POLYCOM INC - FORM 10-Q - October 30, 2009

POLYCOM INC - FORM 10-Q - October 30, 2009

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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, 2009

¨	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)

(925) 924-6000

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months 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 submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 in Exchange Act). Yes ¨ No x

There were 84,393,737 shares of the Company’s Common Stock, par value $.0005, outstanding on October 16, 2009.

POLYCOM, INC.

INDEX

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2009


PART I FINANCIAL INFORMATION		3

Item 1	Financial Statements (unaudited):	3
	Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and September 30, 2008	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and September 30, 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4	Controls and Procedures	37

PART II OTHER INFORMATION		38

Item 1—Legal Proceedings		38
Item 1A—Risk Factors		38
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3—Defaults Upon Senior Securities		59
Item 4—Submission of Matters to a Vote of Security Holders		59
Item 5—Other Information		59
Item 6—Exhibits		60

SIGNATURES		61

PART I – FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

POLYCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)


	September 30, 2009			December 31, 2008
ASSETS
Current assets
Cash and cash equivalents	$	244,517		$	165,669
Short-term investments		151,843			152,407
Trade receivables, net of allowance for doubtful accounts of $3,543 and $3,288 at September 30, 2009 and December 31, 2008 respectively		124,678			126,497
Inventories		69,358			89,730
Deferred taxes		25,203			29,295
Prepaid expenses and other current assets		29,750			34,207

Total current assets		645,349			597,805
Property and equipment, net		79,041			77,294
Long-term investments		11,626			6,420
Goodwill		496,112			495,083
Purchased intangibles, net		51,261			65,369
Deferred taxes		23,184			19,415
Other assets		13,112			16,298

Total assets	$	1,319,685		$	1,277,684

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	58,262		$	57,731
Accrued payroll and related liabilities		19,657			28,711
Deferred revenue		76,606			69,238
Other accrued liabilities		50,160			58,402

Total current liabilities		204,685			214,082
Non-current liabilities
Deferred revenue		43,159			43,285
Taxes payable		28,575			35,878
Deferred taxes		2,763			2,638
Other non-current liabilities		12,151			13,459

Total non-current liabilities		86,648			95,260

Total liabilities		291,333			309,342
Stockholders’ equity
Common stock, $0.0005 par value; Authorized: 175,000,000 shares; Issued and outstanding: 84,319,497 shares at September 30, 2009 and 83,314,500 shares at December 31, 2008		40			40
Additional paid-in capital		1,055,570			1,008,460
Cumulative other comprehensive income (loss)		(2,421	)		4,683
Accumulated deficit		(24,837	)		(44,841	)

Total stockholders’ equity		1,028,352			968,342

Total liabilities and stockholders’ equity	$	1,319,685		$	1,277,684

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, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Revenues:
Product revenues	$	198,955		$	235,397		$	570,668		$	691,693
Service revenues		44,064			40,379			128,452			114,584

Total revenues		243,019			275,776			699,120			806,277

Cost of revenues:
Cost of product revenues		84,288			95,249			242,778			283,383
Cost of service revenues		20,509			19,509			60,569			57,527

Total cost of revenues		104,797			114,758			303,347			340,910

Gross profit		138,222			161,018			395,773			465,367

Operating expenses:
Sales and marketing		70,819			81,562			203,605			231,465
Research and development		29,004			34,456			85,532			105,891
General and administrative		13,556			16,101			39,873			46,023
Acquisition-related integration costs		—			—			—			162
Amortization of purchased intangibles		1,446			1,775			4,344			5,412
Restructuring costs		4,632			4,382			11,476			8,836
Litigation reserves and payments		700			—			700			7,401

Total operating expenses		120,157			138,276			345,530			405,190

Operating income		18,065			22,742			50,243			60,177
Interest and other income (expense), net		(637	)		(689	)		(1,995	)		4,493

Income before provision for income taxes		17,428			22,053			48,248			64,670
Provision for income taxes		3,722			4,111			11,192			14,680

Net income	$	13,706		$	17,942		$	37,056		$	49,990

Basic net income per share	$	0.16		$	0.21		$	0.44		$	0.58

Diluted net income per share	$	0.16		$	0.21		$	0.44		$	0.57

Weighted average shares outstanding for basic net income per share calculation		84,189			84,278			83,855			86,387
Weighted average shares outstanding for diluted net income per share calculation		86,199			86,194			85,168			88,215

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, 2009			September 30, 2008
Cash flows from operating activities:
Net income	$	37,056		$	49,990
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,931			20,620
Amortization of purchased intangibles		14,405			15,779
Provision for doubtful accounts		247			570
Provision for excess and obsolete inventories		3,124			2,510
Non-cash stock-based compensation		21,772			30,212
Excess tax benefits from stock-based compensation		(1,638	)		(4,487	)
Write down of investments other than temporarily impaired		—			921
Loss on disposal of property and equipment		90			102
Changes in assets and liabilities, net of effects of acquisitions:
Trade receivables		1,572			4,395
Inventories		17,248			(23,542	)
Deferred taxes		1,460			1,447
Prepaid expenses and other assets		213			(9,131	)
Accounts payable		531			(8,935	)
Taxes payable		2,974			(1,278	)
Other accrued liabilities		(10,974	)		36,995

Net cash provided by operating activities		113,011			116,168

Cash flows from investing activities:
Purchases of property and equipment		(25,994	)		(35,287	)
Purchases of investments		(408,413	)		(313,695	)
Proceeds from sale and maturity of investments		400,087			278,888

Net cash used in investing activities		(34,320	)		(70,094	)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee option and stock purchase plans		33,958			51,854
Purchase and retirement of common stock		(35,439	)		(222,458	)
Excess tax benefits from stock-based compensation		1,638			4,487

Net cash provided by (used in) financing activities		157			(166,117	)

Net increase (decrease) in cash and cash equivalents		78,848			(120,043	)
Cash and cash equivalents, beginning of period		165,669			279,560

Cash and cash equivalents, end of period	$	244,517		$	159,517

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, 2009, the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008, 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, 2008 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, 2008. 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, 2008.

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 three months ended September 30, 2009 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The Company has performed an evaluation of subsequent events through October 29, 2009, which is the date the financial statements were issued.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies were described in Note 1 to our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”). With the exception of those discussed below, there have been no significant changes to these policies and no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, that are of significance or potential significance to us.

FASB Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification” or “ASC”), the authoritative guidance for GAAP. The Codification is the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009 and the Company has incorporated the current Codification in this Form 10-Q. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.

Recent Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company is currently assessing the potential effect, if any, on its financial statements.

In September 2009, an update was made to “Fair Value Measurements and Disclosures – Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” This update permits entities to measure the fair value of certain investments, including those with fair values that are not readily determinable, on the basis of the net asset value per share of the investment (or its equivalent) if such net asset value is calculated in a manner consistent with the measurement principles in “Financial Services-Investment Companies” as of the reporting entity’s measurement date (measurement of all or substantially all of the underlying investments of the investee in accordance with the “Fair Value Measurements and Disclosures” guidance). The update also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. This update will be effective for the company beginning October 1, 2009. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company’s consolidated financial position and results of operations when it becomes effective.

In August 2009, the FASB issued additional authoritative guidance for the fair value measurement of liabilities. The guidance is effective for the first reporting period (including interim periods) beginning after issuance. We will apply the guidance in the fourth quarter of fiscal 2009. The adoption of the guidance is not expected to have any significant impact on the Company’s condensed consolidated financial statements or related footnotes.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for the Company beginning January 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The Company believes adoption of this new guidance will not have a material impact on its financial statements.

In December 2007 the FASB issued authoritative guidance on accounting for business combinations, which established principles and requirements for the acquirer of a business to recognize and measure in its financial statements the identifiable assets (including in-process research and development and defensive assets) acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company believes this guidance will have an impact on its consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the January 1, 2009 effective date.

3. GOODWILL AND PURCHASED INTANGIBLES

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


	Video Solutions			Voice Communications Solutions			Services Segment			Total
Balance at December 31, 2008	$	269,721		$	134,750		$	90,612		$	495,083
Foreign currency translation		(3	)		1,350			359			1,706
Changes in fair value of assets acquired and liabilities assumed		(309	)		(254	)		(114	)		(677	)

Balance at September 30, 2009	$	269,409		$	135,846		$	90,857		$	496,112

The following table presents details of the Company’s total purchased intangible assets as of September 30, 2009 and December 31, 2008 (in thousands):


	September 30, 2009							December 31, 2008
Purchased Intangible Assets	Gross Value		Accumulated Amortization and Impairment			Net Value		Gross Value		Accumulated Amortization and Impairment			Net Value
Core and developed technology	$	109,178	$	(77,392	)	$	31,786	$	109,178	$	(67,952	)	$	41,226
Patents		14,068		(14,068	)		—		14,068		(14,068	)		—
Customer and partner relationships		44,625		(31,713	)		12,912		44,625		(28,951	)		15,674
Trade name		10,021		(4,759	)		5,262		10,021		(3,940	)		6,081
Other		4,862		(3,561	)		1,301		4,862		(2,474	)		2,388

Total	$	182,754	$	(131,493	)	$	51,261	$	182,754	$	(117,385	)	$	65,369

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the three and nine months ended September 30, 2009, the Company recorded amortization expense related to purchased intangibles of $1.4 million and $4.3 million, respectively, which is included in “Amortization of purchased intangibles” in the condensed consolidated statement of operations. For the three and nine months ended September 30, 2008, the Company recorded amortization expense related to purchased intangibles of $1.8 million and $5.4 million, respectively, which is included in “Amortization of purchased intangibles” in the condensed consolidated statement of operations. The Company recorded approximately $3.4 million and $10.1 million during the three and nine months ended September 30, 2009, respectively, of amortization of purchased intangibles to “Cost of product revenues” in the Condensed Consolidated Statement of Operations. The Company also recorded approximately $3.4 million and $10.3 million during the three and nine months ended September 30, 2008, respectively, of amortization of purchased intangibles to “Cost of product revenues” in the Condensed Consolidated Statement of Operations. Amortization of intangibles is not allocated to the Company’s segments.

The estimated future amortization expense of purchased intangible assets as of September 30, 2009 is as follows (in thousands):


Year ending December 31,	Amount
Remainder of 2009	$	4,835
2010		19,265
2011		14,426
2012		9,947
2013		1,870

Total	$	50,343

Purchased intangibles includes a purchased trade name intangible of $0.9 million with an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. Consequently, this trade name is not amortized but is reviewed for impairment annually or sooner under certain circumstances.

4. ACQUISITION-RELATED INTEGRATION COSTS AND LIABILITIES

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


	Facility Closings			Severance and Related Benefits
Balance at December 31, 2008	$	1,963		$	129
Additions to the reserve		57			—
Cash payments and other usage		(187	)		(58	)
Release of reserve		(184	)		(71	)

Balance at September 30, 2009	$	1,649		$	—

The Company had approximately $0.5 million and $0.6 million in acquisition-related reserves classified as current liabilities at September 30, 2009 and December 31, 2008, respectively. Approximately $1.2 million and $1.5 million of acquisition-related reserves were classified as long term liabilities at September 30, 2009 and December 31, 2008, respectively.

Facility Closings

The Company’s facility closings liability at September 30, 2009 relates to liabilities of $1.6 million associated with the SpectraLink acquisition as a result of plans to vacate three vacant facilities, as well as one vacant facility from the PictureTel acquisition. During the nine months ended September 30, 2009, the Company recorded a net decrease of $0.2 million to the restructuring related to these facility closings.

Severance and Related Benefits

During 2007, 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. During the nine months ended September 30, 2009, the Company released the final $0.1 million of the liability balance against the restructuring reserve.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

5. RESTRUCTURING COSTS

During the three months ended September 30, 2009 and 2008, the Company recorded $4.6 million and $4.4 million, respectively, related to restructuring actions that resulted from the elimination or relocation of various positions as part of restructuring plans approved by management. These actions are generally intended to streamline and focus our efforts and more properly align our cost structure with our projected revenue streams. During the nine months ended September 30, 2009 and 2008, the Company recorded $11.5 million and $8.8 million, respectively, related to these actions.

During the third quarter of 2009, the Company committed to a restructuring plan to realign and reinvest resources in the strategic growth areas of the business. The Company plans to eliminate those positions that are not aligned with the go-to-market structure under our new sales leadership and reallocate resources to growth areas. The plan initially included the elimination of approximately three percent of the Company’s global workforce and we expected to record restructuring charges resulting from these actions totaling between approximately $5 million and $6 million. The Company has identified additional headcount reductions as part of this plan which brings the total headcount elimination to approximately four percent of the Company’s global workforce and will result in total restructuring charges of approximately $8.5 million, of which $4.6 million was recorded in the third quarter of 2009 and the remaining charges will be recorded in the fourth quarter of 2009. All amounts will be paid in cash through the second quarter of 2010. These charges and payments primarily related to severance and other employee termination benefits.

In addition to the actions taken in the third quarter of 2009, the Company eliminated certain positions during the first and second quarters of 2009 related to eliminating approximately six percent of our workforce at the beginning of the year, as well as consolidating certain functions in our shared services center in Beijing, China. As a result of these actions, the Company recorded restructuring charges of $6.9 million and made cash expenditures totaling $5.7 million during the nine months ended September 30, 2009, primarily related to severance and other employee termination benefits. The majority of the remaining cash expenditures are expected to be paid by the end of 2009.

In 2008, management approved various plans for eliminating certain positions throughout the Company. These actions were intended to streamline and focus our efforts and more properly align our cost structure with projected revenue streams. These actions included additional reductions in the third quarter of 2008. As a result of these recent actions, the Company expected to record charges totaling $3.4 million for severance and other employee termination benefits, all of which was recorded during the three months ended September 30, 2008. In addition, the Company recorded additional charges totaling approximately $1.0 million related to actions taken during the first and second quarters of 2008.

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


	Severance and Related Benefits
Balance at December 31, 2008	$	1,783
Additions to the reserve		11,467
Cash payments and other usage		(9,182	)

Balance at September 30, 2009	$	4,068

6. BALANCE SHEET DETAILS

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, 2009		December 31, 2008
Raw materials	$	5,574	$	5,040
Work in process		1,270		1,356
Finished goods		62,514		83,334

	$	69,358	$	89,730

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Deferred revenues consist of the following (in thousands):


	September 30, 2009		December 31, 2008
Short-term:
Service	$	70,849	$	62,746
Product		4,221		5,022
License		1,536		1,470

	$	76,606	$	69,238


Long-term:
Service	$	31,164	$	29,225
Product		1,670		2,685
License		10,325		11,375

	$	43,159	$	43,285

The deferred license revenue relates to the Codian agreement discussed in Note 15.

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


	September 30, 2009		December 31, 2008
Accrued expenses	$	10,940	$	12,277
Accrued co-op expenses		6,486		10,507
Restructuring and acquisition related reserves		4,661		2,408
Warranty obligations		9,365		11,167
Derivative liability		8,648		10,785
Sales tax payable		1,078		753
Employee stock purchase plan withholding		2,134		5,438
Other accrued liabilities		6,848		5,067

	$	50,160	$	58,402

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.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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


	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Balance at beginning of period	$	9,240		$	11,556		$	11,167		$	10,538
Accruals for warranties issued during the period		4,531			4,868			12,151			15,258
Cost of providing warranty during the period		(4,406	)		(5,047	)		(13,953	)		(14,419	)

Balance at end of period	$	9,365		$	11,377		$	9,365		$	11,377

Deferred Maintenance Revenue

The Company offers maintenance contracts for sale on most of its products which 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 $70.8 million and $62.7 million is short-term and is included as a component of “Deferred revenue” as of September 30, 2009 and December 31, 2008, respectively, and $31.2 million and $29.2 million is long-term and is included in “Long-term deferred revenue” as of September 30, 2009 and December 31, 2008, respectively, on the condensed consolidated balance sheets. Changes in deferred maintenance revenue for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Balance at beginning of period	$	98,983		$	83,041		$	91,971		$	77,082
Additions to deferred maintenance		40,756			38,375			119,349			106,745
Amortization of deferred maintenance revenue		(37,726	)		(33,586	)		(109,307	)		(95,997	)

Balance at end of period	$	102,013		$	87,830		$	102,013		$	87,830

The cost of providing maintenance services for the three and nine months ended September 30, 2009 was $19.7 million and $57.9 million, respectively. The cost of providing maintenance services for the three and nine months ended September 30, 2008 was $18.7 million and $55.2 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

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.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

8. INVESTMENTS AND FAIR VALUE MEASUREMENTS:

The Company had cash and cash equivalents of $244.5 million and $165.7 million at September 30, 2009 and December 31, 2008, respectively. Cash and cash equivalents consist of cash in banks, as well as highly liquid investments in money market funds, time deposits, savings accounts, commercial paper, U.S. government securities and corporate debt securities. At September 30, 2009, the Company’s long-term investments had contractual maturities of one to two years.

