect to its
business, financial condition, results of operations or cash flows.
 
                                       19
<PAGE>   20
 
ITEM 2.  CHANGES IN SECURITIES
 
     (a) The rights of the common stock are materially limited or qualified by
the issue of non-voting, convertible Series A Preferred Stock to Intel
Corporation with respect to preferred dividend rights and liquidation preference
of said Series A Preferred Stock.
 
     On the date hereof each outstanding share of the Series A Preferred has the
right to convert to one share of common, see the terms of the Series A Preferred
Stock as set forth in the Amendment to the Certificate of Incorporation filed as
Exhibit 3.1.1 to this Report.
 
     (b) On February 17, 1999, the Company sold 4,478,708 shares of Series A
Preferred Stock to Intel Corporation for cash of $30,500,000. The Company
expects to use the proceeds to accelerate growth of videoconferencing worldwide,
especially in the use of videoconferencing products. The securities were exempt
from registration under the Securities Act of 1933 by virtue of Section 4(2) as
a private placement, accompanied by an investment representation by Intel
Corporation.
 
     The shares of this series of non-voting Series A Preferred Stock,
convertible into the same number of shares of PictureTel Common Stock (with
anti-dilution protection for stock splits and the like), was established by vote
of PictureTel's Board of Directors pursuant to its authority under the Company's
Certificate of Incorporation as reported in the Company's January 18, 1999 8-K
filing. This represented on an as-converted basis, an investment in
approximately 10% of PictureTel Common Stock. This security was sold by
PictureTel in consideration of the payment by Intel of cash as described above
and Intel's entering into a Distribution and Joint Product Development Agreement
with PictureTel. Under the Stock Purchase and Investor Rights Agreement Intel
has certain ancillary rights to acquire additional securities of PictureTel in
order to maintain, subject to the specified terms and conditions, its percentage
ownership of PictureTel's equity.
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits
 
<TABLE>
        <S>      <C>
         3.1.1   Certificate of designation, preferences and other rights of
                 the Series A Preferred Stock of PictureTel Corporation,
                 consisting of an Amendment to the Certificate of
                 Incorporation.
        10.1     Employment agreement between PictureTel Corporation and
                 Frazer Hamilton dated June 16, 1998.
        10.2     Change in control agreement between PictureTel Corporation
                 and Frazer Hamilton dated June 22, 1998.
        10.3     Consultant agreement between PictureTel Corporation and Enzo
                 Torresi dated January 5, 1999.
        27.1     Financial Data Schedule for the period ended April 4, 1999
                 as required by Item 601(c) of Regulation S-K.
</TABLE>
 
     (b) Reports on Form 8-K
 
     On January 22, 1999, the Company filed a report on Form 8-K to announce it
had entered into a distribution and joint development agreement with Intel
Corporation. On February 18, 1999, Intel invested $30.5 million in the Company,
acquiring approximately 10% of the Company's equity through convertible
preferred stock. The two companies will develop videoconferencing and
collaborative products based on a common PC-based technology platform. Under
terms of the agreement, Intel will provide the Company with distribution rights
to sell the Intel ProShare(R) Video System 500 and exclusive worldwide
distribution rights to sell and support the Intel(R)TeamStation(TM) System.
 
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<PAGE>   21
 
                                   SIGNATURE
 
     Pursuant to the Securities Exchange Act of 1934, the registrant has duly
caused this report on Form 10-Q to be signed on its behalf by the undersigned
thereunto duly authorized.
 
                                    PICTURETEL CORPORATION
 
                                               /s/ ARTHUR L. FATUM
                                    --------------------------------------------
                                                   ARTHUR L. FATUM
                                     VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
                                    (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
 
May 19, 1999.
 
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