Edgar Filing: POLYCOM INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

COMMISSION FILE NUMBER 000-27978

POLYCOM, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

94-3128324

(State or other jurisdiction of

incorporation or organization)

(IRS employer

identification number)


4750 WILLOW ROAD, PLEASANTON, CA.		94588
(Address of principal executive offices)		(Zip code)

(Registrant’s telephone number, including area code, is (925) 924-6000)

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 past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act) Yes ¨ No x

There were 90,769,902 shares of the Company’s Common Stock, par value $.0005, outstanding on October 15, 2007.

POLYCOM, INC.

I NDEX

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2007



PART I FINANCIAL INFORMATION		3

Item 1	Financial Statements (unaudited):	3

	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4	Controls and Procedures	43

PART II OTHER INFORMATION		43

	Item 1—Legal Proceedings	43

	Item 1A—Risk Factors	43

	Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	62

	Item 3—Defaults Upon Senior Securities	63

	Item 4—Submission of Matters to a Vote of Security Holders	63

	Item 5—Other Information	63

	Item 6—Exhibits	64

SIGNATURES		65

PART 1 FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

POLYCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)


	September 30, 2007		December 31, 2006
ASSETS
Current assets
Cash and cash equivalents	$	247,987	$	316,368
Short-term investments		77,925		157,345
Trade receivables, net of allowance for doubtful accounts of $2,272 at September 30, 2007 and December 31, 2006		120,887		79,057
Inventories		69,841		48,029
Deferred taxes		42,758		22,459
Prepaid expenses and other current assets		19,851		16,719

Total current assets		579,249		639,977
Property and equipment, net		58,119		39,426
Long-term investments		45,539		102,133
Goodwill		496,595		356,755
Purchased intangibles, net		94,594		12,935
Deferred taxes		10,269		16,746
Other assets		14,837		22,043

Total assets	$	1,299,202	$	1,190,015

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	61,535	$	53,602
Accrued payroll and related liabilities		28,796		22,182
Taxes payable		2,273		58,092
Deferred revenue		54,297		40,227
Other accrued liabilities		51,134		39,780

Total current liabilities		198,035		213,883
Non-current liabilities
Deferred revenue		25,649		20,798
Taxes payable		33,318		—
Deferred taxes		6,594		—
Other non-current liabilities		11,995		8,614

Total non-current liabilities		77,556		29,412

Total liabilities		275,591		243,295
Stockholders’ equity
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; Issued and outstanding: 1 share at September 30, 2007 and December 31, 2006		—		—
Common stock, $0.0005 par value; Authorized: 175,000,000 shares; Issued and outstanding: 90,751,588 shares at September 30, 2007 and 89,467,995 shares at December 31, 2006		44		43
Additional paid-in capital		993,001		907,811
Cumulative other comprehensive gain (loss)		1,367		(555	)
Retained earnings		29,199		39,421

Total stockholders’ equity		1,023,611		946,720

Total liabilities and stockholders’ equity	$	1,299,202	$	1,190,015

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

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended					Nine Months Ended
	September 30, 2007		September 30, 2006			September 30, 2007			September 30, 2006
Revenues:
Product revenues	$	206,979	$	152,410		$	578,353		$	435,919
Service revenues		33,068		20,798			88,264			59,957

Total revenues		240,047		173,208			666,617			495,876

Cost of revenues:
Cost of product revenues		84,465		55,650			230,374			158,599
Cost of service revenues		16,457		10,753			44,383			31,720

Total cost of revenues		100,922		66,403			274,757			190,319

Gross profit		139,125		106,805			391,860			305,557

Operating expenses:
Sales and marketing		61,510		42,736			174,437			124,848
Research and development		36,006		28,694			102,939			84,974
General and administrative		15,663		11,894			44,881			33,693
Acquisition-related costs		423		52			3,140			137
In-process research and development		—		—			9,400			—
Amortization of purchased intangibles		2,416		1,451			6,223			4,640
Restructuring costs		—		1,312			213			1,867

Total operating expenses		116,018		86,139			341,233			250,159

Operating income		23,107		20,666			50,627			55,398
Interest income, net		4,197		5,616			14,787			14,142
Loss on strategic investment		—		—			(7,400	)		—
Other income (expense), net		185		(333	)		(349	)		401

Income before provision for income taxes		27,489		25,949			57,665			69,941
Provision for income taxes		7,697		8,823			17,585			23,780

Net income	$	19,792	$	17,126		$	40,080		$	46,161

Basic net income per share	$	0.22	$	0.19		$	0.44		$	0.52

Diluted net income per share	$	0.21	$	0.19		$	0.42		$	0.51

Weighted average shares outstanding for basic net income per share calculation		91,148		88,373			91,224			88,093
Weighted average shares outstanding for diluted net income per share calculation		94,561		90,506			95,014			89,871

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

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended
	September 30, 2007			September 30, 2006
Cash flows from operating activities:
Net income	$	40,080		$	46,161
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,205			15,596
Amortization of purchased intangibles		13,726			4,640
Provision for (benefit from) doubtful accounts		(33	)		127
Provision for excess and obsolete inventories		50			1,540
Non-cash stock-based compensation		30,281			17,507
Excess tax benefits from stock-based compensation		(14,190	)		(6,181	)
Loss on strategic investment		7,400			—
Purchase of in-process research and development		9,400			—
Loss on disposal of property and equipment		56			90
Changes in assets and liabilities, net of effects of acquisitions:
Trade receivables		(24,051	)		(5,567	)
Inventories		(2,264	)		(217	)
Deferred taxes		4,394			3
Prepaid expenses and other assets		(3,029	)		(2,812	)
Accounts payable		(1,551	)		2,671
Taxes payable		6,566			11,264
Other accrued liabilities		8,704			19,143

Net cash provided by operating activities		93,774			103,965

Cash flows from investing activities:
Purchases of property and equipment		(23,131	)		(17,317	)
Purchases of investments		(286,492	)		(522,320	)
Proceeds from sale and maturity of investments		421,624			488,596
Cash paid in acquisitions, net of cash acquired		(275,619	)		(188	)

Net cash used in investing activities		(163,618	)		(51,229	)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee option and stock purchase plans		63,152			53,408
Purchase and retirement of common stock		(75,849	)		(77,955	)
Excess tax benefits from stock-based compensation		14,190			6,181

Net cash provided by (used in) financing activities		1,493			(18,366	)

Net increase (decrease) in cash and cash equivalents		(68,381	)		34,370
Cash and cash equivalents, beginning of period		316,368			189,271

Cash and cash equivalents, end of period	$	247,987		$	223,641

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

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements, consisting of the condensed consolidated balance sheet as of September 30, 2007, the condensed consolidated statements of operations for the three and nine months ended September 30, 2007 and 2006 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of Polycom, Inc. and its subsidiaries (the “Company”). In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.

The condensed consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and operating results for the nine months ended September 30, 2007 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

2. BUSINESS COMBINATIONS

SpectraLink Corporation

On March 26, 2007, the Company acquired all of the outstanding shares of SpectraLink Corporation (“SpectraLink”). SpectraLink designs, manufactures and sells on-premises wireless telephone products to customers worldwide that complement existing telephone systems by providing mobile communications in a building or campus environment. SpectraLink wireless telephone products increase the efficiency of employees by enabling them to remain in telephone contact while moving throughout the workplace. The aggregate consideration for the transaction, including direct acquisition costs, was approximately $237.3 million. Management allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date giving consideration to an independent appraisal. During the second quarter of 2007, the Company revised its initial purchase price allocation primarily as a result of the finalization of the valuation of purchased intangibles and fixed assets and the identification of additional restructuring liabilities related to consolidating facilities. Additional revisions were made to the purchase price allocation in the three months ended September 30, 2007 including approximately $0.4 million related to the restructuring liabilities with respect to consolidating facilities and approximately $0.6 million related to additional severance.

The accompanying condensed consolidated financial statements reflect a purchase price of approximately $237.3 million, consisting of cash and other costs directly related to the acquisition as follows (in thousands):


Cash	$	232,266
Direct acquisition costs		5,023

Total consideration	$	237,289

The following is a summary of the allocation of the purchase price (in thousands):


Tangible assets:
Current assets	$	53,668
Property, plant and equipment		12,304
Other assets		790

Total tangible assets acquired		66,762
Liabilities:
Current liabilities		(34,295	)
Long-term liabilities		(29,838	)

Total liabilities assumed		(64,133	)

Fair value of net tangible assets		2,629

In-process research and development		9,400
Intangible assets consisting of:
Existing technology		37,400
Core technology		12,600
Customer relationships		17,900
Trade name and trademarks		7,000
Other		800

Total intangible assets		75,700

Goodwill		149,560

Total consideration	$	237,289

The primary reason for the acquisition and the factors that contributed to the recognition of goodwill of $149.6 million relate to SpectraLink’s technology and products that, when combined with the Company’s existing product offerings, will provide Polycom with the ability to provide fixed and mobile solutions that encompass voice, video, and content collaboration solutions from the desktop, to the meeting room, to the mobile individual. See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information on goodwill and purchased intangibles.

The $9.4 million allocated to in-process research and development, which related primarily to projects associated with software enhancements and upgrades to the functionality and performance of the Link, NetLink and DECT products, was recorded in “Purchased in-process research and development” in the Condensed Consolidated Statements of Operations. This amount was determined by management after considering, among other factors, the results of a preliminary independent appraisal based on established valuation techniques in the high-technology industry and was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed as of the acquisition date. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the intangibles and in-process research and development. The estimated net free cash flows generated by the in-process research and development projects were discounted at rates ranging from 15 to 16 percent in relation to the stage of completion and the technical risks associated with achieving technology feasibility. It is reasonably possible that the development of this technology could fail because of either prohibitive cost, inability to perform the required efforts to complete the technology or other factors outside of the Company’s control such as a change in the market for the resulting developed products. In addition, at such time that the projects are completed, it is reasonably possible that the completed products will not receive market acceptance or that the Company is unable to produce and market the product cost effectively.

SpectraLink’s results are included in the Company’s Voice Communications and Services segments from the date of acquisition. The financial information in the table below summarizes the combined results of operations of Polycom and SpectraLink, on a pro forma basis, as though the companies had been combined at the beginning of each period presented. The pro forma financial information combines the historical results of operations of Polycom and SpectraLink for the three and nine months ended September 30, 2007 and 2006. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the acquisition actually taken place on January 1, 2007 or 2006, and should not be taken as indicative of future consolidated operating results (unaudited, in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Net revenues	$	240,047	$	211,159	$	692,540	$	669,974
Net income	$	19,792	$	17,070	$	28,499	$	30,264
Net income per share – basic	$	0.22	$	0.19	$	0.31	$	0.34
Net income per share – diluted	$	0.21	$	0.19	$	0.30	$	0.34

Unaudited pro forma net income includes amortization of purchased intangibles of $3.8 million in each of the three month periods ended September 30, 2007 and 2006 and $11.4 million in each of the nine month periods ended September 30, 2007 and 2006. The unaudited pro forma financial information for the nine months ended September 30, 2007 and 2006 also includes the following non-recurring charges: in-process research and development of $9.4 million, acquisition-related charges for the fair market value adjustment of inventory of $2.4 million and acquisition-related expenses incurred by SpectraLink of $3.7 million. The pro forma amounts above reflect a reduction of interest expense related to the debt that was paid off as part of the acquisition, as well as a reduction in interest income on the cash paid as part of the purchase price, assuming the acquisition occurred as of January 1, 2006 and 2007, with interest income calculated at the Company’s average rate of return for the respective periods. The pro forma net income above assumes an income tax provision at the Company’s consolidated tax rate for the respective year.

Destiny Conferencing Corporation

On January 5, 2007, the Company completed its acquisition of all of the outstanding shares of Destiny Conferencing Corporation (“Destiny”), a privately held telepresence solutions company headquartered in Dayton, Ohio, pursuant to the terms of an Agreement and Plan of Reorganization, or Reorganization Agreement, dated as of January 5, 2007. Destiny designs and manufactures immersive telepresence solutions. Polycom incorporated Destiny’s products into its RPX™ telepresence offering prior to the acquisition under the terms of an OEM Distribution Agreement between the companies. As a result of the acquisition, the Company now owns several patents core to telepresence, a rapidly-emerging market driven by the need for dispersed people to communicate as if they are all in the same room.

Pursuant to the Reorganization Agreement, Destiny shareholders and debtholders received $47.6 million in cash. Approximately $5.2 million of the cash was placed into escrow to be held as security for losses incurred by the Company in the event of certain breaches of the representations and warranties covered in the Reorganization Agreement or certain other events. Destiny shareholders may receive up to an additional $10 million of cash consideration over a two-year period, based on the achievement of certain financial milestones, which will be recorded as additional goodwill if earned. Destiny’s results are included in the Company’s Video Communications and Services segments from the date of acquisition. Pro forma results of operations have not been presented as the effects of this acquisition were not material on an individual basis.

The accompanying condensed consolidated financial statements reflect a purchase price of approximately $48.1 million, consisting of cash and other costs directly related to the acquisition as follows (in thousands):


Cash	$	47,636
Direct acquisition costs		450

Total consideration	$	48,086

The following is a summary of the allocation of the purchase price (in thousands):


Tangible assets:
Current assets	$	1,336
Property, plant and equipment		565

Total tangible assets acquired		1,901

Liabilities:
Current liabilities		(4,209	)
Long-term liabilities		(6,271	)

Total liabilities assumed		(10,480	)
Fair value of net liabilities assumed		(8,579	)
Intangible assets consisting of:
Existing technology		15,600
Customer relationships		1,700
Non-competition agreements		1,500
Goodwill		37,865

Total consideration	$	48,086

Management allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date giving consideration to an independent appraisal.

The primary reason for the acquisition and the factors that contributed to the recognition of goodwill of $37.9 million relate to Destiny’s technology and the underlying patents. See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information on goodwill and purchased intangibles.

3. GOODWILL AND PURCHASED INTANGIBLES

In accordance with SFAS 142, goodwill originating from the SpectraLink and Destiny acquisitions will not be amortized. In general, goodwill is not deductible for tax purposes. Purchased intangible assets are being amortized on a straight-line basis over a period of two to six years.

Changes in goodwill, purchased intangibles, and fair value of net tangible assets are summarized as follows (in thousands):


	Goodwill			Purchased Intangibles			Fair Value of Net Tangible Assets
Balance at December 31, 2006	$	356,755		$	12,935		$	65,951
Acquisition of SpectraLink		149,560			75,700			2,629
Acquisition of Destiny		37,865			18,800			(8,579	)
Amortization		—			(13,726	)		—
Foreign currency translation		2,271			885			—
Subsequent fair value adjustments to assets acquired and liabilities assumed upon acquisition		(49,856	)		—			49,856

Balance at September 30, 2007	$	496,595		$	94,594		$	109,857

The following table presents details of the Company’s goodwill by segment (in thousands):


	Video Communications			Voice Communications		Network Systems Segment		Services Segment			Total
Balance at December 31, 2006	$	239,614		$	8,899	$	53,665	$	54,577		$	356,755
Additional consideration paid for Destiny		24,984			—		—		12,881			37,865
Additional consideration paid for SpectraLink		—			118,152		—		31,408			149,560
Foreign currency translation		—			1,599		253		419			2,271
Changes in fair value of assets acquired and liabilities assumed		(43,445	)		—		—		(6,411	)		(49,856	)

Balance at September 30, 2007	$	221,153		$	128,650	$	53,918	$	92,874		$	496,595

The fair value adjustments to assets acquired during the nine month period ended September 30, 2007 resulted from the adoption of FIN 48 on January 1, 2007 and the elimination of $9.2 million in pre-acquisition tax reserves related to the PictureTel acquisition and the recognition of $40.4 million in net operating loss carryovers that had not been recognized previously. These adjustments to reserves and deferred tax assets resulted in a corresponding reduction in goodwill. See Note 15 of Notes to Condensed Consolidated Financial Statements for further information regarding the adoption of FIN 48.

The following table presents details of the Company’s total purchased intangible assets as of September 30, 2007 and December 31, 2006 (in thousands):


	September 30, 2007										December 31, 2006
Purchased Intangible Assets	Gross Value		Accumulated Amortization			Impairment			Net Value		Gross Value		Accumulated Amortization			Impairment			Net Value
Core and developed technology	$	109,178	$	(45,159	)	$	(1,650	)	$	62,369	$	43,578	$	(34,887	)	$	(1,650	)	$	7,041
Patents		14,068		(12,408	)		(1,361	)		299		14,068		(12,225	)		(1,361	)		482
Customer and partner relationships		44,625		(23,879	)		—			20,746		25,125		(21,921	)		—			3,204
Trade name		10,021		(1,589	)		(150	)		8,282		3,021		(663	)		(150	)		2,208
Other		4,862		(1,904	)		(60	)		2,898		2,462		(2,402	)		(60	)		—

Total	$	182,754	$	(84,939	)	$	(3,221	)	$	94,594	$	88,254	$	(72,098	)	$	(3,221	)	$	12,935

During the three and nine months ended September 30, 2007, the Company allocated approximately $3.3 million and $7.5 million, respectively, of amortization of purchased intangibles to “Cost of Product Revenues” in the Condensed Consolidated Statements of Operations. Amortization and impairment of intangibles is not allocated to our segments. The estimated future amortization expense of purchased intangible assets as of September 30, 2007 is as follows (in thousands):


Year ending December 31,	Amount
Remainder of 2007	$	5,744
2008		22,867
2009		19,250
2010		19,142
2011		14,334
Thereafter		12,339

Total	$	93,676

The Company has determined that a purchased trade name intangible of $0.9 million has an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. Consequently, this trade name is no longer amortized but is reviewed for impairment annually or sooner under certain circumstances.

4. ACQUISITION-RELATED INTEGRATION COSTS AND LIABILITIES

For the three and nine months ended September 30, 2007, the Company recorded a charge to operations of $0.4 million and $3.1 million, respectively, for acquisition-related integration costs. In each of the three and nine months ended September 30, 2006, the Company recorded a charge to operations of $0.1 million for acquisition-related integration costs. In 2007, the costs primarily related to the SpectraLink and Destiny acquisitions. In 2006, the costs primarily related to the DSTMedia acquisition. These costs principally consist of financial advisory, accounting, legal and consulting fees, and other costs incurred directly related to integrating acquired companies.

At September 30, 2007, the Company had $2.6 million in acquisition-related reserves classified as current liabilities and $3.2 million classified as long-term liabilities. At December 31, 2006, the Company had $2.0 million of acquisition-related reserves classified as current liabilities and no acquisition-related reserves classified as long-term liabilities. These charges include the cost of actions designed to improve the Company’s competitiveness, productivity and future profitability and primarily relate to the elimination of redundant and excess facilities and workforce of the acquired businesses.

The following table summarizes the status of the Company’s acquisition-related restructuring liabilities and integration costs (in thousands):


	Facility Closings			Severance and Related Benefits			Total
Balance at December 31, 2006	$	2,015		$	—		$	2,015
Additions to the reserve		3,448			7,041			10,489
Cash payments and other usage		(1,208	)		(5,369	)		(6,577	)
Release of reserve		(168	)		—			(168	)

Balance at September 30, 2007	$	4,087		$	1,672		$	5,759

Facility Closings

The Company’s facility closings liability is primarily attributable to consolidation of facilities related to the SpectraLink acquisition, and to a lesser extent, its PictureTel acquisition. The balance at September 30, 2007 relates to liabilities assumed of $3.4 million in the SpectraLink acquisition as a result of plans to vacate four facilities within the next 12 months, as well as one vacant facility from the PictureTel acquisition. During the three and nine months ended September 30, 2007, the Company recorded payments totaling $0.3 million and $1.2 million, respectively, against the restructuring related to these facility closings. During the three months ended September 30, 2007, the Company released a reserve for a facility related to the PictureTel acquisition.

Severance and Related Benefits

The Company recorded a liability of $7.0 million for severance and related benefits as part of the liabilities assumed in the acquisition of SpectraLink as a result of establishing a plan to involuntarily terminate or relocate certain general and administrative and manufacturing positions over the next 12 months. During the three and nine months ended September 30, 2007, the Company made payments totaling $2.8 million and $5.4 million, respectively, against the restructuring for severance and related benefits.

5. RESTRUCTURING COSTS

During the third quarter of 2006, management approved a restructuring plan for eliminating or relocating certain positions throughout the Company in order to consolidate certain functions into one location, as well as to relocate the Asia Pacific headquarters from Hong Kong to Singapore. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the Company recorded a charge of approximately $1.3 million in 2006, related to workforce reductions and relocations, which events had been communicated to the impacted employees or incurred during the period. The charge was comprised of severance and other employee termination benefits related to these workforce reductions, which impacted less than 3 percent of the Company’s employees worldwide, and costs related to relocations that have been incurred as of December 31, 2006. During the three months ended March 31, 2007, the final $0.2 million charge was taken for the employees who did not terminate until the first quarter of 2007 and, in accordance with FAS 146, exceed the minimum retention period (generally 60 days), as well as for remaining costs associated with employee relocation, facilities closures and moving related expenses, which were recognized when the Company ceased to use the facility or as incurred. Less than $0.1 million remains to be paid as of September 30, 2007 related to these actions and is anticipated to be paid in the quarter ending December 31, 2007.

During the first quarter of 2006, management approved a restructuring plan for eliminating certain positions throughout the Company but focused primarily on the sales and general and administrative functions. The resulting actions were intended to streamline and focus the Company’s efforts and more properly align its cost structure with its projected revenue streams. In accordance with SFAS 146, the Company recorded a charge of approximately $0.6 million in 2006 related to workforce reductions, which had been communicated to the impacted employees during the period. The total charge of $0.6 million consisted of severance and other employee termination benefits related to these workforce reductions, which comprised less than 1 percent of the Company’s employees worldwide. All payments related to these actions were made by December 31, 2006.

The following table summarizes the status of the Company’s restructuring reserves (in thousands):


	Facility Closings			Severance and Related Benefits
Balance at December 31, 2006	$	—		$	771
Additions to the reserve		47			166
Cash payments and other usage		(47	)		(888	)

Balance at September 30, 2007	$	—		$	49

6. INVENTORIES

Inventories are valued at the lower of cost or market with cost computed on a first-in, first-out (“FIFO”) basis. Consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. Inventories consist of the following (in thousands):


	September 30, 2007		December 31, 2006
Raw materials	$	14,154	$	3,554
Work in process		998		769
Finished goods		54,689		43,706

	$	69,841	$	48,029

Inventories at September 30, 2007 include the fair value of inventories acquired during the three months ended March 31, 2007 as part of the SpectraLink and Destiny acquisitions.

7. GUARANTEES

Warranty

The Company provides for the estimated costs of product warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the product sold. In the case of hardware manufactured by Polycom, warranties generally start from the delivery date and continue for one to three years depending on the product purchased. Software products generally carry a 90-day warranty from the date of shipment. The Company’s liability under warranties on software products is to provide a corrected copy of any portion of the software found not to be in substantial compliance with the agreed upon specifications. Factors that affect the Company’s warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures. The Company assesses the adequacy of its recorded warranty liabilities every quarter and makes adjustments to the liability if necessary.

Changes in the warranty obligation, which is included as a component of “Other accrued liabilities” on the condensed consolidated balance sheets, during the period are as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Balance at beginning of period	$	10,491		$	8,071		$	8,060		$	8,053
Accruals for warranties issued during the period		4,163			3,355			11,881			9,615
Warranty assumed in SpectraLink acquisition		—			—			2,335			—
Cost of providing warranty during the period		(3,719	)		(3,414	)		(11,341	)		(9,656	)

Balance at end of period	$	10,935		$	8,012		$	10,935		$	8,012

Deferred Maintenance Revenue

The Company offers maintenance contracts for sale on all of its products that allow for customers to receive service and support in addition to, or subsequent to, the expiration of the contractual product warranty. The Company recognizes the maintenance revenue from these contracts over the life of the service contract.