In addition, the Company has short-term and long-term investments in debt and equity securities and also has strategic investments in private and public companies which are summarized as follows (in thousands):


	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Balances at September 30, 2009:
Investments—Short-term:
U.S. government securities	$	99,460	$	73	$	(1	)	$	99,532
Corporate debt securities		7,550		19		—			7,569
Corporate preferred equity securities		53,138		5		(8,401	)		44,742

Total investments – short-term	$	160,148	$	97	$	(8,402	)	$	151,843

Investments—Long-term:
U.S. government securities	$	5,003	$	99	$	—		$	5,102
Corporate debt securities		6,495		29		—			6,524

Total investments – long-term	$	11,498	$	128	$	—		$	11,626

Investments—privately-held companies	$	2,194	$	—	$	—		$	2,194

Balances at December 31, 2008:
Investments—Short-term:
U.S. government securities	$	83,956		424	$	—		$	84,380
Corporate debt securities		18,204		34		(70	)		18,168
Corporate preferred equity securities		54,857		641		(5,639	)		49,859

Total investments – short-term	$	157,017	$	1,099	$	(5,709	)	$	152,407

Investments—Long-term:
U.S. government securities	$	5,006	$	178	$	—		$	5,184
Corporate debt securities		1,292		—		(56	)		1,236

Total investments – long-term	$	6,298	$	178	$	(56	)	$	6,420

Investments—privately-held companies	$	2,194	$	—	$	—		$	2,194

As of September 30, 2009, the Company’s total cash and cash equivalents and investments held in the United States totaled $165.9 million with the remaining $242.1 million held outside of the United States in various foreign subsidiaries.

U.S. Government Securities

The Company’s U.S. government and agency securities are comprised of direct U.S. Treasury obligations and other U.S. government agency instruments, including mortgage backed securities which are guaranteed by the U.S. government. To ensure that our investment portfolio is sufficiently diversified, our investment policy requires that a certain percentage of our portfolio be invested in these types of securities.

Corporate Debt Securities

The Company’s corporate debt securities are comprised of publicly-traded domestic and foreign corporate debt securities. The Company does not purchase auction rate securities, and cash investments are in instruments that meet high quality credit rating standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer or type of instrument.

Corporate Preferred Equity Securities

The Company’s corporate preferred equity securities are primarily comprised of investment-grade, non-convertible utility preferred stocks that are generally rated the equivalent of BBB or better by at least one of the major credit rating agencies. These corporate preferred equity securities are part of a dividend capture program. This program also permits the purchase of put options on U.S. Treasury bond futures as an interest rate hedge. While an active market exists for these securities, preferred equity securities are not as actively traded as common stock equity securities.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the fair value and gross unrealized losses of our investments, including those that are categorized as cash equivalents, with unrealized losses 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, 2009 and December 31, 2008 (in thousands):


	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, 2009:
U.S. government securities	$	1,151	$	(1	)	$	—	$	—	$	1,151	$	(1	)
Corporate preferred equity securities		42,857		(8,401	)		—		—		42,857		(8,401	)

Total investments	$	44,008	$	(8,402	)	$	—	$	—	$	44,008	$	(8,402	)


	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, 2008:
Corporate debt securities	$	10,522	$	(126	)	$	—	$	—	$	10,522	$	(126	)
Corporate preferred equity securities		36,701		(5,639	)		—		—		36,701		(5,639	)

Total Investments	$	47,223	$	(5,765	)	$	—	$	—	$	47,223	$	(5,765	)

The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other than temporary. If the decline in fair value is considered to be other than temporary, the cost basis of the individual security is written down to its fair value as a new cost basis, and the amount of the write-down is accounted for as a realized loss and included in earnings. During the three and nine months ended September 30, 2009, the Company determined that there were no investments in its portfolio that were other-than temporarily impaired. During the three months ended September 30, 2008, the Company determined that certain corporate preferred equities in its portfolio were other-than temporarily impaired, which resulted in a write down of approximately $0.9 million, which is included in “Other income (loss), net” in the accompanying condensed consolidated statement of operations for the three and nine month periods ended September 30, 2008.

Private Company Investments

For strategic reasons the Company has made various investments in private companies. The private company investments are carried at cost and written down to their estimated net realizable value when indications exist that these investments have been impaired. These investments are recorded in “Other assets” in our condensed consolidated balance sheets.

Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As the basis for considering such assumptions, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, including our marketable securities and foreign currency contracts.

The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include money market funds. Such instruments are generally classified within Level 1 of the fair value hierarchy.

The types of instruments valued based on other observable inputs include U.S. Treasury securities and other government agencies, corporate bonds, commercial paper, preferred stocks and puts on treasury bond futures. Such instruments are generally classified within Level 2 of the fair value hierarchy.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of September 30, 2009, our fixed income available-for-sale securities include U.S. Treasury obligations and other government agency instruments (89%), corporate bonds (4%), commercial paper (4%) and money market funds (3%). Included in available-for-sale securities is approximately $123.7 million of cash equivalents, which consist of investments with maturities of three months or less and include money market funds.

Our non-fixed income available-for-sale securities represent preferred stocks and puts on treasury bond futures as part of a dividend recapture program that generates capital gains to offset capital losses.

The principal market where we execute our foreign currency contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The Company’s foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy. The fair value of the Company’s marketable securities and foreign currency contracts was determined using the following inputs at September 30, 2009 (in thousands):


			Fair Value Measurements at Reporting Date Using
(in thousands) Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
			(Level 1)		(Level 2)
Assets:
Fixed Income available-for-sale securities (a)	$	242,472	$	6,152	$	236,320
Non-fixed income available-for-sale securities (a)	$	44,742		—	$	44,742
Foreign currency forward contracts (b)	$	4,938		—	$	4,938
Liabilities:
Foreign currency forward contracts (c)	$	8,648		—	$	8,648

(a)	Included in cash and cash equivalents and short and long-term investments on our consolidated balance sheet.

(b)	Included in short-term derivative asset on our consolidated balance sheet.

(c)	Included in short-term derivative liability on our consolidated balance sheet.

9. FOREIGN CURRENCY DERIVATIVES

The Company maintains a foreign currency risk management program that is designed to reduce the volatility of the Company’s economic value from the effects of unanticipated currency fluctuations. International operations generate both revenues and costs denominated in foreign currencies. The Company’s policy is to hedge significant foreign currency revenues and costs to improve margin visibility and reduce earnings volatility associated with unexpected changes in currency.

Non-Designated Hedges

The Company hedges its net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated revenues and expenses 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 are carried at fair value with changes in the fair value recorded as interest and 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 remeasurement gains and losses on the hedged assets and liabilities. The Company executes non-designated foreign exchange forward contracts primarily denominated in Euros, British Pounds and Israeli Shekels.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at September 30, 2009 of the outstanding non-designated hedges (foreign currency and dollar amounts in thousands):


	Original Maturities of 360 Days or Less				Original Maturities of Greater than 360 Days
	Foreign Currency	USD Equivalent		Positions	Foreign Currency	USD Equivalent		Positions
Euro	4,528	$	6,490	Buy	4,284	$	5,893	Buy
Euro	5,519	$	8,048	Sell	14,944	$	20,557	Sell
British Pound	506	$	725	Buy	3,405	$	5,927	Buy
British Pound	2,503	$	4,132	Sell	4,701	$	8,184	Sell
Israeli Shekel	2,735	$	720	Sell	14,451	$	4,138	Buy

The following table shows the effect of the Company’s non-designated hedges in the condensed consolidated statement of operations for the nine months ended September 30, 2009 (in thousands):

Derivatives Not Designated as Hedging Instruments

Location of Gain or (Loss)

Recognized in Income on Derivative

Amount of Gain or (Loss)
Recognized in Income on Derivative

Foreign exchange contracts

Interest and other income (expense), net

(1,194

)

Cash Flow Hedges

The Company’s foreign exchange risk management program objective is to reduce volatility in the Company’s economic value from unanticipated foreign currency fluctuations. The Company designates forward contracts as cash flow hedges of foreign currency revenues and expenses, primarily the Euro, British Pound and Israeli Shekel. All foreign exchange contracts are carried at fair value on the balance sheet and the maximum duration of foreign exchange forward contracts do not exceed thirteen months. Speculation is prohibited by policy.

To receive hedge accounting treatment under ASC 815, Derivatives and Hedging, all cash flow hedging relationships are formally designated at hedge inception, and tested both prospectively and retrospectively to ensure the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions. The Company records effective spot to spot changes in these cash flow hedges in cumulative other comprehensive income (loss) until they are reclassified to revenue, cost of goods sold or operating expenses together with the hedged transaction. The time value on forward contracts is excluded from effectiveness testing and recorded to interest and other income (expense) over the life of the contract together with any ineffective portion of the hedge.

The following tables show the effect of the Company’s derivative instruments designated as cash flow in the condensed consolidated statements of operations for the nine month ended September 30, 2009 (in thousands):


	Nine Months Ended September 30, 2009
	Gain or (Loss) Recognized in OCI—Effective Portion			Location of Gain or (Loss) Reclassified from OCI into Income—Effective Portion	Gain or (Loss) Reclassified from OCI into Income— Effective Portion			Location of Gain or (Loss) Recognized—Ineffective Portion and Amount Excluded from Effectiveness Testing	Gain or (Loss) Recognized— Ineffective Portion and Amount Excluded from Effectiveness Testing (a)
Foreign exchange contracts	$	(2,777	)	Product revenues	$	10,581		Interest and other income (expense), net	$	125
Foreign exchange contracts				Cost of revenues		(1,247	)
Foreign exchange contracts				Sales and marketing		(3,209	)
Foreign exchange contracts				Research and development		(1,389	)
Foreign exchange contracts				General and administrative		(1,409	)

Total	$	(2,777	)		$	3,327			$	125

(a)	For the nine months ended September 30, 2009, a $0.3 million loss was recorded for the excluded portion and a $0.4 million gain was recorded for the ineffective portion of the hedge.

As of September 30, 2009, the Company estimated all values reported in accumulated other comprehensive income (loss) will be reclassified to income within the next twelve months.

The following table summarizes the derivative-related activity in cumulative other comprehensive income (loss) (in thousands and not tax effected):


	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Beginning Balance	$	(2,130	)	$	(755	)	$	3,567		$	(2	)
Net gains/losses reclassified into earnings for revenue hedges		159			(282	)		(10,581	)		1,479
Net gains/losses reclassified into earnings for expense hedges		437			(153	)		7,254			(1,390	)
Net change in fair value of cash flow hedges		(1,429	)		6,296			(3,203	)		5,019

Ending Balance	$	(2,963	)	$	5,106		$	(2,963	)	$	5,106

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 immediately reclassified to interest and other income (expense) on the consolidated statement of operations. For the nine months ended September 30, 2009, there were net gains of $0.4 million recognized in interest and other income (expense) relating to hedges of forecasted transactions that did not occur.

The following table summarizes the Company’s notional position by currency, and approximate U.S. dollar equivalent, at September 30, 2009 of the outstanding cash flow hedges, all of which are carried at fair value on the balance sheet (foreign currency and dollar amounts in thousands):


	Original Maturities of 360 Days or Less				Original Maturities of Greater than 360 Days
	Foreign Currency	USD Equivalent		Positions	Foreign Currency	USD Equivalent		Positions
Euro	5,170	$	6,734	Buy	12,539	$	17,488	Buy
Euro	21,488	$	28,454	Sell	32,987	$	46,209	Sell
British Pound	5,251	$	7,804	Buy	9,719	$	15,108	Buy
British Pound	7,400	$	10,995	Sell	10,262	$	16,037	Sell
Israeli Shekel	16,264	$	4,098	Buy	31,703	$	8,008	Buy

The estimates of fair value are based on applicable and commonly quoted prices and prevailing financial market information as of September 30, 2009. See Note 8 for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities that are measured at fair value in the condensed consolidated financial statements on a recurring basis. The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the condensed consolidated balance sheet as of September 30, 2009 (in thousands):


	September 30, 2009
	Fair Value of Derivatives Designated as Hedge Instruments		Fair Value of Derivatives Not Designated as Hedge Instruments
Derivative assets (a):
Foreign exchange contracts	$	3,531	$	1,407

Derivative liabilities (b):
Foreign exchange contracts	$	6,494	$	2,154

(a)	All derivative assets are recorded as prepaid and other current assets in the condensed consolidated balance sheets.

(b)	All derivative liabilities are recorded as other accrued liabilities in the condensed consolidated balance sheets.

10. STOCKHOLDER’S EQUITY

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recorded for the three and nine months ended September 30, 2009 and 2008 and its allocation within the condensed consolidated statement of operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2009		September 30, 2008		September 30, 2009		September 30, 2008
Cost of sales – product	$	469	$	652	$	1,437	$	2,102
Cost of sales – service		740		856		2,110		2,757

Stock-based compensation expense included in cost of sales		1,209		1,508		3,547		4,859
Sales and marketing		2,542		2,948		7,053		9,652
Research and development		1,669		2,700		5,430		8,497
General and administrative		2,265		2,702		5,742		7,204

Stock-based compensation expense included in operating expenses		6,476		8,350		18,225		25,353
Stock-based compensation related to employee equity awards and employee stock purchases		7,685		9,858		21,772		30,212
Tax benefit		1,649		1,791		5,048		6,859

Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax	$	6,036	$	8,067	$	16,724	$	23,353

No stock-based compensation was capitalized during the three and nine months ended September 30, 2009 and 2008 due to these amounts being immaterial. There was no stock-based compensation related to acquisitions during the three and nine months ended September 30, 2009 and 2008.

Valuation Assumptions

The Company granted 100,000 stock options during the three and nine months ended September 30, 2009. During the nine months ended September 30, 2008, the Company granted options to purchase 228,195 shares of common stock. There were no options granted during the three months ended September 30, 2008. The weighted-average estimated fair value of employee stock options

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

granted during the three and nine months ended September 30, 2009 was $8.30 per share. The weighted-average estimated fair value of employee stock options granted during the nine months ended September 30, 2008 was $8.03 per share. 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, 2009 was $6.29 per share and $5.14 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, 2008 was $6.61 per share and $6.77 per share, respectively. The fair value of each stock 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 graded vesting attribution approach using the following assumptions:


	Three Months Ended September 30, 2009				Nine Months Ended September 30, 2009
	Stock Options		Employee Stock Purchase Plan		Stock Options		Employee Stock Purchase Plan
Expected volatility	42.24	%	41.20	%	42.24	%	52.02	%
Risk-free interest rate	1.96	%	0.28	%	1.96	%	0.35	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%
Expected life (yrs)	4.01		0.50		4.01		0.49

	Three Months Ended September 30, 2008				Nine Months Ended September 30, 2008
	Stock Options		Employee Stock Purchase Plan		Stock Options		Employee Stock Purchase Plan
Expected volatility	—		44.40	%	40.32	%	43.97	%
Risk-free interest rate	—		1.88	%	2.37	%	2.01	%
Expected dividends	—		0.0	%	0.0	%	0.0	%
Expected life (yrs)	—		0.50		3.93		0.50

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 assumption 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.

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, 2009 and 2008 is based on awards ultimately expected to vest, such amounts have been reduced for estimated forfeitures. Forfeitures are 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 and Restricted Stock Units

The Compensation Committee of the Board of Directors may also grant performance shares and restricted stock units under the 2004 Plan to officers, to non-employee directors and to certain other employees as a component of the Company’s broad-based equity compensation program. Performance shares represent a commitment by the Company to deliver shares of Polycom common stock at a future point in time, subject to the fulfillment by the Company of pre-defined performance criteria. The number of performance shares subject to vesting is determined at the end of a given performance period. Generally, if the performance criteria are deemed achieved, performance shares will vest from one to three years from the anniversary of the grant date. Restricted stock units are time-based awards that generally vest over a period of two to three years from the date of grant.

For 2009, the Company granted performance shares which contain a market condition based on Total Shareholder Return (TSR) and which measure the Company’s relative performance against the Russell 2000 Index. Such awards will be earned only if performance goals over the performance periods established by or under the direction of the Compensation Committee are met. The performance shares will be delivered in common stock at the end of the vesting period based on the Company’s actual performance compared to the target performance criteria and may equal from zero percent (0%) to two hundred (200%) of the target award. The

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock among the Russell 2000 Index companies over each performance period. During the nine months ended September 30, 2009, the Company granted 499,025 target performance shares, which are evenly divided over three annual performance periods commencing with calendar 2009, at a weighted average fair value of $17.79 per share. Stock-based compensation expense for these performance shares is recognized using the graded vesting method over the three year service period.

In addition, in 2009 the Company also granted 125,000 target performance shares which are subject to the fulfillment by the Company of certain pre-defined performance criteria over multiple performance periods. The actual number of performance shares will be determined at the end of a given performance period.

The Company also granted restricted stock units during the nine months ended September 30, 2009. The fair value of restricted stock units is based on the closing market price of the Company’s common stock on the date of award. The awards generally vest over two or three years in equal annual installments on each anniversary of the date of grant and will be delivered in common stock at the end of each vesting period. Stock-based compensation expense for these restricted stock units is recognized using the graded vesting method. During the nine months ended September 30, 2009 and 2008, the Company granted 1,254,050 and 457,202 restricted stock units at a weighted average fair value of $14.60 and $23.54 per share, respectively.

