POLYCOM INC
10-Q, 1997-11-12
TELEPHONE & TELEGRAPH APPARATUS
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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 28, 1997
                                           
                                          or
                                           
 ___  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     0-27130
                                           
                                         POLYCOM, INC.         
                 ----------------------------------------------------
                (Exact name of registrant as specified in its charter)
                                           

            DELAWARE                                      94-3128324      
- --------------------------------                  -----------------------
(State or other jurisdiction of                       (I.R.S. employer
incorporation or organization)                     identification number)
                                           
 2584 JUNCTION AVENUE,  SAN JOSE, CA.                     95134-1902     
- --------------------------------------            -------------------------
(Address of principal executive offices)                  (Zip Code)
                                           
                                           
       (Registrant's telephone number, including area code, is (408) 474-2900)
                                           

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 ____
                                           
There were 19,189,370 shares of the Company's Common Stock, par value $.0005,
outstanding on October 28, 1997.

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<PAGE>

                                    POLYCOM, INC.
                                           
                                        INDEX
                                           
                                 REPORT ON FORM 10-Q
                       FOR THE QUARTER ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>

                                                                                       Page
                                                                                       Number    
                                                                                       ------  
PART I        FINANCIAL INFORMATION
<S>           <C>                                                                      <C>
    Item 1    Financial Statements:
         
              Condensed Consolidated Balance Sheets as of September 30, 1997 and 
              December 31, 1996.......................................................   3
         
              Condensed Consolidated Statements of Operations for the Three and Nine 
              Month Periods Ended September 30, 1997 and September 30, 1996...........   4
         
              Condensed Consolidated Statements of Cash Flows for the Nine 
              Month Periods Ended September 30, 1997 and September 30, 1996...........   5
         
              Notes to Condensed Consolidated Financial Statements....................   6
         
    Item 2    Management's Discussion and Analysis of Financial Condition 
              and Results of Operations...............................................   9

PART II       OTHER INFORMATION

              Item 1 - Legal Proceedings..............................................   19
              Item 2 - Changes in Securities..........................................   19
              Item 3 - Defaults Upon Senior Securities................................   19
              Item 4 - Submission of Matters to a Vote of Security Holders............   19
              Item 5 - Other Information..............................................   19
              Item 6 - Exhibits and Reports on Form 8-K...............................   19

SIGNATURE.............................................................................   20
</TABLE>

                                                                              2
<PAGE>

PART 1                                    FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS







                                    POLYCOM, INC.
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (IN THOUSANDS)

                                                       Sept. 30,    December 31,
                                                          1997          1996
                                                       ---------     ----------
                                                      (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                            $  16,664     $   9,548
  Short-term investments                                   1,752        10,101
  Accounts receivable, net of allowance for doubtful
     accounts of $438 at Sept. 30, 1997 and $443 at 
     December 31, 1996                                     7,395         6,965
  Inventories                                              9,023         7,458
  Other current assets                                     1,180           384
                                                       ---------     ----------
    Total current assets                                  36,014        34,456
Fixed assets, net                                          3,647         3,164
Other assets                                                 359           100
                                                       ---------     ----------
      Total assets                                     $  40,020     $  37,720
                                                       ---------     ----------
                                                       ---------     ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                     $   6,900     $   4,307
  Accrued and other current liabilities                    2,657         2,192
                                                       ---------     ----------
    Total current liabilities                              9,557         6,499
                                                       ---------     ----------
Stockholders' equity:
  Common stock                                                10            10
  Additional paid-in capital                              42,828        42,521
  Notes receivable from stockholders                         (22)          (29)
  Accumulated deficit                                    (12,353)      (11,281)
                                                       ---------     ----------
    Total stockholders' equity                            30,463        31,221
                                                       ---------     ----------
      Total liabilities and stockholders' equity       $  40,020     $  37,720
                                                       ---------     ----------
                                                       ---------     ----------


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

                                                                              3

<PAGE>




                                    POLYCOM, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (UNAUDITED)
                        (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>

                                         Three Months Ended       Nine Months Ended
                                        Sept. 30,   Sept. 30,    Sept. 30,   Sept. 30,
                                           1997         1996        1997        1996
                                         --------     -------     -------     -------
<S>                                      <C>         <C>          <C>         <C>
Net revenues                              $12,507     $ 9,502     $34,517     $26,990
Cost of net revenues                        6,755       4,619      18,556      12,678
                                         --------     -------     -------     -------
    Gross profit                            5,752       4,883      15,961      14,312
                                         --------     -------     -------     -------

Operating expenses:
  Sales and marketing                       2,724       2,245       8,110       6,515
  Research and development                  2,167       1,930       6,768       5,723
  General and administrative                  917         552       2,370       1,590
  Acquisition expenses                        133        -            473        -   
                                         --------     -------     -------     -------
    Total operating expenses                5,941       4,727      17,721      13,828
                                         --------     -------     -------     -------

Operating income/(loss)                      (189)        156      (1,760)        484

Interest income, net                          233         292         785         516
Other expense, net                             30          23          97          52
                                         --------     -------     -------     -------

Net income/(loss)                         $    14     $   425     $(1,072)    $   948
                                         --------     -------     -------     -------
                                         --------     -------     -------     -------

Net income/(loss) per share               $  0.00     $  0.02     $ (0.06)    $  0.05
                                         --------     -------     -------     -------
                                         --------     -------     -------     -------