Deferred maintenance revenue, of which $48.6 million and $34.0 million is short-term, is included as a component of “Deferred revenue” as of September 30, 2007 and December 31, 2006, respectively, and of which $22.5 million and $18.3 million is long-term, is included in “Long-term deferred revenue” as of September 30, 2007 and December 31, 2006, respectively, on the condensed consolidated balance sheets. Changes in deferred maintenance revenue for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Balance at beginning of period	$	67,664		$	46,716		$	52,261		$	38,741
Additions to deferred maintenance revenue		32,004			20,585			85,497			62,768
Deferred maintenance assumed in SpectraLink acquisition		—			—			7,734			—
Amortization of deferred maintenance revenue		(28,616	)		(18,297	)		(74,440	)		(52,505	)

Balance at end of period	$	71,052		$	49,004		$	71,052		$	49,004

The cost of providing maintenance services for the three months ended September 30, 2007 and 2006 was $15.7 million and $10.1 million, respectively. The cost of providing maintenance services for the nine months ended September 30, 2007 and 2006 was $42.2 million and $29.7 million, respectively.

Officer and Director Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is not material.

Other Indemnifications

As is customary in the Company’s industry, many of the Company’s contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of its products and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability or environmental obligations. In addition, in connection with the sale of the network access product line to Verilink, the Company has agreed to indemnify Verilink against certain contingent liabilities. The Company believes the estimated fair value of these indemnification obligations is not material.

8. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following (in thousands):


	September 30, 2007		December 31, 2006
Accrued expenses	$	11,606	$	8,504
Accrued co-op expenses		10,066		7,870
Restructuring and acquisition related reserves		2,632		2,786
Warranty obligations		10,935		8,060
Short term derivative liability		2,987		299
Sales tax payable		4,883		3,924
Employee stock purchase plan withholding		2,072		3,288
Other accrued liabilities		5,953		5,049

	$	51,134	$	39,780

9. BANK LINE OF CREDIT

The Company has available a $25 million revolving line of credit with a bank under an agreement dated December 3, 2005. Borrowings under the line are unsecured and bear interest at the bank’s prime rate (7.75% at September 30, 2007) or at the London interbank offered rate (LIBOR) plus 0.65% (approximately 5.77% to 5.88%, depending on the term of the borrowings at September 30, 2007). Borrowings under the line are subject to certain financial covenants and restrictions on liquidity, indebtedness, financial guarantees, business combinations, profitability levels, and other related items. The line of credit expires on December 3, 2007 and the Company does not intend to review this credit facility. The Company was in compliance with all applicable financial covenants and restrictions at September 30, 2007.

As of September 30, 2007, there were no balances outstanding under the line of credit; however, the Company has outstanding letters of credit which total approximately $1.6 million at September 30, 2007, of which $1.3 million is secured by this line of credit. Upon expiration of the line of credit, these letters of credit will no longer be secured by a credit facility.

10. COMPUTATION OF NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of outstanding stock options. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is antidilutive.

A reconciliation of the numerator and denominator of basic and diluted net income per share is provided as follows (in thousands except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Numerator—basic and diluted net income per share:
Net income	$	19,792	$	17,126	$	40,080	$	46,161

Denominator—basic and diluted net income per share:
Weighted average shares used to compute basic net income per share		91,148		88,373		91,224		88,093
Effect of dilutive securities:
Common stock options		3,413		2,133		3,790		1,736
Contingently issuable shares for Circa earnout		—		—		—		42

Total shares used in calculation of diluted net income per share		94,561		90,506		95,014		89,871

Basic net income per share	$	0.22	$	0.19	$	0.44	$	0.52

Diluted net income per share	$	0.21	$	0.19	$	0.42	$	0.51

Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. For the three and nine months ended September 30, 2007, approximately 4.4 million and 3.5 million shares, respectively, and for the three and nine months ended September 30, 2006, approximately 3.8 million and 5.3 million shares, respectively, relating to potentially dilutive securities such as stock options were excluded from the denominator in the computation of diluted net income per share from continuing operations because their inclusion would be anti-dilutive.

11. STOCKHOLDER’S EQUITY

Expense Information Under SFAS123(R)

The following table summarizes stock-based compensation expense recorded under SFAS 123(R) for the three and nine months ended September 30, 2007 and 2006 and its allocation within the condensed consolidated statement of operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Cost of sales – product	$	725	$	359	$	1,941	$	1,108
Cost of sales – service		950		432		2,433		1,313

Stock-based compensation expense included in cost of sales		1,675		791		4,374		2,421
Sales and marketing		3,413		1,751		9,164		4,976
Research and development		3,363		1,800		9,034		5,539
General and administrative		3,186		1,631		7,709		4,571

Stock-based compensation expense included in operating expenses		9,962		5,182		25,907		15,086
Stock-based compensation related to employee equity awards and employee stock purchases		11,637		5,973		30,281		17,507
Tax benefit		3,258		2,030		9,086		5,952

Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax	$	8,379	$	3,943	$	21,195	$	11,555

No stock-based compensation was capitalized during the three and nine months ended September 30, 2007 and 2006 due to these amounts being immaterial. There was no stock-based compensation related to acquisitions during the three and nine months ended September 30, 2007 and 2006.

Valuation Assumptions

The Company estimates the fair value of stock options using a Black-Scholes valuation model. The weighted-average estimated value of employee stock options granted during the three and nine months ended September 30, 2007 was $10.72 per share and $10.98 per share, respectively. The weighted-average estimated value of employee stock options granted during the three and nine months ended September 30, 2006 was $7.74 per share and $6.77 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the Employee Stock Purchase Plan during the three and nine months ended September 30, 2007 was $7.97 per share and $8.24 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the Employee Stock Purchase Plan during the three and nine months ended September 30, 2006 was $5.76 and $5.44 per share, respectively. The fair value of each option and employee stock purchase right grant is estimated on the date of grant using the Black-Scholes option valuation model and is recognized as expense using the straight-line attribution approach with the following weighted-average assumptions:


	Three Months Ended September 30, 2007				Nine Months Ended September 30, 2007
	Stock Options		Employee Stock Purchase Plan		Stock Options		Employee Stock Purchase Plan
Expected volatility	35.83	%	34.36	%	33.88	%	34.17	%
Risk-free interest rate	4.66	%	4.96	%	4.70	%	5.04	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%
Expected life (yrs)	3.57		0.50		3.73		0.50


	Three Months Ended September 30, 2006				Nine Months Ended September 30, 2006
	Stock Options		Employee Stock Purchase Plan		Stock Options		Employee Stock Purchase Plan
Expected volatility	37.27	%	38.35	%	36.29	%	38.49	%
Risk-free interest rate	4.95	%	5.18	%	4.78	%	4.88	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%
Expected life (yrs)	3.95		0.50		3.69		0.49

In 2007 and 2006, the Company used the implied volatility for one-year traded options on the Company’s stock as the expected volatility assumption required in the Black-Scholes model. The selection of the implied volatility approach was based upon the availability of actively traded options in the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility or a combined method of determining volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company’s employee stock options and employee stock purchases.

The dividend yield assumption is based on the Company’s history of not paying dividends and the resultant future expectation of dividend payouts.

The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

As the stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2007 and 2006 is based on awards ultimately expected to vest, such amount has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

Performance Shares

During the nine months ended September 30, 2007, the Compensation Committee of the Board of Directors granted 553,900 target performance shares, which represents the number of performance shares that will vest if the Company achieves 100% of the specified performance criteria during the performance periods. In the nine months ended September 30, 2007, 22,160 of the target performance shares were forfeited, leaving 531,740 target performance shares that will vest if the Company achieves 100% of the specified performance criteria during the performance period.

For certain of the 2007 awards, the actual number of performance shares that are subject to vesting could increase or decrease, within a range from zero percent (0%) to two hundred and fifty percent (250%) of the target number of performance shares, if the Company exceeds or underachieves the specified performance criteria during the performance period. For these awards, no performance shares will vest unless, for the performance period specified, the Company achieves certain pre-defined revenue, non-GAAP operating income, and/or non-GAAP net income targets, as specified in each grant agreement. The number of performance shares subject to vesting will be determined based upon the actual results at the end of the performance period. Should the performance criteria be satisfied, these performance shares generally vest in two equal, annual installments, with 50% vesting on the second anniversary of the grant date and an additional 50% vesting on the third anniversary of the grant date. A small portion of the 2007 awards vest over two years.

In addition, certain of the performance shares awarded during the nine months ended September 30, 2007, vest over a 3-year period based on the achievement of underlying pre-defined performance criteria relating to the achievement of annual revenue growth targets. If the performance criteria is not met in one particular performance period, the portion of performance shares allocated to such performance period shall be allocated to the next performance period and shall become eligible to vest if the performance criteria is met on a cumulative basis in such subsequent performance period.

For performance shares granted in 2006, the performance period was from January 1, 2006 to December 31, 2006. Based upon the Company’s actual achievement of certain pre-defined revenue, non-GAAP operating income and/or non-GAAP net income targets during the performance period, the actual number of performance shares was determined to be 608,487. In the nine months ended September 30, 2007, 57,598 performance shares were forfeited and 106 vested due to an employee’s retirement resulting in a balance of 550,783 unvested performance shares. These performance shares generally vest in two equal, annual installments, with 50% vesting in February 2008 and the remaining 50% vesting in February 2009.

The value of the performance shares was based on the closing market price of the Company’s common stock on the date of the award. The total grant date fair value of the performance shares granted during the nine months ended September 30, 2007 and 2006 was $12.8 million and $8.7 million after estimated forfeitures, respectively. Stock-based compensation cost for performance shares for the three and nine months ended September 30, 2007 was $2.4 million and $6.8 million, respectively. Stock-based compensation cost for performance shares for the three months and nine months ended September 30, 2006 was $0.9 million and $2.2 million, respectively. As of September 30, 2007, there was $12.8 million of unrecognized stock-based compensation after estimated forfeitures related to unvested performance shares granted under the 2004 Plan. That cost is expected to be recognized over an estimated weighted average amortization period of approximately 2.5 years. Stock-based compensation expense for performance shares is recognized using the graded vesting method.

Employee Stock Purchase Plan

During the nine months ended September 30, 2007 and 2006, 374,915 and 407,513 shares were purchased at average per share prices of $21.71 and $15.28, respectively. At September 30, 2007, there were 4,217,572 shares available to be issued under this employee stock purchase plan. Compensation expense in connection with the plan for the three months ended September 30, 2007 and 2006 was $0.8 million and $0.5 million, respectively; and $2.2 million and $1.5 million for the nine months ended September 30, 2007 and 2006, respectively.

Share Repurchase Program

During the nine months ended September 30, 2007, the Company repurchased 2.4 million shares of common stock in the open market for cash of $75.7 million. As of September 30, 2007, all of the share repurchases authorized under the 2005 share repurchase plan had been completed, and the Company was authorized to purchase up to an additional $190.0 million of shares in the open market under the 2007 share repurchase plan.

12. BUSINESS SEGMENT INFORMATION

Polycom is a leading global provider of a line of high-quality, easy-to-use communications equipment that enables businesses, telecommunications service providers, and governmental and educational institutions to more effectively conduct video, voice, data and web communications. The Company’s offerings are organized along four product lines: Video Communications, Voice Communications, Network Systems, and Services, which are also considered its segments for reporting purposes. The segments are determined in accordance with how management views and evaluates the Company’s business and based on the criteria as outlined in FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company previously aggregated Video Communications and Voice Communications into one segment called Communications. In the fourth quarter of 2006, the underlying economic characteristics of these segments no longer met the aggregation criteria and, accordingly, all periods have been reclassified to conform to the current period presentation. A description of the types of products and services provided by each reportable segment is as follows:

Video Communications Segment

Video Communications includes a wide range of video conferencing collaboration products from entry level to professional high definition products to meet the needs of any meeting room, from small offices to large boardrooms and auditoriums. Destiny product revenues are included in this segment since January 5, 2007, the date of acquisition.

Voice Communications Segment

Voice Communications includes a wide range of voice communications products that enhance business communications in the conference room, on the desktop and in mobile applications. SpectraLink product revenues are included in this segment since March 26, 2007, the date of acquisition.

Network Systems Segment

Network Systems products provide a broad range of network infrastructure hardware and software to facilitate video, voice and data conferencing and collaboration to businesses, telecommunications service providers, and governmental and educational institutions.

Services Segment

Service is comprised of a wide range of service and support offerings to resellers and directly to some end-user customers. The Company’s service offerings include: maintenance programs; integration services consisting of consulting, education, design and project management services; consulting services consisting of planning and needs analysis for end-users; design services, such as room design and custom solutions; and project management, installation and training. Destiny and SpectraLink service revenues are included in this segment since their respective dates of acquisition.

Segment Revenue and Contribution Margin

Segment contribution margin includes all product line segment revenues less the related cost of sales, direct marketing and direct engineering expenses. Management allocates corporate manufacturing costs and some infrastructure costs such as facilities and information technology costs in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include sales costs, marketing costs other than direct marketing, general and administrative costs, such as legal and accounting, stock-based compensation expenses, acquisition-related integration costs, amortization and impairment of purchased intangible assets, purchased in-process research and development costs, restructuring costs, interest income, net, and other expense, net.

Segment Data

The results of the reportable segments are derived directly from Polycom’s management reporting system. The results are based on Polycom’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution margin.

Asset data, with the exception of inventory, is not reviewed by management at the segment level. All of the products and services within the respective segments are generally considered similar in nature, and therefore a separate disclosure of similar classes of products and services below the segment level is not presented.

Financial information for each reportable segment is as follows as of and for the three and nine months ended September 30, 2007 and 2006 (in thousands):


	Video		Voice		Network Systems		Services		Total
For the three months ended September 30, 2007:
Revenue	$	99,503	$	85,715	$	21,761	$	33,068	$	240,047
Contribution margin		50,296		35,249		5,192		14,528		105,265
As of September 30, 2007: Inventories		24,052		31,827		6,066		7,896		69,841
For the three months ended September 30, 2006:
Revenue	$	82,663	$	49,593	$	20,154	$	20,798	$	173,208
Contribution margin		42,495		21,430		4,269		8,773		76,967
As of September 30, 2006: Inventories		19,459		13,976		5,571		5,438		44,444
For the nine months ended September 30, 2007:
Revenue	$	294,723	$	222,496	$	61,134	$	88,264	$	666,617
Contribution margin		149,962		94,510		12,555		38,116		295,143
For the nine months ended September 30, 2006:
Revenue	$	236,047	$	135,779	$	64,093	$	59,957	$	495,876
Contribution margin		117,835		60,162		15,285		24,441		217,723

The reconciliation of segment information to Polycom consolidated totals is as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Segment contribution margin	$	105,265		$	76,967		$	295,143		$	217,723
Corporate and unallocated costs		(64,073	)		(47,313	)		(184,632	)		(137,778	)
Stock-based compensation		(11,637	)		(5,973	)		(30,281	)		(17,507	)
Effect of stock-based compensation cost on warranty expense		(261	)		(200	)		(661	)		(396	)
Acquisition related-costs		(423	)		(52	)		(3,140	)		(137	)
Amortization of purchased intangibles		(5,764	)		(1,451	)		(13,726	)		(4,640	)
Purchase accounting adjustments made to inventory of acquired companies		—			—			(2,463	)		—
Purchased in-process research and development charges		—			—			(9,400	)		—
Restructuring costs		—			(1,312	)		(213	)		(1,867	)
Interest income, net		4,197			5,616			14,787			14,142
Loss on strategic investments		—			—			(7,400	)		—
Other income (expense), net		185			(333	)		(349	)		401

Income before provision for income taxes	$	27,489		$	25,949		$	57,665		$	69,941

13. COMPREHENSIVE INCOME

The components of comprehensive income are as follows (in thousands):


	Three Months Ended					Nine Months Ended
	September 30, 2007			September 30, 2006		September 30, 2007			September 30, 2006
Net income	$	19,792		$	17,126	$	40,080		$	46,161
Change in unrealized gain (loss) on investments		(105	)		239		(399	)		553
Change in cumulative translation adjustment		2,823			75		3,154			75
Change in unrealized gain (loss) on hedging securities		(156	)		113		(833	)		208

Comprehensive income	$	22,354		$	17,553	$	42,002		$	46,997

14. INVESTMENTS:

The Company has investments in debt securities and also has strategic investments in private and public companies. The classification of these investments is as follows (in thousands):


	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Balances at September 30, 2007:
Investments—Short-term:
State and local governments	$	10,376	$	1	$	—		$	10,377
Corporate debt securities		69,472		243		(2,167	)		67,548

Total investments – short-term	$	79,848	$	244	$	(2,167	)	$	77,925

Investments—Long-term:
U.S. government securities	$	21,098	$	11	$	(1	)	$	21,108
Corporate debt securities		24,498		8		(75	)		24,431

Total investments – long-term	$	45,596	$	19	$	(76	)	$	45,539

Investments—privately-held companies	$	1,694	$	—	$	—		$	1,694

Balances at December 31, 2006:
Investments—Short-term:
U.S. government securities	$	27,062	$	2	$	(50	)	$	27,014
State and local governments		25,113		—		(3	)		25,110
Corporate debt securities		106,142		368		(1,289	)		105,221

Total investments – short-term	$	158,317	$	370	$	(1,342	)	$	157,345

Investments—Long-term:
U.S. government securities	$	49,049	$	1	$	(123	)	$	48,927
Corporate debt securities		53,345		4		(143	)		53,206

Total investments – long-term	$	102,394	$	5	$	(266	)	$	102,133

Investments—privately – held companies	$	8,900	$	—	$	—		$	8,900

The following table summarizes the fair value and gross unrealized losses of our short-term and long-term investments with unrealized losses (in thousands), aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2007 and December 31, 2006:


	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2007:
U.S. government securities	$	9,674	$	(2	)	$	5,003	$	(1	)	$	14,667	$	(3	)
Corporate debt securities		59,251		(1,979	)		7,463		(281	)		66,714		(2,260	)

Total Investments	$	68,925	$	(1,981	)	$	12,466	$	(282	)	$	81,391	$	(2,263	)


	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2006:
U.S. government securities	$	28,327	$	(37	)	$	37,028	$	(136	)	$	65,355	$	(173	)
State and local governments		2,232		(3	)		—		—			2,232		(3	)
Corporate debt securities		111,522		(1,396	)		14,704		(36	)		126,226		(1,432	)

Total Investments	$	142,081	$	(1,436	)	$	51,732	$	(172	)	$	193,813	$	(1,608	)

Debt Securities

The Company’s short term and long term investments are comprised of U.S., state and municipal government obligations and foreign and domestic public corporate debt securities, some of which are invested in auction rate securities. Investments, other than auction rate securities, are classified as short-term or long-term based on their original or remaining maturities and whether the securities represent the investment of funds available for current operations. Nearly all investments are held in the Company’s name at a limited number of major financial institutions. At September 30, 2007 and December 31, 2006, all of the Company’s investments were classified as available-for-sale and are carried at fair value based on quoted market prices at the end of the reporting period. Unrealized gains and losses are recorded as a separate component of cumulative other comprehensive income in stockholder’s equity. If these investments are sold at a loss or are considered to have other than temporarily declined in value, a charge to operations is recorded. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in interest income, net. During the three months and nine months ended September 30, 2007, the Company recorded gross realized gains of $0.6 million and $3.5 million and gross realized losses of less than $0.1 million and $1.1 million, respectively, on the disposal of investments. During the three months and nine months ended September 30, 2006, the Company recorded gross realized gains of $0.8 million and $1.9 million and gross realized losses of $0.1 million and less than $0.2 million, respectively, on the disposal of investments. The unrealized loss balances in U.S. government obligations and public corporate debt securities as of September 30, 2007 were primarily caused by rising interest rates. Because the Company has the ability and intent to hold these debt securities until a recovery of fair value, which may be until maturity, it does not consider these debt securities to be other-than-temporarily impaired at September 30, 2007.

The Company’s investment policy limits the concentration of its investments in debt securities to an unlimited amount of U.S. Government and U.S. Government Agencies, a maximum of 4% in a single issuer for all other corporate debt securities and a maximum of 10% in any single money market fund. The policy also limits the percent of our portfolio held in these instruments to a minimum of 20% in U.S. Government and U.S. Government Agencies and no more than 25% to 75% in other corporate debt instruments depending on the debt classification. All of the Company’s debt securities must be rated by both Standard and Poor’s and Moody’s and must have a high quality credit rating. Because of the nature of the Company’s investment policy, the Company does not monitor industry classification of the investments other than commercial bank issues. The Company is in compliance with its investment policy at September 30, 2007.

Private Company Investments

For strategic reasons, the Company has made various investments in private companies. These private company investments are carried at cost and written down to fair market value when indications exist that these investments have other than temporarily declined in value. The Company reviews these investments for impairment when events or changes in circumstances indicate that impairment may exist and make appropriate reductions in carrying value, if necessary. The Company evaluates a number of factors, including price per share of any recent financing, expected timing of additional financing, liquidation preferences, historical and forecast earnings and cash flows, cash burn rate, and technological feasibility of the investee company’s products to assess whether or not the investment is impaired. At September 30, 2007 and December 31, 2006, these investments had a carrying value of $1.7 million and $8.9 million, respectively. In the three and nine months ended September 30, 2007, the Company made an additional investment of $0.2 million. The Company did not record any write-downs of existing investments in privately held companies during the three months ended September 30, 2007. During the nine months ended September 30, 2007, the Company wrote down its investment in a privately held company of $7.4 million. The write-down of $7.4 million was based upon the Company’s evaluation of the investee’s financial position, including cash usage, the status of the investee’s business prospects as of June 30, 2007, and the rights and privileges associated with the investment. Based on this evaluation and the Company’s intent as of June 30, 2007 not to participate in the additional funding of the investee that was in process, it was determined that based upon the preferences, including liquidation preferences, that will be held by more senior securities, the write down of the carrying value to zero was necessary. Subsequently, the Company did not participate in the additional funding that closed during the third quarter. In the nine months ended September 30, 2006, the Company made a $2.0 million investment in a privately held company and did not record any write-downs of existing investments in privately held companies. These investments are recorded in “Other assets” in our condensed consolidated balance sheets.

15. INCOME TAXES

The Company’s effective tax rate for the three and nine months ended September 30, 2007 was 28% and 30.5%, respectively, which resulted in a provision for income taxes of $7.7 million and $17.6 million, respectively. The effective tax rate for both the three and nine months ended September 30, 2006 was 34%, which resulted in a provision for income taxes of $8.8 million and $23.8 million, respectively. The decrease in the tax rate for the three months ended September 30, 2007 was primarily the result of the reinstatement of the federal research and experimental credit in 2007 and a relative increase in foreign earnings which are subject to lower tax rates. The decrease in the tax rate for the nine months ended September 30,

2007 as compared to the year ago period, in addition to the preceding factors, benefited from the settlement of certain audit years with the Israeli tax authorities during the first quarter of this year and the write-off of a strategic investment in the second quarter, substantially offset by the non-deductibility of the in-process research and development acquired in the SpectraLink acquisition during the first quarter of this year.