Non-employee directors currently receive annual awards of restricted stock units. The restricted stock units vest quarterly over one year from the date of grant. The fair value of these awards is the fair market value of the Company’s common stock on the date of grant. Stock-based compensation expense for these awards is generally amortized over nine months from the date of grant due to voluntary termination provisions contained in the underlying agreements.

Stock Option Exchange Program

On August 21, 2009, the Company completed a one-time stock option exchange program, which was approved by its stockholders in May 2009, pursuant to which eligible employees were able to exchange certain outstanding options, whether vested or unvested, for new restricted stock units (RSUs). Eligible employees were able to exchange all of their eligible outstanding options with an exercise price greater than $28.94 per share under certain stock plans that were granted on or before July 27, 2008. A total of 2,340,994 options, ranging in exercise price from $30.19 to $50.13 were exchanged. All surrendered options were cancelled, and immediately thereafter, the Company issued a total of 445,007 RSUs. The vesting schedule of the RSUs will generally be that 50% of the shares will vest on the one-year anniversary of the new RSU grant date and the remaining 50% of the shares will vest on the second anniversary of the new RSU grant date, subject to the employee’s continued employment with the Company through the relevant dates. The exchange is considered to be a modification to the original equity award. In addition to continuing to amortize the remaining stock compensation associated with the exchanged options, the exchange resulted in an incremental $1.4 million in stock compensation expense which will be expensed over the two-year service period of the RSUs.

Employee Stock Purchase Plan

During the nine months ended September 30, 2009 and 2008, 898,464 and 575,603 shares were purchased at average per share prices of $12.00 and $20.77, respectively. At September 30, 2009, there were 2,743,505 shares available to be issued under the employee stock purchase plan. The stock-based compensation cost recognized in connection with the employee stock purchase plan for the three and nine months ended September 30, 2009 was $0.6 million and $2.7 million, respectively. The stock-based compensation cost recognized in connection with the employee stock purchase plan for the three and nine months ended September 30, 2008 was $0.9 million and $3.1 million, respectively.

Share Repurchase Program

From time to time, the Company’s Board of Directors has approved plans under which the Company may at its discretion purchase shares of its common stock in the open market. During the three and nine months ended September 30, 2009, the Company purchased 0.8 million shares and 1.6 million shares, respectively, of common stock in the open market for cash of $20.0 million and $32.8 million, respectively. During the three and nine months ended September 30, 2008, the Company purchased 3.1 million shares and 8.9 million shares, respectively, of common stock in the open market for cash of $80.0 million and $220.0 million, respectively. The purchase price for the shares of the Company’s stock repurchased is recorded as a reduction to stockholders’ equity. As of September 30, 2009, the Company was authorized to purchase up to an additional $187.2 million of shares in the open market under the current share repurchase plan.

11. 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 or the conversion of preferred stock to common stock. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is antidilutive.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, 2009		September 30, 2008		September 30, 2009		September 30, 2008
Numerator—basic and diluted net income per share:
Net income	$	13,706	$	17,942	$	37,056	$	49,990

Denominator—basic and diluted net income per share:
Weighted average shares used to compute basic net income per share		84,189		84,278		83,855		86,387
Effect of dilutive common stock equivalents:
Stock options to purchase common stock		839		1,453		423		1,445
Restricted common stock awards and performance shares		1,171		463		890		383

Total shares used in calculation of diluted net income per share		86,199		86,194		85,168		88,215

Basic net income per share	$	0.16	$	0.21	$	0.44	$	0.58

Diluted net income per share	$	0.16	$	0.21	$	0.44	$	0.57

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, 2009, approximately 3.1 million and 5.6 million shares, and for the three and nine months ended September 30, 2008, approximately 4.6 million and 4.7 million shares, relating to potentially dilutive securities, primarily from stock options were excluded from the denominator in the computation of diluted net income per share because their inclusion would be anti-dilutive.

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 three product categories: Video Solutions, Voice Communications Solutions 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 the authoritative guidance. A description of the types of products and services provided by each reportable segment is as follows:

Video Solutions Segment

Video Solutions includes a wide range of video conferencing collaboration products from entry level to professional high definition and telepresence products to meet the needs of any meeting room, from small offices to large boardrooms and auditoriums. This segment also includes products that 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.

Voice Communications Solutions Segment

Voice Communications Solutions includes a wide range of voice communications products that enhance business communications in the conference room, on the desktop and in mobile applications.

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.

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, 2009 and 2008 (in thousands):


	Video Solutions		Voice Communications Solutions		Services		Total
For the three months ended September 30, 2009:
Revenue	$	127,870	$	71,085	$	44,064	$	243,019
Contribution margin		58,617		28,696		21,291		108,604
As of September 30, 2009: Inventories		34,181		20,396		14,781		69,358
For the three months ended September 30, 2008:
Revenue	$	145,953	$	89,444	$	40,379	$	275,776
Contribution margin		70,559		37,601		17,855		126,015
As of September 30, 2008: Inventories		39,763		35,303		17,072		92,138
For the nine months ended September 30, 2009:
Revenue	$	376,547	$	194,121	$	128,452	$	699,120
Contribution margin		174,378		74,639		61,337		310,354
For the nine months ended September 30, 2008:
Revenue	$	417,056	$	274,637	$	114,584	$	806,277
Contribution margin		197,110		113,511		49,106		359,727

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


	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Segment contribution margin	$	108,604		$	126,015		$	310,354		$	359,727
Corporate and unallocated costs		(72,600	)		(83,727	)		(211,479	)		(236,775	)
Stock-based compensation		(7,685	)		(9,859	)		(21,772	)		(30,212	)
Effect of stock-based compensation cost on warranty expense		(95	)		(93	)		(280	)		(385	)
Acquisition related-costs		—			—			—			(162	)
Amortization of purchased intangibles		(4,827	)		(5,212	)		(14,405	)		(15,779	)
Litigation reserves and payments		(700	)		—			(700	)		(7,401	)
Restructuring costs		(4,632	)		(4,382	)		(11,475	)		(8,836	)
Interest and other income (expense), net		(637	)		(689	)		(1,995	)		4,493

Income before provision for income taxes	$	17,428		$	22,053		$	48,248		$	64,670

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

13. COMPREHENSIVE INCOME

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


	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Net income	$	13,706		$	17,942		$	37,056		$	49,990
Change in unrealized gain (loss) on investments		1,319			1,629			(2,450	)		(535	)
Change in cumulative translation adjustment		1,959			(5,959	)		1,875			(1,163	)
Change in unrealized gain (loss) on hedging securities		(832	)		5,861			(6,529	)		5,108

Comprehensive income	$	16,152		$	19,473		$	29,952		$	53,400

14. INCOME TAXES

The Company’s overall effective tax rate for the three and nine months ended September 30, 2009 was 21.4% and 23.2%, respectively, which resulted in a provision for income taxes of $3.7 million and $11.2 million, respectively. The effective tax rate for the three and nine months ended September 30, 2008 was 18.6% and 22.7%, respectively, which resulted in a provision for income taxes of $4.1 million and $14.7 million, respectively. The increase in the effective tax rate for the three and nine months ended September 30, 2009 as compared to the same periods in 2008 was primarily related to the release of $2.3 million in tax reserves due to the lapse of the statutes of limitation in various foreign jurisdictions in the third quarter of 2008 offset by a relative increase in foreign earnings in 2009 which are subject to lower tax rates, combined with the benefit of the federal research and development tax credit which is reflected in the tax rate in 2009, but not included in the 2008 tax rate until December 2008 as the credit was reinstated in October 2008 and retroactively extended from January 1, 2008.

In the three months ended September 30, 2009, the Company released $0.4 million in tax reserves due to the lapse of statutes of limitation in the U.S. and foreign jurisdictions. Offsetting the reserve releases was an increase to the tax reserves of $2.9 million related to net operating losses from the acquisition of PictureTel that were used to offset current taxes payable during the period along with an increase of $0.1 million for movement in foreign exchange rates during the quarter. In the nine months ended September 30, 2009, additional reserve releases of $0.9 million in the first quarter and $9.9 million in the second quarter were recorded related to statute expirations. The second quarter reserve release of $9.8 million related to the lapse of statutes of limitation in the U.S. and was recorded as an adjustment to additional paid in capital. In the three months ended September 30, 2008, the Company released $2.4 million in tax reserves, $2.3 million of which was due to the lapse of the statutes of limitation in various foreign jurisdictions, and $0.1 million of which was a pre-acquisition reserve for SpectraLink related to a statute expiration that was reflected as an adjustment to goodwill in the third quarter of 2008. For the nine months ended September 30, 2008, the total reserve release was $3.1 million, including $0.7 million in tax reserves that were released in the first quarter of 2008 for a statute expiration in Japan. As of September 30, 2009, the Company has $39.1 million of unrecognized tax benefits compared to $55.8 million at September 30, 2008. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2009, the Company had approximately $4.0 million of accrued interest and penalties related to uncertain tax positions. As of September 30, 2008, the Company had approximately $3.6 million of accrued interest and penalties related to uncertain tax positions.

15. LITIGATION AND SETTLEMENT AGREEMENTS

During the three months ended September 30, 2009, the Company recorded a $0.7 million reserve as Litigation reserves and payments in the Condensed Consolidated Statement of Operations related to an ongoing legal matter.

In February 2008, the Company, TANDBERG asa (“Tandberg”), Codian Ltd. (“Codian”) and certain of their respective affiliates entered into a settlement agreement to dismiss all litigation between the parties. Under the terms of the agreement, the Company received a lump-sum payment of $14.0 million, and will receive future patent royalties on the Codian MCU 4200 product shipped in the United States. The parties have also exchanged broad cross-licenses covering their respective business lines. The $14.0 million is being amortized to revenue over the license period of 10 years. The balance of $11.7 million at September 30, 2009 is included in “Deferred revenue” in our Condensed Consolidated Balance Sheets.

The Company recorded charges totaling $7.4 million during the nine months ended September 30, 2008 as a result of entering into a settlement agreement for $1.2 million and $6.2 million related to trial preparation costs and the fee arrangement with its outside counsel that represented the Company in the litigation against Codian, pursuant to which additional fees were owed based upon the favorable outcome that was achieved in the first quarter of 2008. These charges are included in “Litigation reserves and payments” in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2008.

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 ANTICIPATED PRODUCTS, CUSTOMER AND GEOGRAPHIC REVENUE LEVELS AND MIX, GROSS MARGINS, OPERATING COSTS AND EXPENSES AND OUR CHANNEL INVENTORY LEVELS, 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 THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008.

Overview

We are a leading global provider of high-quality, easy-to-use communications solutions that enable enterprise and public sector customers to more effectively collaborate over distance, time zones, and organizational boundaries. Our solutions are built on architectures that enable unified voice, video, and content collaboration. Our offerings are organized in three segments: Video Solutions, Voice Communications Solutions and Services.

Important drivers for Polycom products in the current economy are the need for companies to reduce costs and travel expenses while increasing their productivity and quickly achieving returns on their investments (ROI). With the globalization of the enterprise, Polycom technology—especially our high definition telepresence and video conferencing solutions—is redefining the way organizations are able to communicate and thus achieve their goals. Customers are also looking to Polycom for solutions that can help them to meet their goals regarding “green” initiatives and to comply with mandates to reduce their corporate carbon footprint. We believe the demand for solutions to meet these core business initiatives will increase over the next decade.

The shift from circuit-switched telephony networks to Internet Protocol (IP) based networks is enabling new technologies and continues to be a significant driver for Polycom’s collaborative communications markets and for our business. High Definition (HD) voice, video, and content is another key driver for Polycom. This significant improvement in quality provided by HD is enabling telepresence and other communications models that we believe approximate in-person communications. Strategically, Polycom is investing most of its research, development, sales, and marketing efforts into delivering a superior IP-based, HD collaborative communications solution, using Polycom proprietary technology in the evolving, standards-based IP communications environment. Our goal is to deliver best-of-breed HD collaborative communications solutions that integrate into any call management system or unified communications environment.

Revenues for the three and nine months ended September 30, 2009, were $243.0 million and $699.1 million, respectively, as compared to $275.8 million and $806.3 million for the three and nine months ended September 30, 2008, respectively. The decrease in revenues primarily reflects a significant decrease in the sales volumes of our voice communications solutions products and, to a lesser extent, a decrease in sales of our video solutions products, partially offset by increases in service revenues. We believe that the decrease in revenues is primarily due to the global economic climate, which has resulted in longer sales cycles and delays in new equipment purchases, particularly in our Voice Communications Solutions segment.

While our revenues decreased year-over-year across many of our product lines and geographies, our business improved sequentially from the second quarter of 2009, due principally to revenues from infrastructure products increasing both sequentially and year-over-year, and revenues from our voice communication solutions increasing sequentially compared to sequential declines in recent quarters. Our video communication product revenues were essentially flat sequentially. Geographically, we experienced strong sequential and year-over-year growth in Asia and revenues in EMEA returned to sequential growth, despite the typical summer seasonality. Despite these recent signs of stabilization, we continue to be cautious about our future outlook in light of the global economic climate.

We believe our Voice Communications Solutions products are more susceptible to general economic conditions than our other products, which has led to longer sales cycles for our voice products, and we have experienced year-over-year declines in voice product revenues in the last three quarters. In particular, while we believe that our video product lines may be better able to

sustain the impact of current economic conditions and recessionary and other factors, our voice products do not provide the same return on investment profile that we believe our video products provide to customers who are curtailing travel and other related expenditures in a down economy, making our voice products more susceptible to the current economic downturn. Further, although we believe our Video Solutions products offer a rapid return on investment, tightened corporate budgets and capital expenditures in this economic environment did adversely impact Video Solution revenues in the first nine months of the year as compared to the comparable year ago period and will likely continue to negatively impact our Video Solutions product revenues.

We recently announced several key strategic initiatives that we are undertaking as part of our strategy to capture growth in the unified collaboration market in which we operate. These include enhancements to our go-to-market capability; building our strategic partnerships with companies such as Avaya, Hewlett-Packard, IBM, Microsoft and others; establishment of a service provider line of business to focus on enhanced sell-through, as well as specific products and services to support their growing offerings in the managed and hosted space; increased innovation surrounding our immersive telepresence products; and expansion of our professional services practice. Over the next few quarters, we plan to significantly increase our spending levels in sales and marketing and, to a lesser extent, research and development and general and administrative areas, to support these key initiatives. This increased investment level is designed to yield increased growth in both our revenues and profitability in the future.

During the nine months ended September 30, 2009, we generated approximately $113.0 million in cash flow from operating activities, which after the impact of investing and financing activities described in further detail under “Liquidity and Capital Resources,” resulted in a $78.8 million net increase in our total cash and cash equivalents.

Our Video Solutions, Voice Communications Solutions and Services segments accounted for 53%, 29% and 18%, respectively, and 54%, 28% and 18%, respectively, of our revenues during the three and nine months ended September 30, 2009, compared with 53%, 32% and 15%, respectively, and 52%, 34% and 14%, respectively, of our revenues in the three and nine months ended September 30, 2008. 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 months ended September 30, 2009 and 2008.

Results of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

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, 2009		September 30, 2008		September 30, 2009		September 30, 2008
Revenues:
Product revenues	82	%	85	%	82	%	86	%
Service revenues	18	%	15	%	18	%	14	%

Total revenues	100	%	100	%	100	%	100	%
Cost of revenues:
Cost of product revenues as a % of product revenues	42	%	40	%	43	%	41	%
Cost of service revenues as a % of service revenues	47	%	48	%	47	%	50	%

Total cost of revenues	43	%	42	%	43	%	42	%

Gross profit	57	%	58	%	57	%	58	%

Operating expenses:
Sales and marketing	29	%	30	%	29	%	29	%
Research and development	12	%	12	%	12	%	13	%
General and administrative	6	%	6	%	6	%	6	%
Acquisition-related integration costs	0	%	0	%	0	%	0	%
Amortization of purchased intangibles	1	%	1	%	1	%	0	%
Restructuring costs	2	%	1	%	2	%	1	%
Litigation reserves and payments	0	%	0	%	0	%	1	%

Total operating expenses	50	%	50	%	50	%	50	%

Operating income	7	%	8	%	7	%	8	%
Interest and other income (expense), net	0	%	0	%	0	%	0	%

Income before provision for income taxes	7	%	8	%	7	%	8	%
Provision for income taxes	1	%	2	%	2	%	2	%

Net income	6	%	6	%	5	%	6	%

Revenues


	Three Months Ended						Nine Months Ended
$ in thousands	September 30, 2009		September 30, 2008		Increase (Decrease)		September 30, 2009		September 30, 2008		Increase (Decrease)
Video Solutions	$	127,870	$	145,953	(12	)%	$	376,547	$	417,056	(10	)%
Voice Communications Solutions	$	71,085	$	89,444	(21	)%	$	194,121	$	274,637	(29	)%
Services	$	44,064	$	40,379	9	%	$	128,452	$	114,584	12	%

Total Revenues	$	243,019	$	275,776	(12	)%	$	699,120	$	806,277	(13	)%

Total revenues for the three months ended September 30, 2009 were $243.0 million, a decrease of $32.8 million, or 12%, over the same period of 2008. Total revenues for the nine months ended September 30, 2009 were $699.1 million, a decrease of $107.1 million, or 13%, over the same period of 2008. The decrease in revenues in both the three and nine month periods primarily reflects a significant decrease in sales volumes of our voice communications products, and to a lesser extent, decreases in sales of our video solutions products, partially offset by an increase in service revenues.