Weighted average shares outstanding        19,783      19,833      19,053      18,657
                                         --------     -------     -------     -------
                                         --------     -------     -------     -------
</TABLE>


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

                                                                              4

<PAGE>


                                    POLYCOM, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (UNAUDITED)
                                    (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          Nine Months Ended
                                                                      Sept. 30,    Sept. 30,
                                                                         1997         1996
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
      
Cash flows from operating activities:
Net income/(loss)                                                     $  (1,072)   $    948 
 Adjustments to reconcile net income/(loss) to net cash 
     provided by/(used in) operating activities:
  Depreciation and amortization                                           1,354       1,112 
  Provision for excess and obsolete inventories                             493         205 
 Changes in assets & liabilities:
   Accounts receivable                                                     (430)      (2,669)
   Inventories                                                           (2,058)      (1,927)
   Prepaid expenses and other assets                                     (1,055)        (198)
   Accounts payable                                                       2,593         562 
   Accrued and other liabilities                                            465         427 
                                                                      ---------    ---------
Net cash provided by/(used in) operating activities                         290       (1,540)
                                                                      ---------    ---------
Cash flows from investing activities:
   Acquisition of fixed assets                                           (1,837)      (1,044)
   Proceeds from sale and maturity of short term investments             11,154      116,027 
   Purchases of short term investments                                   (2,805)    (132,694)
                                                                      ---------    ---------
Net cash provided by/(used in) investing activities                       6,512      (17,711)
                                                                      ---------    ---------
Cash flows from financing activities:
   Proceeds from issuance of notes payable                                    -        2,974 
   Repayment of notes payable and capital leases                              -       (5,966)
   Proceeds from issuance of common stock, net of repurchases               307       19,920 
   Proceeds from repayment of notes receivable from stockholders              7           60 
                                                                      ---------    ---------
Net cash provided by financing activities                                   314       16,988 
                                                                      ---------    ---------
Net increase/(decrease) in cash and cash equivalents                      7,116       (2,263)
Cash and cash equivalents, beginning of year                              9,548        3,539 
                                                                      ---------    ---------
Cash and cash equivalents, end of period                              $  16,664    $   1,276
                                                                      ---------    ---------
                                                                      ---------    ---------
Supplemental disclosure of cash flow information:
 Cash paid for interest                                               $       -    $     108
Supplemental schedule of noncash investing and financing:
 Fixed assets financed by notes payable                               $       -    $     329
 Common stock issued for notes from shareholders                      $       -    $      17
</TABLE>

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

                                                                              5

<PAGE>
                                           
                                           
                                           
                                           
                                    POLYCOM, INC.
                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (UNAUDITED)
                                           
1. BASIS OF PRESENTATION

The condensed consolidated balance sheet as of September 30, 1997 and the 
condensed consolidated statements of operations for the three and nine month 
periods ending September 30, 1997 and 1996 and condensed consolidated 
statements of cash flows for the nine month periods ending September 30, 1997 
and 1996, have been prepared by the Company without audit.  

The preparation of financial statements in conformity with United States' 
generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amounts of assets and 
liabilities and disclosure of contingent assets and liabilities at the date 
of the financial statements and the reported amounts of revenues and expenses 
during the reported period.  Actual results could differ from those estimates.

In the opinion of management, all adjustments (which include only normal 
recurring adjustments) necessary to present fairly the financial position, 
results of operations and cash flows at September 30, 1997 and for all 
periods presented have been made.  The condensed consolidated balance sheet 
at December 31, 1996 has been derived from the audited financial statements 
at that date.

Certain information and footnote disclosures normally included in financial 
statements prepared in accordance with generally accepted accounting 
principles have been condensed or omitted pursuant to the Securities and 
Exchange Commission rules and regulations.  These condensed financial 
statements should be read in conjunction with the audited financial 
statements and notes thereto included in the Company's Report on Form 10-K 
dated March 26, 1997, as amended on May 6, 1997, and filed with the 
Securities and Exchange Commission.

The Company uses a 52-53 week fiscal year.  Each reporting period ends on the 
last Sunday of a month.  As a result, a fiscal year may not end as of the 
same day as the calendar period.  For convenience of presentation, the 
accompanying consolidated financial statements have been shown as ending on 
September 30 and December 31 of each applicable period.

This Report on Form 10-Q contains forward looking statements that involve 
risks and uncertainties, including possible fluctuations in quarterly 
results; the market acceptance of ShowStation and the risks associated with 
this emerging market; the market acceptance of ViewStation, a 
videoconferencing product by ViaVideo Communications, Inc.; the acceptance of 
SoundPoint, SoundStation Premier and other new products; the timely launch of 
the ShowStation IP product; the success of the manufacturing transfer of the 
SoundStation Premier product line; the impact of competitive products and 
pricing; the completion of the potential merger with ViaVideo Communications, 
Inc. and the risks associated with integrating the two companies; the 
profitability of the videoconferencing division; and the other risks detailed 
from time to time in the Company's SEC reports, including the Form 10-K dated 
March 26, 1997, as amended May 6, 1997, and the Form 10-Q's.

2. INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined in 
a manner which approximates the first-in, first-out ("FIFO") method.  
Inventories consisted of the following (in thousands): 

                                         Sept. 30,        Dec 31,
                                             1997           1996
                                         ---------      ---------
         Raw Materials                   $  4,471       $  3,252
         Finished Goods                     4,552          4,206
                                         --------       --------
                                         $  9,023       $  7,458
                                         --------       --------
                                         --------       --------

                                                                              6

<PAGE>


3. BANK LINE OF CREDIT

On October 31, 1997, the Company completed an agreement with Silicon Valley 
Bank for a $5.0 million bank revolving line of credit.  Borrowings under the 
line are unsecured and bear interest at the bank's prime rate (currently 
8.5%).  The agreement allows for an additional facility of $5.0 million upon 
request of Polycom and payment of associated fees.  Borrowings under the line 
are subject to certain financial covenants and restrictions on indebtedness, 
equity distributions, financial guarantees, business combinations and other 
related items. The line expires in October 1999.  

4. STOCK OPTION REPRICING

In March 1997, the Company implemented an option cancellation and regrant 
program for employees (other than executive officers) holding stock options 
with exercise prices per share in excess of $4.50. Outstanding options 
covering an aggregate of 223,200 shares with exercise prices in excess of 
$4.50 per share were canceled and new options for the same number of shares 
were granted with an exercise price of $4.375 per share. The new options will 
vest over a five-year period beginning on March 5, 1997.

5. PER SHARE INFORMATION

Net income/(loss) per share is computed using the weighted average number of 
common and dilutive common equivalent shares outstanding during the period. 
Common equivalent shares consist of shares issuable upon the exercise of 
stock options, using the treasury stock method. Common stock issued under a 
stock option plan which are subject to repurchase are excluded from shares 
issued in the year-to-date computation of net loss per share as their effect 
is antidilutive.

6.  RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 
128). SFAS No. 128 establishes a different method of computing net 
income/(loss) per share than is currently required under Accounting 
Principles Board Opinion No. 15.  Under SFAS No. 128, the Company will be 
required to present both basic net income/(loss) per share and diluted net 
income/(loss) per share.  Basic and diluted net loss per share are expected 
to approximate the currently presented net loss per share.  However, basic 
net income per share is expected to be higher than net income per share as 
currently computed because the effect of dilutive stock options will not be 
considered in computing basic net income per share.  Diluted net income per 
share is expected to be comparable to the currently presented net income per 
share.  The Company will adopt SFAS No. 128 in its fiscal quarter ending 
December 31, 1997 and at that time all historical net income/(loss) per share 
data will be restated to conform to the provisions of SFAS No. 128.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". 
SFAS No. 130 establishes standards for the reporting and display of 
comprehensive income and its components in a full set of general purpose 
financial statements.  Comprehensive income is defined as the change in 
equity of a business enterprise during a period from transactions and other 
events and circumstances from non-owner sources.  The impact of adopting SFAS 
No. 130, which is effective for the Company in 1998, has not been determined.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an 
Enterprise and Related Information".  SFAS No. 131 requires publicly-held 
companies to report financial and other information about key 
revenue-producing segments of the entity for which such information is 
available and is utilized by the chief operation decision maker.  Specific 
information to be reported for individual segments includes profit or loss, 
certain revenue and expense items and total assets.  A reconciliation of 
segment financial information to amounts reported in the financial statements 
would be provided.  SFAS No. 131 is effective for the Company in 1998 and the 
impact of adoption has not been determined.

                                                                              7

<PAGE>

7. FIRST AGREEMENT WITH 3M

In March 1997, the Company entered into a joint marketing and development 
agreement with Minnesota Mining and Manufacturing Company ("3M"). Under the 
agreement, 3M provides $3.0 million in funding to Polycom for certain 
deliverables related to the development of dataconferencing products and may 
also provide shared technology resources for the development of future 
products. Through September 30, 1997, the Company recorded the $3.0 million 
as revenue, $1.0 million in each of the first three quarters of 1997, based 
on delivery of the items specified in the contract.  The amounts recognized 
as revenue approximates the amount that would have been recognized using the 
percentage of completion methodology.  Additionally, Polycom will grant 3M 
exclusive private-label rights in certain distribution channels to the 
products developed under this agreement subject to certain minimum volumes.  
Further, 3M received warrants to purchase up to 2,000,000 shares of the 
Company's common stock at an exercise price of $7.50 per share. The warrants 
expire in March 1999, which may be extended until March 2000 depending on the 
delivery of Polycom's first product developed under the agreement.  The 
warrants were valued using the Black-Scholes model and were determined to 
have an insignificant impact for financial reporting purposes.

SECOND AGREEMENT WITH 3M

In June 1997, the Company entered into a second joint marketing and 
development agreement with Minnesota Mining and Manufacturing Company.  Under 
this agreement, 3M provides $2.5 million in funding to Polycom for certain 
deliverables related to the development of videoconferencing products and may 
also provide shared technology resources for the development of future 
products. Polycom will grant 3M exclusive private-label rights in certain 
distribution channels to the products developed under this agreement.  As of 
September 30, 1997, the Company has not recognized any revenue under this 
agreement.

9. RELATED PARTY TRANSACTION

In March 1997, the Company loaned $250,000 to an officer of the Company under 
the terms of a note receivable which is due in March 2002. The note is 
secured by shares of the Company's stock owned by the officer.