Tax deductions associated with stock option exercises related to grants vesting prior to January 1, 2006 are credited to stockholders’ equity. Tax deductions in excess of prior book expenses under FAS123R associated with stock option exercises related to grants vesting on or after January 1, 2006 are also credited to stockholders’ equity. The reductions of income taxes payable resulting from the exercise of employee stock options and other employee stock programs that were credited to stockholders’ equity were approximately $2.3 million and $13.9 million for the three and nine months ended September 30, 2007 and $3.3 million and $5.4 million for the three and nine months ended September 30, 2006.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As a result, the Company decreased its reserves for uncertain tax positions by $12.6 million. A $3.4 million decrease in relation to interest and penalties and various tax reserves was accounted for as a cumulative adjustment to the beginning balance of retained earnings. A $9.2 million decrease related to pre-acquisition tax reserves was accounted for as an adjustment to goodwill. At the adoption date of January 1, 2007, the Company had $61.5 million of unrecognized tax benefits, $26.6 million of which would affect our income tax expense if recognized. The remaining balance of the unrecognized tax benefits of $34.9 million would be an adjustment to goodwill or stockholders’ equity. In addition, the Company recognized certain net operating loss carryovers of PictureTel that had not been recognized previously. This resulted in the establishment of a deferred tax asset of $40.4 million and a corresponding reduction in goodwill. In March 2007, the Company released $3.7 million of tax reserve due to a settlement with the Israel tax authority. As of September 30, 2007, the Company had $57.9 of unrecognized tax benefits. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits in the next 12 months.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2007, the Company had approximately $2.8 million of accrued interest and penalties related to uncertain tax positions, including $0.2 million and $0.6 million recorded during the three and nine months ended September 30, 2007, respectively.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1998. Foreign income tax matters for most foreign jurisdictions have been concluded for years through 1999 except for the United Kingdom and Switzerland which have been concluded for years through 2004 and Israel which has been concluded for years through 2003.

16. HEDGING

Non-Designated Hedges

The Company hedges its net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that the Company’s earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (expense), net. These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

The Company enters into foreign exchange forward contracts denominated in Euros, British Pounds and Israeli Shekels. These hedges do not require special hedge accounting under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133). At each reporting period, the fair value of the Company’s forward contracts is recorded on the balance sheet, and any fair value adjustments are recorded in other income (expense), net, and are offset by the corresponding gains and losses on foreign currency denominated assets and liabilities. Fair values of foreign exchange forward contracts are determined using quoted spot and interest rates. The Company does not enter into foreign currency forward contracts for trading or speculative purposes.

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at September 30, 2007 of the outstanding non-designated hedges, all of which mature in 30 days or less (foreign currency and dollar amounts in thousands):


	Foreign Currency	USD Equivalent		Positions
Euro	3,976	$	5,501	Sell
Euro	3,500	$	4,948	Buy
British Pound	1,355	$	2,748	Sell
Israeli Shekel	2,305	$	556	Buy

Foreign currency transactions, net of the effect of hedging activity on forward contracts, resulted in a net gain of $0.3 million and a net loss of $0.1 million for the three and nine months ended September 30, 2007, respectively.

Cash Flow Hedges

The Company’s policy in managing its foreign exchange risk management program is to protect the economic value of the company from foreign currency fluctuations. As a result, the Company purchases forward foreign exchange contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. All foreign exchange contracts are carried at fair value and the maximum duration of forward foreign exchange contracts do not exceed thirteen months. Cash flow exposures result from portions of our forecasted revenues and operating expenses being denominated in currencies other than the U.S. dollar, primarily the Euro, British Pound and Israeli Shekel. We enter into these foreign exchange contracts to hedge forecasted revenue and operating expenses in the normal course of business, and accordingly, they are not speculative in nature.

To receive hedge accounting treatment under SFAS 133, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The Company records spot to spot changes in these cash flow hedges in cumulative other comprehensive income (loss) until the forecasted transaction occurs. As of September 30, 2007, we estimate that all of the existing loss, which is $0.8 million, will be reclassified into revenue and operating expenses from accumulated other comprehensive income (loss) within the next twelve months. The following table summarizes the hedging related activity in accumulated other comprehensive income (loss) (in thousands):


	Three Months Ended September 30, 2007			Nine Months Ended September 30, 2007
Balance at beginning of period	$	(665	)	$	12
Net losses reclassified into earnings for revenue hedges		(724	)		(1,245	)
Net gains reclassified into earnings for operating expense hedges		355			794
Net increase / (decrease) in fair value of cash flow hedges		213			(382	)

Balance at end of period	$	(821	)	$	(821	)

When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or operating expense depending upon the transaction being hedged. During the three months ended September 30, 2007, net loss of less than $0.7 million and net gains of $0.4 million were reclassified from cumulative other comprehensive loss to both revenue and operating expense. During the nine months ended September 30, 2007, net loss of $1.2 million and net gains of $0.8 million were reclassified from cumulative other comprehensive loss to both revenue and operating expense. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be reclassified from cumulative other comprehensive income (loss) to other income (expense) on the consolidated statement of operations at that time. For the three and nine months ended September 30, 2007, there were no such net gains or losses recognized in other income (expense) relating to hedges of forecasted transactions that did not occur.

The Company evaluates hedging effectiveness prospectively and retrospectively and records any ineffective portion of the hedging instruments in other income (expense) on the consolidated statement of operations. The Company did not incur any net gains or losses for cash flow hedges due to hedge ineffectiveness during the three and nine months ended September 30, 2007. The time value of purchased derivative instruments is excluded from effectiveness testing and is recorded in other income (expense) over the life of the contract. Other income (expense) for each of the three and nine months ended September 30, 2007 included net gains of less than $0.1 million, representing the excluded time value component of the purchased forward contracts.

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at September 30, 2007 of the outstanding cash flow hedges, all of which are carried at fair value and have maturities within the next 6 months (foreign currency and dollar amounts in thousands):


	Foreign Currency	USD Equivalent		Positions
Euro	8,600	$	11,531	Buy
Euro	22,300	$	29,808	Sell
British Pound	6,600	$	12,937	Buy
British Pound	8,700	$	16,992	Sell
Israeli Shekel	36,900	$	8,862	Buy

As of September 30, 2007, the Company had a derivative asset of $1.7 million included in prepaid expenses and other current assets and a derivative liability of $3.0 million included in other accrued liabilities.

17. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of this statement.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), “Fair Value Measurements”, which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective the first quarter of the Company’s 2008 fiscal year, with early adoption permitted. The Company has not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on its financial statements.

Item 2.

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

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS “MAY,” “BELIEVE,” “COULD,” “ANTICIPATE,” “WOULD,” “MIGHT,” “PLAN,” “EXPECT,” “WILL,” “INTEND,” “POTENTIAL,” AND SIMILAR EXPRESSIONS OR THE NEGATIVE OF THESE TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS, INCLUDING, AMONG OTHER THINGS, STATEMENTS REGARDING OUR CUSTOMER AND GEOGRAPHIC REVENUE LEVELS AND MIX, GROSS MARGINS, AND OPERATING COSTS AND EXPENSES, INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN “RISK FACTORS” IN THIS DOCUMENT, AS WELL AS OTHER INFORMATION FOUND IN THE DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006.

Overview

We are a leading global provider of a line of high-quality, easy-to-use communications equipment that enables enterprise users to more effectively conduct video, voice, data and web communications in fixed and mobile environments. Our offerings are organized along four product lines: Video Communications, Voice Communications, Network Systems, and Services. For reporting purposes, we consider each of these separate segments.

Our products are unified under The Polycom Accelerated Communications Architecture, a framework of common technology principles and objectives for intelligent, standards-based communications. This architecture is designed to facilitate interoperability among systems in a multi-vendor ecosystem, leverage common features across a variety of products and streamline management processes. The Polycom Accelerated Communications Architecture serves as the enabling platform for unified collaborative communication, our corporate vision of a unified communications environment for employees, customers and partners to communicate in a dispersed workplace.

The continuing shift from circuit-switched telephony networks to Internet Protocol (IP) based networks is a significant driver for Polycom’s collaborative communications markets and for our business. In 2006 and throughout 2007, for instance, our Voice over IP (VoIP) products grew faster than any other product line in the company. In addition, over half of our group video products and essentially all of our desktop video products are shipped to connect to IP environments rather than legacy ISDN networks. Strategically, Polycom is investing a substantial portion of its research, development, sales and marketing efforts into delivering a superior IP-based collaborative communications solution, using Polycom proprietary technology in the evolving, standards-based IP communications environment.

On January 5, 2007, we completed our acquisition of Destiny Conferencing Corporation, or Destiny, pursuant to the terms of an Agreement and Plan of Reorganization, or Reorganization Agreement, dated as of January 5, 2007. Destiny designs and manufactures immersive telepresence solutions. Polycom incorporated Destiny’s products into its RPX^™ telepresence offering prior to the acquisition under the terms of an OEM Distribution Agreement between the companies. Further, this work became the foundation for our recently announced TPX^™ telepresence offering. As a result of the acquisition, we now own several patents core to telepresence, a rapidly-emerging market driven by the need for dispersed people to communicate as if they are all in the same room. Destiny’s results of operations are included in our results of operations as part of our Video Communications and Services segments from January 5, 2007, the date of acquisition.

On March 26, 2007, we completed our acquisition of SpectraLink Corporation. SpectraLink designs, manufactures and sells on-premises wireless telephone products to customers worldwide that complement existing telephone systems by providing mobile communications in a building or campus environment. SpectraLink wireless telephone products increase the efficiency of employees by enabling them to remain in telephone contact while moving throughout the workplace. We believe that the SpectraLink acquisition will position us as the only independent provider of both fixed and mobile solutions that seamlessly encompass voice, video, and data collaboration solutions from the desktop, to the meeting room, to the mobile individual. SpectraLink’s results of operations are included in our results of operations as part of our Voice Communications and Services segments from March 26, 2007.

See Notes 2, 3 and 4 of Notes to Condensed Consolidated Financial Statements for further information on our acquisitions and related costs and charges.

Revenues were $240.0 million and $666.6 million for the three and nine months ended September 30, 2007, respectively, as compared to $173.2 million and $495.9 million for the three and nine months ended September 30, 2006, respectively. The increase in revenues for the three months ended September 30, 2007 over the comparable year ago period primarily reflects increased sales of our voice and video communications products and increased service revenues. Network systems product revenues continued to experience growth during the three months ended September 30, 2007 as compared to the year ago period after several quarters of revenue declining year over year, growing 8% year over year although contributing only 2% of the overall growth in revenue during the three-month period. The increase in revenues for the nine months ended September 30, 2007 over the comparable year ago period reflects increased sales of our voice and video communications products, and to a lesser extent, increased service revenues, partially offset by decreased sales of our network system products. Revenues for the three and nine months ended September 30, 2007, included $37.8 million and $76.3 million of revenues, respectively, related to the products and services acquired through the SpectraLink acquisition. Excluding revenues from the SpectraLink acquisition, revenues for the three and nine months ended September 30, 2007 increased 17% and 23%, respectively, from the comparable year ago periods. In addition, during the nine months ended September 30, 2007, we generated approximately $93.8 million in cash flow from operating activities. After the impact of other investing and financing activities described in further detail under “Liquidity and Capital Resources,” we had a $68.4 million net decrease in our total cash and cash equivalents.

Our Video Communications, Voice Communications, Network Systems and Services segments accounted for 41%, 36%, 9% and 14%, respectively, of our revenues during the three months ended September 30, 2007. This compares to the three months ended September 30, 2006, where our Video Communications, Voice Communications, Network Systems and Services segments accounted for 48%, 29%, 11% and 12%, respectively, of our revenues. Our Video Communications, Voice Communications, Network Systems and Services segments accounted for 44%, 34%, 9% and 13%, respectively, of our revenues during the nine months ended September 30, 2007. This compares to the nine months ended September 30, 2006, where our Video Communications, Voice Communications, Network Systems and Services segments accounted for 48%,

27%, 13% and 12%, respectively, of our revenues. The increase in our Voice Communications and Services segments as a percentage of revenues in the three and nine months ended September 30, 2007, as compared to the comparable year ago periods, is due primarily to revenues from the acquisition of SpectraLink in March 2007. See Note 12 of Notes to Condensed Consolidated Financial Statements for further information on our segments, including a summary of our segment revenues, segment contribution margin and segment inventory.

The discussion of results of operations at the consolidated level is followed by a discussion of results of operations by segment for the three and nine month periods ended September 30, 2007 and 2006.

Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006

The following table sets forth, as a percentage of revenues, condensed consolidated statements of operations data for the periods indicated.


	Three Months Ended				Nine Months Ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Revenues:
Product revenues	86	%	88	%	87	%	88	%
Service revenues	14	%	12	%	13	%	12	%

Total revenues	100	%	100	%	100	%	100	%
Cost of revenues:
Cost of product revenues as a % of product revenues	41	%	37	%	40	%	36	%
Cost of service revenues as a % of service revenues	50	%	52	%	50	%	53	%

Total cost of revenues	42	%	38	%	41	%	38	%

Gross profit	58	%	62	%	59	%	62	%

Operating expenses:
Sales and marketing	26	%	25	%	26	%	25	%
Research and development	15	%	16	%	15	%	17	%
General and administrative	7	%	7	%	7	%	7	%
Acquisition-related integration costs	0	%	0	%	1	%	0	%
Amortization of purchased intangibles	1	%	1	%	1	%	1	%
Purchased in-process research and development	0	%	0	%	1	%	0	%
Restructuring costs	0	%	1	%	0	%	1	%

Total operating expenses	49	%	50	%	51	%	51	%

Operating income	9	%	12	%	8	%	11	%
Interest income, net	2	%	3	%	2	%	3	%
Loss on strategic investments	0	%	0	%	(1	)%	0	%
Other income (expense), net	0	%	0	%	0	%	0	%

Income before provision for income taxes	11	%	15	%	9	%	14	%
Provision for income taxes	3	%	5	%	3	%	5	%

Net income	8	%	10	%	6	%	9	%

Revenues

Total revenues for the three months ended September 30, 2007 were $240.0 million, an increase of $66.8 million, or 39%, over the same period of 2006. The increase in revenues was due to increased sales of our voice and video communications products and services revenues, and to a lesser extent, increased sales of our network system products. Revenues for the three months ended September 30, 2007 included $37.8 million of product and service revenues attributable to our recent acquisition of SpectraLink. Video communications revenues increased to $99.5 million for the three months ended September 30, 2007 from $82.7 million in the same period of 2006, primarily due to increased sales volumes and higher average selling prices of our group video systems, which consisted primarily of our VSX™ and HDX product families. Voice communications product revenues increased to $85.7 million for the three months ended September 30, 2007 from $49.6 million in the same period of 2006, primarily as a result of revenues from our SpectraLink products acquired during the first quarter of this year, as well as increases in sales volumes of our Voice-over-IP and circuit switched products. Excluding SpectraLink revenues, Voice Communications segment revenues increased 12% during the three months ended

September 30, 2007, as compared to the comparable period in 2006, representing a more modest growth rate than experienced over the last several years. In addition, this also represented a return to sequential growth, increasing 5% over the quarter ended June 30, 2007, after experiencing a sequential decrease of 2% in the quarter ended June 30, 2007 as compared to the quarter ended March 31, 2007. We believe these results were due in part to the distraction of integrating the SpectraLink acquisition. Such distraction could continue to have an impact in future quarters as we complete the integration.

Revenues from our Network Systems products increased to $21.8 million for the three months ended September 30, 2007 from $20.1 million in the same period of 2006, due primarily to increases in our audio network systems product revenues, which were partially offset by decreases in our video network systems and software product sales. Service revenues increased to $33.1 million for the three months ended September 30, 2007 from $20.8 million in the same period of 2006, primarily due to increases in voice-related services as a result of the recently acquired SpectraLink product lines, and to a lesser extent increased video-related services and video network system services.

Total revenues for the nine months ended September 30, 2007 were $666.6 million, an increase of $170.7 million, or 34%, over the same period of 2006. The increase in revenues was due to increased sales of our voice and video communications products, and to a lesser extent, increased service revenues, partially offset by decreased sales of our network system products. Revenues for the nine months ended September 30, 2007 included $76.3 million of product and service revenues attributable to our recent acquisition of SpectraLink. Video communications revenues increased to $294.7 million for the nine months ended September 30, 2007 from $236.0 million in the same period of 2006, primarily due to increased sales volumes and higher average selling prices of our group video systems, which consisted primarily of our VSX and HDX products. Voice communications product revenues increased to $222.5 million for the nine months ended September 30, 2007 from $135.8 million in the same period of 2006, primarily as a result of revenues from our SpectraLink products acquired during the first quarter of this year as well as increases in sales volumes of our Voice-over-IP and circuit switched products. Revenues from our Network Systems products decreased to $61.1 million for the nine months ended September 30, 2007 from $64.1 million in the same period of 2006, due primarily to decreases in our audio network system revenues, which was partially offset by increases in revenues from our video network systems and software product sales. Services revenues increased to $88.3 million for the nine months ended September 30, 2007 from $60.0 million in the same period of 2006, primarily due to increases in voice-related services as a result of the recently acquired SpectraLink products lines, and to a lesser extent, increased video-related services and video network system services.

International sales, or revenues outside of the U.S. and Canada, accounted for 40% and 41% of total revenues for the three months ended September 30, 2007 and 2006, respectively, and accounted for 43% of total revenues in each of the nine month periods ended September 30, 2007 and 2006.

On a regional basis, North America, Europe, Asia Pacific and Latin America revenues accounted for 60%, 22%, 15% and 3%, respectively, of our total revenues for the three months ended September 30, 2007. North America, Europe, Asia Pacific and Latin America revenues increased 41%, 46%, 22% and 34%, respectively, in the three months ended September 30, 2007 as compared to the same period in 2006. North America and Europe revenues increased as a result of increased voice and video communication product and service revenues, and to a lesser extent, increased network systems product revenues. Although growing sequentially and year over year, North America sequential growth was lower than experienced in prior years, particularly in video communications revenues, which we believe was due in part to management distraction due to the SpectraLink integration, anticipated new product introductions of the HDX 4000 and HDX 8000, and the transition to a higher-touch sales model. Asia Pacific revenues increased as a result of increased video communication product revenues, and to a lesser extent, increased service and network systems product revenues. Revenues from voice communications products were essentially flat in Asia Pacific as compared to the year ago period. Latin America revenues increased as a result of an increase in video and voice communication product revenues, and to a lesser extent, increased service revenues, partially offset by decreased network systems product revenues. Excluding revenues from our recent acquisition of SpectraLink, North America and Europe revenues grew 13% and 21%, respectively, for the three months ended September 30, 2007 as compared to the same period in 2006. Asia Pacific and Latin America revenues were not significantly impacted by the SpectraLink product lines during the three months ended September 30, 2007.

On a regional basis, North America, Europe, Asia Pacific and Latin America revenues accounted for 57%, 23%, 17% and 3%, respectively, of our total revenues for the nine months ended September 30, 2007. North America, Europe, Asia Pacific and Latin America revenues increased 35%, 41%, 25% and 44%, respectively, in the nine months ended September 30, 2007 as compared to the same period in 2006. North America and Europe revenues increased as a result of increased voice and video communication product revenues and increased service revenues, partially offset by decreased network systems product revenues. Asia Pacific and Latin America revenues increased as a result of an increase in video communication product revenues, and to a lesser extent, increased voice communication product, network systems product and service revenues. Excluding revenues from our recent acquisition of SpectraLink, North America and Europe revenues grew 14% and 24%, respectively, for the nine months ended September 30, 2007 as compared to the same period in 2006.

Asia Pacific and Latin America revenues were not significantly impacted by the SpectraLink product lines during the nine months ended September 30, 2007.

No one customer accounted for 10% or more of our total net revenues or our Voice Communications or Service segment revenues for the three and nine months ended September 30, 2007. One channel partner accounted for 13% of our Video Communications segment revenues, in the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2007, one customer accounted for 22% and 16%, respectively, of our Network Systems segment revenues. One channel partner accounted for 11% of our total net revenues and 15% and 13% of our Voice and Video Communications segment revenues, respectively, in the three months ended September 30, 2006. The same channel partner accounted for 13% and 12% of our Voice and Video Communications segment revenues in the nine months ended September 30, 2006, respectively. For the three months ended September 30, 2006, one customer accounted for 13% of our Network Systems segment revenues. No customer accounted for more than 10% of our total net revenues or our Network Systems segment revenues for the nine months ended September 30, 2006 or our Services segment revenues for the three and nine month periods ended September 30, 2006. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our consolidated net revenues or segment net revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a material adverse impact during the transition period. We sell our audio network systems direct to end users and the revenues in the Network Systems segment from end users are subject to more variability than our revenues from our reseller customers. The loss of one or more of the audio network system customers could have a material adverse impact on our Network Systems segment and consolidated revenues.

We usually ship our products within a short time, generally within the same quarter, after we receive an order and, therefore, backlog has not been a good indicator of future revenues. As of September 30, 2007, we had $50.5 million of order backlog as compared to $40.4 million at December 31, 2006 and $38.7 million at September 30, 2006. We include in backlog open product orders which we expect to ship or services for which we expect to bill and record revenue in the following quarter. Once billed, unrecorded service revenue is included in deferred revenue. We believe that the current level of backlog will continue to fluctuate primarily as a result of the level and timing of orders received and customer delivery dates requested outside of the quarter. The level of backlog at any given time is also dependent in part on our ability to forecast revenue mix and plan our manufacturing accordingly and ongoing service deferrals as service revenues increase as a percent of total revenue. In addition, orders from our channel partners are based in part on the level of demand from end-user customers. Any decline or uncertainty in end-user demand could negatively impact end-user orders, which in turn could negatively affect orders from our channel partners in any given quarter. As a result, our backlog could decline from current levels.

Cost of Revenues and Gross Margins


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase (Decrease)		September 30, 2007			September 30, 2006			Increase (Decrease)
Product Cost of Revenues	$	84,465		$	55,650		52	%	$	230,374		$	158,599		45	%
% of Product Revenues		41	%		37	%	4	pts		40	%		36	%	4	pts
Product Gross Margins		59	%		63	%	(4	)pts		60	%		64	%	(4	)pts
Service Cost of Revenues	$	16,457		$	10,753		53	%	$	44,383		$	31,720		40	%
% of Service Revenues		50	%		52	%	(2	)pts		50	%		53	%	(3	)pts
Service Gross Margins		50	%		48	%	2	pts		50	%		47	%	3	pts
Total Cost of Revenues	$	100,922		$	66,403		52	%	$	274,757		$	190,319		44	%
% of Total Revenues		42	%		38	%	4	pts		41	%		38	%	3	pts
Total Gross Margins		58	%		62	%	(4	)pts		59	%		62	%	(3	)pts

Cost of Product Revenues and Product Gross Margins

Cost of product revenues consists primarily of contract manufacturer costs, including material and direct labor, our manufacturing organization, tooling depreciation, warranty expense, freight expense, royalty payments, stock-based compensation costs, amortization of certain technology-related purchased intangibles, and an allocation of overhead expenses, including facilities and IT costs. Typically, Network Systems segment products have a higher gross margin than products in our Video and Voice Communications segments.

Cost of product revenues and product gross margins included a $0.7 million and $0.4 million charge for stock-based compensation in the three months ended September 30, 2007 and 2006, respectively, and $1.9 million and $1.1 million for stock-based compensation in the nine months ended September 30, 2007 and 2006, respectively.

Overall, product gross margins decreased by 4 percentage points in both the three months and nine months ended September 30, 2007, respectively, as compared to the comparable periods in 2006. For the three months ended September 30, 2007, the decrease is due in part to the amortization of core and existing technology purchased intangibles as a result of our recent acquisitions and increased stock-based compensation costs. For the nine months ended September 30, 2007, in addition to the amortization of core and existing technology purchased intangibles as a result of our recent acquisitions and increased stock-based compensation costs, cost of product revenues increased as a result of the write-up of inventory to its fair value at the time of the acquisition. These increased costs, which are not allocated to our segments, accounted for approximately 2 percentage points of the decrease in gross margin for both the three and nine months ended September 30, 2007. Excluding these unallocated costs, gross margins decreased in our Video Communications, Voice Communications and Network Systems segments for the three months ended September 30, 2007 and decreased in our Voice Communications and Network Systems segment and was essentially flat in our Video Communications segment for the nine months ended September 30, 2007 versus the comparable 2006 periods. The fluctuations in Video Communications and Voice Communications gross margin was primarily due to changes in product mix. Our Voice-over-IP handset products and the products we acquired from SpectraLink have a lower gross margin than the consolidated gross margin of our other voice communications products which resulted in lower gross margins during the three and nine months ended September 30, 2007 and depending upon the mix could result in lower Voice Communications gross margins in the future. The decrease in gross margins in our Network Systems segment for the three and nine months ended September 30, 2007 was due to decreased margins in video network systems as a result of decreased average selling prices.