Video Solutions segment revenues include revenues from sales of our video communications and infrastructure product lines. Revenue from video communications products decreased to $104.7 million for the three months ended September 30, 2009 from $123.9 million in the year ago period, a 15% decrease. Revenue from video communications products decreased to $311.3 million for the nine months ended September 30, 2009 from $360.9 million in the year ago period, a 14% decrease. The revenue decreases in the three and nine month periods were primarily due to a decrease in sales volumes of our VSX^® product family, and to a lesser extent lower sales volumes of our RPX immersive telepresence products, partially offset by increases in sales volumes of our HDX^® product family and new products, such as our Polycom^® CX5000 and QDX™ 6000 video solutions. Revenues from our infrastructure products for the three months ended September 30, 2009 were $23.2 million, up 5% from revenues of $22.1 million in the comparable 2008 period. Revenues from our infrastructure products for the nine months ended September 30, 2009 were $65.3 million, up 16% from revenues of $56.1 million in the comparable 2008 period. The revenue increases in both periods are primarily due to increases in our video infrastructure and software revenues, which were driven primarily by the introduction of new products and enhancements to existing products.

Voice Communications Solutions product revenues decreased in the three and nine month periods as compared to the comparable year ago periods primarily due to lower sales volumes of voice communications products, including our circuit-switched, wireless, Voice-over-IP and installed voice product lines. Revenues from our Voice Communications Solutions have declined year-over-year since the fourth quarter of 2008. We believe these declines are primarily a result of the global economic climate and that this business will improve as the economy improves. In the third quarter of 2009 we experienced sequential growth for the first time since the second quarter of 2008, with Voice Communication revenues growing 15% over the second quarter of 2009. In the second quarter of 2009, Voice Communication revenues were flat sequentially to the first quarter of 2009, as compared to the sequential declines we experienced in the first quarter of 2009, fourth quarter of 2008, and the third quarter of 2008 of 22%, 12%, and 5%, respectively.

Services revenues increased in the three and nine month periods as compared to the comparable year ago periods primarily due to increases in video-related services, and to a lesser extent, increased infrastructure-related services, partially offset by a decrease in voice-related services.

International sales, or revenues outside of the U.S. and Canada, accounted for 47% of total revenues for both the three and nine month periods ended September 30, 2009 and 46% of total revenues in both the three and nine month periods ended September 30, 2008. On a regional basis, North America, Europe, Asia Pacific and Latin America accounted for 53%, 23%, 21% and 3%, respectively, of our total revenues for the three months ended September 30, 2009 and 53%, 24%, 20% and 3%, respectively, of our total revenues for the nine months ended September 30, 2009. North America, Europe and Latin America revenues decreased 14%, 17% and 23%, respectively, in the three months ended September 30, 2009 over the comparable 2008 period, while Asia Pacific revenues grew 4%. North America, Europe, Asia Pacific and Latin America revenues decreased 14%, 18%, 3% and 22%, respectively, in the nine months ended September 30, 2009 over the comparable 2008 period. The decrease in revenues is primarily a result of the global economic climate. We have a hedging program that uses forward-exchange contracts to hedge against foreign currency fluctuations for a portion of anticipated revenues denominated in the Euro and British Pound. During the three and nine months ended September 30, 2009, our European revenues included a $0.2 million decrement and a $10.6 million benefit related to

our hedging activities compared to a $0.3 million benefit and $1.5 million decrement to revenue during the three and nine months ended September 30, 2008. In both the first nine months of 2009 and 2008, revenues from sales denominated in Euros and British Pounds comprised less than 20% of our total worldwide revenues. The impact in any given quarter of our hedging programs is dependent upon a number of factors, including the actual level of foreign currency denominated revenues, the percentage of actual revenues covered by our hedge contracts, the exchange rate in our underlying hedge contracts and the actual exchange rate during the quarter. Based upon our outstanding hedge contracts, we anticipate that the hedging benefit to our revenues will likely decrease throughout the remainder of 2009, depending on the future exchange rates of the U.S. dollar versus the Euro and the British Pound, which would also have a negative impact on our gross margins. See Note 9 of Notes to Condensed Consolidated Financial Statements for further information on our hedging activities.

During the three months ended September 30, 2009, one channel partner accounted for 13% of our total net revenues, 14% of our Video Solutions segment revenues and 17% of our Voice Communications Solutions revenue. During the nine months ended September 30, 2009, one channel partner accounted for 11% of our total net revenues, 12% of our Video Solutions segment revenues and 14% of our Voice Communications Solutions revenue. No one customer accounted for more than 10% of our Services segment revenues during the three or nine months ended September 30, 2009. During the three and nine months ended September 30, 2008, no one customer accounted for more than 10% of our total net revenues or of our Voice Communications Solutions or Services segment revenues. One channel partner accounted for 11% of our Video Solutions segment revenues during both the three and nine months ended September 30, 2008. 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 typically ship products within a short time after we receive an order and, therefore, we do not consider backlog to be a good indicator of future revenues. As of September 30, 2009, we had $56.8 million of order backlog as compared to $61.8 million at September 30, 2008. We include in backlog open product orders which we expect to ship or service orders which we expect to bill in the following quarter. Once billed, unrecorded service revenue is included in deferred revenue until earned. 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, although we plan to grow our backlog, our backlog could decline from its current levels.

Cost of Revenues and Gross Margins


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2009			September 30, 2008			Increase/ (Decrease)		September 30, 2009			September 30, 2008			Increase/ (Decrease)
Product Cost of Revenues	$	84,288		$	95,249		12	%	$	242,778		$	283,383		14	%
% of Product Revenues		42	%		40	%	2	pts		43	%		41	%	2	pts
Product Gross Margins		58	%		60	%	(2	)pts		57	%		59	%	(2	)pts
Service Cost of Revenues	$	20,509		$	19,509		5	%	$	60,569		$	57,527		5	%
% of Service Revenues		47	%		48	%	(1	)pt		47	%		50	%	(3	)pts
Service Gross Margins		53	%		52	%	1	pt		53	%		50	%	3	pts
Total Cost of Revenues	$	104,797		$	114,758		(9	)%	$	303,347		$	340,910		(11	)%
% of Total Revenues		43	%		42	%	1	pt		43	%		42	%	1	pt
Total Gross Margins		57	%		58	%	(1	)pt		57	%		58	%	(1	)pt

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, amortization and impairment of certain intangible assets, stock-based compensation costs and an allocation of overhead expenses, including facilities and IT costs. Cost of product revenues and product gross margins included a $0.5 million and $0.6 million charge for stock-based compensation in the three months ended September 30, 2009 and 2008, respectively, and $1.4 million and $2.1 million for stock-based compensation in the nine months ended September 30, 2009 and 2008, respectively. Generally, Video Solutions segment products have a higher gross margin than products in our Voice Communications Solutions segment.

Overall, product gross margins decreased by 2 percentage points in both the three and nine months ended September 30, 2009 as compared to the comparable periods in 2008 due to decreases in gross margins in both our Video Solutions and Voice

Communications Solutions segments. The decrease in the Video Solutions segment gross margins was primarily due to a shift in product mix toward lower margin products, as well as other new video communications products, and lower sales volumes of some of our other video communications products, such as our VSX product family. The decrease in the Voice Communications Solutions segment gross margins was due primarily to lower sales volumes, particularly in our wireless and circuit-switched product lines, and a shift in mix toward lower margin products, such as our Voice-over-IP handsets.

During the three and nine months ended September 30, 2009, our finished goods inventory levels decreased from the December 31, 2008 levels primarily due to a lower planned build as a result of lower revenues. As a result of the reduction in finished goods inventory, gross margins were negatively impacted during the nine months ended September 30, 2009, due to decreased absorption of manufacturing overhead costs.

We expect product gross margins to remain relatively flat in the near term, but margins could be higher or lower depending on mix variations and other factors.

Forecasting future product gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Uncertainties surrounding revenue levels, including future potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, 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 price variances, warranty and product 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 components that are included in our products.

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 consolidated product gross margins. Cost of service revenues and service gross margins included a $0.7 million and $0.9 million charge for stock-based compensation in the three months ended September 30, 2009 and 2008, respectively, and $2.1 million and $2.8 million for stock-based compensation in the nine months ended September 30, 2009 and 2008, respectively.

Overall, service gross margins increased in the three and nine months ended September 30, 2009 over the comparable periods in 2008 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. In addition, the increase in our Services segment revenues as a percentage of total revenues contributed to the overall decrease in gross margins for the three and nine months ended September 30, 2009 as service gross margins are lower than our product gross margins.

Forecasting future service gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Uncertainties surrounding revenue levels, including future potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, and related attach rates for new service as well as maintenance renewal rates, the utilization of our professional services personnel as we develop our professional services practice and expand our offerings as part of our recently announced key strategic initiatives, our ability to achieve greater efficiencies in the installations of our RPX™ telepresence product, increasing costs for freight and repair costs, and the timing of sales over the next few quarters can cause our cost of services revenues percentage to vary from quarter to quarter. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues.

Sales and Marketing Expenses


$ in thousands	Three Months Ended						Decrease		Nine Months Ended						Increase/ (Decrease)
$ in thousands	September 30, 2009			September 30, 2008			Decrease		September 30, 2009			September 30, 2008			Increase/ (Decrease)
Expenses	$	70,819		$	81,562		(13	)%	$	203,605		$	231,465		(12	)%
% of Revenues		29	%		30	%	(1	)pt		29	%		29	%	—

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.

The decrease in sales and marketing expenses in absolute dollars for the three and nine months ended September 30, 2009, as compared to the comparable period in 2008, was due primarily to a decrease in compensation costs as a result of decreases in revenue, lower travel and entertainment expenses, reduced spending on marketing programs, as well as decreased recruitment and training

costs, partially offset by increased spending on demo equipment and facilities. Sales and marketing expenses included a $2.5 million and $2.9 million charge for stock-based compensation in the three month periods ended September 30, 2009 and 2008, respectively, and a $7.1 million and $9.7 million charge for stock-based compensation in the nine month periods ended September 30, 2009 and 2008, respectively.

We expect our sales and marketing expenses to increase in absolute dollars in the near term as a result of incurring costs to recruit and hire new sales and marketing personnel, and expenses will also likely increase in the future as revenues increase. We will also make additional investments in sales and marketing as a result of our investment plan to support our recently announced key strategic initiatives surrounding enhancing our go-to-market capability, increasing our strategic partnerships and establishing a service provider line of business in order to extend our market reach and grow our business. Forecasting sales and marketing expenses as a percentage of revenue is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter. Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we market new products and also depending upon the timing of trade shows. Sales and marketing expenses may also fluctuate due to increased international expenses and the impact of changes in foreign currency exchange rates. In order to control operating expenses in any given quarter, we have taken actions to reduce costs such as delaying or limiting the scope of marketing programs and other projects, imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues. These actions are not necessarily sustainable in the long term and we will likely need to increase spending in order to maintain and build the business in future periods, which among other factors may negatively impact our operating margins, particularly upon the reinstatement of merit increases and bonus programs and the elimination of encouraged paid time-off programs.

Research and Development Expenses


	Three Months Ended						Increase/ (Decrease)		Nine Months Ended						Decrease
$ in thousands	September 30, 2009			September 30, 2008			Increase/ (Decrease)		September 30, 2009			September 30, 2008			Decrease
Expenses	$	29,004		$	34,456		(16	)%	$	85,532		$	105,891		(19	)%
% of Revenues		12	%		12	%	—			12	%		13	%	(1	)pt

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 decreased in absolute dollars for the three and nine months ended September 30, 2009 as compared to the comparable periods in 2008, while remaining flat as a percentage of revenue for the three months ended September 30, 2009 and decreasing as a percentage of revenue for the nine months ended September 30, 2009 as compared to the comparable periods in 2008. The decreases in absolute dollars in the three and nine months ended September 30, 2009 as compared to the comparable periods in 2008 are due to decreases in headcount and program development expenses to control costs. Research and development expenses included a $1.7 million and $2.7 million charge for stock-based compensation in the three month periods ended September 30, 2009 and 2008, respectively, and a $5.4 million and $8.5 million charge for stock-based compensation in the nine month periods ended September 30, 2009 and 2008, respectively.

We are currently investing research and development resources to enhance and upgrade the products that comprise our collaboration communications solutions, which encompass products and services in all three segments, including enhancements to our existing network systems products, products that address the high definition video conferencing market, including our immersive telepresence products, and additional voice-over-IP products. We also 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 are also currently planning to invest more heavily in research and development as a result of increased business opportunities with strategic partners and service provider customers as a result of our recently announced key strategic initiatives in these areas.

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 near term, but will fluctuate depending on the timing and number of development activities in any given quarter. Research and development expenses as a percentage of revenue is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter. In order to control operating expenses in any given quarter, we have taken actions to reduce costs such as delaying or limiting the scope of engineering projects, imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues. These actions are not necessarily sustainable in the long term and we will likely need to increase

spending in order to maintain and build the business in future periods, which among other factors may negatively impact our operating margins, particularly upon the reinstatement of merit increases and bonus programs and the elimination of encouraged paid time-off programs.

General and Administrative Expenses


	Three Months Ended						Increase/ (Decrease)		Nine Months Ended						Increase/ (Decrease)
$ in thousands	September 30, 2009			September 30, 2008			Increase/ (Decrease)		September 30, 2009			September 30, 2008			Increase/ (Decrease)
Expenses	$	13,556		$	16,101		(16	)%	$	39,873		$	46,023		(13	)%
% of Revenues		6	%		6	%	—			6	%		6	%	—

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 decreased in absolute dollars for the three and nine months ended September 30, 2009 as compared to the comparable periods in 2008. The decrease in general and administrative expenses in the three and nine months ended September 30, 2009 over the comparable periods in the prior year was primarily due to decreased compensation charges, as well as lower recruiting fees and reduced bad debt expense. General and administrative expenses included a $2.3 million and $2.7 million charge for stock-based compensation in the three month periods ended September 30, 2009 and 2008, respectively, and a $5.7 million and $7.2 million charge for stock-based compensation in the nine month periods ended September 30, 2009 and 2008, respectively.

Significant future charges due to costs associated with litigation 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 litigation and 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 the lack of visibility of certain 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. We believe that our general and administrative expenses will increase in absolute dollar amounts in the near term, but could fluctuate as we make investments in enhancements to our financial and operating systems and other costs related to supporting a larger company, increased costs associated with regulatory requirements, and our continued investments in international regions. General and administrative expenses will also increase as a result of additional investments required to support our recently announced key strategic initiatives, including adding additional infrastructure to support our increased go-to-market capability and service provider line of business. In order to control operating expenses in any given quarter, we have taken actions to reduce costs such as delaying or limiting the scope of administrative projects, imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues. These actions are not necessarily sustainable in the long term and we will likely need to increase spending in order to maintain and build the business in future periods, which among other factors may negatively impact our operating margins, particularly upon the reinstatement of merit increases and bonus programs and the elimination of encouraged paid time-off programs.

Acquisition-Related Integration Costs

We did not record any charges for acquisition-related integration costs during the three months ended September 30, 2009 or 2008 and the nine months ended September 30, 2009. We recorded a charge to operations of $0.2 million for the nine month period ended September 30, 2008 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. In addition, if we acquire additional businesses in the future, we could incur material acquisition expenses related to these transactions.

Amortization of Purchased Intangibles

In the three months ended September 30, 2009 and 2008, we recorded $1.4 million and $1.8 million, respectively, and in the nine months ended September 30, 2009 and 2008, we recorded $4.3 million and $5.4 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 several months to eight years.

Restructuring

During the three months ended September 30, 2009 and 2008, we recorded $4.6 million and $4.4 million, respectively, related to restructuring actions that resulted from the elimination or relocation of various positions as part of restructuring plans approved by management. These actions are generally intended to streamline and focus our efforts and more properly align our cost structure with our projected revenue streams. During the nine months ended September 30, 2009 and 2008, we recorded $11.5 million and $8.8 million, respectively, related to these actions.

During the third quarter of 2009, we committed to a restructuring plan to realign and reinvest resources in the strategic growth areas of the business. We are eliminating those positions that are not aligned with the go-to-market structure under our new sales leadership and reallocate resources to growth areas. The plan initially included the elimination of approximately three percent of the Company’s global workforce and we expected to record restructuring charges resulting from these actions totaling between approximately $5 million and $6 million. We have identified additional headcount as part of this restructuring plan, which brings the total headcount elimination to approximately four percent of the Company’s global workforce and will result in restructuring charges of approximately $8.5 million, of which $4.6 million was recorded in the third quarter of 2009 and the remaining charges will be recorded in the fourth quarter of 2009. All amounts will be paid in cash through the second quarter of 2010. These charges and payments primarily related to severance and other employee termination benefits.