10. LEASE COMMITMENTS

On May 12, 1997, the Company entered into a three year operating lease for
19,890 square feet of a building in Livermore, California.  The space is being
used as the Company's distribution and repair center.  The lease associated with
this building will expire on May 31, 2000 and the minimum annual payments under
this lease are as follows: 1997 - $69,615; 1998 - $126,302; 1999 - $138,235;
2000 - $59,670.

                                                                             8

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND     
         RESULTS OF OPERATIONS

OVERVIEW 

    Polycom Inc. ( "Polycom" or "the Company") was incorporated in December 
1990 to develop, manufacture and market audioconferencing and 
dataconferencing products that facilitate meetings at a distance. The Company 
was engaged principally in research and development from inception through 
September 1992, when it began volume shipments of its first audioconferencing 
product, SoundStation. As of September 30, 1997, the Company's 
audioconferencing product line consisted of the SoundStation, SoundStation 
EX, SoundStation Premier and SoundPoint. The Company began shipping its first 
dataconferencing product, ShowStation, in November 1995.  In October 1997, 
Polycom announced enhancements to its audio and dataconferencing product 
lines and its first videoconferencing product, the ViewStation, a 
videoconferencing product by ViaVideo Communications, Inc., which are 
discussed later in this section.  The Company markets its products 
domestically and internationally through a direct sales force and a network 
of value-added resellers (VARs), original equipment manufacturers (OEMs) and 
retail channels. Through September 30, 1997, the Company has derived a 
substantial majority of its net revenues from sales of its SoundStation 
products. The Company anticipates that sales of its SoundStation product line 
will continue to account for a substantial majority of net revenues at least 
through the year ending December 31, 1997. Any factor adversely affecting the 
demand or supply for the SoundStation product line could materially adversely 
affect the Company's business, financial condition, cash flows or results of 
operations. 

    From inception through the nine month period ended September 30, 1995, 
the Company incurred losses from operations, primarily as a result of its 
investments in the development of its products and the expansion of its sales 
and marketing, manufacturing and administrative organizations. The Company 
achieved profitability in the fourth quarter of 1995 and generated a small 
operating income in each quarter of fiscal 1996.  Although the Company 
incurred operating losses in the first, second and third quarters of 1997 and 
intends to continue to invest significantly in research and development, 
Polycom plans to generate operating income, excluding acquisition expenses, 
in the fourth quarter of 1997 assuming that the proposed acquisition of 
ViaVideo Communications, Inc. does not close in that quarter.  If the 
proposed acquisition of ViaVideo Communications, Inc. does close in the 
fourth quarter of 1997, Polycom will have a significant net loss for the 
period due to the expected impact of ViaVideo's operating expenses, offset 
only marginally, if at all, by small initial net video revenues at the end of 
the period.  There can be no assurance that the Company will achieve its 
operating plans or achieve profitable operations in the fourth quarter or in 
any subsequent period. 

    In January 1997, the Company announced plans to divisionalize the Company 
along its two lines of business: audioconferencing and dataconferencing.  The 
Company named a general manager for each division and formally restructured 
the Company's research and development organization into two separate 
divisions, reporting to each business' general manager.  Business unit 
alignments were also made in the Company's sales, marketing and general and 
administrative organizations.  In the second quarter of 1997, business unit 
alignments were also made in the manufacturing organization.  In June 1997, 
the Company announced an agreement to acquire ViaVideo Communications Inc. 
("ViaVideo"), a company based in Austin, Texas, dedicated to the development 
of videoconferencing equipment.  This acquisition, if completed, is expected 
to establish the Company in the videoconferencing market and will form the 
Company's third division.  As of this date, the merger is still pending.  See 
the discussion below for further details on this transaction. 

    In March 1997, the Company entered into a joint marketing and development
agreement (the "First Agreement") with Minnesota Mining and Manufacturing
Company ("3M").  Under the agreement, 3M provides $3.0 million in funding to
Polycom for certain deliverables related to the development of the next
generation dataconferencing product and will also provide shared technology
resources for the development of future products.  Through September 30, 1997,
the Company recorded the $3.0 million as revenue, $1.0 million in each of the
first three quarters of 1997, based on delivery of the items specified in the
contract.  The amounts recognized as revenue approximates the amount that would
have been recognized using the percentage of completion methodology.
Additionally, Polycom will grant 3M exclusive private-label rights in certain
distribution channels to the products developed under this agreement subject to
certain minimum volumes.  Further, 3M received warrants to purchase up to
2,000,000 shares of the Company's common stock 

                                                                              9

<PAGE>

at an exercise price of $7.50 per share. The warrants expire in March 1999, 
which may be extended until March 2000 depending on the delivery of Polycom's 
first product developed under the agreement.  The warrants were valued using 
the Black-Scholes model and were determined to have an insignificant impact 
for financial reporting purposes.

    In June 1997, the Company entered into a second joint marketing and 
development agreement (the "Second Agreement") with Minnesota Mining and 
Manufacturing Company.  Under this agreement, 3M provides $2.5 million in 
funding to Polycom for certain deliverables related to the development of 
videoconferencing products and may also provide shared technology resources 
for the development of future products.  Polycom will grant 3M exclusive 
private-label rights in certain distribution channels to the products 
developed under this agreement. As of September 30, 1997, the Company has not 
recognized any revenue under this agreement.

    As mentioned above, in June 1997 the Company signed an agreement under 
which Polycom may acquire ViaVideo Communications, Inc.  This acquisition of 
ViaVideo, a development stage company with its initial videoconferencing 
product targeted to be released by the end of 1997, is intended to add a 
videoconferencing product and engineering team to Polycom's audioconferencing 
and dataconferencing product portfolio.  