Cost of Service Revenues and Service Gross Margins

Cost of service revenues consists primarily of material and direct labor, including stock-based compensation costs, depreciation, and an allocation of overhead expenses, including facilities and IT costs. Generally, services have a lower gross margin than our product gross margins. Cost of service revenues and service gross margins included a $1.0 million and $0.4 million charge for stock-based compensation in the three months ended September 30, 2007 and 2006, respectively and a $2.4 million and $1.3 million charge for the nine months ended September 30, 2007 and 2006, respectively.

Overall, service gross margins increased in the three and nine months ended September 30, 2007 over the comparable period in 2006 as a result of revenues increasing at a faster pace than related service costs, as well as a shift in mix of services revenues toward higher margin video maintenance revenues.

Forecasting future gross margin percentages is difficult, and there are a number of risks related to our ability to maintain our current gross margin levels. Uncertainties surrounding revenue levels and related production level variances, competition, changes in technology, changes in product mix, variability of stock-based compensation costs, and the potential of resulting royalties to third parties, manufacturing efficiencies of subcontractors, manufacturing and purchased part variances, warranty and recall costs and timing of sales over the next few quarters can cause our cost of revenues percentage to vary significantly. In addition, we may experience higher prices on commodity components that are included in our products, such as the cost increases for memory devices used in many of our products and cost increases in components that are required to be in compliance with the Restrictions on Hazardous Substances (RoHS) rules in Europe.

In addition, cost variances associated with the manufacturing ramp of new products, or the write-off of initial inventory purchases due to product launch delays or the lack of market acceptance of our new products could occur, which would increase our cost of revenues as a percentage of revenues. In addition to the uncertainties listed above, cost of revenues as a percentage of revenues may increase due to a change in our mix of distribution channels and the mix of international versus North American revenues. Cost of revenues will also increase in the remainder of 2007 as a result of increased compensation charges due to higher stock-based compensation expense, as well as annual merit increases and incentive accruals. Stock-based compensation costs associated with stock options are determined through the use of an option-pricing model that is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. Changes in these underlying factors and assumptions may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

Sales and Marketing Expenses


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase		September 30, 2007			September 30, 2006			Increase
Expenses	$	61,510		$	42,736		44	%	$	174,437		$	124,848		40	%
% of Revenues		26	%		25	%	1	pt		26	%		25	%	1	pt

Sales and marketing expenses consist primarily of salaries and commissions for our sales force, stock-based compensation costs, advertising and promotional expenses, product marketing expenses, and an allocation of overhead expenses, including facilities and IT costs. Sales and marketing expenses, except for direct marketing expenses, are not allocated to our segments. Sales and marketing expenses included a $3.4 million and $1.8 million charge for stock-based compensation in the three month periods ended September 30, 2007 and 2006, respectively, and a $9.2 million and $5.0 million charge for stock-based compensation in the nine month periods ended September 30, 2007 and 2006, respectively.

The increase in sales and marketing expense in absolute dollars and as a percentage of revenues for the three and nine months ended September 30, 2007, as compared to the comparable period in 2006, was due primarily to an increase in sales commissions and co-op marketing charges as a result of increased revenues, increases in our sales and marketing headcount due to our acquisition of SpectraLink and the expansion of our sales and marketing efforts, as well as increased compensation charges due to incentive compensation costs and stock-based compensation expense.

We expect to continue to increase our sales and marketing expenses in absolute dollar amounts as we continue to increase our sales coverage across all our markets, including emerging markets and key vertical markets, through the hiring of additional sales personnel and additional marketing programs in order to capitalize on the demand for high definition products, to sell and market the additional product offerings we anticipate as a result of our strategic partnerships and to increase revenues of our recently acquired SpectraLink WLAN products. Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we market new products and the timing of trade shows. We also expect sales and marketing expenses to increase in absolute dollars in 2007 over the 2006 levels as a result of the acquisition of SpectraLink and, to a lesser extent, our acquisition of Destiny. Sales and marketing expenses may also fluctuate due to increased international expenses and the impact of changes in foreign currency exchange rates. In addition, sales and marketing expenses will also increase in 2007 over the 2006 levels as a result of increased compensation charges due to higher stock-based compensation expense, as well as annual merit increases and incentive accruals. Stock-based compensation costs associated with stock options are determined through the use of an option-pricing model that is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. Changes in these underlying factors and assumptions may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

Research and Development Expenses


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase (Decrease)		September 30, 2007			September 30, 2006			Increase (Decrease)
Expenses	$	36,006		$	28,694		25	%	$	102,939		$	84,974		21	%
% of Revenues		15	%		16	%	(1	)pts		15	%		17	%	(2	)pts

Research and development expenses are expensed as incurred and consist primarily of compensation costs, including stock-based compensation costs, outside services, expensed materials, depreciation and an allocation of overhead expenses, including facilities and IT costs. Research and development expenses included a $3.4 million and $1.8 million charge for stock-based compensation in the three month periods ended September 30, 2007 and 2006, respectively, and a $9.0 million and $5.5 million charge for stock-based compensation in the nine month periods ended September 30, 2007 and 2006, respectively.

Research and development expenses as a percentage of revenue decreased for the three and nine months ended September 30, 2007 as compared to the comparable period in 2006, primarily due to spending increasing by 25% and 21%, respectively, in the comparable periods while revenues increased 39% and 34%, respectively, over the comparable periods. The increase in absolute dollars in the three and nine months ended September 30, 2007 as compared to the comparable periods in 2006, is due to planned increases in program development expenses to support increased investment in new product initiatives, such as our High Definition video and voice products and enhancements to our network systems products, as well as increased compensation charges related to increased headcount due to our acquisition of SpectraLink, incentive accruals and stock-based compensation expense. Research and development expenses increased in the three and nine months ended September 30, 2007 as compared to the comparable periods in 2006, in our Video Communications and Voice Communications segments and decreased slightly in our Network Systems segment.

We are currently investing research and development resources to enhance and upgrade the products that comprise our unified collaboration communications solutions, which encompass products and services in all our segments, including enhancements to our existing network systems products, products that address the high definition video conferencing market and additional voice-over-IP products. We also plan to make incremental investments in research and development in WLAN to broaden the enterprise wide application for the SpectraLink products. In addition, we are investing research and development resources across all segments to support our strategic partnerships. With the recent formation of our Video Solutions Division we anticipate committing a greater proportion of our research and development expenses toward enhancing the integration and interoperability of our entire video solutions product suite.

We believe that technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies and products to combat competitive pressures. Also, continued investment in new product initiatives will require significant research and development spending. We expect that research and development expenses in absolute dollars will increase in the future. We also expect research and development expenses to increase in absolute dollars in 2007 over the 2006 levels as a result of the acquisition of SpectraLink and, to a lesser extent, our acquisition of Destiny. In addition, research and development expenses will continue to increase in 2007 over the 2006 levels as a result of increased compensation charges due to higher stock-based compensation expense as well as annual merit increases and incentive accruals. Stock-based compensation costs associated with stock options are determined through the use of an option-pricing model that is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. Changes in these underlying factors and assumptions may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

General and Administrative Expenses


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase		September 30, 2007			September 30, 2006			Increase
Expenses	$	15,663		$	11,894		32	%	$	44,881		$	33,693		33	%
% of Revenues		7	%		7	%	—			7	%		7	%	—

General and administrative expenses consist primarily of compensation costs, including stock-based compensation costs, professional service fees, allocation of overhead expenses, including facilities and IT costs, patent litigation costs, and bad debt expense. General and administrative expenses are not allocated to our segments. General and administrative expenses included a $3.2 million and $1.6 million charge for stock-based compensation in the three month periods ended September 30, 2007 and 2006, respectively, and a $7.7 million and $4.6 million charge for stock-based compensation in the nine month periods ended September 30, 2007 and 2006, respectively.

As a percentage of revenues, general and administrative expenses remained flat for the three and nine months ended September 30, 2007 as compared to the comparable periods in 2006. The increase in spending in absolute dollars in general and administrative in the three and nine months ended September 30, 2007 over the comparable period in the prior year was primarily due to increased compensation charges related to increased headcount from our SpectraLink acquisition, increased incentive accruals and stock-based compensation expense, as well as increased legal and project-related outside services costs. In the three and nine months ended September 30, 2007, the increase in compensation charges, including stock compensation costs, accounted for $2.5 million and $4.6 million of the increase, respectively, legal and outside services accounted for $0.5 million and $1.4 million of the increase, respectively, and increases in infrastructure costs accounted for $0.3 and $0.4 million of the increase, respectively.

Significant future charges due to costs associated with litigation, including our ongoing litigation with Codian, or uncollectibility of our receivables could increase our general and administrative expenses and negatively affect our profitability in the quarter in which they are recorded. Additionally, predicting the timing of bad debt expense associated with uncollectible receivables is difficult. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to visibility of costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors. General and administrative expenses may also increase as a result of the fee arrangement we have with outside legal counsel representing us in our litigation against Codian, pursuant to which we may owe additional legal fees if a favorable outcome in the litigation is ultimately achieved. Such fees would be recorded in the period in which a favorable litigation outcome occurs. We believe that our general and administrative expenses will also likely continue to increase in absolute dollar amounts in the future

primarily as a result of expansion of our administrative staff and other costs related to supporting a larger company, increased costs associated with regulatory requirements, and our continued investments in international regions. We also expect general and administrative expenses to increase in absolute dollars in 2007 over the 2006 levels as a result of the acquisition of SpectraLink. In addition, general and administrative expenses will continue to increase in 2007 over the 2006 levels as a result of increased compensation charges due to higher stock-based compensation expense as well as annual merit increases and incentive accruals. Stock-based compensation costs associated with stock options are determined through the use of an option-pricing model that is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. Changes in these underlying factors and assumptions may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

Acquisition-Related Integration Costs

We recorded a charge to operations of $0.4 million and $0.1 million for the three month periods ended September 30, 2007 and 2006, respectively, and $3.1 million and $0.1 million for the nine month periods ended September 30, 2007 and 2006, respectively, for acquisition-related integration costs. These charges primarily include outside financial advisory, accounting, legal and consulting fees, and other costs incurred directly related to integrating acquired companies. The 2007 charges are primarily related to professional services costs to integrate SpectraLink, which we acquired in March 2007, and to a lesser extent Destiny, which we acquired in January 2007. The 2006 charges are primarily related to professional services costs to integrate DSTMedia, which we acquired in August 2005. We expect to incur additional integration costs related to the SpectraLink acquisition throughout the remainder of 2007. In addition, if we acquire additional businesses in the future, we may incur material acquisition expenses related to these transactions.

Purchased In-process Research and Development

In the nine month period ended September 30, 2007, we recorded a charge totaling $9.4 million for in-process research and development acquired as part of our acquisition of SpectraLink, which related primarily to projects associated with software enhancements and upgrades to the functionality and performance of the Link, NetLink and DECT products. There were no such charges for the three months ended September 30, 2007 and 2006 and for the nine months ended September 30, 2006. The amount allocated to purchased in-process research and development was determined by management after considering, among other factors, established valuation techniques in the high-technology communications industry and was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed for these in-process research and development projects as of the acquisition date. The development of these technologies remains a significant risk due to the remaining efforts to achieve technological feasibility, rapidly changing customer markets, uncertain standards for new products, and significant competitive threats. The nature of the efforts to develop these technologies into commercially viable products consists primarily of planning, designing, experimenting, and testing activities necessary to determine that the technologies can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on emerging markets and could have a material adverse impact on our business and operating results.

The key assumptions used in valuing the in-process research and development primarily consisted of an expected completion date for the in-process projects, which range in stages of completion from 36% to 92% and are expected to be completed over the next 10 to 12 months; estimated costs to complete the projects of approximately $1.4 million; revenue and expense projections, assuming the products have entered the market; and discount rates based on the risks associated with the development lifecycle of the in-process technology acquired at rates ranging from 15 to 16 percent. Failure to achieve the expected levels of revenue and net income from these products will negatively impact the return on investment expected at the time the acquisition was completed and may result in impairment charges.

Amortization of Purchased Intangibles

In the three months ended September 30, 2007 and 2006, we recorded $2.4 million and $1.5 million, respectively, and in the nine months ended September 30, 2007 and 2006, we recorded $6.2 and $4.6 million, respectively, in amortization of purchased intangibles related to the Voyant, DSTMedia, Destiny and SpectraLink acquisitions. Purchased intangible assets are being amortized to expense over their estimated useful lives which range from two years to eight years. The increase in absolute dollars for the three and nine months ended September 30, 2007 as compared to the year ago periods is primarily due to the SpectraLink and Destiny acquisitions during the three months ending March 31, 2007, partially offset by decreases related to certain purchased intangibles related to Voyant becoming fully amortized as of December 31, 2006.

Restructuring Costs

During the third quarter of 2006, management approved a restructuring plan for eliminating or relocating certain positions throughout the Company in order to consolidate certain functions into one location, as well as to relocate the Asia Pacific headquarters from Hong Kong to Singapore. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the Company recorded a charge of approximately $1.3 million in 2006 related to workforce reductions and relocations, which events had been communicated to the impacted employees or incurred during the period. The charge was comprised of severance and other employee termination benefits related to these workforce reductions, which impacted less than 3 percent of the Company’s employees worldwide, and costs related to relocations that had been incurred as of December 31, 2006. During the three months ended March 31, 2007, the final $0.2 million charge was taken for the employees who did not terminate until the first quarter of 2007 and, in accordance with FAS 146, exceeded the minimum retention period (generally 60 days), as well as for remaining costs associated with employee relocation, facilities closures and moving related expenses, which were recognized when the Company ceased to use the facility or as incurred. Less than $0.1 million remains to be paid as of September 30, 2007 related to these actions and is anticipated to be paid in the quarter ending September 30, 2007.

During the first quarter of 2006, management approved a restructuring plan for eliminating certain positions throughout the Company but focused on the sales and general and administrative functions. The resulting actions were intended to streamline and focus the Company’s efforts and more properly align its cost structure with its projected revenue streams. In accordance with SFAS 146, the Company recorded a charge of approximately $0.6 million during the three months ending March 31, 2006 related to workforce reductions, which had been communicated to the impacted employees during the period. The total charge of $0.6 million consisted of severance and other employee termination benefits related to these workforce reductions, which comprised less than 1 percent of the Company’s employees worldwide. All payments related to these actions were made by December 31, 2006.

Interest Income, Net

Interest income, net, consists primarily of interest earned on our cash, cash equivalents and investments less bank charges resulting from the use of our bank accounts. Interest income, net of interest expense, was $4.2 million and $5.6 million for the three months ended September 30, 2007 and 2006, respectively, and $14.8 million and $14.1 million for the nine months ended September 30, 2007 and 2006, respectively.

Interest income decreased for the three months ended September 30, 2007 over the comparable period in the prior year primarily due to lower average cash and investment balances during the period due to our acquisition and stock repurchase activity, partially offset by higher average investment returns. Interest income increased for the nine months ended September 30, 2007 over the comparable period in the prior year primarily due to higher average investment returns, partially offset by lower average cash and investment balances during the period due to our acquisition and stock repurchase activity. Average interest rate returns on our cash and investments were 5.04% for the three months ended September 30, 2007 compared to 4.84% for the three months ended September 30, 2006, and 5.29% for the nine months ended September 30, 2007 compared to 4.39% for the nine months ended September 30, 2006.

Interest income, net will decrease in 2007 compared to 2006 due to our lower cash balance as a result of our recent acquisitions and stock repurchases during the year and could also fluctuate as a result of changes in market interest rates. The cash balance could decrease further depending upon the amount of cash used in any future acquisitions, our stock repurchase activity and other factors.

Loss on Strategic Investment

For strategic reasons, we have made various investments in private companies. These private company investments are carried at cost and written down to fair market value when indications exist that these investments have other than temporarily declined in value. We review these investments for impairment when events or changes in circumstances indicate that impairment may exist and make appropriate reductions in carrying value, if necessary. We evaluate a number of factors, including price per share of any recent financing, expected timing of additional financing, liquidation preferences, historical and forecast earnings and cash flows, cash burn rate, and technological feasibility of the investee company’s products to assess whether or not the investment is impaired. At September 30, 2007 and December 31, 2006, these investments had a carrying value of $1.7 million and $8.9 million, respectively. These investments are recorded in “Other assets” in our Condensed Consolidated Balance Sheets.

In the three months and nine months ended September 30, 2007, we made an additional $0.2 million investment in a privately held company. In the nine months ended September 30, 2006, we made a $1.0 million investment in a privately held company. In the three months ended September 30, 2007 and the three and nine months ended September 30, 2006, we did not record any write-downs of existing investments in privately held companies. In the nine months ended September 30, 2007, an investment in a privately held company was permanently written down by $7.4 million, from original cost, which is reflected in “Loss on strategic investment” in the Consolidated Statements of Operations.

Provision for Income Taxes

Our overall tax rate for the three and nine months ended September 30, 2007 was 28.0% and 30.5%, respectively, which resulted in a provision for income taxes of $7.7 million and $17.6 million, respectively. Our overall tax rate for both the three and nine months ended September 30, 2006 was 34%, which resulted in a provision for income taxes of $8.8 million and $23.8 million, respectively. The decrease in the tax rate for the three months ended September 30, 2007 as compared to the year ago period, was primarily the result of the reinstatement of the federal research and experimental credit in 2007 and a relative increase in foreign earnings which are subject to lower tax rates. The decrease in the tax rate for the nine months ended September 30, 2007 as compared to the year ago period, in addition to the preceding factors, benefited from the settlement of certain audit years with the Israeli tax authorities during the first quarter of this year, the write-off of a strategic investment in the second quarter, substantially offset by the non-deductibility of the in-process research and development acquired in the SpectraLink acquisition during the first quarter of this year.

Tax deductions associated with stock option exercises related to grants vesting prior to January 1, 2006 are credited to stockholders’ equity. Tax deductions in excess of prior book expenses under FAS123R associated with stock option exercises related to grants vesting on or after January 1, 2006 are also credited to stockholders’ equity. The reductions of income taxes payable resulting from the exercise of employee stock options and other employee stock programs that were credited to stockholders’ equity were approximately $2.3 million and $13.8 million for the three and nine months ended September 30, 2007 and $3.2 million and $5.4 million for the three and nine months ended September 30, 2006.

On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more likely than not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As a result, we decreased our reserves for uncertain tax positions by $12.6 million. A $3.4 million decrease in relation to interest and penalties and various tax reserves was accounted for as a cumulative adjustment to the beginning balance of retained earnings. A $9.2 million decrease related to pre-acquisition tax reserves was accounted for as an adjustment to goodwill. At the adoption date of January 1, 2007, we had $61.5 million of unrecognized tax benefits, $26.6 million of which would affect our income tax expense if recognized. The remaining balance of the unrecognized tax benefits of $34.9 million would be an adjustment to goodwill or stockholders’ equity. In addition, we recognized certain net operating loss carryovers of PictureTel that had not been recognized previously. This resulted in the establishment of a deferred tax asset of $40.4 million and a corresponding reduction in goodwill. In March 2007, we released $3.7 million of tax reserve due to a settlement with the Israel tax authority. As of September 30, 2007, we had $57.9 of unrecognized tax benefits. We do not currently anticipate significant changes in the amount of unrecognized income tax benefits in the next 12 months.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2007, the Company had approximately $2.8 million of accrued interest and penalties related to uncertain tax positions, including $0.2 million and $0.6 million recorded during the three and nine months ended September 30, 2007, respectively.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1998. Foreign income tax matters for most foreign jurisdictions have been concluded for years through 1999 except for the United Kingdom and Switzerland which have been concluded for years through 2004 and Israel which has been concluded for years through 2003.

Segment Information

A description of our products and services, as well as selected financial data, for each segment can be found in Note 12 to the Condensed Consolidated Financial Statements. Future changes to our organizational structure or business, such as the recently announced formation of our Video Solutions Division, may result in changes to the reportable segments disclosed. The discussions below include the results of each of our segments for the three and nine months ended September 30, 2007 and 2006.

Segment contribution margin includes all segment revenues less the related cost of sales, direct marketing and direct engineering expenses. Management allocates corporate manufacturing costs and some infrastructure costs such as facilities and IT costs in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and to allocate resources to, each of the segments. Certain costs and operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include sales costs, marketing costs other

than direct marketing, stock-based compensation costs, general and administrative costs, such as legal and accounting costs, acquisition-related integration costs, amortization and impairment of purchased intangible assets, purchase accounting adjustments made to inventory, purchased in-process research and development costs, restructuring costs, interest income, net, and other expense, net.

Video Communications


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase		September 30, 2007			September 30, 2006			Increase
Revenue	$	99,503		$	82,663		20	%	$	294,723		$	236,047		25	%
Contribution margin	$	50,296		$	42,495		18	%	$	149,962		$	117,835		27	%
Contribution margin as % of video communication revenues		51	%		51	%	—			51	%		50	%	1	pt

Revenues from our Video Communications segment for the three and nine months ended September 30, 2007 increased 20% and 25% over the same periods of 2006, respectively, due primarily to increased sales volumes and higher average selling prices of our group video systems, which consisted primarily of our VSX and HDX product family. Sales of our RPX telepresence products did not have a significant impact on revenues for the three and nine month periods ended September 30, 2007.

International revenues, or revenues outside of Canada and the U.S., accounted for 49% and 45% of our Video Communications segment revenues for the three months ended September 30, 2007 and 2006, respectively, and 52% and 49%, respectively, for the nine months ended September 30, 2007 and 2006. In both the three and nine months ending September 30, 2007, one channel partner accounted for 13% of our total revenues for our Video Communications segment.

The contribution margin as a percentage of Video Communications segment revenues for the three months ended September 30, 2007 remained flat at 51% as compared to the same period in 2006 primarily due to engineering expenses decreasing as a percent of revenues offset by lower gross margins primarily as a result of product mix and increased direct marketing expenses. Engineering and direct marketing expenses both increased in absolute dollars during the three months ended September 30, 2007 as compared to the same period in 2006 reflecting increased investments in developing and marketing our HDX and RPX product lines. The contribution margin as a percentage of Video Communications segment revenues for the nine months ended September 30, 2007 increased to 51% as compared to 50% in the same period in 2006. The increase in contribution margin was primarily due to engineering expenses decreasing as a percent of revenues, although increasing in absolute dollars in the comparable nine month periods. Direct marketing expenses also increased both in dollars and as a percentage of revenues during the nine months ended September 30, 2007 as compared to the comparable period in 2006. Gross margins remained relatively flat for the comparable nine month periods.

Direct marketing and engineering spending in the Video Communications segment will fluctuate depending upon the timing of new product launches and marketing programs.

Voice Communications


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase (Decrease)		September 30, 2007			September 30, 2006			Increase (Decrease)
Revenue	$	85,715		$	49,593		73	%	$	222,496		$	135,779		64	%
Contribution margin	$	35,249		$	21,430		64	%	$	94,510		$	60,162		57	%
Contribution margin as % of voice communication revenues		41	%		43	%	(2	)pts		42	%		44	%	(2	)pts

Revenues from our Voice Communications segment for the three and nine months ended September 30, 2007 increased 73% and 64%, respectively, over the same periods of 2006, due primarily to revenues from our SpectraLink products acquired during the first quarter of this year, as well as increased sales volumes of our Voice-over-IP products and circuit switched products. Revenues from products acquired in the SpectraLink acquisition accounted for $30.1 million and $60.3 million of the increase over the comparable three and nine month periods, respectively. Excluding SpectraLink revenues, Voice Communications segment revenues increased 12% during the three months ended September 30, 2007, as compared to the comparable period in 2006, representing a more modest growth rate than experienced over the last several years. We believe these results were due in part to the distraction of integrating the SpectraLink acquisition. Such distraction could continue to have an impact on future quarters as we complete the integration.