In addition to the actions taken in the third quarter of 2009, we eliminated certain positions during the first and second quarters of 2009 related to eliminating approximately six percent of our workforce at the beginning of the year, as well as consolidating certain functions in our shared services center in Beijing, China. As a result of these actions, we recorded restructuring charges of $6.9 million and made cash expenditures totaling $5.7 million during the nine months ended September 30, 2009, primarily related to severance and other employee termination benefits. The majority of the remaining cash expenditures are expected to be paid by the end of 2009.

In 2008, management approved various plans for eliminating certain positions throughout the Company. These actions were intended to streamline and focus our efforts and more properly align our cost structure with projected revenue streams. These actions included additional reductions in the third quarter of 2008. As a result of these recent actions, we expected to record charges totaling $3.4 million for severance and other employee termination benefits, all of which was recorded during the three months ended September 30, 2008. In addition, we recorded additional charges totaling approximately $1.0 million related to actions taken during the first and second quarters of 2008.

See Note 5 of Notes to Condensed Consolidated Financial Statements for further information on restructuring costs.

In the future, we may take additional restructuring actions to gain operating efficiencies or reduce our operating expenses, while simultaneously implementing additional cost containment measures and expense control programs. Such restructuring actions are subject to significant risks, including delays in implementing expense control programs or workforce reductions and the failure to meet operational targets due to the loss of employees or a decrease in employee morale, all of which would impair our ability to achieve anticipated cost reductions. If we do not achieve the anticipated cost reductions, our business could be harmed.

Litigation Reserves and Payments

During the three and nine months ended September 30, 2009, we recorded a reserve totaling $0.7 million related to an ongoing legal matter. During the nine months ended September 30, 2008, we recorded charges totaling $7.4 million as a result of trial preparation costs and the fee arrangement we had with our outside legal counsel that represented us in our litigation against Codian, pursuant to which we owed additional legal fees based upon the favorable outcome that was achieved in the first quarter of 2008. There were no such expenses in the three months ended September 30, 2008. See Note 15 of Notes to Condensed Consolidated Financial Statements for further information.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, consists primarily of interest earned on our cash, cash equivalents and investments less bank charges resulting from the use of our bank accounts, gains and losses on investments, non-income related taxes and fees and foreign exchange related gains and losses. Interest and other income (expense), was a net expense of $0.6 million and $2.0 million during the three and nine months ended September 30, 2009, respectively, as compared to net other expense of $0.7 million and net other income of $4.5 million for the three and nine months ended September 30, 2008, respectively.

Interest and other income (expense), net, decreased in the three months ended September 30, 2009 compared to the same period in the prior year primarily due to lower interest income in 2009 as compared to 2008, partially offset by losses recorded in the third quarter of 2008 related to investments which we considered to be other than temporarily impaired. There were no such impairment losses in the third quarter of 2009. During the nine months ended September 30, 2009 interest and other income (expense), net, decreased primarily due to lower interest income and foreign exchange related losses compared to foreign exchange related gains in same period of the prior year, partially offset by lower non-income related taxes and license fees and losses recorded in the third quarter of 2008 related to investments which we considered to be other than temporarily impaired. There were no such impairment losses during the nine months ended September 30, 2009. Interest income decreased for the three and nine months ended September 30, 2009 over the comparable periods in the prior year primarily due to lower average investment returns. Average interest rate returns on our cash and investments were 0.71% for the three months ended September 30, 2009 compared to 2.58% for the three months ended September 30, 2008, and 0.48% for the nine months ended September 30, 2009 compared to 3.18% for the nine months ended September 30, 2008.

Interest and other income (expense), net will decrease in 2009 compared to 2008 due primarily to lower investment returns due to the current interest rate environment. The cash balance could also decrease depending upon the amount of cash used in any future acquisitions, our stock repurchase activity and other factors, which would also impact our interest income. Interest and other income (expense) will also fluctuate due to changes in foreign currency exchange rates and fluctuations in costs associated with our hedging program.

Provision for Income Taxes

Our overall effective tax rate for the three and nine months ended September 30, 2009 was 21.4% and 23.2%, respectively, which resulted in a provision for income taxes of $3.7 million and $11.2 million, respectively. The effective tax rate for the three and nine months ended September 30, 2008 was 18.6% and 22.7%, respectively, which resulted in a provision for income taxes of $4.1 million and $14.7 million, respectively. The increase in the effective tax rate for the three and nine months ended September 30, 2009 as compared to the same periods in 2008 was primarily related to the release of $2.3 million in tax reserves due to the lapse of the statutes of limitation in various foreign jurisdictions in the third quarter of 2008 offset by a relative increase in foreign earnings in 2009 which are subject to lower tax rates, combined with the benefit of the federal research and development tax credit which is reflected in the tax rate in 2009, but not included in the 2008 tax rate until December 2008 as the credit was reinstated in October 2008 and retroactively extended from January 1, 2008.

In the three months ended September 30, 2009, we released $0.4 million in tax reserves due to the lapse of statutes of limitation in the U.S. and foreign jurisdictions. Offsetting the reserve releases was an increase to the tax reserves of $2.9 million related to net operating losses from the acquisition of PictureTel that were used to offset current taxes payable during the period along with an increase of $0.1 million for movement in foreign exchange rates during the quarter. In the nine months ended September 30, 2009, additional reserve releases of $0.9 million in the first quarter and $9.9 million in the second quarter were recorded related to statute expirations. The second quarter reserve release for $9.8 million related to the lapse of statutes of limitation in the U.S. was recorded as an adjustment to additional paid in capital. In the three months ended September 30, 2008, we released $2.4 million in tax reserves, $2.3 million of which was due to the lapse of the statutes of limitation in various foreign jurisdictions, and $0.1 million of which was a pre-acquisition reserve for SpectraLink related to a statute expiration that was reflected as an adjustment to goodwill in the third quarter of 2008. For the nine months ended September 30, 2008, the total reserve release was $3.1 million, as $0.7 million in tax reserves for a Japan statute expiration was released in the first quarter of 2008. As of September 30, 2009, we have $39.1 million of unrecognized tax benefits compared to $55.8 million at September 30, 2008. We estimate that there will be no material changes in uncertain tax positions in the next 12 months.

We recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2009, we had approximately $4.0 million of accrued interest and penalties related to uncertain tax positions. As of September 30, 2008, we had approximately $3.6 million of accrued interest and penalties related to uncertain tax positions.

We are also subject to the periodic examination of our income tax returns by the Internal Revenue Service (IRS) and other tax authorities, and in some cases, we have received additional tax assessments. Currently, certain tax years are under audit by the relevant tax authorities, including the beginning of an examination of our U.S. federal tax returns for the calendar years 2006 and 2007 by the IRS. The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS examination could be resolved within the next 12 months, based on the current facts and circumstances, we cannot estimate the timing of such resolution or the range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements. We do not expect any material settlements in the next 12 months but the outcome of the examinations is inherently uncertain.

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 Condensed Consolidated Financial Statements. Future changes to our organizational structure or business 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, 2009 and 2008.

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 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, purchased in-process research and development costs, restructuring costs, interest income, net, and other expense, net.

Video Solutions


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2009			September 30, 2008			Decrease		September 30, 2009			September 30, 2008			Decrease
Revenue	$	127,870		$	145,953		(12	)%	$	376,547		$	417,056		(10	)%
Contribution margin	$	58,617		$	70,559		(17	)%	$	174,378		$	197,110		(11	)%
Contribution margin as % of video solutions revenues		46	%		48	%	(2	)pts		46	%		47	%	(1	)pt

Revenues from our Video Solutions segment decreased by $18.1 million or 12% to $127.9 million in the three months ended September 30, 2009 and by $40.5 million or 10% in the nine months ended September 30, 2009 as compared to the same periods in 2008. Video Solutions segment revenues include revenues from sales of our video communications and infrastructure product lines.

Revenue from video communications products, which consisted primarily of our HDX™ and VSX^® product families, decreased by 15% to $104.7 million for the three months ended September 30, 2009 from $123.9 million in the year ago period. Revenue from video communications products decreased by 14% to $311.3 million for the nine months ended September 30, 2009 from $360.9 million in the year ago period. The decreases in both the three and nine month periods were primarily due to a decrease in sales volumes as a result of the global economic climate. Sales of our RPX and TPX telepresence solutions were also lower in the third quarter of 2009 as compared to both the third quarter of 2008 and the second quarter of 2009. With the increasing adoption of high definition (HD), our HD products comprised an increasing percentage of the group video units sold. For the third quarter of 2009, approximately 75% of our video communication product revenues were derived from our high definition HDX products versus our standard definition VSX products. We believe the return on investment of video may make this segment of our business more resilient than our Voice Communications Solutions segment in the current economic environment; however, in the first nine months of 2009 we experienced, and may continue to experience, a negative impact on our Video Solutions product revenues due to tightened capital and operating budgets given the current economic environment.

Revenues from our infrastructure products for the three months ended September 30, 2009 were $23.2 million, up 5% from revenues of $22.1 million in the comparable 2008 period. Revenues from our infrastructure products for the nine months ended September 30, 2009 were up 16% to $65.3 million from $56.1 million in the comparable 2008 period. The increases in both the three and nine month periods were due primarily to increases in our video infrastructure and software revenues, offsetting decreases in voice infrastructure revenues. Total unit sales of our video infrastructure products increased in the third quarter of 2009 as compared to the same period in 2008, and we continued to see a mix shift toward our newer RMX product lines away from our MGC products, with RMX units comprising the majority of video infrastructure units shipped during the third quarter of 2009. Growth in our software revenues primarily reflects increased revenues from sales of our Polycom Converged Management Application (CMA™) desktop software application products. Voice infrastructure product revenues were essentially zero in the current period as compared to 14% of our infrastructure revenues in the third quarter of 2008. We anticipate that voice infrastructure product revenues will likely remain at the current levels given the increased adoption of our unified RMX product offering.

International revenues, which are defined as revenues outside of Canada and the U.S., accounted for 58% and 54% of our Video Solutions segment revenues for the three months ended September 30, 2009 and 2008, respectively and 56% and 57%, respectively, for the nine months ended September 30, 2009 and 2008. During the three months ended September 30, 2009 and 2008, one channel partner accounted for 14% and 11%, respectively, of our total net revenues for our Video Solutions segment. During the nine months ended September 30, 2009 and 2008, one channel partner accounted for 12% and 11%, respectively, of our total net revenues for our Video Solutions segment. We believe it is unlikely that the loss of any one channel partner would have a long term material adverse effect on consolidated revenues as we believe end-users would likely purchase our Video Solutions 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.

The contribution margin as a percentage of Video Solutions segment revenues was 46% for the three months ended September 30, 2009 as compared to 48% in the comparable period in 2008. The decrease in contribution margin was primarily due to lower gross margins in the three months ended September 30, 2009 as compared to the same period in 2008 in our video communications product lines, which were partially offset by higher gross margins in our infrastructure product lines. The decrease in gross margins was primarily due to a shift in product mix toward lower margin products and lower sales volumes of our video communications products. Engineering expenses decreased in absolute dollars while increasing as a percentage of revenues. Direct marketing expenses remained relatively flat in absolute dollars and as a percent of revenues.

The contribution margin as a percentage of Video Solutions segment revenues was 46% for the nine months ended September 30, 2009 as compared to 47% during the same period in 2008. The decrease in contribution margin was primarily due to lower gross margins in the three months ended September 30, 2009 as compared to the same period in 2008 in our video communications product lines which were partially offset by higher gross margins in our infrastructure product lines. The decrease in gross margins was

primarily due to a shift in product mix toward lower margin products and lower sales volumes of our video communications products. Engineering expenses decreased in both absolute dollars and as a percentage of revenues. Direct marketing expenses decreased in absolute dollars and remained relatively flat as a percent of revenues.

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

Voice Communications Solutions


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2009			September 30, 2008			Decrease		September 30, 2009			September 30, 2008			Decrease
Revenue	$	71,085		$	89,444		(21	)%	$	194,121		$	274,637		(29	)%
Contribution margin	$	28,696		$	37,601		(24	)%	$	74,639		$	113,511		(34	)%
Contribution margin as % of voice communication revenues		40	%		42	%	(2	)pts		38	%		41	%	(3	)pts

Revenues from our Voice Communications Solutions segment for the three months September 30, 2009 decreased 21% over the comparable 2008 period to $71.1 million, due primarily to lower sales volumes of voice communications products, including our circuit-switched, wireless, Voice-over-IP and installed voice product lines. Our Voice Communications Solutions segment revenues are dependent on our partners’ rollouts of IP call management systems and system expansions, and in the current economic climate, product sales in this segment continued to slow in 2009 as compared to 2008. Revenues from our Voice Communications Solutions have declined year-over-year since the fourth quarter of 2008. We believe these declines are primarily a result of the global economic climate and that this business will improve as the economy improves. Our voice communications products do not provide the same return on investment profile that we believe our video solutions products provide to customers who are curtailing travel and other related expenditures in a down economy, making our voice products more susceptible to the current economic downturn. In the third quarter of 2009, our Voice Communications Solutions segment revenues increased sequentially by 15%, compared to sequential decreases in the third quarter of 2008 through the first quarter of 2009 and flat revenues in the second quarter of 2009 as compared to the first quarter of 2009. We believe these improved results in the third quarter of 2009 are due in part to improvements in the economy.

International revenues, which are defined as revenues outside of Canada and the U.S., accounted for 32% and 37% of our Voice Communications segment revenues in the three months ended September 30, 2009 and 2008, respectively, and 35% and 36% for the nine months ended September 30, 2009 and 2008, respectively. In the three and nine months ended September 30, 2009, one channel partner accounted for 17% and 14% respectively, of our Voice Communications Solutions segment revenues. During the three and nine months ended September 30, 2008, no one channel partner accounted for more than 10% of our total net revenues for our Voice Communications Solutions segment. We believe it is unlikely that the loss of any one channel partner would have a long term material adverse effect on consolidated revenues as we believe end-users would likely purchase our Voice Communications Solutions 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.

The contribution margin as a percentage of Voice Communications Solutions segment revenues for the three months ended September 30, 2009 decreased to 40% as compared to 42% in the comparable 2008 period. The decrease in contribution margin was primarily due to lower gross margins during the third quarter of 2009 and an increase in direct marketing expenses as a percent of revenues, partially offset by a decrease in engineering expenses as a percent of revenues. Gross margins decreased primarily as a result of lower sales volumes, particularly in our wireless and circuit-switched product lines, and a shift in product mix toward lower margin products, such as our Voice-over-IP handsets. Engineering expenses decreased both in absolute dollars and as a percent of revenues. Direct marketing expenses decreased in absolute dollars but increased as a percentage of revenues due to the lower revenues in the third quarter of 2009 as compared to the third quarter of 2008.

The contribution margin as a percentage of Voice Communications Solutions segment revenues for the nine months ended September 30, 2009 decreased to 38% as compared to 41% in the comparable 2008 period. The decrease in contribution margin was primarily due to lower gross margins during the first nine months of 2009, partially offset by decreased engineering and direct marketing expenses. Gross margins decreased primarily as a result of lower revenues, particularly in our wireless and circuit-switched product lines, and a shift in product mix toward lower margin products, such as our Voice-over-IP handsets. Engineering and direct marketing expenses decreased in absolute dollars but increased as a percentage of revenues due to the lower revenues in the first nine months of 2009 as compared to the first nine months of 2008.

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

Services


	Three Months Ended								Nine Months Ended
$ in thousands	September 30, 2009			September 30, 2008			Increase		September 30, 2009			September 30, 2008			Increase
Revenue	$	44,064		$	40,379		9	%	$	128,452		$	114,584		12	%
Contribution margin	$	21,291		$	17,855		19	%	$	61,337		$	49,106		25	%
Contribution margin as % of services revenues		48	%		44	%	4	pts		48	%		43	%	5	pts

Revenues from our Services segment increased by $3.7 million or 9% to $44.1 million in the three months ended September 30, 2009 and by $13.9 million or 12% to $128.5 million in the nine months ended September 30, 2009, as compared to the same periods in 2008. The revenue increase was due primarily to increases in video-related services, and to a lesser extent, increased infrastructure-related services, partially offset by a decrease in voice-related services. Revenues from our video-related services grew year-over-year in spite of the decline in video communications product revenues as a result of long-term maintenance contracts and maintenance renewals from our installed base.

International revenues, or revenues outside of Canada and the U.S., accounted for 38% and 35% of total Services revenues for the three months ended September 30, 2009 and 2008, respectively, and 38% and 33% for the nine months ended September 30, 2009 and 2008, respectively. 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, 2009 or 2008.