    Under the terms of the agreement with ViaVideo, 9.7 million shares of 
Polycom common stock, plus up to an additional 300,000 shares based on future 
option grants by ViaVideo, will be exchanged for all outstanding shares and 
options of ViaVideo.  Depending on the average price of Polycom's shares 
during a specified period preceding the acquisition, the total number of 
Polycom shares to be issued may be reduced so in no event will the total 
acquisition consideration exceed $90 million.  It is expected that the 
transaction will be accounted for as a pooling of interests and will qualify 
as a tax-free reorganization.  The transaction is expected to be completed 
during the fourth quarter of 1997 or the first quarter of 1998 and is subject 
to various conditions which include first customer shipment by ViaVideo of 
its initial videoconferencing system no later than March 31, 1998 and 
Polycom's share price preceding the acquisition to be at or above $3.00 per 
share.  There can be no guarantee that ViaVideo will meet the required 
milestones, that the shareholders will approve the merger, that there will be 
market acceptance of the ViaVideo videoconferencing product, that the 
transaction will be accounted for as a pooling of interests, that the 
products, technology and personnel of ViaVideo can be successfully integrated 
into the Company, or that the future of the business will be profitable.

    In October 1997, the Company announced a new set of data, video and 
audioconferencing products to add to its existing line.  In the 
dataconferencing market, Polycom announced its new ShowStation IP product 
which is its next generation conference room projector.  The ShowStation IP 
is targeted to be available in North America in December 1997 and in Europe 
and Asia Pacific on a country-by-country basis over the following several 
months.  Attaining operating profitability in the fourth quarter of 1997 and 
beyond is dependent on meeting these targeted release dates for the 
ShowStation IP product.  In the videoconferencing arena, Polycom introduced 
the new ViewStation, a videoconferencing product by ViaVideo Communications, 
Inc.  ViewStation is targeted to be available in North America at the end of 
1997 and its availability through Polycom is entirely dependent on the 
closing of the expected merger between Polycom and ViaVideo Communications, 
Inc.  In the audioconferencing market, Polycom introduced the SoundStation 
Premier Satellite which is a unique enhanced system that works in conjunction 
with Polycom's SoundStation Premier conference phone.  The SoundStation 
Premier satellite is targeted to be available in North America in December 
1997.  There can be no assurance that any products not yet commercially 
available will be available by the Company's targeted dates and the lack of 
availability of these products will materially affect Polycom's financial 
results.         
    
    This Report on Form 10-Q contains forward looking statements that involve
risks and uncertainties, including possible fluctuations in quarterly results;
the market acceptance of ShowStation and the risks associated with this emerging
market; the market acceptance of ViewStation, a videoconferencing product by
ViaVideo Communications, Inc.; the acceptance of SoundPoint, SoundStation
Premier and other new products; the timely launch of the ShowStation IP product;
the success of the manufacturing transfer of the SoundStation Premier product
line; the impact of competitive products and pricing; the completion of the
planned merger with ViaVideo Communications, Inc. and the risks associated with
integrating the 

                                                                            10

<PAGE>

companies; the profitability of the videoconferencing division; and the other 
risks detailed from time to time in the Company's SEC reports, including the 
Form 10-K dated March 26, 1997, as amended on May 6, 1997, and the Form 
10-Q's.

RESULTS OF OPERATIONS

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

                                 Three Months Ended      Nine Months Ended
                                Sept. 30    Sept. 30    Sept. 30,   Sept. 30,
                                   1997        1996        1997        1996
                                --------    --------    ---------   ---------
Net revenues                       100%        100%        100%        100%
Cost of net revenues                54%         49%         54%         47%
                                 -----       -----        -----       ----
    Gross profit                    46%         51%         46%         53%
                                 -----       -----        -----       ----

Operating expenses:
  Sales and marketing               22%         24%         23%         24%
  Research and development          17%         20%         20%         21%
  General and administrative         8%          6%          7%          6%
  Acquisition expenses               1%          0%          1%          0%
                                 -----       -----        -----       ----
    Total operating expenses        48%         50%         51%         51%
                                 -----       -----        -----       ----

Operating income/(loss)             (2%)         1%         (5%)         2%

Interest income, net                 2%          3%          2%          2%
Other expense, net                   0%          0%          0%          0%
                                 -----       -----        -----       ----

Net income/(loss)                    0%          4%         (3%)         4%
                                 -----       -----        -----       ----
                                 -----       -----        -----       ----

     The following table sets forth net revenues by line of business for the 
periods indicated (amounts in thousands).