International revenues, or revenues outside of Canada and the U.S., accounted for 34% and 38% of our Voice Communications segment revenues for the three months ended September 30, 2007 and 2006, respectively, and 35% and 36%, respectively, for the nine months ended September 30, 2007 and 2006. The decrease in international revenues as a percentage of revenue is due primarily to increase in U.S. service revenues as a result of the SpectraLink acquisition. No one channel partner accounted for 10% or more of our Voice Communications segment revenues during the three and nine months ended September 30, 2007.

The contribution margin as a percentage of Voice Communications segment revenues for both the three and nine months ended September 30, 2007 decreased by 2 percentage points compared to the same periods in 2006. The decrease in contribution margin was primarily due to lower gross margins due to the higher mix of Voice-over-IP and wireless product revenues which generally have a lower gross margin than our circuit switched and installed voice products and increased engineering expenses which increased as a percent of revenues, as well as in absolute dollars in the three and nine months ended September 30, 2007 as compared to the same period in 2006 due primarily to the SpectraLink acquisition at the end of the first quarter of this year. The wireless products we acquired from SpectraLink have a lower gross margin than the consolidated gross margin of our other voice communications products and depending upon the mix could result in lower Voice Communications gross margins in the future. Direct marketing spending increased in absolute dollars in both the three and nine month periods ended September 30, 2007, while decreasing as a percentage of revenues in the three month period and increasing as a percentage of revenues in the nine month period.

Direct marketing and engineering spending in the Voice Communications segment will fluctuate depending upon the timing of new product launches and marketing programs.

Network Systems


	Three Months Ended						Increase		Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase		September 30, 2007			September 30, 2006			Decrease
Revenue	$	21,761		$	20,154		8	%	$	61,134		$	64,093		(5	)%
Contribution margin	$	5,192		$	4,269		22	%	$	12,555		$	15,285		(18	)%
Contribution margin as % of network systems revenues		24	%		21	%	3	pts		21	%		24	%	(3	)pts

Revenues from our Network Systems segment for the three and nine months ended September 30, 2007 increased 8% and decreased 5%, respectively, over the same periods in 2006. Network systems product revenues grew for the second consecutive quarter as compared to the respective year ago periods after several quarters of revenue declining year over year, growing 8% year over year although contributing only 2% of the overall growth in revenue during the period. The increase in the three months ended September 30, 2007 over the comparable period in 2006 was due primarily to increases in our audio network system sales, which were partially offset by decreases in our video network systems and software product sales. The decrease in the nine months ended September 30, 2007 over the comparable period in 2006 was due to decreased audio network systems revenues, which was partially offset by increases in revenues from our video network systems and software product sales. The decline in audio network systems revenues in the nine months ended September 30, 2007, over the same periods in 2006, is due to lower volumes and lower average selling prices per port, primarily due to the consolidation of service provider customers, customer capacity requirements and the discontinuance of the OCI product line. The increase in video network systems revenues in the nine months ended September 30, 2007, over the same periods in 2006, was due to increased volume, partially offset by decreased average selling prices.

International revenues, or revenues outside of Canada and the U.S., accounted for 44% and 43% of our Network Systems segment revenues for the three months ended September 30, 2007 and 2006, respectively, and 43% and 42%, respectively, for the nine months ended September 30, 2007 and 2006. For the three and nine months ended September 30, 2007, one customer accounted for 22% and 16%, respectively, of our Network Systems segment revenues.

The contribution margin as a percentage of Network Systems segment revenues for the three months ended September 30, 2007 increased to 24% as compared to 21% in the same period in 2006 as a result of lower engineering expenses, in absolute dollars and as a percentage of revenue, partially offset by lower gross margins. Direct marketing expenses increased in absolute dollars and as a percentage of revenue during the comparable three month periods. The contribution margin as a percentage of Network Systems segment revenues for the nine months ended September 30, 2007 decreased to 21% as compared to 24% in the same period in 2006 due primarily to lower gross margins, which was partially offset by lower

engineering and direct marketing expenses. Gross margins for Network Systems were lower in the three and nine months ending September 30, 2007 compared to the same periods in 2006 primarily due to decreased audio network system revenues which typically have a higher gross margin due to their software content and lower average selling prices on video network systems.

Services


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2007			September 30, 2006			Increase		September 30, 2007			September 30, 2006			Increase
Revenue	$	33,068		$	20,798		59	%	$	88,264		$	59,957		47	%
Contribution margin	$	14,528		$	8,773		66	%	$	38,116		$	24,441		56	%
Contribution margin as % of services revenues		44	%		42	%	2pts			43	%		41	%	2pts

Revenues from our Services segment for the three and nine months ended September 30, 2007 increased 59% and 47%, respectively, over the same period in 2006, due primarily to increased revenues from our SpectraLink acquisition in the first quarter of 2007 as well as increased video related services. Revenues from services related to products acquired in the SpectraLink acquisition accounted for $7.7 million and $16.0 million, respectively, of the increase over the three and nine month year ago periods.

International revenues, or revenues outside of Canada and the U.S., accounted for 29% and 34% of total Service revenues for the three months ended September 30, 2007 and 2006, respectively and 30% and 33%, respectively, for the nine months ended September 30, 2007 and 2006. The decrease in international revenues as a percentage of revenues is due primarily to an increase in U.S. service revenues as a result of the SpectraLink acquisition. No one customer accounted for more than 10% of our total revenues for our Services segment for the three or nine months ended September 30, 2007.

Overall, the increase in the Services segment contribution as a percentage of Services segment revenues for the three and nine months ended September 30, 2007 as compared to the same periods in 2006 is due primarily to increased gross margins more than offsetting increases in operating expenses. Service gross margins increased for the three and nine months ended September 30, 2007 as compared to the same periods in 2006 as a result of revenue increasing at a faster pace than related service costs.

Liquidity and Capital Resources

As of September 30, 2007, our principal sources of liquidity included cash and cash equivalents of $248.0 million, short-term investments of $77.9 million and long-term investments of $45.5 million. Substantially all of our short-term and long-term investments are comprised of U.S. government securities, state and local government securities and corporate debt securities. See Note 14 of Notes to our Condensed Consolidated Financial Statements. In addition, we have a $25.0 million line of credit with a bank which was unused at September 30, 2007 and expires on December 3, 2007. We do not intend to renew this line of credit. We have outstanding letters of credit totaling approximately $1.6 million that are in place to satisfy certain of our facility lease requirements.

We generated cash from operating activities totaling $93.8 million in the nine months ended September 30, 2007, compared to $104.0 million in the comparable period of 2006. The decrease in cash provided from operating activities for the nine months ended September 30, 2007 over the comparable period in 2006 was due primarily to larger increases in trade receivables, inventories and prepaids and other assets, a decrease in accounts payable and smaller increases in taxes payable and other accrued liabilities. Offsetting these negative effects were increases in net income and non-cash expenses as well as a decrease in deferred taxes.

The total net change in cash and cash equivalents for the nine months ended September 30, 2007 was a decrease of $68.4 million. The primary uses of cash during this period were $275.6 million for the acquisitions of Destiny and SpectraLink, $75.8 million for repurchases of common stock and $23.1 million for purchases of property and equipment. The primary sources of cash were $93.8 million from operating activities, $63.2 million associated with the exercise of stock options and purchases under the employee stock purchase plan, $14.2 million for the excess tax benefit from stock based compensation and $135.1 million in proceeds from sales and maturities of investments, net of purchases. The positive cash from operating activities was primarily the result of net income, adjusted for non-cash expenses and other items such as depreciation, amortization, the provision for doubtful accounts, inventory write-downs for excess and obsolescence, non-cash stock based compensation, excess tax benefit from stock based compensation, loss on strategic investments, the purchases of in-process research and development and loss on disposal of property and equipment, reductions in deferred taxes and increases in taxes payable and other accrued liabilities. Offsetting the positive effect of these items were net increases in trade receivables, inventories and prepaid expenses and other assets, as well as net decreases in accounts payable.

Our days sales outstanding, or DSO, metric was 46 days at September 30, 2007 compared to 39 days at September 30, 2006. This increase in DSO was due primarily to fluctuations in revenue linearity and the addition of SpectraLink receivables. We expect that DSO will remain in the 40 to 50 day range but could vary as a result of a number of factors such as fluctuations in revenue linearity and increases in receivables from service providers and government entities that have longer payment terms of 45 and 60 days, respectively, compared to our standard 30 day terms. Inventory turns decreased from 6.0 turns at September 30, 2006 to 5.5 turns at September 30, 2007. The reduction in turns primarily reflects our acquisition of SpectraLink in the first quarter of 2007 and related inventory at lower turns rates. We believe inventory turns will continue to fluctuate depending on our ability to reduce lead times, as well as changes in product mix and a greater mix of ocean freight versus air freight to reduce freight costs.

As part of the Destiny Conferencing acquisition, Destiny shareholders may receive up to an additional $10.0 million of consideration through 2008, payable in cash, based on achievement of certain financial milestones relating to the operating results of Destiny.

As part of the DSTMedia acquisition, DSTMedia shareholders may receive up to an additional $20.0 million of consideration through 2008, payable in cash, based on the achievement of certain financial milestones relating to the operating results of DSTMedia.

From time to time, the Board of Directors has approved plans to purchase shares of our common stock in the open market. During the three and nine months ended September 30, 2007, we purchased approximately 1.6 million and 2.4 million shares of our common stock in the open market for cash of $50.0 million and $75.7 million, respectively. As of September 30, 2007, we were authorized to purchase up to an additional $190.0 million under the 2007 share repurchase plan.

At September 30, 2007, we had open purchase orders related to our contract manufacturers and other contractual obligations of approximately $130.6 million primarily related to inventory purchases. We also currently have commitments that consist of obligations under our operating leases. In the event that we decide to cease using a facility and seek to sublease such facility or terminate a lease obligation through a lease buyout or other means, we may incur a material cash outflow at the time of such transaction, which will negatively impact our operating results and overall cash flows. In addition, if facilities rental rates decrease or if it takes longer than expected to sublease these facilities, we could incur a significant further charge to operations and our operating and overall cash flows could be negatively impacted in the period that these changes or events occur.

These purchase commitments and lease obligations are reflected in our Condensed Consolidated Financial Statements once goods or services have been received or at such time when we are obligated to make payments related to these goods, services or leases. In addition, our bank has issued letters of credit to secure the leases on some of our offices. These letters of credit total approximately $1.6 million and are secured by our credit facilities or cash deposits with our banks.

The table set forth below shows, as of September 30, 2007, the future minimum lease payments, net of estimated sublease income of less than $0.1 million through June 2008, due under our current lease obligations. For example, we lease an approximately 152,000 square foot building which is fully subleased to a third party for a term that is concurrent with the term of our lease obligation. As a result, we are not currently showing a lease obligation related to this facility. If this sublease were to be terminated, or if the tenant defaulted on payment, we would incur additional lease payments that would negatively impact our operating results and overall cash flows. In addition to these minimum lease payments, we are contractually obligated under the majority of our operating leases to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance. Our contractual obligations as of September 30, 2007 are as follows (in thousands):


Year ending December 31,	Gross Minimum Lease Payments		Estimated Sublease Receipts			Net Minimum Lease Payments		Projected Annual Operating Costs		Other Long- Term Liabilities		Purchase Commitments
Remainder of 2007	$	3,469	$	(15	)	$	3,454	$	848	$	—	$	67,746
2008		13,394		(30	)		13,364		3,347		505		61,195
2009		12,568		—			12,568		3,163		1,664		843
2010		12,073		—			12,073		2,663		2,106		801
2011		11,671		—			11,671		2,432		1,441		—
Thereafter		21,815		—			21,815		4,026		6,278		—

Total payments	$	74,990	$	(45	)	$	74,945	$	16,479	$	11,994	$	130,585

As discussed in Note 15 of the Notes to the Condensed Consolidated Financial Statements, we adopted the provisions of FIN 48 as of January 1, 2007. At January 1, 2007, we had a liability for unrecognized tax benefits and an accrual for the related interest totaling $61.5 million, none of which is expected to be due within the next 12 months.

We believe that our available cash, cash equivalents, investments and bank line of credit will be sufficient to meet our operating expenses and capital requirements for the foreseeable future. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.

Off-Balance Sheet Arrangements

As of September 30, 2007, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our process used to develop estimates, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

Revenue Recognition and Product Returns

We recognize revenue when persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met. Additionally, we recognize extended service revenue on our hardware and software products as the service is performed, generally one to five years.

Our video communications and network systems products are integrated with software that is essential to the functionality of the equipment. Additionally, we provide unspecified software upgrades and enhancements related to most of these products through our maintenance contracts. Accordingly, we account for revenue for these products in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” and all related interpretations.

We use the residual method to recognize revenue when an agreement includes one or more elements to be delivered at a future date. If there is an undelivered element under the arrangement, we defer revenue based on vendor-specific objective evidence of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If vendor-specific objective evidence of fair value does not exist for all undelivered elements, we defer all revenue until sufficient evidence exists or all elements have been delivered.

We accrue for sales returns and other allowances as a reduction to revenues upon shipment based upon our contractual obligations and historical experience.

Channel Partner Programs and Incentives

We record estimated reductions to revenues for channel partner programs and incentive offerings including special pricing agreements, promotions and other volume-based incentives. If market conditions were to decline or competition were to increase further, we may take future actions to increase channel partner incentive offerings, possibly resulting in an incremental reduction of revenues at the time the incentive is offered. Co-op marketing funds are accounted for in accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s

Products.” Under these guidelines, we accrue for co-op marketing funds as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues.

Warranty

We provide for the estimated cost of product warranties at the time revenue is recognized. Our warranty obligation is affected by estimated product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revision of the estimated warranty liability would be required.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review our allowance for doubtful accounts quarterly by assessing individual accounts receivable over a specific aging and amount, and all other balances on a pooled basis based on historical collection experience. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable.

Excess and Obsolete Inventory

We record write downs for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future product life-cycles, product demand and market conditions. If actual product life cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of or increase in that newly established cost basis.

Stock-based Compensation Expense

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values in accordance with SFAS 123(R), which requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. Our determination of fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our Consolidated Statements of Operations.

Prior to the adoption of SFAS 123(R), we accounted for employee equity awards and employee stock purchases using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in our Consolidated Statements of Operations, other than as related to acquisitions, because the exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Deferred and Refundable Taxes

We estimate our actual current tax expense together with our temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance against these tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a valuation allowance in a period, we must include and expense the allowance within the tax provision in the consolidated statement of operations. As of September 30, 2007, we have $53.0 million in net deferred tax assets. In order to fully utilize these deferred tax assets we need to generate sufficient amounts of future U.S. taxable income. We believe based upon our financial projections that it is more likely than not that we will generate sufficient future taxable income to utilize these assets and therefore, as of September 30, 2007, we have not established a valuation allowance against these assets.

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires us to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained. Upon adoption, we decreased our reserves for uncertain tax positions by $12.6 million. A $3.4 million decrease in relation to interest and penalties and various tax reserves was accounted for as a cumulative adjustment to the beginning balance of retained earnings. A $9.2 million decrease related to pre-acquisition tax reserves was accounted for as an adjustment to goodwill. In addition, we recognized certain net operating loss carryovers of PictureTel that had not been recognized previously. This resulted in the establishment of a deferred tax asset of $40.4 million and a corresponding reduction in goodwill. We continue to follow the practice of recognizing interest and penalties related to income tax matters as a part of provision for income taxes.

Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations

The purchase combinations completed require us to identify and estimate the fair value of the assets acquired, including intangible assets other than goodwill, and liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. For example, in the PictureTel and SpectraLink acquisitions, we identified vacated or redundant facilities that we intended to sublease or for which we intended to negotiate a lease termination settlement. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair value would be required. Changes occurring in our estimates after the allocation period, as defined in Statement of Financial Accounting Standards No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”, would be recognized in our Condensed Consolidated Statements of Operations. If actual costs are less than our estimates, these charges would continue to be recognized as an adjustment to goodwill.

Goodwill and Purchased Intangibles

We assess the impairment of goodwill and other indefinite lived intangibles at least annually unless impairment indicators exist sooner. We assess the impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include the following:

•

significant underperformance relative to projected future operating results;

•

significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

•

significant negative industry or economic trends.

If we determine that the carrying value of goodwill and other indefinite lived intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would typically measure any impairment based on a projected discounted cash flow method using a discount rate determined by us to be commensurate with the risk inherent in our current business model.

In the fourth quarter of 2006, we completed our annual goodwill impairment test. The assessment of goodwill impairment was conducted by determining and comparing the fair value of our reporting units, as defined in SFAS 142, to the reporting unit’s carrying value as of that date. Based on the results of these impairment tests, we determined that our goodwill assets were not impaired as of December 31, 2006.

We assess our purchased intangibles for impairment on an ongoing basis. The assessment of purchased intangibles impairment is conducted by first estimating the undiscounted expected future cash flows to be generated from the use and eventual disposition of the purchased intangibles and comparing this amount with the carrying value of these assets. If the undiscounted cash flows are less than the carrying amounts, impairment exists, and future cash flows are discounted at an appropriate rate and compared to the carrying amounts of the purchased intangibles to determine the amount of the impairment. Based on events in the fourth quarters of 2006 and 2005, we performed an assessment of our purchased intangibles and we determined that certain purchased intangible assets acquired as part of the Voyant acquisition had been impaired as of December 31, 2006 and 2005 and we recorded impairment charges of approximately $1.4 million and $1.9 million, respectively. Screening for and assessing whether impairment indicators exist or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires significant judgment. Additionally, changes in the high-technology industry occur frequently and quickly. Therefore, there can be no assurance that a charge to operations will not occur as a result of future goodwill and purchased intangible impairment tests.

Non-marketable Securities

We periodically make strategic investments in companies whose stock is not currently traded on any stock exchange and for which no quoted price exists. The cost method of accounting is used to account for these investments as we hold a non-material ownership percentage. We review these investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to us that an impairment exists may be a significant decrease in the market value of the company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash flow losses combined with a history of operating or cash flow losses or projections and forecasts that demonstrate continuing losses associated with the company’s future business plans. Impairment indicators identified during the reporting period could result in a significant write down in the carrying value of the investment if we believe an investment has experienced a decline in value that is other than temporary. For example, to date, due to these and other factors, we have recorded cumulative charges against earnings totaling $21.5 million associated with the impairment of these investments, including $7.4 million in the second quarter of 2007. At September 30, 2007 and December 31, 2006, our strategic investments had a carrying value of $1.7 million and $8.9 million, respectively.

Derivative Instruments

The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We enter into derivatives only with counterparties that are among the largest U.S. banks, ranked by assets, in order to minimize our credit risk.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), “Fair Value Measurements”, which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 will be effective in the first quarter of our 2008 fiscal year with early adoption permitted. We have not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on our financial statements.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and bank borrowings. The investment portfolio includes highly liquid, high-quality instruments. Some investments in the portfolio may contain an embedded derivative, and interest rate hedges may be placed if they are tied to a specific investment or group of investments in accordance with our Investment Policy; however, they are generally not significant.

The estimated fair value of our cash and cash equivalents approximates the principal amounts reflected in our Consolidated Balance Sheets based on the short maturities of these financial instruments. Short-term and long-term investments consist of U.S., state and municipal government obligations and foreign and domestic public corporate debt securities. If we sell our investments prior to their maturity, we may incur a charge to operations in the period the sale takes place.

The following tables present the hypothetical changes in fair values in the securities, excluding cash and cash equivalents, held at September 30, 2007 that are sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS) and 100 BPS over six and twelve-month time horizons.

The following table estimates the fair value of the portfolio at a twelve-month time horizon (in thousands):


	Valuation of Securities Given an Interest Rate Decrease of X Basis Points						Valuation of Securities Given an Interest Rate Increase of X Basis Points
Issuer	100 BPS		50 BPS		Current Fair Market Value		50 BPS		100 BPS
U.S. Government Securities	$	21,135	$	21,122	$	21,108	$	21,095	$	21,082
State and local governments		10,390		10,383		10,377		10,370		10,364
Corporate debt securities		92,095		92,037		91,979		91,921		91,863

Total	$	123,620	$	123,542	$	123,464	$	123,386	$	123,309

The following table estimates the fair value of the portfolio at a six-month time horizon (in thousands):


	Valuation of Securities Given an Interest Rate Decrease of X Basis Points						Valuation of Securities Given an Interest Rate Increase of X Basis Points
Issuer	100 BPS		50 BPS		Current Fair Market Value		50 BPS		100 BPS
U.S. Government Securities	$	21,122	$	21,115	$	21,108	$	21,102	$	21,095
State and local governments		10,383		10,380		10,377		10,373		10,370
Corporate debt securities		92,037		92,008		91,979		91,950		91,921

Total	$	123,542	$	123,503	$	123,464	$	123,425	$	123,386

Foreign Currency Exchange Rate Risk

While the majority of our sales are denominated in United States dollars, we also sell our products and services in certain European regions in Euros and in British Pounds, which has increased our foreign currency exchange rate fluctuation risk.

While we do not hedge for speculative purposes, as a result of our exposure to foreign currency exchange rate fluctuations, we purchase forward exchange contracts to hedge our foreign currency exposure to the Euro, British Pound and Israeli Shekel. As of September 30, 2007, we had outstanding forward exchange contracts to sell 0.5 million Euros at 1.16, sell 1.4 million British Pounds at 2.03, and buy 2.3 million Israeli Shekels at 4.14. These forward exchange contracts hedge our net position of foreign currency-denominated receivables, payables and cash balances and typically mature in one month.

We also have a cash flow hedging program under which we hedge a portion of anticipated revenues and operating expenses denominated in the Euro, British Pound and Israeli Shekels. As of September 30, 2007, we had outstanding foreign exchange contracts to sell 13.7 million Euros at 1.33 and 2.1 million British Pounds at 1.93 and to buy 36.9 million Israeli Shekels at 4.16. These forward exchange contracts, carried at fair value, typically have maturities of less than 6 months.

As a result of our acquisition of SpectraLink, we now have operations in Horsens, Denmark. From time to time, we enter into foreign currency contracts to reduce our exposure to foreign-denominated inventory purchases made by the Denmark operation. For the three and nine months ended September 30, 2007, the gains from these foreign currency exchange contracts were not significant. Changes in fair value of these forward contracts are recognized in other income (loss), net at the end of each period and were not material for the periods presented.

Based on our overall currency rate exposure as of September 30, 2007, a near-term 10% appreciation or depreciation in the United States Dollar, relative to our foreign local currencies, would have an immaterial effect on our financial position, results of operations and cash flows. We may also decide to expand the type of products we sell in foreign currencies or may, for specific customer situations, choose to sell in foreign currencies in our other regions, thereby further increasing our foreign exchange risk.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to Polycom’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in internal control over financial reporting.

On March 26, 2007, we acquired SpectraLink Corporation and, as a result, we have begun integrating the processes, systems and controls relating to the acquired company into our existing system of internal control over financial reporting in accordance with our integration plans. In addition, various transitional controls designed to supplement existing internal controls have been implemented with respect to the acquired processes and systems. Except for the processes, systems and controls relating to the integration of SpectraLink, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we expect to face an increasing number of patent and other intellectual property claims as the number of products and competitors in Polycom’s industry grows and the functionality of video, voice, data and web conferencing products overlap. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all. Based on currently available information, management does not believe that the ultimate outcomes of these unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, litigation is subject to inherent uncertainties, and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations or liquidity for the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

Item 1A.