Overall, the increase in the Services segment contribution margin as a percentage of Services segment revenues for the three and nine months ended September 30, 2009 as compared to the same periods in 2008 is due primarily to increased gross margins and lower operating expenses as a percentage of revenues. Service gross margins increased for the three and nine months ended September 30, 2009 as compared to the same periods in 2008 as a result of revenue increasing at a faster pace than related service costs.

Liquidity and Capital Resources

As of September 30, 2009, our principal sources of liquidity included cash and cash equivalents of $244.5 million, short-term investments of $151.8 million and long-term investments of $11.6 million. Substantially all of our short-term and long-term investments are comprised of U.S. government securities, corporate debt securities and corporate preferred equity securities. See Note 8 of Notes to our Condensed Consolidated Financial Statements.

Our total cash and cash equivalents and investments held outside of the United States in various foreign subsidiaries totaled $242.1 million as of September 30, 2009, and the remaining $165.9 million was held in the United States. If we would need to access our cash and cash equivalents and investments held outside of the United States in order to fund acquisitions, share repurchases or our working capital needs, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

We generated cash from operating activities totaling $113.0 million in the nine months ended September 30, 2009, compared to $116.2 million in the comparable period of 2008. The decrease in cash provided from operating activities for the nine months ended September 30, 2009 was due primarily to decreased net income and non-cash expenses, a smaller decrease in accounts receivable and a decrease in other accrued liabilities. Partially offsetting these negative effects were a decrease in inventories and prepaid expenses and other assets, an increase in accounts payable and taxes payable and a larger decrease in deferred taxes.

The total net change in cash and cash equivalents for the nine months ended September 30, 2009 was an increase of $78.8 million. The primary sources of cash were $113.0 million from operating activities and $34.0 million associated with the exercise of stock options and purchases under the employee stock purchase plan. The primary uses of cash during this period were $8.3 million for purchases of investments, net of sales and maturities, $26.0 million for purchases of property and equipment and $35.4 million for purchases of our common stock. 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, and non-cash stock based compensation), reductions in trade receivables, inventories, deferred taxes and prepaid expenses and other assets and an increase in accounts payable and taxes payable. Partially offsetting the positive effect of these items were net decreases in other accrued liabilities.

Our days sales outstanding, or DSO, metric was 47 days at September 30, 2009 and 44 days at September 30, 2008. 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, an increase in international receivables which typically have longer payment terms and increases in receivables from service providers and government entities that have longer payment terms of 45 and 60 days, respectively, compared to 30 day terms for many other customers. Inventory turns were 6.0 turns at September 30, 2009. We believe inventory turns will 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.

We enter into foreign currency forward-exchange contracts, which typically mature in one month, to hedge our exposure to foreign currency fluctuations of foreign currency-denominated receivables, payables, and cash balances. We record on the balance sheet at each reporting period the fair value of our forward-exchange contracts and record any fair value adjustments in results of operations. Gains and losses associated with currency rate changes on contracts are recorded as interest and other income (expense), offsetting transaction gains and losses on the related assets and liabilities. Additionally, our hedging costs can vary depending upon the size of our hedge program, whether we are purchasing or selling foreign currency relative to the U.S. dollar and interest rates spreads between the U.S. and other foreign markets, which may have been subject to greater fluctuations and less predictability due to the current credit crisis.

Additionally, we also have a hedging program that uses forward-exchange contracts to hedge against foreign currency fluctuations for a portion of anticipated revenues and operating expenses denominated in the Euro and British Pound as well as operating expenses denominated in Israeli Shekels. At each reporting period, we record the fair value of our unrealized forward contracts on the balance sheet with related unrealized gains and losses as a component of cumulative other comprehensive income, a separate element of stockholders’ equity. Realized gains and losses associated with the effective portion of the forward-exchange contracts are recorded within revenue or operating expense, depending upon the underlying exposure being hedged. Any ineffective portion of a hedging instrument would be recorded as interest and other income (expense). The impact in any given quarter of our hedging programs is dependent upon a number of factors, including the actual level of foreign currency denominated revenues, the percentage of actual revenues covered by our hedge contracts, the exchange rate in our underlying hedge contracts and the actual exchange rate during the quarter. Based upon our outstanding hedge contracts, we anticipate that the hedging benefit to our revenues will likely decrease throughout the remainder of 2009, depending on the future exchange rates of the U.S. dollar versus the Euro and British Pound, which would also have a negative impact on our gross margins.

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 months ended September 30, 2009, we purchased approximately 0.8 million shares of our common stock in the open market for cash of $20.0 million. We continue to closely monitor our repurchase program, in light of the current economic environment. As a result, we substantially reduced our share repurchase activity in the first nine months of 2009 due to the global economic conditions. As of September 30, 2009, we were authorized to purchase up to an additional $187.2 million under the 2008 share repurchase plan. See Note 10 of Notes to our Condensed Consolidated Financial Statements for a discussion of the accounting for our common stock repurchases and the resultant accumulated deficit included in stockholder’s equity in our condensed consolidated balance sheet.

At September 30, 2009, we had open purchase orders related to our contract manufacturers and other contractual obligations of approximately $114.7 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 Consolidated Financial Statements once goods or services have been received or at such time that we are obligated to make payments related to these goods, services or leases. In addition, our bank has issued letters of credit totaling approximately $1.4 million to secure the leases on some of our offices.

The table set forth below shows, as of September 30, 2009, the future minimum lease payments due under our current lease obligations. Total estimated sublease income for 2009 to 2012 is approximately $0.2 million and is netted in the amounts below. 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, 2009 are as follows (in thousands):


	Net Minimum Lease Payments		Projected Annual Operating Costs		Other Long - Term Liabilities		Purchase Commitments
Year ending December 31,
Remainder of 2009	$	3,425	$	811	$	—	$	104,266
2010		14,695		3,294		909		9,759
2011		13,859		2,993		1,765		723
2012		10,111		2,076		1,778		—
2013		6,145		1,048		811		—
Thereafter		13,628		2,499		6,887		—

Total payments	$	61,863	$	12,721	$	12,150	$	114,748

As discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements, at September 30, 2009, we have unrecognized tax benefits, including related interest, totaling $39.1 million, none of which is expected to be due within the next 12 months. Payments we make for income taxes may increase during 2009 as our available net operating losses are depleted.

We believe that our available cash, cash equivalents and investments will be sufficient to meet our operating expenses and capital requirements for the next 12 months and beyond based on our current business plans. 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, debt 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, 2009, 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 our critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

Our significant accounting policies were described in Note 1 to our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. With the exception of those discussed below, there have been no significant changes to these policies and no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, that are of significance or potential significance to us.

FASB Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification” or “ASC”), the authoritative guidance for GAAP. The Codification is the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for us beginning July 1, 2009 and we have incorporated the current Codification in this Form 10-Q. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.

Recent Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the

scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We are currently assessing the potential effect, if any, on our financial statements.

In September 2009, an update was made to “Fair Value Measurements and Disclosures – Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” This update permits entities to measure the fair value of certain investments, including those with fair values that are not readily determinable, on the basis of the net asset value per share of the investment (or its equivalent) if such net asset value is calculated in a manner consistent with the measurement principles in “Financial Services-Investment Companies” as of the reporting entity’s measurement date (measurement of all or substantially all of the underlying investments of the investee in accordance with the “Fair Value Measurements and Disclosures” guidance). The update also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. This update will be effective for us beginning October 1, 2009. Management is currently evaluating the effect that adoption of this update will have, if any, on our consolidated financial position and results of operations when it becomes effective.

In August 2009, the FASB issued additional authoritative guidance for the fair value measurement of liabilities. The guidance is effective for the first reporting period (including interim periods) beginning after issuance. We will apply the guidance in the fourth quarter of fiscal 2009. The adoption of the guidance is not expected to have any significant impact on our condensed consolidated financial statements or related footnotes.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for us beginning January 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial statements.

In December 2007 the FASB issued authoritative guidance on accounting for business combinations, which established principles and requirements for the acquirer of a business to recognize and measure in its financial statements the identifiable assets (including in-process research and development and defensive assets) acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. We believe this guidance will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the January 1, 2009 effective date.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We generally invest excess cash in marketable debt instruments of the U.S. government and its agencies and high-quality corporate debt securities, and by policy, limit the amount of credit exposure to any one issuer. We also invest in corporate preferred equity securities as part of a dividend capture program. These investments in the dividend capture program are typically hedged for interest rate fluctuations, which may not be effective; however, these hedges 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. government obligations and foreign and domestic public corporate debt securities and corporate preferred equity securities. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict, particularly in light of the recent credit market instability. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may realize losses on the sale of our investments or we may incur further temporary impairment charges requiring us to record additional unrealized losses in accumulated other comprehensive loss. We could also incur additional other-than-temporary impairment charges resulting in realized losses in our statement of operations which would reduce net income. We consider various factors in determining whether we should recognize an impairment charge, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the security or issuer, and our intent and ability to hold the investment for a period of time sufficient to allow any anticipated recovery in the market value. Further, if we sell our investments prior to their maturity, we may incur a charge to operations in the period the sale takes place.

A sensitivity analysis was performed on our investment portfolio as of September 30, 2009. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of various magnitudes. In prior years the analysis had been performed for the time periods of 6 months and 12 months. In the current year we have modified the analysis to model the effect of an immediate parallel shift in the yield curve. This methodology assumes a more immediate change in interest rates to reflect the current economic environment.

The following table presents the hypothetical fair values of our securities, excluding cash and cash equivalents, held at September 30, 2009 that are sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from immediate parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS and 150 BPS (in thousands):

-150 BPS

-100 BPS

-50 BPS

Fair Value

9/30/2009

+50 BPS

+100 BPS

+150 BPS

$163,921

$163,770

$163,620

$163,469

$163,318

$163,167

$163,016

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 enter into forward exchange contracts to hedge our foreign currency exposure to the Euro, British Pound and Israeli Shekel relative to the United States Dollar. We mitigate bank counterparty risk related to our foreign currency hedging program through our policy that requires the Company to execute hedge contracts with banks that are among the world’s largest 100 banks, as ranked by total assets in U.S. dollars.

As of September 30, 2009, we had outstanding forward exchange contracts to sell 1.0 million Euros at 1.57, sell 2.0 million British Pounds at 1.71, and sell 2.7 million Israeli Shekels at 3.80. These forward exchange contracts hedge our net position of foreign currency-denominated receivables, payables and cash balances and typically mature in 360 days or less. As of September 30, 2009, we also had net outstanding forward exchange contracts to sell 10.7 million Euros at 1.38, sell 1.3 million British Pounds at 1.74, and buy 14.5 million Israeli Shekels at 3.49 that had maturities of more than 360 days.

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, 2009, we had net outstanding foreign exchange contracts to sell 16.3 million Euros at 1.33 and 2.1 million British Pounds at 1.48 and to buy 16.3 million Israeli Shekels at 3.97. These forward exchange contracts, carried at fair value, typically have maturities of less than 360 days. As of September 30, 2009, we also had net outstanding foreign exchange contracts to sell 20.4 million Euros at 1.40 and 0.5 million British Pounds at 1.71 and buy 31.7 million Israeli Shekels at 3.96. These forward exchange contracts, carried at fair value, typically have maturities of more than 360 days. As a result of our cash flow hedging program, in the first and second quarters of 2008 and the third quarter of 2009, we reduced operating income by $0.2 million, $0.3 million and $0.6 million, respectively, as compared to increasing operating income in the third and fourth quarters of 2008 and the first and second quarters of 2009 by $0.4 million, $2.9 million, $2.3 million and $1.6 million, respectively.

Based on our overall currency rate exposure as of September 30, 2009, a near-term 10% appreciation or depreciation in the United States Dollar, relative to our foreign local currencies, would have a positive or negative impact of approximately $16.0 million on our results of operations. 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. See Note 9 of Notes to Condensed Consolidated Financial Statements for further information on our foreign exchange derivatives.

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.

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2009 that has materially affected, or is 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. If management believes that a loss arising from these matters is probable and can be reasonably estimated, we record the amount of the loss. As additional information becomes available, any potential liability related to these matters is assessed and the estimates revised. 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

YOU 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 THAT 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 YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN OUR ANNUAL REPORT ON FORM 10-K, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

Global economic conditions have materially affected and may continue to adversely affect our revenues and harm our business.

Economic conditions worldwide have contributed from time to time to slowdowns in the communications and networking industries and have caused a negative impact on the specific segments and markets in which we operate. As our business has grown, we have become increasingly exposed to these adverse changes in general economic conditions, which can result in reductions in capital expenditures by end-user customers for our products, longer sales cycles, the deferral or delay of purchase commitments for our products and increased competition. These factors have adversely impacted our operating results in prior periods, including most recently in the first nine months of 2009, and have created significant and increasing uncertainty for the future. Despite some recent signs of stabilization, these factors have caused us to continue to be cautious about our future outlook. The current global recession, the continuing credit crisis that has affected worldwide financial markets, the extraordinary volatility in the stock markets, other current negative macroeconomic and global recessionary factors, and uncertainty or further weakening in key vertical or geographic markets, could continue to negatively impact technology spending for our products and services and may materially adversely affect our business, operating results and financial condition.

Further, current global economic conditions have resulted in a tightening in the credit markets, low liquidity levels in many financial markets, and extreme volatility in credit, equity, foreign currency and fixed income markets. These economic conditions negatively impact our business, particularly our future revenue potential, losses on investments and the collectability of our accounts receivable, by causing the inability of our customers to obtain credit to finance purchases of our products and services, customer or partner insolvencies or bankruptcies, decreased customer confidence to make purchasing decisions resulting in delays in their purchasing decisions, decreased customer demand or demand for lower-end products, and decreased customer ability to pay their obligations when they become due to us. For example, our partner Nortel’s bankruptcy filing in January 2009 has negatively impacted our revenues as our level of business with Nortel has been materially lower than that of historical levels.

We believe our voice communications solutions products are more susceptible to general economic conditions than our other products, which has led to longer sales cycles for our voice products and negative year-over-year growth of revenues in the voice product line. In particular, while we believe that our video product lines may be better able to sustain the impact of current economic conditions and recessionary and other factors, our voice products do not provide the same return on investment profile that we believe

our video products provide to customers who are curtailing travel and other related expenditures in a down economy, making our voice products more susceptible to the current economic downturn. Further, although we believe our video solutions products offer a rapid return on investment, tightened corporate budgets and capital expenditures in this economic environment will likely continue to negatively impact our video solutions product revenues, as was the case in the first nine months of 2009.

Economic pressures have also caused us to carefully control our expenses through programs such as headcount reductions, reduced discretionary spending, deferral of nonessential projects, suspension of annual salary merit increases, and encouraged paid time-off programs. Although we believe such measures to be prudent given the current economic outlook, certain of these initiatives may cause us to underspend in areas later determined to be essential to the future growth of the business, negatively impact short- and long-term research and development and go-to-market productivity, or negatively impact employee morale and retention and may, as a result, adversely impact our future ability to effectively compete once economic conditions improve. Further, the tightening of our budgets and the cost control measures being taken by us in this period of economic downturn have caused us to defer infrastructure improvement projects, such as software upgrades, which may handicap the growth of our business in future periods. These actions are not necessarily sustainable in the long term and we may need to increase spending in order to maintain and build the business in future periods, which among other factors may negatively impact our operating margins, particularly the reinstatement of merit increases and bonus programs and the elimination of encouraged paid time-off programs.

Our quarterly operating results 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 or can be difficult to predict. These factors include, but are not limited to:

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the impact of the current recession, including the restricted credit environment impacting the credit of our partners and end user customers, and the spread of these conditions and recessionary factors to other countries, which has, and we expect will continue to, impact our global financial performance in future quarters;

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our ability to effectively compete and grow our infrastructure product sales, which if unsuccessful, would reduce our revenues and negatively impact our gross margins;

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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 solutions product lines, (iii) the development of new partnerships and the impact of consolidation in our industry, such as the recently announced acquisition of Tandberg by Cisco Systems, (iv) increased competition from larger companies like Cisco Systems, particularly upon the successful completion of the Tandberg acquisition, and Hewlett-Packard and (v) the introduction by our competitors of new products that may be considered more technologically advanced than the products that we offer and that are introduced in the market more rapidly than we can offer them;

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the timing and extent of additional investments we make to support our recently announced strategic initiatives may not result in the revenue and profitability growth that these investments are intended to yield;

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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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changes to our sales organization with the recent hiring of a new executive vice president of Global Field Operations and vice president of U.S. Sales and other changes in the global sales organization, which creates distraction for our sales force and our channel partners, may lead to employee attrition in the sales organization and may materially impact our future revenues and profitability during the transition period;

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

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the impact of the volatility of the U.S. dollar, which could result in delays in purchasing our products or lower average selling prices to offset, affecting both revenues and gross margins;

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the impairment of investments, including the corporate debt and preferred equity securities in our investment portfolio, as well as our strategic investments or other assets;

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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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the impact of new product introductions which typically have lower gross margins for a period of time after their introduction;

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the negative impact of the growth of our VoIP product sales on 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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the level and mix of inventory that we hold to meet future demand, including the impact of our efforts to decrease inventory and improve inventory turns, which could negatively impact our gross margins as a result of under absorption of our manufacturing costs in any given period;

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changes in effective tax rates which are difficult to predict due to, among other things, the timing and geographical mix of our earnings and potential new rules and regulations;

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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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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 includes outside development manufacturers, and the associated manufacturing costs;

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the impact of increasing costs of freight and components used in the manufacturing of our products and the potential negative impact on our gross margins;

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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; 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.