                                Three Months Ended      Nine Months Ended
                               Sept. 30,   Sept. 30,   Sept. 30,   Sept. 30,
                                 1997        1996        1997        1996
                              ---------    --------    --------    --------
Audioconferencing:
Net revenues                  $  11,082    $  8,051   $  28,848   $  23,308
Cost of net revenues              5,897       2,902      14,901       8,792
                              ---------    --------    --------    --------
  Gross profit                $   5,185    $  5,149   $  13,947   $  14,516
                              ---------    --------    --------    --------
                              ---------    --------    --------    --------
  Gross margin %                    47%         64%         48%         62%

Dataconferencing:
Net revenues                  $   1,425    $  1,451    $  5,669    $  3,682
Cost of net revenues                858       1,717       3,655       3,886
                              ---------    --------    --------    --------
  Gross profit                $     567    $   (266)   $  2,014    $   (204)
                              ---------    --------    --------    --------
                              ---------    --------    --------    --------
  Gross margin %                    40%        (18%)        36%         (6%)

NET REVENUES

    Total net revenues were $12.5 million in the third quarter of 1997 compared
to $9.5 million in the third quarter of 1996, an increase of 32%.  Within the
audioconferencing product line, net revenues were $11.1 million in the third
quarter of 1997, an increase of $3.0 million or 38%, when compared to the same
period for 1996.  The increase was due to the impact of unit sales growth of the
SoundStation product as 

                                                                            11
<PAGE>

well as the SoundPoint product and SoundStation Premier introduced in the 
third and fourth quarters of 1996, respectively.  This was partially offset 
by a 37% price reduction on SoundStation product sold in North America 
effective January 1997 and a 30% price reduction on international 
SoundStation sales effective April 1997.  Dataconferencing net revenues in 
the third quarter of 1997 were $1.4 million compared to $1.5 million for the 
same period of 1996, a decrease of 2%.  The decrease was due to a significant 
unit volume decrease which was almost entirely offset by the $1.0 million 
payment associated with the First Agreement with 3M which did not occur in 
the third quarter of 1996.  No such payment will occur in the fourth quarter 
of 1997, or any subsequent quarter, under the First Agreement with 3M as 
Polycom has completed the deliverables related to this agreement. 

    For the first nine months of 1997, total net revenues were $34.5 million, 
an increase of $7.5 million or 28%, compared to the same period in 1996.  The 
audioconferencing net revenues for the first nine months of 1997 were up $5.5 
million, or 24%, when compared to the first nine months of 1996.  This 
increase was due to the introduction of the new product lines in this 
division, which was partially offset by the price reductions for the 
SoundStation product line.  For the first nine months of 1997, SoundStation 
unit sales increased over the same period in 1996, offsetting the impact of 
the price reduction.  Additionally, although the SoundPoint product revenue 
was up over the same period in 1996, revenue for this product was down in 
comparison to the second quarter of 1997 due to lower unit sales and the 
market mix.  Specifically, sales to the adjunct PBX market performed well in 
the current quarter, but sales of the SoundPoint were off in the desktop 
videoconferencing market.  Dataconferencing revenues were $5.7 million for 
the first nine months of 1997 versus $3.7 million in the first nine months of 
1996.  This increase was due entirely to the revenue associated with the 
First Agreement with 3M which offset ShowStation unit volume decreases.  The 
Company will not recognize any further revenue from the First Agreement with 
3M. 

    During the third quarters of 1997 and 1996 and for the first nine months 
of 1997 and 1996, the Company derived a majority of its net revenues from 
sales of its SoundStation product family.  However, no customer or reseller 
accounted for more than 10% of the Company's net revenues during these same 
periods for either 1997 or 1996.  Further, the Company received, and recorded 
as revenue, $3.0 million under the First Agreement with 3M during the first 
nine months of 1997.

    International net revenues for the third quarter of 1997 accounted for 
25% of total net revenues for the Company, up slightly from 24% in the third 
quarter of 1996.  This increase was due to a significant increase in the 
Europe and Asia-Pacific regions for the audioconferencing business which was 
offset by a reduction in the dataconferencing business.  The decline in the 
dataconferencing business was attributable to significant international OEM 
sales in the third quarter of 1996 which did not occur in the third quarter 
of 1997.  For the first nine months of 1997, international net revenues were 
23% of total net revenues compared to 22% in the same period of 1996.  Again, 
increases in the audioconferencing business were offset by decreases in the 
dataconferencing business.  The Company anticipates that international sales 
will continue to account for a significant portion of total net revenues for 
the foreseeable future. However, international net revenues may fluctuate in 
the future as the Company introduces new products, since the Company expects 
to initially introduce such products in North America and also because of the 
additional time required for product homologation and regulatory approvals of 
new products in international markets.  In addition, the implementation of 
the international price reduction for SoundStation products effective April 
1997 will affect international revenues in future quarters.  To the extent 
the Company is unable to expand international sales in a timely and 
cost-effective manner, the Company's business, financial condition or results 
of operations could be adversely affected. There can be no assurance that the 
Company will be able to maintain or increase international market demand for 
the Company's products.  To date, a substantial majority of the Company's 
international sales has been denominated in U.S. currency, however, the 
Company expects that in the future more international sales may be 
denominated in local currencies.

