Variable scope for bash shell scripts and functions in the script

Do the backticks spawn a subshell and thus making my script not work?:

Yes they do and any changes made in variable in a subshell are not visible in parent shell.

How do I work around this issue?

You can probably try this loop that avoid spawning a subshell:

while read line
do
   while read i
   do
      end=$(echo $i | cut -d ' ' -f 1-4 | cut -d ',' -f 1)
      duration=$(testfunc "$end")
   done < <(grep -P "\w+ stream" "$file2" | grep "$line")
done < "$file1"

PS: But testfunc will still be called in sub process.

You can try something like

global1=0
global2=0
start_read=true

function testfunc {
   global1=9999
   global2=1111
   echo "in testfunc"
   echo $global1
   echo $global2
   duration=something
}

file1=whocares
file2=whocares2

for line in `cat $file1`
do
   for i in `grep -P "\w+ stream" $file2 | grep "$line"`   # possible but unlikely problem spot
   do
         end=$(echo $i | cut -d ' ' -f 1-4 | cut -d ',' -f 1)   # possible but unlikely spot
         testfunc $end       # more likely problem spot
   done
done

echo "global1 = $global1"
echo "global2 = $global2"