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, and given the current economic environment and the recently announced acquisition of Tandberg by Cisco Systems, it will likely intensify and place increased pressure on average selling prices for our products. 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 and our ability to bring such products to market more rapidly than our competitors do;

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the ability to appropriately and competitively price our products;

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product performance;

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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 and functionality;

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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 sell new products in a direct-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, video infrastructure product revenues declined sequentially in the first and second quarters of 2007 and again in the first and second quarters of 2008, and could decline again in the future. Revenues relating to new product offerings may also be unpredictable. For instance, although we initially saw strong sales of our Polycom CX5000 Unified Conference Station in the second and third quarters of 2009, there can be no assurance that revenue will remain at those levels or grow in future quarters.

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. If we are unable to compete effectively in these regions in terms of price, technology, 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 video solutions industry. For our video conferencing end points, our major competitors include Tandberg, Cisco Systems, Hewlett-Packard and a number of other companies including Aethra, Huawei, LifeSize and Sony, as well as various smaller or new industry entrants. We face competition for sales of our RPX and TPX telepresence solutions and related services from Cisco Systems, Hewlett-Packard, Tandberg, Teleris and others. 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 our having to increase our spending on marketing, and we may not be able to effectively compete against these companies due to their size.

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, as well as cause us to invest more in sales and marketing in order to compete effectively. Sales of our RPX and TPX products were lower in the second and third quarters of 2009 than in the first quarter of 2009, which we believe may have been caused by increased competition from companies with greater resources than us, as well as new competitive products entering the marketplace, which trend may continue in future quarters, potentially adversely affecting our revenues from such product lines.

In addition, with 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 and other resources, greater brand recognition or greater access to top-level executives than we have, or may partner with companies which have more substantial resources and production, sales, marketing, engineering and other capabilities with which to develop, manufacture, market and sell their products and to bring their products to market or respond to changing technologies more rapidly than we can, or that may be more adept in responding to rapidly changing market conditions or changing technologies than we are. 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, strategic partnerships are regularly being formed and announced by our competitors, which may increase competition and result in increased downward pressure on our product prices.

In October 2009, Cisco Systems announced its planned acquisition of Tandberg, which could potentially have an adverse effect on our business and our future results of operations, possibly materially. Upon the completion of the planned acquisition, we will have to compete with a larger combined company with significantly greater financial and sales and marketing resources than ours, an extensive channel network and with a newly acquired expanded video communications product line. The planned acquisition may also create confusion among our channel partners and strategic partners as they reassess their future relationships with each company and try to distinguish each company’s product offerings. The acquisition may also cause distraction and increased resource requirements for our sales force and management team as they communicate with customers about the impact of the acquisition on our business and may increase our marketing spend to effectively compete.

We have lost group video conferencing sales opportunities to our competitors, including Tandberg, and also to competitors in China who sell at lower price points than we do. 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. In addition, Cisco Systems, Hewlett-Packard, IBM, Microsoft or other large companies 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. 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.

Our video solutions infrastructure products experience significant direct competition from Tandberg, RADVISION, Cisco Systems, which resells RADVISION’s products, Huawei, and various smaller or new industry entrants. Tandberg’s acquisition of Codian strengthened their infrastructure product offerings and continues to result in increased competition from Tandberg against our total video solutions offering, and has negatively impacted our video solutions revenues, as well as our market position with respect to video conferencing and infrastructure offerings. Our video solutions infrastructure product revenues declined sequentially from the fourth quarter of 2004 through the second quarter of 2006 as well as in the first and second quarters of 2007 and the first and second

quarters of 2008 as a result of sales lost to competitors as well as lower average selling prices due in part to competitive pressures. Further, we launched our next generation video network system platform (RMX 2000^®) in 2007 and introduced enhancements to that platform in February 2009 with the introduction of our RMX 2000^® V4.0, and we intend to launch new infrastructure 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 video solutions revenues as we anticipate. As a result, we may continue to lose market share with respect to our video solutions infrastructure products, as we have experienced in previous quarters.

The market for voice communications equipment, including voice conferencing and desktop equipment, and wireless voice devices 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. Further, we believe that the market for voice communication products may be more sensitive to economic conditions than our video solutions products as we have seen recently. Although we saw some stabilization in our voice communications business in the second and third quarters of 2009, it is too early to predict whether or not this business will continue to recover in future quarters. In voice communications solutions, our major conference phone competitors include Aethra, ClearOne Communications, Konftel, Mitel, Yamaha and other companies that offer lower cost, full-duplex speakerphones. Furthermore, all major telephony manufacturers produce hands-free speakerphone units that cost less than our voice communications products. Our major VoIP desktop competitors include Aastra, LG Nortel, Linksys, a division of Cisco Systems, Snom and Thompson, in addition to several low cost manufacturers in Asia and Europe that are emerging. 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-Lucent, Avaya, Cisco Systems, Mitel, Nortel and Siemens. A significant portion of our VoIP desktop product revenues come from Internet Telephony Service Providers (or ITSPs) that use a hosted call server platform from one business partner. If that partner were to be acquired by a competitor, or if potential customers for our VoIP desktop products use or move to other platforms, our VoIP desktop revenues could suffer, possibly materially.

With respect to our wireless product lines, our competitors include Aastra, Hitachi Cable and Linksys for small business and entry-level products. Our KIRK wireless products compete with offerings from DECT providers such as Aastra, Alcatel-Lucent, Ericsson and Siemens. Our SpectraLink wireless products compete with proprietary and Wi-Fi-based products from Ascom, Cisco Systems, Motorola, Siemens and Vocera. The overall market in the wireless 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 SpectraLink and KIRK 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.

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 as they look at our products as potential third party service revenue streams, in addition to trying to provide one service solution to their customers. In addition, as we expand our professional services offerings, we may compete more directly with system integrators.

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, such as the recently announced acquisition of Tandberg by Cisco Systems. Rumored or actual consolidation of our partners and competitors can cause uncertainty and disruption to our business and can cause our stock price to fluctuate. Also, these competitors, either 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. Further, the economic downturn may incent partners of ours with whom we do not currently compete to become competitors of ours as a means of growing their business in a difficult economic environment.

Our plans to invest in our business for further growth have caused, and may continue to cause, a negative impact on our stock price and may not ultimately lead to our intended results.

our professional services practice. Over the next few quarters, we plan to significantly increase our spending levels in sales and marketing and, to a lesser extent, research and development and general and administrative areas, to support these key initiatives. This increased investment level is designed to yield increased growth in both our revenues and profitability in the future.

The results of these investments are expected, in the short-term, to negatively impact our stock price as our profitability will not be at the level as originally anticipated by our investors. Further, these investments may not result in the revenue and profitability growth that these investments are designed to yield. We may have also underestimated the required investment that each of these initiatives requires in order to for us to achieve the anticipated results.

We face risks associated with developing and marketing our products, including new product development and new product lines that require a more direct-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 solutions and voice communications solutions products are characterized by rapidly changing technology, such as the recent demand for high definition video technology and lower cost video infrastructure 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, our ability to price our products competitively while maintaining favorable product margins, differentiation of new products from those of our competitors, and market acceptance of these products. Other factors that may affect our success include properly addressing the complexities associated with compatibility issues, channel partner and sales force training, technical and sales support, and field support.

Further, as our product portfolio expanded and as we entered into product lines that require a more direct-touch sales model and more complex negotiations, such as our RPX and TPX product lines, we made key strategic investments in additional sales and marketing personnel in 2008. It has taken 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. In addition, we plan to make additional investments in developing our immersive telepresence products as part of our recently announced key strategic initiatives. 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 as quickly as anticipated, or at all. In addition, in our high end video solutions, such as telepresence, that typically require direct high touch sales involvement with potential customers, we compete directly with large, multi-national corporations, such as Cisco Systems and Hewlett-Packard, who have substantially greater financial, technical and executive resources than we do, as well as greater name recognition and market presence with many potential customers.

We continually need to educate and train our channel partners to avoid any confusion as to desirability of new product offerings compared to our existing product offerings. During the last few years, 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. We introduced our RMX 2000 and RMX 1000 conferencing platforms, which provide the next generation of conferencing infrastructure and had a negative impact on the sales of our MGC™ media servers and the HDX 4000™, our high definition executive desktop product, which had a negative impact on sales of our existing executive desktop product. We believe that the anticipation of the announcement of our HDX 8000™ video conferencing product, our high definition video conferencing product for small- to medium-sized conference rooms, temporarily delayed sales of our HDX 9000™ video conferencing product, our high definition video conferencing product intended for larger conference room settings, in the third quarter of 2007. Such delays in purchases could adversely affect our revenues, gross margins and operating results in the period of the delay. In addition, the introduction of new products such as the HDX 7000™ video conferencing product for smaller conference rooms, the HDX 8000 video conferencing product and our latest Polycom CX5000™ Unified Conferencing Station may have an unintended negative impact on sales of and corresponding revenues associated with other video conferencing products such as our VSX and other HDX and telepresence 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.

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, such as the delays experienced with the introduction of our HDX 9000 in the fourth quarter of 2007. 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 product development groups are dispersed among California, Colorado, Georgia, Massachusetts and Texas in the United States, as well as in China, Denmark, India 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. Further, some defects may not be detected or cured prior to a new product launch, or may be detected after a product has already been launched and may be incurable or result in a product recall. For example, in the past we have encountered defects with the lithium ion batteries in our wireless products. The occurrence of any of these events has resulted and could in the future 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.

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, or any failure by us to properly anticipate product life cycles, 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. Further, as customers transition to our HDX video conferencing endpoints from our VSX video conferencing endpoints or to our RMX platform from our MGC infrastructure products, we may experience additional write-downs in inventory value of these products in the future, as has happened in the past. 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.

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 HDX 4000, VSX 3000 and CMA™ Desktop 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 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 infrastructure 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 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 occurs more quickly than anticipated, the market for certain other wireless product lines may decline.

Our SpectraLink 8000 (formerly “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 SpectraLink 8000 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. 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. 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. 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 SpectraLink 6000 (formerly “Link WTS”), proprietary technology that we also acquired through the SpectraLink acquisition. Sales of the SpectraLink 6000 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 SpectraLink 8000 products. DECT solutions could face the same competition and cause a downward trend in our wireless product sales growth and our overall gross margin in such product lines.

The market for on-premises wireless telephone systems has not grown as quickly as we anticipated when we acquired SpectraLink. If this market does not grow or grow as quickly as anticipated, our future results of operations could be harmed. In particular, increased demand for our SpectraLink 8000 product depends on the growth of the voice over Wi-Fi-related market. 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 SpectraLink 8000 and its potential impact on sales of our SpectraLink 6000 product are difficult to predict.

The certification and approval process for our SpectraLink 8000 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 SpectraLink 8000 products. However, countries’ certification and approval processes for 802.11 compatible products such as SpectraLink 8000 are typically time consuming and potentially costly. If we have difficulty or experience delays in obtaining certification and approval by foreign countries for our SpectraLink 8000 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 SpectraLink 8000 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, our profitability would be harmed. Further, new products typically have lower gross margins for a period of time after their introduction. We have recently launched a number of new products and new products are becoming an increasing percentage of our revenues. For example, our HD video products, which generate higher gross profit dollars than our other non-HD video products due to higher average selling prices, may result in a lower overall gross margin percentage for an extended period of time after their introduction depending upon the mix of new products sold during the period. 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 video infrastructure products, 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 infrastructure product revenues that we experienced in the first and second quarters of 2007 and the first and second quarters of 2008 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. 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 video infrastructure products typically have higher gross margins than our other product lines. Therefore, our overall gross margins could decrease if we continue to experience decreases in our video infrastructure product sales. Further, if our video infrastructure sales suffer, there may be a correspondingly negative impact on our services business, which relies in part on video infrastructure 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.

Failure to adequately service and support our product offerings 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 video infrastructure products, our new video product offerings and our software products. This has increased the need for enhanced product warranty and service capabilities. If we cannot adequately develop and train our internal support organization or maintain our relationship with our outside technical support provider, it could adversely affect our business.

In addition, sales of our telepresence product line are more complex sales transactions than our other product lines, and the end-user customer in such transactions typically purchases an enhanced level of support service from us so that it can ensure that this significant investment can be fully operational and satisfy the end-user’s requirements. This requires an enhanced level of support and project management from the Company in terms of resources and technical knowledge of an end-user customer’s telecommunication network. As this type of service is relatively new for us, our inability to provide the proper level of support on a cost beneficial basis may cause damage to our reputation in this new emerging market and may, as a result, harm our business and results of operations.

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

We have acquired several businesses, which together resulted in goodwill valued at approximately $496.1 million and other purchased intangible assets valued at approximately $51.3 million as of September 30, 2009. This represents a significant portion of the assets recorded on our balance sheet. 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. The decreases in revenue and stock price that have occurred and may occur in the future as a result of global economic factors make such an impairment more likely to result. 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 2007 and 2006, when we wrote down certain intangible assets associated with our acquisition of Voyant in the amount of $3.6 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, 2009, our investments in private companies are valued at $2.2 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.

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.

Failure to achieve the anticipated benefits of any 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 our acquisitions because of the following significant challenges:

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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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potentially incompatible cultural differences between the two companies;

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geographic dispersion of operations;

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interruption of manufacturing operations as we transition an acquired company’s manufacturing to our outsourced manufacturing model;

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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 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 acquisitions or any future acquisitions we may make.

Our failure to successfully implement restructuring plans 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 or as part of restructuring actions taken to streamline the business, identify redundant facilities. If we identify redundant facilities, we would develop a plan to exit as part of the integration of the businesses or as part of the implementation of the restructuring plan. For example, as of September 30, 2009 we have a remaining liability in the amount of $1.0 million related to facilities we vacated in connection with our acquisition of SpectraLink. This reserve 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, including as a result of the global economic crisis, 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. 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. Seasonal fluctuations could negatively affect our business, which could cause our operating results to fall short of anticipated results for such quarters.

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 and our inability to reduce expenses quickly can result in 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. For example, in the third and fourth quarters of 2008, we experienced delays in orders from our channel partners, particularly in the last few weeks of the quarter that we believe were attributable to global economic factors. We are also experiencing longer sales cycles in connection with our high end video conferencing solutions sales and our voice solutions products, which could also increase the level of unpredictability and fluctuation in the timing of orders. Further, depending upon the complexity of these solutions, such as telepresence and some video infrastructure products, and the underlying contractual terms, revenue may not be recognized until the product has been accepted by the end-user, resulting in further revenue unpredictability. Moreover, 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.

Our backlog has fluctuated significantly over our corporate history. While our product backlog has increased in recent years, we typically ship products shortly after receipt of an order. In addition, we believe that backlog levels will continue to fluctuate due to many factors such as the ability of our sales force to generate orders linearly throughout the quarter, our ability to forecast revenue mix and plan our manufacturing capacity, 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 significantly in future quarters, as we saw in the first quarter of 2009, and we do not believe backlog is a good indicator of future operating results. 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.

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, a significant portion of our product 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, our products are typically categorized as capital equipment and, due to the current unfavorable economic and credit environment, budgets for capital equipment purchases may be delayed, reduced or eliminated for 2009. This is causing increased uncertainty for the remainder of 2009. Accordingly, 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, and 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 will cause delays in our ability to recognize revenue and may impact our quarterly revenues, 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. As we increase our focus on growing our service provider business, it is likely that an increased amount of our revenue will be subject to such contractual acceptance terms. 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 launched our HDX video conferencing products and our RMX conferencing platform, all of which continue to 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 enter into a new OEM partnership with a company other than us or develop products of their own, or acquire such products through acquisition, 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-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. Further, consolidation amongst our channel partners or strategic partners, such as the pending acquisition by Avaya of Nortel Enterprise Solutions, may adversely impact our business as we expect short-term distraction and a potential negative impact on our revenues during the integration of the two companies.

We recently licensed from Microsoft the right to distribute our re-branded Polycom^® CX5000 Unified Conference Station in the second quarter of 2009. The Polycom CX5000 contributed to our sequential growth in video communications product revenues in the second quarter of 2009. While we experienced strong sales in the initial quarters of the product launch, such results may not be necessarily indicative of future product sales. Additionally, in the future, Microsoft could decide to enter into similar distribution agreements for this product with companies other than us which could adversely affect our revenues in future periods.

As part of our recently announced key strategic initiatives we intend to build our strategic partnerships with such companies as Avaya, Hewlett-Packard, IBM, Microsoft, and others; however, defining and developing these partnerships is expensive and time consuming and may not come to fruition or yield the desired results.