RISK FACTORS

INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OR ALL OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE SIGNIFICANTLY DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT. IN ASSESSING THESE RISKS, INVESTORS SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

If we fail to compete successfully domestically and internationally, our business and results of operations would be significantly harmed.

Competition that we face in our markets is intense. The principal competitive factors in the markets in which we presently compete and may compete in the future include:

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the ability to provide and sell a broad range of products and services that are responsive to changing technology and changing customer requirements;

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product performance;

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price;

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the ability to introduce new products;

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the ability to reduce production costs;

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the ability to provide value-added features;

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the ability to successfully integrate our products with, and operate our products on, existing customer platforms;

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the ability to offer new products that require a more direct, high touch sales model;

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market presence and brand recognition; and

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the ability to extend credit to our partners.

We may not be able to compete successfully against our current or future competitors. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved performance characteristics. New product introductions by our current or future competitors, or our delay in bringing new products to market to compete with competitive products, could cause a significant decline in sales or loss of market acceptance of our existing products and future products. We believe that the possible effects from ongoing competition may be a reduction in the prices of our products and our competitors’ products, the introduction of additional lower priced competitive products or the introduction of new products or product platforms that render our existing products or technologies obsolete. For example, our video network systems product revenues had declined sequentially since the fourth quarter of 2004 until the second quarter of 2006, as a result of sales lost to competitors as well as lower average selling prices due in part to competitive pressures. While revenues from our video network systems product revenues improved sequentially in the third and fourth quarters of 2006, video network system product revenues were lower in the first quarter of 2007 than the fourth quarter of 2006, and could decline again in the future.

Competition that we face in our markets is intense and competition that we face in certain of our international markets is different than that we face in North America and is currently based principally on price. We have noted additional competitors and increased pricing pressures in China, India and other parts of Asia. Although we have had improved year over year performance in Asia throughout 2006 and the first half of 2007, we still see increased competition in this region, particularly in China. If we are unable to compete effectively in these regions in terms of price, technology (where we believe the barriers to entry are getting lower), product offerings or marketing strategies, our overall financial results may suffer.

Competition in each of our markets is intense, and our inability to compete effectively in any of these markets could negatively affect our results of operations.

We face significant competition in the communications industry. In video communications, our major competitors include Tandberg and a number of other companies including Aethra, Avistar, Cisco Systems, D-Link, Hewlett-Packard, Huawei, Kedacom Technologies, LifeSize, NEC, Panasonic, Sony, VCON, VTEL and ZTE, as well as various smaller or new industry entrants. We face competition for sales of our RPX™ and TPX™ telepresence solutions and related services against competitive product offerings from Cisco Systems, Hewlett-Packard, Teleris and others. In addition, Microsoft has announced that it will be launching products that will be competitive with our video conferencing products. Some of these companies have substantial financial resources and production, marketing, engineering and other capabilities with which to develop, manufacture, market and sell their products, which may result in us having to increase our spending on marketing and we may not be able to effectively compete against these companies due to our size. In addition, with advances in telecommunications standards, connectivity and video processing technology, next generation high definition video resolution technology and the increasing market acceptance of video communications, other established or new companies may develop or market products competitive with our video conferencing products, including companies with greater financial or other resources, greater brand recognition or greater access to top-level executives than we have, or may partner with companies which have more substantial financial resources and production, sales, marketing, engineering and other capabilities with which to develop, manufacture, market or sell their products and to bring their products to market more rapidly than we can, or that may be more adept in responding to rapidly changing market conditions or changing technologies than we are. We may also underestimate the demand for particular products that incorporate new technologies. These factors could negatively impact our video revenues as customers assess such new technologies or wait to make purchases until sales prices for such next generation products fall. Conversely, new product adoption may grow at such rates that we are unable to

keep up with increasing demand due to our size, resources, need to establish new partnerships, or other factors. Also, new strategic partnerships are regularly being formed and announced by our competitors, such as the video partnership announced in January 2007 between Hewlett-Packard and Tandberg, which may increase competition and result in increased downward pressure on our product prices. Direct competition for telepresence product sales against larger competitors like Cisco Systems and Hewlett Packard may also result in increased downward pressure on our product prices.

We have lost group video conferencing sales opportunities to our competitors, including Tandberg and to competitors in China who sell at lower price points than we do. Although we had improved year over year performance in Asia throughout 2006 and the first three quarters of 2007, we still see increased competition in this region, particularly in China, which we believe contributed to a sequential decrease in group video conferencing unit sales in Asia in the third quarter of 2006. We expect to continue to face stiff competition, and our competitors may gain market share from us, due in part to their strategic relationships and their latest product offerings. In addition, we believe we will face increasing competition from alternative video communications solutions that employ new technologies or new combinations of technologies from companies such as Cisco Systems, Hewlett-Packard, IBM, and Microsoft that enable web-based or network-based video and collaboration communications. In addition, Cisco Systems, Hewlett-Packard, IBM, Microsoft or another large multi-national company with resources substantially larger than ours, could enter any of our markets through acquisition of a direct competitor, which would significantly change the competitive landscape. For example, Cisco Systems recently acquired WebEx, a leader in web conferencing, and it is difficult to ascertain what effect, if any, this acquisition will have on us. Further, the commoditization of certain video conferencing products could lead to the availability of alternative, lower-cost video conferencing products than ours and, accordingly, drive down our sales prices and negatively impact our revenues.

The market for voice communications equipment, including voice conferencing and desktop equipment, is highly competitive and also subject to rapid technological change, regulatory developments and emerging industry standards. We expect competition to persist and increase in the future in this area. In voice communications, our major conference phone competitors include Aethra, ClearOne Communications, LifeSize, Konftel, Mitel, Yamaha and other companies that offer lower cost, full-duplex speakerphones. Our major VoIP desktop competitors include Aastra, Cisco Systems and Linksys, a division of Cisco Systems. There are also several low cost manufacturers in Asia and Europe that are emerging with VoIP desktop products competitive with ours. We have also recently introduced a range of high definition VoIP devices from personal speakerphones to executive desktop devices enabling integration with Microsoft Office Communications Server 2007. Some of these products will directly compete with products offered by LG Nortel. In addition, there are PBX and IP Call Manager manufacturers that compete with standards based IP products including Alcatel, Avaya, Cisco Systems, Mitel, Nortel and Siemens. Furthermore, all major telephony manufacturers produce hands-free speakerphone units that cost less than our voice communications products

With respect to our recently acquired SpectraLink product lines, our product competition falls into four general categories: multi-user cordless telephone products, unlicensed multi-cell systems, cellular-based systems, and WLAN-based systems. We also now compete in the residential market (both wired and wireless DECT systems) primarily in Europe. Our primary competitors include Cisco Systems, Samsung and Hitachi Cable. The overall market in the consumer segment is highly competitive, and many of such competitors may have greater financial, technical, research and development, and marketing resources than we do. In addition, mature DECT standard-based products previously marketed by large telecom companies in markets outside the U.S. are being introduced in the U.S., which may be lower-priced than our Link and NetLink offerings. Enterprise adoption of standards for wireless LAN and VoIP may lead to the commoditization of wireless telephone technology and the availability of low-cost alternative products. Other purchasers may prefer to buy their wireless telephone systems from a single source provider of wireless local area networks, or LANs, such as Cisco Systems, who provides wireless infrastructure and wireless telephones.

Our video network systems business has significant direct competition from RADVISION, and a number of other companies, including Cisco Systems, which resells RADVISION’s products, Tandberg, Huawei, and Codian, which was recently acquired by Tandberg, as well as from various smaller or new industry entrants. Tandberg’s acquisition of Codian may strengthen their network systems offerings and result in increased competition from Tandberg against our total video solutions offering, potentially causing a negative impact on our video solutions revenues, as well as, our market position with respect to video conferencing and network systems offerings. Our video network systems product revenues declined sequentially from the fourth quarter of 2004 until the second quarter of 2006 as a result of sales lost to competitors as well as lower average selling prices due in part to competitive pressures. Our audio network systems business has significant competition from companies such as Avaya, Cisco Systems, and Compunetix. Although we recently launched our next generation video network system platform (RMX 2000™) and intend to launch new network services product offerings, including enhancements to existing products, in the future, these new product offerings may be delayed or may not have as much of a positive impact on our network systems revenues as we anticipate.

For our services business, we do not currently experience any significant competition from any third party maintenance and support companies, although many of our competitors in our various product lines offer strong service offerings, particularly in overseas markets. We also may not be as well-situated as these competitors to scale and to compete as effectively in our services business, particularly in the international arena. Third party maintenance companies may become a threat to our service base in the future, as the industry grows and they look at our products as potential third party service revenue streams, in addition to trying to provide one service solution to their customers. Today, some of our channel partners resell Polycom maintenance and support services, while others sell their own maintenance and support services. To the extent that channel partners sell their own services rather than ours, although they purchase maintenance contracts from us to support their service offering, these partners compete with us. In addition, as we expand our professional services offerings, we may compete more directly with system integrators. In addition, it is possible that we will see increased competition in all of our product lines to the extent that one or more of our competitors join together either through mutual agreement or acquisitions to form new partnerships to compete against us. These competitors on a stand-alone basis or on a combined basis could have more substantial financial resources and production, sales, marketing, engineering and other capabilities with which to develop, manufacture, market and sell their products.

We face risks associated with developing and marketing our products, including new product development and new product lines that require a more direct, high-touch sales model.

Our success depends on our ability to assimilate new technologies in our products and to properly train our channel partners ,sales force and end user customers in the use of those products.

The markets for video and voice communications and network systems products are characterized by rapidly changing technology, such as the recent demand for high definition video technology and lower cost network systems products, evolving industry standards and frequent new product introductions. The success of our new products depends on several factors, including proper new product definition, product cost, timely completion and introduction of new products, proper positioning of new products in relation to our total product portfolio and their relative pricing, differentiation of new products from those of our competitors, and market acceptance of these products. Additionally, properly addressing the complexities associated with compatibility issues, channel partner and sales force training, technical and sales support, as well as field support, are also factors that may affect our success.

Further, as our product portfolio expands and as we enter into product lines that require a more direct, high-touch sales model and that require more complex negotiations, such as our RPX product line, we are making key strategic investments in additional sales and marketing personnel. It will require time for us to hire additional key sales and marketing talent in such numbers that we believe are required to compete effectively both domestically and internationally and then further time for such new personnel to receive training and to become familiar with our product lines and services. Ultimately, it is possible that our increased investments in this area may not yield the financial results that we hope to achieve from such investments or we may not be able to hire the type of sales and marketing talent that we intend to hire.

We continually need to educate and train our channel partners to avoid any confusion as to the desirability of the new product offering compared to our existing product offerings. During the last year, we launched several new product offerings, and there is a risk that these new products could cause confusion among our channel partners and end-users, thereby causing them to delay purchases of any product until they determine if these products are more desirable products than our other products. For instance, in 2005, we introduced the VSX7000e and VSX7000s as successors to our VSX 7000 product, which caused confusion among certain of our channel partners, some of whom delayed purchases of these new product offerings until they better understood the features and functionality of these products. Similarly, our recently introduced high definition video product family (HDX) may cause confusion with respect to our VSX^® product line. We also recently introduced our RMX 2000™ conferencing platform, which provides the next generation of conferencing infrastructure and may cause confusion with respect to our MGC™ media servers, and the HDX4000™, our high definition executive desktop product, which could have a negative impact on sales of our existing executive desktop product. We believe that the anticipated announcement of our HDX8000™ video conferencing product, our high definition video conferencing product for small- to medium-sized conference rooms, temporarily delayed sales of our HDX9000™ video conferencing product, our high definition video conferencing product intended for larger conference room settings. Such delays in purchases could adversely affect our revenues, gross margins and operating results in the period of the delay. Conversely, the introduction of new products such as the HDX8000 video conferencing product may have an unintended negative effect on sales of and corresponding revenues associated with other video conferencing products such as our VSX and other HDX offerings. We and our channel partners must also effectively educate our potential end user customers about the benefits of video conferencing and the products that we offer and the features available over those of our competitors, including reliability and ease of use.

The shift in communications from circuit-switched to IP-based technologies over time may require us to add new channel partners, enter new markets and gain new core technological competencies. We are attempting to address these needs and the need to develop new products through our internal development efforts, through joint developments with other companies and through acquisitions. We may not identify successful new product opportunities and develop and bring products to market in a timely manner. Further, as we introduce new products that can or will render existing products obsolete, these product transition cycles may not go smoothly, causing an increased risk of inventory obsolescence and relationship issues with our end user customers and channel partners. The failure of our new product development efforts, any inability to service or maintain the necessary third-party interoperability licenses, our inability to properly manage product transitions or to anticipate new product demand, or our inability to enter new markets would harm our business and results of operations.

We may experience delays in product introductions and our products may contain defects which could seriously harm our results of operations.

We have experienced delays in the introduction of certain new products and enhancements in the past and have recently experienced delays in the introduction of certain of our high definition video conferencing products, such as the HDX9000. The delays in product release dates that we experienced in the past were due to factors such as unforeseen technology issues, manufacturing ramping issues and other factors, which we believe negatively impacted our sales revenue in the relevant periods. Any of these or other factors may occur again and delay our future product releases. In addition, we have occasionally terminated new product development efforts prior to any introduction of the new product.

Our video communications product development group is located in Massachusetts and Texas, our voice communications product development group is dispersed among California, Colorado, Georgia, Massachusetts, Canada, Denmark and India, and our network systems product development group is dispersed among Colorado, Georgia and Israel. Our need to manage large and geographically dispersed product development groups in our product lines results in certain inefficiencies and increased product development costs and creates an increased risk of delays in new product introductions.

We produce highly complex communications equipment, which includes both hardware and software and incorporates new technologies and component parts from different suppliers. Resolving product defect and technology issues could cause delays in new product introduction. In addition, many of the complex products that we now provide due to our SpectraLink acquisition can only be fully tested when deployed in “live” existing wireless networks. As a result, end-users may only discover defects or errors or experience breakdowns in their networks after the products have been deployed. Further, if such defects are not detected or cured prior to a new product launch, or are detected after a product has already been launched and cannot be cured or result in a product recall, such as our voluntary recall of the lithium ion batteries in our SoundStation 2W™ products in the first quarter of 2006, these events could result in the failure of a partial or entire product line or a temporary or permanent withdrawal of a product from the market. We may also have to invest significant capital and other resources to correct these problems, including product reengineering expenses and inventory, warranty and replacement costs. These problems might also result in claims against us by our customers or others.

Any delays in the future for new product offerings currently under development or any product defect issues or product recalls could adversely affect the market acceptance of these products (and correspondingly result in loss of market share), our ability to compete effectively in the market, and our reputation, and therefore, could lead to decreased product sales and could seriously harm our results of operations. We may also experience cancellation of orders, difficulty in collecting accounts receivable, increased service and warranty costs in excess of our estimates, diversion of resources and increased insurance costs and other losses to our business or to end-user customers.

We face risks related to the adoption rate of new technologies.

We have invested significant resources developing products that are dependent on the adoption rate of new technologies. For example, our SoundStation IP™ and SoundPoint IP™ products are dependent on the roll out of voice-over-IP, or VoIP, technologies. In addition, VoIP products are traditionally sold through service providers. We may not be successful in expanding our current service provider network or maintaining a successful service provider network. The success of our HDX4000™, VSX 3000™ and PVX™ software application products depends on the increased use of desktop video collaboration technologies. Further, as we see the adoption rate of new technologies increase, product sales of our legacy products may be negatively impacted. Due to the SpectraLink acquisition, we now face risks related to our ability to respond to rapid technological changes within the on-premises wireless telephone industry. The wireless communications industry is characterized by rapid technological change, short product life cycles, and evolving industry standards.

The success of all of our products is also dependent on how quickly Session Initiation Protocol (or SIP), which is a signaling protocol for Internet conferencing, telephony, presence, events notification and instant messaging, firewall and Network Address Translation (or NAT) traversal, which is an Internet standard that enables a local-area network (or LAN) to use one set of IP addresses for internal traffic and a second set of addresses for external traffic, and call management integration technologies are deployed as new technologies and how quickly we adopt and integrate these new technologies into our existing and future products. The success of our V2IU™ and firewall traversal solutions will depend on market acceptance and the effect of current and potential competitors and competitive products.

In addition, we continue to expend significant resources to develop new products or product enhancements based upon anticipated demand for new features and functionality, such as next generation high definition video resolution technology. We may not be able to sell certain of our products in significant volumes and our business may be harmed if the use of new technologies that our future products are based on does not occur, if the development of suitable sales channels does not occur, or occurs more slowly than expected, if our products that incorporate new technologies are not priced competitively or are not readily adopted, or if the adoption rates of such new technologies do not drive demand for our other products as we anticipate. For example, although we believe increased sales of group and desktop video solutions will drive increased demand for video network system products, such increased demand may not occur or we may not benefit to the same extent as our competitors. We also may not be successful in creating demand in our installed customer base, such as customers who have our legacy SoundStation products, for products that we develop that incorporate new technologies or features.

We may not successfully execute on our vision of product requirements because of errors in defining product marketing requirements, planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. Due to the competitive nature of our business, any failure by us to meet any of these challenges could render our products or technologies obsolete or noncompetitive and thereby materially and adversely affect our business, reputation, and operating results.

A lower than anticipated rate of acceptance of domestic and international markets using the 802.11 standard or the emergence of competing standards may impede the growth of our wireless handsets or, if the market adoption of 802.11 standards occur more quickly than anticipated, the market for certain other SpectraLink product lines may decline.

Our NetLink wireless telephones that we acquired as part of the SpectraLink acquisition are compatible with the IEEE 802.11 standard for use on 802.11 compliant wireless LAN networks. Consequently, demand for NetLink wireless telephones depends upon the acceptance of markets utilizing 802.11-compliant networks. This depends in part upon the initial adoption of the 802.11 standard in international markets, as well as enhancements to that standard in the U.S. and foreign markets where the standard has already been adopted. Additionally, the acceptance of 802.11 compliant networks may move more slowly, if at all, if competing wireless networks are established and utilized. Additionally, the deployment of wireless voice and data systems has been inhibited by security concerns including the potential of unauthorized access to data and communications transmitted over or accessible through a wireless system. Potential customers may choose not to purchase our wireless products until wireless systems are developed which provide for greater security. Further, our wireless products may not be compatible with secure wireless systems that may be developed in the future. If markets utilizing 802.11 compliant networks do not grow as we anticipate, our product growth in this area would be impeded and we would not be able to factor the related revenue into our growth in the future. If the 802.11 standard does not emerge as the dominant wireless standard in our markets, or multiple standards are adopted that require different technologies, we may need to spend time and resources to add functionality to meet the additional standards and many of our strategic initiatives and investments may be of no or limited value. Further, to the extent that additional standards are adopted, our product differentiation could be minimized and our implementation may not be interoperable with the standard, necessitating additional product development to meet the standard which may cause product delays.

Conversely, if the market adoption of 802.11 standards is faster than anticipated, it may affect sales of DECT technology and Link WTS, proprietary technology that we also recently acquired through the SpectraLink acquisition. Sales of SpectraLink’s Link product have not been increasing in recent years and could be negatively impacted in the future by the adoption of 802.11 and purchases of our NetLink products. DECT solutions could face the same competition and cause a downward trend in our SpectraLink product sales growth and our overall gross margin in such product lines.

The market for on-premises wireless telephone systems may fail to grow or to grow as quickly as we anticipated when we acquired SpectraLink. If this market does not grow or grow quickly, our future results of operations could be harmed. In particular, increased demand for our new NetLink product depends on the growth of the voice over Wi-Fi-related market. Although NetLink handset sales grew significantly in the periods prior to our acquisition of SpectraLink, the market for deployment of converged voice and data wireless networks in the general enterprise continues to be immature. We expect that this will remain the case unless that market moves through its acceptance of IP wireless applications, standards adoption increases to reduce complexity, and customers deploy wireless IP access points more fully throughout their enterprise networks in densities required to support wireless voice traffic. Accordingly, the transition to NetLink and its potential impact on sales of our Link product are difficult to predict.

The certification and approval process for our NetLink product for use in countries that support the 802.11 standard is lengthy and often unpredictable.

Foreign countries which adopt the 802.11 standard could provide future markets for our new NetLink products. However, countries’ certification and approval processes for 802.11 compatible products such as ours are typically time consuming and potentially costly. If we have difficulty or experience delays in obtaining certification and approval by foreign countries for our NetLink wireless telephone product, then we and/or our distributor channels may not be able to gain access to the markets in these countries in a timely fashion, if at all, which would limit international growth of our NetLink product line.

Lower than expected market acceptance of our products, price competition and other price changes would negatively impact our business.

If the market does not accept our products, particularly our new product offerings which we are relying on for future revenues, such as the HDX4000, our new high definition executive desktop product, our profitability would likely be harmed. Our profitability could also be negatively affected in the future as a result of continuing competitive price pressures in the sale of video and voice conferencing equipment and network systems, which could cause us to reduce the prices for any of these products or discontinue one product with the intent of simplifying our product offering and enhancing sales of a similar product. For example, we believe that the sequential declines in video network system revenues that we experienced from the fourth quarter of 2004 until the second quarter of 2006 are due in part to lower average selling prices as a result of increased competitive pressures. Further, we have reduced prices in the past in order to expand the market for our products, and in the future, we may further reduce prices, introduce new products that carry lower margins in order to expand the market or stimulate demand for our products, or discontinue existing products as a means of stimulating growth in a similar product. Effective July 1, 2006, we began to separately charge for the initial year of service for our video conferencing products rather than charging one combined price for the product and service. These actions may not have the desired result of increasing revenues and improving service renewal rates and, accordingly, could have an adverse impact on our product margins and profitability. In addition, we anticipate that our gross margins may become more difficult to predict due to these types of changes, the wide range of margins associated with each of our product lines, and shifts in the mix of products sold. Our network systems products typically have higher gross margins than our other product lines. Therefore, our gross margins could decrease if we continue to experience decreases in our network systems product sales. For example, in the first quarter of 2007, gross margins in our network systems segment were the lowest we have ever experienced and below our targeted range. Further, if our network systems sales suffer, a correspondingly negative impact may be had on our services business, which relies in part on network systems sales for its success. Finally, if we do not fully anticipate, understand and fulfill the needs of end user customers in the vertical markets that we serve, we may not be able to fully capitalize on product sales into those vertical markets and our revenues may, accordingly, fail to grow as anticipated or may be adversely impacted.

Product obsolescence and excess inventory can negatively affect our results of operations.

We operate in a high technology industry which is subject to rapid and frequent technology and market demand changes. These changes can often render existing or developing technologies obsolete. In addition, the introduction of new products and any related actions to discontinue existing products can cause existing inventory to become obsolete. These obsolescence issues can require write-downs in inventory value when it is determined that the recorded value of existing inventory is greater than its fair market value, such as we experienced in the fourth quarter of 2005 with excess ViewStation^® inventory and in the third quarter of 2006 with excess QSX™ and ViewStation inventory. Also, the pace of change in technology development and in the release of new products has increased and is expected to continue to increase. If sales of one of these products has an unplanned negative effect on sales of another of our products, it could significantly increase the inventory levels of the negatively impacted product. For each of our products, the potential exists for new products to render existing products obsolete, cause inventories of existing products to increase, cause us to discontinue a product or reduce the demand for existing products.

Impairment of our goodwill or other assets would negatively affect our results of operations.

Since 2001, we have acquired several businesses, which together include goodwill valued at approximately $496.6 million and other purchased intangible assets valued at approximately $94.6 million as of September 30, 2007. This represents a significant portion of the assets recorded on our balance sheet and reflects significant increases in 2007 as a result of the recent Destiny and SpectraLink acquisitions. Goodwill and indefinite lived intangible assets are reviewed for impairment at least annually or sooner under certain circumstances. Other intangible assets that are deemed to have finite useful lives will continue to be amortized over their useful lives but must be reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Screening for and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires significant judgment. Therefore, we cannot assure you that a charge to operations will not occur as a result of future goodwill and intangible asset impairment tests. If impairment is deemed to exist, we would write down the recorded value of these intangible assets to their fair values, as we did in the fourth quarters of 2005 and 2006, when we wrote down certain intangible assets associated with our acquisition of

Voyant in the amount of $1.9 million and $1.4 million, respectively. If and when these write-downs do occur, they could harm our business and results of operations.