                                                                            12

<PAGE>

COST OF NET REVENUES

    Cost of net revenues consists primarily of the Company's manufacturing 
organization, contract manufacturers, tooling depreciation, warranty expense 
and an allocation of overhead expenses.  The cost of net revenues represented 
54% and 49% of net revenues for the third quarters of 1997 and 1996, 
respectively. By division, audioconferencing cost of net revenues was 53% in 
the third quarter of 1997 versus 36% in the 1996 third quarter, while 
dataconferencing cost of net revenues was 60% in the third quarter of 1997 
compared to 118% in the third quarter of 1996.  The increase in 
audioconferencing cost of net revenue percentage is primarily attributable to 
the SoundStation price reduction implemented in North America in January 1997 
and in the International regions in April 1997.  Also, the costs associated 
with the transition to a manufacturer in Thailand and the introduction of a 
lower margin audio product contributed to the higher cost of net revenues 
percentage.  It is expected that the transition costs associated with the 
transition to the Thailand manufacturer will not recur in the future.  
Additionally, the Company offered deeper discounts in the third quarter of 
1997 than in previous quarters in its quarter-end distributor incentive 
program which negatively affected the cost of net revenues percentage. These 
discounts were particularly significant in the SoundStation Premier product 
line as the Company strives to increase the market mix of this product. In 
the dataconferencing division, the decrease in the cost of net revenues 
percentage was primarily due to the revenue received under the First 
Agreement with 3M, which had very low associated costs.  Because Polycom will 
not receive revenue from the First Agreement with 3M in the fourth quarter of 
1997, the dataconferencing cost of net revenues are expected to increase 
leading to a low to negative gross margin percentage for the dataconferencing 
business in the fourth quarter. 

    For the first nine months of 1997 the cost of net revenues percentage was 
54%, compared to 47% for the same period in 1996.  The audioconferencing cost 
of net revenues was 52% in the first nine months of 1997 versus 38% in the 
first nine months of 1996.  This increase was due to the price reductions in 
the SoundStation product family mentioned above as well as the introduction 
of a lower margin audio product in the third quarter of 1996.  The 
dataconferencing cost of net revenues was 64% in the first nine months of 
1997 versus 106% in the same period of 1996.  This decrease was due primarily 
to the revenues received under the First Agreement with 3M.   
  
    The Company's historical price reductions have been driven by the 
Company's desire to expand the market for its products, and the Company may 
further reduce prices or introduce new products that carry higher costs in 
order to further expand the market or to respond to competitive pricing 
pressures, although there can be no assurance that such actions by the 
Company will expand the market for its products or be sufficient to meet 
competitive pricing pressures.  In the future, the cost of net revenue 
percentage may be affected by price competition and changes in unit volume 
shipments, product cost and warranty expenses.  The cost of net revenues 
percentage may also be impacted by the mix of distribution channels used by 
the Company, the mix of products sold and the mix of International versus 
North American revenues. The Company typically realizes lower cost of net 
revenue percentages on direct sales than on sales through indirect channels 
and lower cost of net revenues percentage on International revenues than on 
North American revenues.  If sales through resellers, especially OEMs, 
increase as a percentage of total revenues, the Company's cost of net 
revenues percentage will be adversely impacted. 

    In June 1997, the Company began manufacturing the SoundStation products 
at a manufacturing contractor based in Thailand.  During the third quarter of 
1997, this same manufacturer also began producing the Premier product family. 
Although the transition of the manufacturing process to the Thailand 
manufacturer caused an unfavorable cost variance in the third quarter of 
1997, the Company expects that this change will lower audioconferencing cost 
of net revenues in the fourth quarter of 1997 and beyond, although there can 
be no assurances that this will occur.  In July 1997, the Company moved its 
distribution and product repair center to a new location in Livermore, 
California.  This move is expected to provide the Company with better control 
over its distribution and repair activities and may improve overall warranty 
and service costs, although there are no assurances that this will happen.

                                                                            13

<PAGE>

    


SALES AND MARKETING EXPENSES

<TABLE>
<CAPTION>

                               THREE MONTHS ENDED                  NINE MONTHS ENDED
                     -----------------------------------   ----------------------------------
                     SEPT. 30,    SEPT. 30,    INCREASE/   SEPT. 30,    SEPT. 30,   INCREASE/
$  IN THOUSANDS         1997         1996      (DECREASE)     1997         1996     (DECREASE)
- ---------------      --------     --------     ----------  --------     --------    ----------
<S>                  <C>          <C>          <C>         <C>          <C>         <C>
Expenses             $  2,724     $  2,245       21.3%     $  8,110     $  6,515       24.5%

% of Net Revenues        21.8%        23.6%      (1.8%)        23.5%        24.1%      (0.6%)

</TABLE>


    Sales and marketing expenses consist primarily of salaries and 
commissions, advertising and promotional expenses, an allocation of overhead 
expenses and customer service and support costs.  The increase in expenses of 
the third quarter of 1997 compared to the third quarter of 1996 was primarily 
related to the expansion of the Company's sales and marketing organizations, 
particularly in the international and retail sales channels.  An increase in 
advertising and promotions also contributed to the overall increase.  For the 
first nine months of 1997 compared to the same period for 1996, the increase 
was due to the expansion of the marketing organization and the sales effort 
in the international regions, particularly Europe and Asia Pacific.  

    The Company expects to continue to increase its sales and marketing 
expenses in absolute dollar amounts in an effort to expand North American and 
international markets, market new products and establish and expand 
distribution channels.  In particular, due to the innovative nature of the 
ShowStation, ShowStation IP and ViewStation, a videoconferencing product by 
ViaVideo Communications, Inc., products, the Company believes it will be 
required to incur significant additional expenses for sales and marketing, 
including advertising, to educate potential customers as to the desirability 
of ShowStation, ShowStation IP and ViewStation.  Also, compensation and 
benefits for the new Vice President of Marketing will cause an increase in 
Marketing and Sales expense in the future.   Further, although sales and 
marketing expenses will likely increase in absolute dollars, the effects the 
proposed merger with ViaVideo Communications, Inc. will have on its 
percentage of net revenues and on the profitability of the Company are 
difficult to predict, if not impossible, at this time. 