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 video infrastructure product which is in direct competition with our video infrastructure offerings. Also, Cisco Systems has a partnership with Tandberg, one of our major competitors in the video solutions business, pursuant to which Tandberg provides Cisco Systems with technology that is co-branded and sold by Cisco Systems, and Cisco Systems has recently announced its plans to acquire Tandberg. Cisco Systems has also announced new video conferencing products that are in direct competition with our video conferencing solutions. With our 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 SpectraLink 8000 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 or continuation 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. For example, in the first quarter of 2009, we generally saw our channel partners decrease their inventory levels in response to lower sales to dealers and end-users, which negatively affected our revenues during the quarter. 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. In addition, we accrue for sales returns and other allowances as a reduction to revenues upon shipment based upon our contractual obligations and historical experience, and the underlying reserve requirements will fluctuate from quarter to quarter based upon the volume and mix of revenues to our channel partners.

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. Further, from time to time, we may make changes to our channel partner contracts. 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 or that we will receive the positive benefits that we are anticipating in making these program and contractual changes.

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

We have seen consolidation among certain of our existing channel partners and strategic 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 and other disruption caused to the combined businesses during the integration period, the timing and extent of revenue from these channel partners may be adversely affected. For example, we believe that the recent announcement that Avaya will acquire Nortel Enterprise Solutions, both of which are strategic partners of ours, may adversely impact our business as we expect short-term distraction and a potential negative impact on our revenues during the integration of the two companies.

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. As we have grown our revenues and our customer base, our exposure to credit risk has increased. In addition, global economic uncertainty and recessionary factors, a downturn in technology spending in the United States and other countries, and the current financial services crisis has restricted 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, jeopardizing the collectability of our revenues from such channel partners and negatively impacting our future results

as they reorganize or go out of business. For example, our partner Nortel filed for bankruptcy protection in the first quarter of 2009, one of our Asian distributors filed for bankruptcy in the third quarter of 2008 and one of our large European distributors filed for bankruptcy in the fourth quarter of 2007. Since filing bankruptcy, our level of business with Nortel has been materially lower than that of historical levels and the pending acquisition by Avaya could have a further negative impact on revenues.

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 infrastructure products, and we experience significant quarterly variability in the timing and amount of these orders. The revenues for infrastructure products from service providers are subject to more variability than infrastructure product revenues from our channel partners. The loss of any one of these service provider customers for our infrastructure products, or our failure to adequately maintain or grow the level of infrastructure-related product sales to service providers, could have a materially adverse impact on our consolidated revenues. For example, in 2008 our revenues for our voice infrastructure products, which are sold primarily to service provider customers, decreased by 66% compared to 2007.

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 research and development and manufacturing facilities for our infrastructure products and many of the suppliers for such products are located in Israel. Political, economic and military conditions in Israel and the Middle East region directly affect our infrastructure 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 infrastructure products and could disrupt research or developmental activities. 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, including the current credit crisis and global recession;

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potential foreign currency exchange rate fluctuations, including the recent volatility of the U.S. dollar, and the impact of our underlying hedging programs;

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unexpected changes in regulatory requirements and tariffs;

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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;

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potentially adverse tax consequences;

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the near and long-term impact of the instability in the Middle East 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; and

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

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 and costs 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. We maintain 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. Further, with the recent credit crisis and volatility of the U.S. dollar against other currencies in the second half of 2008, our products have become more expensive for our partners whose purchases are denominated in U.S. dollars, which may further disadvantage us relative to our competitors or negatively impact our margins. 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. These currency fluctuations would be recorded in Interest and Other Income (Expense) in our 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. As a result, our hedging costs can vary depending upon the size of our hedge program, whether we are purchasing or selling foreign currency relative to the U.S. dollar and interest rates spreads between the U.S. and other foreign markets. As a result, Interest and Other Income (Expense) has become less predictable and more difficult to forecast. For example, in the first nine months of 2009, the Company incurred $0.4 million in hedging costs compared to $0.7 million in the first nine months of 2008, resulting in significant movements in our Interest and Other Income (Expense) year over year. 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. The impact in any given quarter of our hedging programs is dependent upon a number of factors, including the actual level of foreign currency denominated revenues, the percentage of actual revenues covered by our hedge contracts, the exchange rate in our underlying hedge contracts and the actual exchange rate during the quarter. Based upon our outstanding hedge contracts, we anticipate that the benefit to our revenues will likely decrease throughout the remainder of 2009, depending on the future exchange rates of the U.S. dollar versus the Euro and the British Pound, which would also have a negative impact on our gross margins. For example, as a result of our cash flow hedging program, in the first and second quarters of 2008 and the third quarter of 2009, we reduced operating income by $0.2 million, $0.3 million and $0.6 million, respectively, as compared to increasing operating income in the third and fourth quarters of 2008 and the first and second quarters of 2009 by $0.4 million, $2.9 million, $2.3 million, and $1.6 million respectively. 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.

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 retention of key sales personnel as we experience transition under new sales leadership. Competition for such personnel is intense, and we may not be successful in attracting or retaining such personnel. In addition, the success of the planned expansion of our sales force as part of our recently announced strategic initiative around increasing our go-to-market capability 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 and have a material adverse impact on our operating results. 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-touch sales model, as well as due to the ongoing integration of the SpectraLink operations at that time. Given the decrease in our stock price, the equity incentives of our employees have significantly decreased in value. This decline may create difficulty in retaining employees who may choose to seek new employment with corresponding new higher value equity grants, and any attempt to grant new or higher value equity to retain employees may create dilution for current investors.

From time to time, we may also decide to replace certain key personnel or we may make changes in certain senior management positions, particularly as we continue to grow in terms of size and complexity, or make organizational changes such as we did in 2007 when we created the Video Solutions organization, through the combination of our Video and Network Systems divisions. Most recently, in July 2009, we announced the hiring of a new executive vice president of Global Field Operations and vice president of U.S. Sales, as well as other changes in our global sales organization, which creates distraction for our sales force and our channel partners, may lead to employee attrition in the sales organization and may materially impact our future revenues and profitability

during the transition period. Such transitions may be disruptive to the affected function and our business, possibly on a longer term basis than we expect, particularly as the sales 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, or as we continue to have changes in key sales personnel, which may result in continued disruptions to the business. Further, we may not experience the operating efficiencies in product planning, research, and development or sales productivity that any reorganizations within the sales organization are intended to achieve. In addition, on October 23, 2009, we announced that we placed our Senior Vice President and General Manager, Voice Communications Solutions, on administrative leave. Our Chief Executive Officer will assume these duties during the leave of absence.

The loss of key employees, 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 infrastructure 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, including our acquisitions of SpectraLink and Destiny in 2007, and we recently announced several key strategic initiatives that we are undertaking to further grow our business, including enhancing our go-to-market capability, increasing our strategic partnerships, establishing a service provider line of business, increased innovation in our immersive telepresence products and expansion of our professional services practice. Continued growth may cause a significant strain on our infrastructure, internal systems and managerial 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. For instance, we are in the process of upgrading our Enterprise Resource Planning (ERP) systems to meet the growing demands of our business, which upgrade efforts were slowed toward the end of 2008 due to a decrease in Company spending during the period of economic downturn. The fact that such ERP upgrades have been delayed, or may not be effectively completed when resumed, could cause harm to our ongoing business operations. 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, such as the restructuring activities we completed during 2008. Any organizational disruptions associated with the consolidation process could require further management attention and financial expenditures, or we may discover we terminated the wrong personnel or cut too deeply, which may impact our operations. 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 services and for the outside development and manufacture of certain of our products, and our operations could be harmed by supply or service 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, natural disasters, 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 infrastructure 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, 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 their inability to obtain any financing necessary to adequately fund their operations, particularly in light of the current economic environment, 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.

In the case of the video network operations center (VNOC) services we provide to users of our telepresence products, we are dependent upon third party suppliers for such services. In the event that any such supplier is acquired by a competitor or faces financial difficulty, such event creates a risk of VNOC service discontinuity for our customers while we search for a replacement provider and may materially adversely affect our ability to sell our telepresence products.

Further, the business failure or financial instability of any supplier of these components or services or of any 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.

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.

Finally, 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 price increases for components as a result of increased transportation and manufacturing costs of our suppliers, or our inability to obtain lower component prices in response to competitive price reductions.

Manufacturing disruption or capacity constraints or failure of our information technology systems would harm our business.

We subcontract the manufacture of our voice products, including our wireless 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. While we have begun to develop secondary manufacturing sources for certain products, 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 any of our or our subcontractors’ manufacturing sites due to destruction, natural disaster or similar events could result in a loss of product inventory. Further, we could experience a failure of our ERP systems or other information technology systems that occurs toward the end of a financial quarter or that lasts for a significant duration, either of which events could adversely impact our ability to process orders and ship product in any given quarter. 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.

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.

Finally, certain of our thinly capitalized subcontractors may fail or be detrimentally harmed in the current economic downturn, which could have a materially adverse impact on our results of operations.

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, Simtrol, Skelmir, SNMP, and Software House, video algorithm protocols from DSP and ATT/LUCENT, Windows software from Microsoft, development source code from Avaya, Nokia, Vocal Technologies Ltd., Wind River, Ingenient and Avistar, audio algorithms from Telchemy, D2, Nortel Networks, Sipro, Telogy and Voiceage, and communication software from Spirit and Troll Tech. 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 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. Further, our intellectual property protection controls across our global operations may not be adequate to fully protect us from the theft or misappropriation of our intellectual property, which could adversely harm our business.

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. 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. In addition, we may become involved in matters such as regulatory investigations or other governmental or private legal proceedings, which could result in requests for information from us that could be distracting, expensive and time consuming for us while we comply with such requests, and, if public, may also cause our stock price to be negatively impacted.

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, either directly against us or against our customers, 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 or pay amounts to third parties pursuant to contractual indemnity provisions. 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.

If we fail to manage our exposure to the volatility and economic uncertainty in the global financial marketplace successfully, our operating results could be adversely impacted.

We are exposed to financial risk associated with the global financial markets, which includes volatility in interest rates, uncertainty in the credit markets and the recent instability in the foreign currency exchange market.

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal, maintain adequate liquidity and portfolio diversification while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments include debt instruments of the U.S. government and its agencies, investment-grade corporate debt securities, bank certificates of deposit, corporate preferred equity securities that are primarily investment-grade rated and money market instruments denominated in U.S. dollars.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities, interest rate changes, the ongoing strength and quality of the global credit market and liquidity. All of the securities in our investment portfolio are investment-grade rated, but the instability of the credit market could impact those ratings and our decision to hold these securities, if they do not meet our minimum credit rating requirements. If we should decide to sell such securities, we may suffer losses in principal value that have significantly declined in value due to the declining credit rating of the securities and the ongoing strength, quality and liquidity of the preferred equity’s market and the global financial markets as a whole. For example, in the second quarter of 2009, we incurred a loss of $0.6 million related to the sale of preferred equity securities. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments. For example, in the third quarter of 2008, we recognized losses totaling $0.9 million for investments we considered to be other than temporarily impaired. With the current instability in the financial markets, we could incur significant realized or other than temporary impairment losses associated with certain of our investments which would reduce our net income. We may also incur further temporary impairment charges requiring us to record additional unrealized loss in accumulated other comprehensive income. In addition, the recent decrease in interest rates has adversely impacted the return we receive on our investments.

A significant portion of our net revenue and expenses are transacted in U.S. dollars. However, some of these activities are conducted in other currencies, primarily currencies in Europe and Asia. As a response to the risks of changes in value of foreign currency denominated transactions, we may enter into foreign currency forward contracts or other instruments, the majority of which have a maturity date greater than one year. Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not execute forward contracts in all currencies in which we conduct business. The translation of these foreign currency denominated transactions will impact net revenues, operating expenses and net income as a result of fluctuations in the U.S. dollar against foreign currencies. Accordingly, such amounts denominated in foreign currencies may fluctuate in value and produce significant earnings and cash flow volatility. For example, as a result of our cash flow hedging program, in the first and second quarters of 2008 and the third quarter of 2009, we reduced operating income by $0.2 million, $0.3 million and $0.6 million, respectively, as compared to increasing operating income in the third and fourth quarters of 2008 and the first and second quarters of 2009 by $0.4 million, $2.9 million, $2.3 million and $1.6 million, respectively.

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 both our responsibility and the responsibility of our partner, our or our 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, or if our competitors have certifications for competitive products for which we are not yet certified, our revenues and results of operations would be adversely impacted.

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, 2008, that our internal control over financial reporting was effective as of December 31, 2008, 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 adapt our control framework appropriately as we continue to grow our business. For instance, we recently opened a Shared Services Center (“SSC”) in Beijing, China, to perform certain accounting, order entry and other functions previously performed in regional headquarter locations. If the controls we put in place with respect to the SSC fail to operate effectively, our control framework could suffer or be considered ineffective. 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 guidance on share-based payments 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, by $29.9 million in 2007 and by $26.9 million in 2008 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.

In December 2007, the FASB issued Accounting Standard, or AS, Topic 805, Business Combinations, or AS 805, which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition related restructuring liabilities, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. AS 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. We believe that AS 805 will result in the recognition of certain types of expenses in our results of operations that we would capitalize pursuant to previous accounting standards and may also impact our financial statements in other ways upon the completion of any future acquisitions.

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

We are a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates, which are difficult to predict, could be unfavorably affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities. Further, the accounting for stock compensation expense in accordance with AS 805 and uncertain tax positions in accordance with AS 740 could result in more unpredictability and variability to our future effective tax rates.

The Company is also subject to the periodic examination of its income tax returns by the Internal Revenue Service and other tax authorities, and in some cases, we have received additional tax assessments. The Company regularly assesses the likelihood of adverse

outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. We may underestimate the outcome of such examinations which, if significant, would have a material adverse effect on the Company’s net income and financial condition.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, or other natural disaster, quarantines or other disruptions associated with infectious diseases, national catastrophe, terrorist activities, war, ongoing disturbances in the Middle East, 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. In 2008, we launched a business continuity program that is based on enterprise risk assessment which addresses the impact of natural, technological, man-made and geopolitical disasters on the Company’s critical business functions. This plan helps facilitate the continuation of critical business activities in the event of a disaster, but may not prove to be sufficient. 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 EMEA and Asia to expand our business in these regions. In EMEA 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 prepay discounts, these additional incentives have lowered our profitability. In addition, the recent economic crisis, economic uncertainty or a downturn in technology spending in the United States and other countries has restricted 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. For example, our partner Nortel filed for bankruptcy in the first quarter of 2009, one of Asian distributors filed for bankruptcy in the third quarter of 2008, and one of our large European distributors filed for bankruptcy in the fourth quarter of 2007. Either a delay in collections or bankruptcy would harm our cash flow and days sales outstanding performance.

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. We believe inventory turns will continue to fluctuate depending upon our ability to reduce lead times, as well as due to changes in anticipated product demand and product mix and a greater mix of ocean freight versus air freight to reduce freight costs. For instance, in the first quarter of 2008, our inventory levels increased significantly from the December 31, 2007 levels as a result of these factors.

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

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;

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our recently announced plans to invest heavily in our business for future growth, which may, in the short-term, affect our profitability;

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the announcement of new products, product enhancements or acquisitions by us or by or of our competitors, such as the recent announcement by Cisco Systems of their plans to acquire Tandberg, our largest independent competitor;

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technological innovations by us or our competitors;

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quarterly variations in our results of operations;

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

•

domestic and international macroeconomic factors, such as the credit crisis and recession currently being experienced in the United States and internationally.

In addition, the stock market continues to experience significant price and volume fluctuations related to general economic, political and market conditions. These fluctuations have had a substantial effect on the market prices for many high technology companies like us and are often unrelated to the operating performance of the specific companies. As with the stock of many other public companies, the market price of our common stock has been particularly volatile during the recent period of upheaval in the capital markets and world economy. This excessive volatility in our stock price is unpredictable and may continue for an indefinite period of time due to these extraordinary economic factors and instability in the global financial markets.

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 quarter ended September 30, 2009:


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)
7/1/09 to 7/31/09	441,010	$	23.72	440,983	$	196,704,000
8/31/09 to 8/31/09	410,693	$	23.39	407,820	$	187,165,000
9/1/09 to 9/30/09	95	$	24.15	—	$	187,165,000

Total	851,798	$	23.56	848,803

(1)	Includes 2,995 of shares repurchased in July, August, and September 2009 to satisfy tax withholding obligations as a result of the vesting of performance shares and restricted stock units.

(2)

In May 2008, the Company’s Board of Directors approved a new share repurchase plan under which the Company at its discretion may purchase shares in the open market from time to time with an aggregate value of up to $300.0 million (“2008 share repurchase plan”). As of September 30, 2009, the Company was authorized to purchase up to an additional $187.2 million of shares in the open market under the 2008 share repurchase plan. These shares of common stock have been retired and reclassified as authorized and unissued shares. The 2008 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		Form of Officer Performance Share Agreement for Andrew M. Miller.

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.

SIGNATURE

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: October 30, 2009

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		Form of Officer Performance Share Agreement for Andrew M. Miller.

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company