In addition, we have made investments in private companies which we classify as “Other assets” on our balance sheet. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of these companies’ industries, the strength of the private equity markets and general market conditions. To date, due to these and other factors, we have recorded cumulative charges against earnings totaling $21.5 million associated with the impairment of such investments, including $7.4 million in the second quarter of 2007. As of September 30, 2007, our investments in private companies are valued at $1.7 million. We may make additional investments in private companies which would be subject to similar impairment risks, and these impairment risks may cause us to write down the recorded value of any such investments. Further, we cannot assure you that future inventory, investment, license, fixed asset or other asset write-downs will not happen. If future write-downs do occur, they could harm our business and results of operations.

Failure to adequately service and support our products could harm our results of operations.

Our products are becoming increasingly more complex and are incorporating more complex technologies, such as those included in our network systems products, our new video product offerings and our software products. This has increased the need for product warranty and service capabilities. If we cannot develop and train our internal support organization or maintain our relationship with our outside technical support provider, it could harm our business.

Our quarterly operating results may fluctuate significantly and are not necessarily a good indicator of future performance.

Our quarterly operating results have fluctuated in the past and may vary significantly in the future as a result of a number of factors, many of which are out of our control. These factors include, but are not limited to:

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fluctuations in demand for our products and services, principally due to (i) the changing global economic environment, (ii) increased competition as we have seen in Asia, particularly in China and India, across all product lines and globally with respect to video and network systems product lines, (iii) the development of new partnerships, such as the relationships between Tandberg and Cisco Systems and Sony and Cisco Systems in our video product line, and (iv) increased competition from larger companies like Cisco Systems and Hewlett-Packard;

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the prices and performance of our products and those of our existing or potential new competitors, which can change rapidly due to technological innovations;

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the timing, size and mix of the orders for our products;

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whether growth of our VoIP product sales will negatively impact sales of our circuit-switched products and whether VoIP product sales will serve as an effective driver for sales of our IP-based video solutions, as we anticipate;

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disruption within our company and among our channel partners as a result of the recent SpectraLink acquisition and the focus on the integration of the underlying operations;

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changes in tax rates due to, among other things, the timing and geographical mix of the earnings;

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changes in the underlying factors and assumptions regarding a number of highly complex and subjective variables used in the option-pricing model to determine stock-based compensation which may result in significant variability in the stock-based compensation costs we record, making such amounts difficult to accurately predict;

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slowing sales by our channel partners to their customers, which places further pressure on our channel partners to minimize inventory levels and reduce purchases of our products;

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changes to our channel partner programs, contracts and strategy that could result in a reduction in the number of channel partners or could cause more of our channel partners to add our competitors’ products to their portfolio;

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the impact of introducing product lines that require a more direct, high-touch sales model;

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the level and mix of inventory that we hold to meet future demand;

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fluctuations in the level of international sales and our exposure to the impact of international currency fluctuations on both revenues and expenses;

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dependence on third party manufacturers, which would include outside development manufacturers, and associated manufacturing costs;

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the magnitude of any costs that we must incur in the event of a product recall or of costs associated with product warranty claims;

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the impact of seasonality on our various product lines and geographic regions;

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the impairment of strategic investments or other assets; and

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adverse outcomes in intellectual property litigation and other matters and the costs associated with asserting and enforcing our intellectual property portfolio.

As a result of these and potentially other factors, we believe that period-to-period comparisons of our historical results of operations are not necessarily a good predictor of our future performance. If our future operating results are below the expectations of stock market securities analysts or investors, our stock price will likely decline.

Difficulties in integrating our acquisitions could adversely impact our business.

Difficulties in integrating past or potential future acquisitions could adversely affect our business.

We have completed a number of acquisitions during our operating history, including our acquisitions of Destiny and SpectraLink in the first quarter of 2007. The process of integrating acquired companies into our operations requires significant resources and is time consuming, expensive and disruptive to our business. For instance, we may continue to experience disruption to our voice business, sales organization and other organizations, due to the integration of SpectraLink’s operations, such as we experienced in the second quarter of 2007 where our year-over-year revenue growth in our voice business excluding SpectraLink revenues was more modest than experienced over the last several years and even declined sequentially by 2%. We believe that such disruption continued to have an ongoing impact in the third quarter of 2007 and contributed to our lower than normal sequential growth in the U.S. We have also experienced, and may continue to experience, unique legal, geographic or other issues in connection with the integration of SpectraLink’s Danish subsidiary, KIRK telecom. Failure to achieve the anticipated benefits of these acquisitions, to retain key personnel, or to successfully integrate the operations of these companies could harm our business, results of operations and cash flows. We may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

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potentially incompatible cultural differences between the two companies;

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incorporating the acquired company’s technology and products into our current and future product lines;

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potential deterioration of the acquired company’s product sales and corresponding revenues due to integration activities and management distraction;

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potentially creating confusion in the marketplace by ineffectively distinguishing or marketing the product offerings of the newly acquired company with our existing product lines, such as we experienced in China with DSTMedia in 2005;

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geographic dispersion of operations;

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generating marketing demand for an expanded product line;

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distraction of the existing and acquired sales force during the integration of the companies;

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the difficulty in leveraging the acquired company’s and our combined technologies and capabilities across all product lines and customer bases; and

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our inability to retain previous customers or employees of an acquired company.

Further, certain of our acquisition agreements incorporate earn-out provisions in them. Such earn-out provisions entitle the former shareholders of the acquired companies to receive additional consideration upon the satisfaction of certain predetermined criteria. It is possible that disputes over unpaid earn-out amounts may result in litigation to the company, which could be costly and cause management distraction.

We have spent and will continue to spend significant resources identifying and acquiring businesses. The efficient and effective integration of our acquired businesses into our organization is critical to our growth. Any of our recent and future acquisitions involve numerous risks including difficulties in integrating the operations, technologies and products of the acquired companies, the diversion of our management’s attention from other business concerns, particularly when dealing with the integration of large and complex organizations such as SpectraLink, and the potential loss of key employees of the acquired companies. Failure to achieve the anticipated benefits of these and any future acquisitions or to successfully integrate the operations of the companies we acquire could also harm our business, results of operations and cash flows. Additionally, we cannot assure you that we will not incur material charges in future quarters to reflect additional costs associated with past acquisitions or any future acquisitions we may make.

Our failure to successfully implement our restructuring plan related to vacant and redundant facilities could adversely impact our business.

We have in the past, and may in the future, as part of acquiring a company, identify redundant facilities, which we would develop a plan to exit as part of the integration of the businesses. For example, we have a liability in the amount of $3.3 million related to facilities we intend to vacate in connection with our recent acquisition of SpectraLink. We also have a remaining liability of approximately $0.8 million at September 30, 2007 related to vacant and redundant facilities in connection with our acquisition of PictureTel, which is net of estimated sublease income we expect to generate. Our estimate of sublease income is based on current comparable rates for leases in the respective markets. If actual sublease income is lower than our estimates for any reason, if it takes us longer than we estimated to sublease these facilities, or if the associated cost of subleasing or terminating our lease obligations for these facilities is greater than we estimated, we would incur additional charges to operations which would harm our business, results of operations and cash flows. For example, we have an approximately 152,000 square foot building which is fully subleased to a third party for the length of our lease obligation. If this tenant were unable to fulfill, for any reason, their contractual obligations under the sublease, we would incur additional charges to operations which would harm our business. In addition, until our vacated and redundant facilities are subleased or the lease obligations for these facilities are terminated, we will continue to pay the contractual lease and facility operating expense obligations without any sublease income to offset these costs. Further, in the event that we agree to sublease a facility or terminate a lease obligation through a lease buyout or other means, we may incur a material cash outflow up to and potentially exceeding our recorded liability at the time of such transaction, which would harm our operating cash flows. To the extent that any such cash outflows or additional costs exceed the amount of our recorded liability related to the sublease or termination of these lease obligations, we could incur a charge to operations which would harm our business and adversely impact our results of operations.

We experience seasonal demand for our products and services, which may adversely impact our results of operations during certain periods.

Sales of some of our products have experienced seasonal fluctuations which have affected sequential growth rates for these products, particularly in our third and first quarters. For example, there is generally a slowdown for sales of our products in the European region in the third quarter of each year and sales to government entities typically slow in our fourth quarter and to a greater extent in our first quarter. In addition, sales of our video conferencing products have historically declined in the first quarter of the year compared to the fourth quarter of the prior year, although this was not the case in the first quarter of 2007. We also saw a sequential decrease in group video conferencing unit sales in Europe and Asia in the third quarter of 2006 and in Asia in the third quarter of 2007, which we believe may be attributable to seasonality. Seasonal fluctuations could negatively affect our business, which could cause our operating results to fall short of anticipated results for such quarters, as they did in the first quarter of 2005.

Our operating results are hard to predict as a significant amount of our sales may occur at the end of a quarter and certain of our service provider contracts include contractual acceptance provisions.

The timing of our channel partner orders and product shipments can harm our operating results.

Our quarterly revenues and operating results depend in large part upon the volume and timing of channel partner orders received during a given quarter and the percentage of each order that we are able to ship and recognize as revenue during each quarter, each of which is extremely difficult to forecast. We are also beginning to experience longer sales cycles in connection with our high end video conferencing solutions sales, which could also increase the level of unpredictability and fluctuation in the timing of orders. Moreover, although we have seen better sales linearity throughout 2006 and 2007, a significant portion of our orders in a given quarter are shipped in the last month of that quarter and sometimes in the last few weeks of the quarter. Also, our backlog has fluctuated significantly over our corporate history. We believe that backlog levels will continue to fluctuate due to many factors such as ability of our sales force to generate orders linearly throughout the quarter, our ability to forecast revenue mix and plan our manufacturing accordingly, customer request dates, timing of product acceptance where contractually required and ongoing service deferrals as service revenues increase as a percent of total revenue. In addition, orders from our channel partners are based on the level of demand from end-user customers. Any decline or uncertainty in end-user demand could significantly negatively impact end-user orders, which could in turn negatively affect orders from our channel partners in any given quarter. As a result, our backlog could decline in future quarters, even to zero. Any degradation in linearity levels or any failure or delay in the closing of orders during the last part of a quarter would materially harm our operating results. Furthermore, we may be unable to ship products in the period we receive the order due to these or other factors, which could have an adverse impact on our operating results. In such events, the price of our common stock would decline.

Difficulty in estimating future channel partner orders can harm our operating results, the establishment of product lead times to maximize our inventory efficiency and our focus on operations efficiency in the logistics area.

Revenues for any particular quarter are extremely difficult to predict with any degree of certainty. We typically ship products within a short time after we receive an order and therefore, backlog is not a good indicator of future revenues. In addition, orders from our channel partners are based on the level of demand from end-user customers. Any decline or uncertainty in end-user demand could negatively impact end-user orders, which could in turn significantly negatively affect orders from our channel partners in any given quarter. Accordingly, our expectations for both short and long-term future revenues are based almost exclusively on our own estimate of future demand and not on firm channel partner orders. Our expense levels are based largely on these estimates. In addition, the majority of our audio and video network system orders are received in the last month of a quarter, typically the last few weeks of that quarter; thus, the unpredictability of the receipt of these orders could negatively impact our future results. Further, while we believe we have taken steps to transition SpectraLink to our revenue linearity model, SpectraLink has historically received the majority of its orders in the last month of the quarter, or even the last couple of weeks of the quarter; and there can be no assurance that this will not occur again in the future while we continue to integrate SpectraLink’s operations into ours. We also have historically received a majority of our channel partner orders in the last month of a quarter and often in the last few weeks of the quarter. In the event that order linearity once again degrades to the levels we have experienced in the past, where the majority of our sales occurred in the last month of the quarter, or if for any reason orders and revenues do not meet our expectations in a particular period, we will be limited in our ability to reduce expenses quickly. Accordingly, any significant shortfall in demand for our products in relation to our expectations would have an adverse impact on our operating results.

Delays in receiving contractual acceptance may cause delays in our ability to recognize revenue, depending upon the timing and shipment of orders under such contracts.

Certain of our sales contracts include product acceptance provisions which vary depending upon the type of product and individual terms of the contract. In addition, acceptance criteria may be required in other contracts in the future, depending upon the size and complexity of the sale and the type of products ordered. Accordingly, we defer revenue until the underlying acceptance criteria in any given contract have been met. Depending upon the acceptance terms, the timing of the receipt and subsequent shipment of an order may result in acceptance delays, may reduce the predictability of our revenues, and, consequently, may adversely impact our revenues and results of operations in any particular quarter.

We face risks related to our dependence on channel partners to sell our products.

To avoid confusion by our channel partners regarding our product offerings, we need to continually devote significant resources to educating and training them.

When we take any significant actions regarding our product offerings, or acquire new product offerings, it is important to educate and train our channel partners to avoid any confusion on the desirability of the new product offering in relation to our existing product offerings.

For instance, integrating acquired product offerings with ours has created confusion among our channel partners in the past and may continue to do so in the future. We will need to continue to devote significant resources to educate and train our channel partners about our product offerings. We have recently launched our HDX video conferencing products, our new RMX conferencing platform and have added additional products through the acquisitions of SpectraLink and Destiny which will require significant resources and training to educate our channels. Channel confusion could also occur if we do not adequately train or educate the channel on our product families, especially in the cases where we simplify our product offerings by discontinuing one product in order to stimulate growth of a similar product. Ongoing confusion may lead to delays in ordering our products, which would negatively affect our revenues.

Conflicts and competition with our channel partners and strategic partners could hurt sales of our products.

We have various Original Equipment Manufacturer (OEM) agreements with major telecommunications equipment manufacturers, such as Avaya, Cisco Systems and Nortel Networks, whereby we manufacture our products to work with the equipment of the OEM. These relationships can create conflicts with our other channel partners who directly compete with our OEM partners, or could create conflicts among our OEM partners who compete with each other, which could adversely affect revenues from these other channel partners or our OEM partners. Conflicts among our OEM partners could also make continued partnering with these OEM partners increasingly difficult, or our OEM partners, including large competitors such as Cisco Systems, may decide to develop products of their own that compete with ours in the future, which could adversely affect our revenues and results of operations. Because many of our channel partners also sell equipment that competes with our products, these channel partners could devote more attention to these other products which could harm our business. Further, as we move to a more direct, high-touch sales model, we may alienate some of our channel partners or cause a shift in product sales from our traditional channel model as these traditional relationships evolve over time. Due to these and other factors, channel conflicts could arise which cause channel partners to devote resources to other non Polycom communications equipment, or to offer new products from our new and existing competitors, which would negatively affect our business or results of operations.

Some of our current and future products are directly competitive with the products sold by both our channel and strategic partners. For example, we have an agreement with Cisco Systems under which we ship SoundStation IP conference phones for resale by Cisco Systems. In addition, Cisco Systems sells a network systems product which is in direct competition with our network systems offerings. Also, Cisco Systems has a partnership with Tandberg, one of our major competitors in the video communications business, pursuant to which Tandberg provides Cisco Systems with technology that is co-branded and sold by Cisco Systems. Cisco Systems has also announced a new high end video conferencing product which is in direct competition with our video conferencing solutions. With our recent acquisition of SpectraLink, we also compete with Cisco Systems in the WLAN space. As a consequence of conflicts such as these, there is the potential for our channel and strategic partners to compete head-to-head with us and to significantly reduce or eliminate their orders of our products or design our technology out of their products. Further, some of our products are reliant on strategic partnerships with call servers providers and wireless infrastructure providers. These partnerships result in interoperable features between products to deliver a total solution to our mutual end user customers. Competition with our partners in all of the markets in which we operate is likely to increase, potentially resulting in strains on our existing relationships with these companies. As an example, we are now competing in the voice-over-IP handset arena through service providers, which may cause our relationships with our IP PBX strategic partners to erode. In addition, due to increasing competition with us for sales of video conferencing equipment, Cisco Systems may decide to terminate its relationship with us to resell our SoundStation IP conference phones or eliminate the interoperability of its wireless access points with our NetLink wireless telephones. Further, our strategic partners may acquire businesses that are competitive with us. Any such strain or acquisition could limit the potential contribution of our strategic relationships to our business, restrict our ability to form strategic relationships with these companies in the future and create additional competitive pressures on us, including downward pressure on our average selling prices, which would result in a decrease in both revenues and gross margins, any of which could harm our business.

We are subject to risks associated with our channel partners’ product inventories and product sell-through.

We sell a significant amount of our products to channel partners who maintain their own inventory of our products for sale to dealers and end-users. If these channel partners are unable to sell an adequate amount of their inventory of our products in a given quarter to dealers and end-users or if channel partners decide to decrease their inventories for any reason, such as a recurrence of global economic uncertainty and downturn in technology spending, the volume of our sales to these channel partners and our revenues would be negatively affected. While there has been some improvement in technology spending and the global economy, constraints in technology capital spending still exist and if these conditions recur in the future, our business and operating results will continue to be negatively affected. For example, in the first and fourth quarters of 2005, we experienced sequential decreases in absolute dollars in revenues from U.S. government entities. In addition, if channel partners decide to purchase more inventory, due to product availability or other reasons, than is required to satisfy end-user demand or if end-user demand does not keep pace with the additional inventory purchases, channel inventory could grow in any particular quarter, which could adversely affect product revenues in the subsequent quarter. In addition, we also face the risk that some of our channel partners have inventory levels in excess of future anticipated sales. If such sales do not occur in the time frame anticipated by these channel partners for any reason, these channel partners may substantially decrease the amount of product they order from us in subsequent periods, or product returns may exceed historical or predicted levels, which would harm our business. Moreover, if we choose to eliminate or reduce special cost or stocking incentive programs, quarterly revenues may fail to meet our expectations or be lower than historical levels.

Our revenue estimates associated with products stocked by some of our channel partners are based largely on end-user sales reports that our channel partners provide to us on a monthly basis. To date, we believe this data has been generally accurate. To the extent that this sales-out and channel inventory data is inaccurate or not received timely, we may not be able to make revenue estimates for future periods.

Potential changes to our channel partner programs or channel partner contracts may not be favorably received and as a result our channel partner relationships and results of operations may be adversely impacted.

Our channel partners are eligible to participate in various incentive programs, depending upon their contractual arrangements with us. As part of these arrangements, we have the right to make changes in our programs and launch new programs as business conditions warrant. These changes could upset our channel partners to the extent that they could add competitive products to their portfolios, delay advertising or sales of our products, or shift more emphasis to selling our competitors products, if not appropriately handled. There can be no assurance that our channel partners will be receptive to future changes and that we will receive the positive benefits that we are anticipating in making these program changes.

Further, we are currently making changes to our channel partner contracts in Asia, and we may elect to make additional changes to our channel partner contracts in Europe and Latin America, which could result in a change in the number and mix of channel partners, a smaller number of channel partners, and the same channel upset we experienced in North America when similar changes were made.

Consolidation of our channel partners may result in changes to our overall business relationships and less favorable contractual terms.

We have recently seen consolidation among certain of our existing channel partners. In such instances, we may experience changes to our overall business and operational relationships due to dealing with a larger combined entity. Further, our ability to maintain such relationships on favorable contractual terms may be limited. For instance, the combined entity may be successful in negotiating the most favorable contractual terms out of each of their respective contracts, including terms such as credit and acceptance, which are less favorable than those in our existing contracts with each channel partner. Depending on the extent of these changes, the timing and extent of revenue from these channel partners may be adversely affected.

We are subject to risks associated with the success of the businesses of our channel partners.

Many of our channel partners that carry multiple Polycom products, and from whom we derive significant revenues, are thinly capitalized. Although we perform ongoing evaluations of the creditworthiness of our channel partners, the failure of these businesses to establish and sustain profitability, obtain financing or adequately fund capital expenditures could have a significant negative effect on our future revenue levels and profitability and our ability to collect our receivables. Further, while there has been some improvement in technology spending and the global economy, constraints in technology capital spending still exist and could cause more of our channel partners’ businesses to suffer or fail, which would harm our business.

Our channel partner contracts are typically short-term and early termination of these contracts may harm our results of operations.

We do not typically enter into long-term contracts with our channel partners, and we cannot be certain as to future order levels from our channel partners. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the channel partner. In the event of an early termination by one of our major channel partners, we believe that the end-user customer would likely purchase from another one of our channel partners. If this did not occur and we were unable to rapidly replace that revenue source, its loss would harm our results of operations.

If revenues from sales to our service provider customers decrease significantly from prior periods, our results of operations may suffer materially.

Service providers constitute some of the larger end user customers of our audio network systems products. The revenues in the network systems segment from service providers are subject to more variability than segment revenues from our channel partners and, as of the fourth quarter of 2006, service provider sales have comprised an increasingly smaller percentage of our revenues, as well as decreased in absolute dollars sequentially in the second, third and fourth quarters of 2006 and the first two quarters of 2007 and on a year-over-year basis. The loss of any one of these service provider customers for our network systems products, or our failure to adequately maintain or grow the level of network systems-related product sales to service providers, could have a materially adverse impact on our consolidated revenues.

We face risks related to our international operations and sales.

Because of our significant operations in Israel, we are subject to risks associated with the military and political environment in Israel and the Middle East region.

The principal research and development and manufacturing facilities of our network systems group and many of that group’s suppliers are located in Israel. Political, economic and military conditions in Israel and the Middle East region directly affect our network systems group’s operations. A number of armed conflicts have taken place and continue to take place between Israel and its geographic neighbors. As a result, certain of our employees have been called to active military duty, and additional employees may be called to serve in the future. Current and future armed conflicts or political instability in the region may impair our ability to produce and sell our network systems products and could disrupt research or developmental activities. For example, a key supplier’s operations were interrupted and had to be relocated during the second quarter of 2006. This instability could have an adverse impact on our results of operations. Further, the military action in Iraq or other countries in the region perceived as a threat by the United States government could result in additional unrest or cause Israel to be attacked, which would adversely affect our results of operations and harm our business.

International sales and expenses represent a significant portion of our revenues and operating expenses and risks inherent in international operations could harm our business.

International sales and expenses represent a significant portion of our revenues and operating expenses, and we anticipate that international sales will continue to increase and to account for a significant portion of our revenues for the foreseeable future and that international operating expenses will continue to increase. International sales and expenses are subject to certain inherent risks, including the following:

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adverse economic conditions in international markets;

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potential foreign currency exchange rate fluctuations;

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the near and long-term impact of the instability in Iraq or other hostilities;

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disruptions in business due to natural disasters, quarantines or other disruptions associated with infectious diseases or other events beyond our control;

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unexpected changes in regulatory requirements and tariffs;

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adverse economic impact of terrorist attacks and incidents and any military response to those attacks;

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difficulties in staffing and managing foreign operations;

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difficulties in competing effectively for international sales against international competitors;

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longer payment cycles;

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problems in collecting accounts receivable; and

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potentially adverse tax consequences.

International revenues may fluctuate as a percentage of total revenues in the future as we introduce new products. These fluctuations are primarily the result of our practice of introducing new products in North America first and the additional time required for product homologation and regulatory approvals of new products in international markets. To the extent we are unable to expand international sales in a timely and cost-effective manner, our business could be harmed. We cannot assure you that we will be able to maintain or increase international market demand for our products.

Although, to date, a substantial majority of our international sales have been denominated in U.S. currency, we expect that a growing number of sales will be denominated in non-U.S. currencies as more international customers request billing in their currency. For example, effective January 1, 2006, we established local currency pricing in the European Union and the United Kingdom whereby we price and invoice our products and services in Euros and British Pounds. In addition, some of our competitors currently invoice in foreign currency, which could be a disadvantage to us in those markets where we do not. Our international operating expenses are denominated in foreign currency. As a result of these factors, we expect our business will be significantly more vulnerable to currency fluctuations, which could adversely impact our results of operations. For instance, in the second quarter of 2006 and third quarter of 2007, our international operating costs increased as a result of the weakness in the U.S. dollar. These currency fluctuations were recorded in other income (expense) in our Condensed Consolidated Statements of Operations. We will continue to evaluate whether to, and are likely to decide to, expand the type of products we sell in selected foreign currencies in addition to the Euro and British Pound or may, for specific customer situations, choose to sell our products in foreign currencies, thereby further increasing our foreign exchange risk.

While we do not hedge for speculative purposes, as a result of our increased exposure to currency fluctuations, we from time to time engage in currency hedging activities to mitigate currency fluctuation exposure. Also, due to the denomination of our European product sales in Euros and of our United Kingdom product sales in British Pounds, we have increased our hedging activity. However, we have limited experience with these hedging activities, and they may not be successful, which could harm our operating results and financial condition. In addition, significant adverse changes in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in revenue or profitability in that country, as discounts may be temporarily or permanently affected.

General economic conditions may reduce our revenues and harm our business.

As our business has grown, we have become increasingly exposed to adverse changes in general economic conditions which can result in reductions in capital expenditures by end-user customers for our products, longer sales cycles, deferral or delay of purchase commitments for our products and increased competition. These factors adversely impacted our operating results in prior years. Any recurrence of these events could have a similar effect. For example, the recent financial services crisis in the United States could have further reaching effects which adversely affect our business in the future.

Difficulties we may encounter managing a substantially larger business could adversely affect our operating results.

If we fail to successfully attract and retain qualified personnel, our business will be harmed.

Our future success will depend in part on our continued ability to hire, assimilate and retain qualified personnel, including the additional sales personnel we plan to hire in the remainder of 2007 and into 2008 and the retention of key sales personnel as we move to a more direct, high-touch sales model. Competition for such personnel is intense, and we may not be successful in attracting or retaining such personnel. In addition, the success of our planned expansion of our sales force is also dependent upon their ability to achieve certain productivity levels in an acceptable timeframe and any inability to do so could be disruptive to our business. For instance, we believe that execution by the sales team in the third quarter of 2007 was adversely impacted by distraction caused in part by the shift to a direct, high-touch sales model as well as the ongoing integration of the SpectraLink operations.

From time to time, we may also decide to replace certain key personnel or make changes in certain senior management positions, particularly as we continue to grow to meet market demands, or make organizational changes such as we announced in June 2007, where we created the Video Solutions organization, through the combining of our Video and Network Systems divisions. Such transitions may be disruptive to the affected function and our business, possibly on a longer term basis than we expected, particularly as the reorganized team, many of whom have not worked together previously, learns to work together effectively, and could divert management’s attention from other ongoing business concerns. Further, we may not experience the operating efficiencies in product planning, research, and development that the reorganization is intended to achieve.

Further, we have relied on our ability to grant stock options and other stock awards as a means of recruiting and retaining highly skilled personnel. Recent accounting regulations requiring the expensing of stock awards, including stock options, will impair our future ability to provide these incentives without incurring significant compensation costs. The loss of any key employee, including key employees from our recently acquired companies, the failure of any key employee to perform in his or her current position or our inability to attract and retain skilled employees, particularly technical and management, as needed, could harm our business.

In addition, as we add more complex software product offerings, it will become increasingly important to retain and attract individuals who are skilled in managing and developing these complex software product offerings. Further, many of our key employees in Israel, who are responsible for development of our network systems products, are obligated to perform annual military reserve duty and may be called to active duty at any time under emergency conditions. The loss of the services of any executive officer or other key technical or management personnel could have an adverse and disruptive impact on their affected function and, consequently, materially harm our business or operations.

We have experienced significant growth in our business and operations due to internal expansion and business acquisitions, and if we do not appropriately manage this growth and any future growth, our operating results will be negatively affected.

Our business has grown in recent years through both internal expansion and business acquisitions, and continued growth may cause a significant strain on our infrastructure, internal systems and managerial resources. In addition, our acquisitions of Destiny and of SpectraLink in the first quarter of 2007 will further strain such resources. To manage our growth effectively, we must continue to improve and expand our infrastructure, including information technology and financial operating and administrative systems and controls, and continue managing headcount, capital and processes in an efficient manner. Our productivity and the quality of our products may be adversely affected if we do not integrate and train our new employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization and increase our operating expenses. We also may be less able to predict and effectively control our operating expenses due to the growth and increasing complexity of our business. In addition, our information technology systems may not grow at a sufficient rate to keep up with the processing and information demands placed on them by a much larger company. The efforts to continue to expand our information technology systems or our inability to do so could harm our business. Further, revenues may not grow at a sufficient rate to absorb the costs associated with a larger overall headcount.

Our future growth may require significant additional resources given that, as we increase our business operations in complexity and scale, we may have insufficient management capabilities and internal bandwidth to manage our growth and business effectively. We cannot assure you that resources will be available when we need them or that we will have sufficient capital to fund these potential resource needs. Also, as we assess our resources following our acquisitions, we will likely determine that redundancy in certain areas will require consolidation of these resources. Any organizational disruptions associated with the consolidation process could require further management attention and financial expenditures. If we are unable to manage our growth effectively, if we experience a shortfall in resources or if we must take additional restructuring charges, our results of operations will be harmed.

We have limited supply sources for some key components of our products and for the outside development and manufacture of certain of our products, and our operations could be harmed by supply interruptions, component defects or unavailability of these components or products.

Some key components used in our products are currently available from only one source and others are available from only a limited number of sources, including some key integrated circuits and optical elements. Because of such limited sources for component parts, we may have little or no ability to procure these parts on favorable pricing terms. We also obtain certain plastic housings, metal castings, batteries, and other components from suppliers located in China and certain Southeast Asia countries, and any political or economic instability in that region in the future, quarantines or other disruptions associated with infectious diseases, or future import restrictions, may cause delays or an inability to obtain these supplies. Further, we have suppliers in Israel and the military action in Iraq or war with other Middle Eastern countries perceived as a threat by the United States government may cause delays or an inability to obtain supplies for our network systems products.

We have no raw material supply commitments from our suppliers and generally purchase components on a purchase order basis either directly or through our contract manufacturers. Some of the components included in our products, such as microprocessors and other integrated circuits, have from time to time been subject to limited allocations by suppliers. In addition, companies with limited or uncertain financial resources manufacture some of these components. Further, we do not always have direct control over the supply chain, as many of our component parts are procured for us by our contract manufacturers. In the event that we, or our contract manufacturers, are unable to obtain sufficient supplies of components, develop alternative sources as needed, or companies with limited financial resources go out of business, our operating results could be seriously harmed.

Moreover, our operating results would be seriously harmed by receipt of a significant number of defective components or components that fail to fully comply with environmental or other regulatory requirements, an increase in component prices, such as the recent price increases for components that are in compliance with the Restrictions on Hazardous Substances (RoHS) rules in Europe, or our inability to obtain lower component prices in response to competitive price reductions.

Additionally, our HDX video conferencing products are designed based on integrated circuits produced by Texas Instruments and cameras produced by JVC. Our VSX video conferencing products are designed based on integrated circuits produced by Equator Technologies, a subsidiary of Pixelworks Inc., and cameras produced by Sony. If we could no longer obtain integrated circuits or cameras from these suppliers, we would incur substantial expense and take substantial time in redesigning our products to be compatible with components from other manufacturers, and we cannot assure you that we would be successful in obtaining these components from alternative sources in a timely or cost-effective manner. Additionally, Sony competes with us in the video communications industry, which may adversely affect our ability to obtain necessary components. The failure to obtain adequate supplies of vital components could prevent or delay product shipments, which could harm our business. We also rely on the introduction schedules of some key components in the development or launch of new products. Any delays in the availability of these key components could harm our business.

Further, we have strategic relationships with third parties to develop and manufacture certain products for us. The loss of any such strategic relationship due to competitive reasons, our inability to resolve any contractual disputes that may arise between us, the financial instability of a strategic partner, or other factors, could have a negative impact on our ability to produce and sell certain products and product lines and, consequently, may adversely affect our revenues and results of operations.

Finally, the business failure or financial instability of any supplier of these components or product manufacturer could adversely affect our cash flows if we were to expend funds in some manner to ensure the continued supply of those components or products.

Manufacturing disruption or capacity constraints would harm our business.

We subcontract the manufacture of our voice, including our recently acquired SpectraLink products, and video product lines to Celestica, a third-party contract manufacturer. We use Celestica’s facilities in Thailand, China and Singapore, and should there be any disruption in services due to natural disaster, terrorist acts, quarantines or other disruptions associated with infectious diseases, or other similar events, or economic or political difficulties in any of these countries or Asia or any other reason, such disruption would harm our business and results of operations. Also, Celestica’s facilities are currently the manufacturer for substantially all of these products, which means we are essentially sole-sourced for the manufacturing of such products, and if Celestica experiences an interruption in operations, suffers from capacity constraints, which may include constraints based on production demands from us as we grow our business, or is otherwise unable to meet our current or future production requirements we would experience a delay or inability to ship our products, which would have an

immediate negative impact on our revenues. Moreover, any incapacitation of a manufacturing site due to destruction, natural disaster or similar events could result in a loss of product inventory. As a result of any of the foregoing, we may not be able to meet demand for our products, which could negatively affect revenues in the quarter of the disruption or longer depending upon the magnitude of the event, and could harm our reputation. In addition, operating in the international environment exposes us to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations and potentially adverse tax consequences, all of which could harm our business and results of operations.

We have recently transitioned the manufacturing of the products acquired as a result of the SpectraLink acquisition, which products were previously manufactured in Boulder, Colorado and through a third-party contract manufacturer in Mexico, to Celestica in Thailand and Benchmark Electronics in Alabama and Thailand. As we are in the early stages of this transition, we could experience unexpected quality problems or experience delays in the manufacturing and delivery of products to fulfill orders, which would adversely impact our revenues on these products.

With respect to the products acquired as a result of the SpectraLink acquisition and its Danish subsidiary KIRK telecom, the majority of the KIRK products are manufactured in Horsens, Denmark. Any event that may disrupt or indefinitely discontinue the facilities’ capacity to manufacture, assemble and repair our KIRK products could greatly impair our ability to generate revenue, fulfill orders and attain financial goals for these products.

We face risks relating to changes in rules and regulations of the FCC and other regulatory agencies.

The wireless communications industry, in which we are now involved due to the SpectraLink acquisition, is regulated by the FCC in the United States and similar government agencies in other countries and is subject to changing political, economic, and regulatory influences. Regulatory changes, including changes in the allocation of available frequency spectrum, or changing free un-licensed to fee based spectrum licensing, could significantly impact our SpectraLink operations in the United States and internationally.

If we have insufficient proprietary rights or if we fail to protect those rights we have, our business would be materially impaired.

We rely on third-party license agreements and termination or impairment of these agreements may cause delays or reductions in product introductions or shipments which would harm our business.

We have licensing agreements with various suppliers for software incorporated into our products. For example, we license video communications source code from ADTRAN, Delcom, Mitsubishi, Simtrol, Skelmir, SNMP, and Software House, video algorithm protocols from DSP, UB Video, ATT/LUCENT and Flextronics, Windows software from Microsoft, development source code from Avaya, Cisco Systems, In Focus Systems Inc., Nokia, Nortel Networks, Vocal Technologies Ltd., Windriver, Ingenient and Avistar, audio algorithms from D2, Nortel Networks, Sipro, Telogy and Voiceage, and communication software from Konexx and RADVISION. In addition, certain of our products are developed and manufactured based largely or solely on third-party technology. These third-party software licenses and arrangements may not continue to be available to us on commercially reasonable or competitive terms, if at all. The termination or impairment of these licenses could result in delays or reductions in new product introductions or current product shipments until equivalent software could be developed, licensed and integrated, if at all possible, which would harm our business and results of operations. Further, if we are unable to obtain necessary technology licenses on commercially reasonable or competitive terms, we could be prohibited from marketing our products, could be forced to market products without certain features, or could incur substantial costs to redesign our products, defend legal actions, or pay damages.

We rely on our 802.11 technology partners to continue to provide the wireless local area network for our NetLink product, and to provide access points which support SpectraLink’s Voice Priority (SVP) technology.

In the absence of a wireless voice prioritization standard to ensure quality of service, we rely on 802.11 technology partners, such as Alcatel-Lucent, Aruba Wireless Networks, Cisco Systems, Nortel, Symbol Technologies, 3 Com, and Trapeze Networks Inc. to continue to provide wireless local area network support for our NetLink product, and to provide access points that support SpectraLink’s SVP capability. If any of our technology partners fail to provide voice prioritization support for our products, the market opportunity for NetLink products would be reduced and our future results of operations would be harmed until we find new 802.11 technology partners or voice prioritization standards are adopted.

We rely on patents, trademarks, copyrights and trade secrets to protect our proprietary rights which may not be sufficient to protect our intellectual property.

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary rights. Others may independently develop similar proprietary information and techniques or gain

access to our intellectual property rights or disclose such technology. In addition, we cannot assure you that any patent or registered trademark owned by us will not be invalidated, circumvented or challenged in the U.S. or foreign countries or that the rights granted thereunder will provide competitive advantages to us or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all. Furthermore, others may develop similar products, duplicate our products or design around our patents. In addition, foreign intellectual property laws may not protect our intellectual property rights. Litigation may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity of and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources which could harm our business, and we could ultimately be unsuccessful in protecting our intellectual property rights.

We face intellectual property infringement claims and other litigation claims that might be costly to resolve and, if resolved adversely, may harm our operating results or financial condition.

We are a party to lawsuits (patent-related and otherwise) in the normal course of our business. For instance, in November 2005, we initiated a patent infringement lawsuit against Codian (recently acquired by Tandberg), which is still ongoing and in which Codian has asserted certain counterclaims against us. Further, in July 2007, Codian filed a suit against us alleging infringement of two of its patents. Litigation is often expensive, lengthy and disruptive to normal business operations. Our legal costs may increase as we get closer to our March 2008 trial date in the Codian litigation, as new parties get involved in the litigation due to Tandberg’s acquisition of Codian, and as we incur additional costs defending Codian’s suit against us. Our legal costs may also increase as a result of the fee arrangement we have with outside legal counsel representing us in our litigation against Codian, pursuant to which we may owe additional legal fees if a favorable outcome in the litigation is ultimately achieved. Such fees would be recorded in the period in which a favorable litigation outcome occurs. The results of, and costs associated with, complex litigation matters are difficult to predict, and the uncertainty associated with substantial unresolved lawsuits could harm our business, financial condition and reputation. Negative developments with respect to pending lawsuits could cause our stock price to decline, and an unfavorable resolution of any particular lawsuit could have an adverse and possibly material effect on our business and results of operations.

We expect that the number and significance of claims and legal proceedings that assert patent infringement claims or other intellectual property rights covering our products will increase as our business expands. In particular, we expect to face an increasing number of patent and copyright claims as the number of products and competitors in our industry grows and the functionality of video, voice, data and web conferencing products overlap. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms favorable to us or at all. An unfavorable outcome in any such claim or proceeding could have a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods. Further, any settlement announced by us may expose us to further claims against us by third parties seeking monetary or other damages which, even if unsuccessful, would divert management attention from the business and cause us to incur costs, possibly material, to defend such matters. For example, in November 2004, we settled our outstanding patent infringement litigation with Avistar Communications, Inc. (“Avistar”) and Collaboration Properties, Inc., a wholly-owned subsidiary of Avistar, and, in connection with such settlement, paid $27.5 million.

Loss of government contracts or failure to obtain required government certifications could have a material adverse effect on our business.

We sell our products indirectly and provide services to governmental entities in accordance with certain regulated contractual arrangements. While reporting and compliance with government contracts is the role of our indirect partner, the partner’s lack of reporting or compliance could have an impact on the sales of our products to government agencies. Further, the United States Federal government has certain certification and product requirements for products sold to them. If we are unable to meet applicable certification or other requirements within the timeframes specified by the United States Federal government, our revenues and results of operations would be adversely impacted.

While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we are required to furnish a report by our management on our internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. While we were able to assert in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, that our internal control over financial reporting was effective as of December 31, 2006, we must continue to monitor and assess our internal control over financial reporting. In addition, our control framework may suffer if we are unable to effectively incorporate SpectraLink and SpectraLink’s existing controls into our control structure or to adapt our control framework appropriately as we continue to grow our business. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

Changes in existing financial accounting standards or practices may adversely affect our results of operations.

Changes in existing accounting rules or practices, new accounting pronouncements, or varying interpretations of current accounting pronouncements could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. For example, through 2005, we were not required to record stock-based compensation charges to earnings in connection with stock option grants and other stock awards to our employees. However, the Financial Accounting Standards Board (FASB) issued SFAS 123(R), “Share-Based Payment,” which now requires us to record stock-based compensation charges to earnings for employee stock awards. Such charges reduced net income by $16.3 million in 2006 and by $21.2 million for the first nine months of 2007 and will continue to negatively impact our future earnings. In addition, future changes to various assumptions used to determine the fair value of awards issued or the amount and type of equity awards granted create uncertainty as to the amount of future stock-based compensation expense and make such amounts difficult to predict accurately.

Changes in our tax rates could adversely affect our future results.

The Company’s future effective tax rates could be unfavorably affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of the Company’s deferred tax assets and liabilities, or changes in tax laws or their interpretation. For instance, we previously announced an increase in our expected tax rate in 2006 due to the lapse in the U.S. research and development tax credit, which was subsequently reinstated and resulted in a tax rate adjustment in the fourth quarter of 2006. The adoption of SFAS 123(R) also adds more unpredictability and variability to our future effective tax rates. In addition, the adoption of FIN 48 in January 2007 may add more variability to our future effective tax rates. For example, our 2006 effective tax rate increased from 28% to 30% as a result of some of these factors and could further increase in the future.

In addition, the Company is subject to the periodic examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on the Company’s net income and financial condition, possibly materially.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, typhoon or other natural disaster, quarantines or other disruptions associated with infectious diseases, national catastrophe, terrorist activities, war, ongoing Iraqi disturbances, an attack on Israel, disruptions in our computing and communications infrastructure due to power loss, telecommunications failure, human error, physical or electronic security breaches and computer viruses (which could leave us vulnerable to loss of our intellectual property and disruption of our business activities), and other events beyond our control. We do not have a fully implemented detailed disaster recovery plan. In addition, our business interruption insurance may not be sufficient to compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business and results of operations.

Our cash flow could fluctuate due to the potential difficulty of collecting our receivables and managing our inventories.

Over the past few years, we initiated significant investments in Europe and Asia to expand our business in these regions. In Europe and Asia, as with other international regions, credit terms are typically longer than in the United States. Therefore, as Europe, Asia and other international regions grow as a percentage of our revenues, accounts receivable balances will likely increase as compared to previous years. Although, from time to time, we have been able to largely offset the effects of these influences through additional incentives offered to channel partners at the end of each quarter in the form of prepaid discounts, these additional incentives have lowered our profitability. In addition, the recurrence of economic uncertainty or downturn in technology spending in the United States may restrict the availability of capital which may delay our collections from our channel partners beyond our historical experience or may cause companies to file for bankruptcy. Either of these conditions would harm our cash flow and days sales outstanding performance. Although in recent quarters our experience in collecting receivables has been good and we expect this trend to continue, there can be no assurance that it will continue.

Our days sales outstanding (DSO) metric is currently 46 days. While we expect that our DSO metric will increase slightly as we integrate SpectraLink, DSO should continue to be in the 40 to 50 day range. However, our DSO metrics could also increase as a result of fluctuations in revenue linearity, future acquisitions, and a greater mix of international sales, or any other factors.

In addition, as we manage our business and focus on shorter shipment lead times for certain of our products and implement freight cost reduction programs, our inventory levels may increase, resulting in decreased inventory turns that could negatively impact our cash flow. For example, our inventory turns decreased from 7.7 turns in the fourth quarter of 2004 to 5.5 turns in the third quarter of 2007. We believe inventory turns will continue to fluctuate depending upon our ability to reduce lead times, as well as due to changes in product mix and a greater mix of ocean freight versus air freight to reduce freight costs.

Our stock price fluctuates as a result of the conduct of our business and stock market fluctuations.

The market price of our common stock has from time to time experienced significant fluctuations. The market price of our common stock may be significantly affected by a variety of factors, including:

•

statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business, including competitors, partners, suppliers or telecommunications industry leaders or relating to us specifically, as has occurred recently;

•

the announcement of new products or product enhancements by us or our competitors;

•

technological innovations by us or our competitors;

•

quarterly variations in our results of operations;

•

acquisition of one of our competitors by a significantly larger company;

•

general market conditions or market conditions specific to technology industries; and

•

domestic and international macroeconomic factors.

In addition, the stock market continues to experience price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology companies like us. These fluctuations are often unrelated to the operating performance of the specific companies.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchase Program

The following table provides a month-to-month summary of the stock purchase activity during the third quarter ended September 30, 2007:


Period	Total Number of Shares Purchased⁽¹⁾⁽²⁾	Average Price Paid per Share⁽¹⁾⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plan⁽²⁾	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan⁽²⁾
7/01/07 to 7/31/07	—		—	—	$	240,017,000
8/01/07 to 8/31/07	1,617,578	$	30.98	1,613,639	$	190,017,000
9/01/07 to 9/30/07	—		—	—	$	190,017,000

Total	1,617,578	$	30.98	1,613,639

⁽¹⁾	Includes 3,939 of shares repurchased to satisfy tax withholding obligations as a result of the vesting of shares of restricted stock.

⁽²⁾

On August 9, 2005, the Company announced that the Board of Directors had approved a share repurchase plan, pursuant to which it would purchase shares of the Company’s common stock with an aggregate value of up to $250 million in the open market from time to time (“2005 share repurchase plan”). In addition, on May 7, 2007, the Company announced that the Board of Directors had extended its existing program by approving an additional share repurchase program to purchase up to $250 million of its common stock (“2007 share repurchase plan”). During the three and nine months ended September 30, 2007, the Company repurchased 1.6 million and 2.4 million shares of common stock in the open market for cash of $50.0 million and $75.7 million, respectively. As of September 30, 2007, all of the share repurchases authorized under the 2005 share repurchase plan had been completed, and the Company was authorized to purchase up to an additional $190.0 million of shares in the open market under the 2007 share repurchase plan. These shares of common stock have been retired and reclassified as authorized and unissued shares. The 2007 share repurchase plan does not have an expiration date but is limited by the dollar amount authorized.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

Item 5.

OTHER INFORMATION

Not Applicable.

Item 6.

EXHIBITS


Exhibit No.		Description

10.1		Transition Agreement, dated August 9, 2007, by and between the Company and Phil Keenan.

10.2		Retention Agreement, dated October 11, 2007, by and between the Company and Ed Ellett.

31.1		Certification of the President and Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).

31.2		Certification of the Senior Vice President, Finance and Administration and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 5, 2007

POLYCOM, INC.

/S/ ROBERT C. HAGERTY

Robert C. Hagerty

President and Chief Executive Officer

(Principal Executive Officer)

/S/ MICHAEL R. KOUREY

Michael R. Kourey

Senior Vice President, Finance and Administration, and Chief Financial Officer

(Principal Financial Officer)

/S/ LAURA J. DURR

Laura J. Durr

Vice President and Worldwide Controller

(Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

10.1		Transition Agreement, dated August 9, 2007, by and between the Company and Phil Keenan.

10.2		Retention Agreement, dated October 11, 2007, by and between the Company and Ed Ellett.

31.1		Certification of the President and Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).

31.2		Certification of the Senior Vice President, Finance and Administration and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.