RESEARCH AND DEVELOPMENT EXPENSES

<TABLE>
<CAPTION>

                            THREE MONTHS ENDED                     NINE MONTHS ENDED
                     -----------------------------------   ----------------------------------
                     SEPT. 30,    SEPT. 30,   INCREASE/    SEPT. 30,    SEPT. 30,     INCREASE/
$  IN THOUSANDS         1997        1996      (DECREASE)      1997         1996      (DECREASE)
- ---------------      --------     --------    ----------    --------     --------    ----------
<S>                  <C>          <C>         <C>          <C>          <C>          <C>
Expenses             $  2,167     $  1,930       12.2%     $  6,768     $  5,723         18.3%

% of Net Revenues        17.3%        20.3%      (3.0%)        19.6%         21.2%       (1.6%)

</TABLE>


    Research and development expenses consist primarily of compensation 
costs, consulting fees, an allocation of overhead expense, supplies and 
depreciation. The expense increases for the third quarter of 1997 versus the 
third quarter of 1996 and for the first nine months of 1997 compared to the 
same period of 1996 were primarily attributable to increased staffing and 
associated support to expand and enhance the Company's product lines, 
particularly in the dataconferencing division.  Also, in compliance with a 
joint services agreement with ViaVideo Communications, Inc., Polycom incurred 
and billed out, as a credit to its expense, charges related to development 
work done on behalf of ViaVideo Communications, Inc.

    The Company believes that technological leadership is critical to its 
success and is committed to continuing a high level of research and 
development. Consequently, the Company intends to increase its research and 
development expenses in absolute dollars in the future. Further, although 
research and development expenses will likely increase in absolute dollars, 
the effects the proposed merger with ViaVideo Communications, Inc. will have 
on its percentage of net revenues and on the profitability of the Company are 
difficult to predict, if not impossible, at this time. 

                                                                            14

<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>

                            THREE MONTHS ENDED                         NINE MONTHS ENDED
                     ----------------------------------     -----------------------------------
                     SEPT. 30     SEPT. 30,   INCREASE/     SEPT. 30,   SEPT. 30,     INCREASE/
 $ IN THOUSANDS        1997         1996      (DECREASE)      1997         1996      (DECREASE)
- ---------------      --------     --------    ----------    --------     --------    ----------
<S>                  <C>          <C>         <C>           <C>          <C>         <C>
 Expenses             $ 917         $ 552         66.1%      $ 2,370      $ 1,590         49.1%

 % of Net Revenues      7.3%          5.8%         1.5%          6.9%         5.9%         1.0%

</TABLE>


    General and administrative expenses consist primarily of compensation 
costs, an allocation of overhead expense, and outside legal and accounting 
expenses.  The increase in general and administrative expenses, both in 
absolute dollars and as a percentage of net revenues, for the third quarter 
of 1997 when compared to the same period of 1996 was primarily due to 
increased staffing, including the hiring of a president, to support the 
Company's growth and an increased focus in both the audioconferencing and 
dataconferencing divisions. The increase in expenses for the first nine 
months of 1997 over the first nine months of 1996 was due again to increased 
staffing to support the growth of the Company.

    The Company believes that its general and administrative expenses will 
increase in absolute dollar amounts in the future primarily as a result of 
expansion of the Company's administrative staff and costs related to being a 
public company. Further, although general and administrative expenses will 
likely increase in absolute dollars, the effects the proposed merger with 
ViaVideo Communications, Inc. will have on its percentage of net revenues and 
on the profitability of the Company are difficult to predict, if not 
impossible, at this time. 

ACQUISITION EXPENSES

    For the third quarter of 1997, the Company incurred expenses totaling 
$0.1 million related to the pending acquisition of ViaVideo Communications, 
Inc.  For the first nine months of 1997, these acquisition expenses were $0.5 
million.  A significant portion of these charges were for outside legal, 
accounting and consulting services.  Management believes the acquisition 
related expenses will be less throughout the remainder of this fiscal year; 
however, there can be no assurances that this will happen, that the future 
charges will not be material or that the merger will ever be completed.

    There can be no assurances that Polycom will complete the proposed merger 
or that the Company will not incur additional charges in subsequent quarters 
associated with the merger or that management will be successful in its 
efforts to integrate the operations of the acquired company.  Although the 
Company believes the proposed acquisition described above is in the best 
interest of the Company and its stockholders, there are significant risks 
associated with this transaction, including but not limited to: (i) 
difficulties in integration of the companies, (ii) difficulties in 
maintaining revenue levels during product transitions, (iii) difficulties or 
delays in achieving product and technology integration benefits, and (iv) 
increased competition from other videoconferencing companies.  Further, the 
proposed acquisition described above relates to a company that is in its 
early stage of development.  As a result, the Company believes that the 
increases in costs of net revenues and in operating expenses associated with 
the development and integration of these technologies will, in the near term, 
greatly exceed any associated increases in net revenues, which will have an 
adverse impact on operating results.

                                                                            15

<PAGE>

INTEREST INCOME, NET AND OTHER EXPENSES, NET

    Interest income, net consists of interest earned on the Company's cash 
equivalents and short-term investments net of any interest expense.  For the 
third quarter of 1997, interest income, net was $0.2 million, a decrease of 
20% from the third quarter of 1996.  This decrease was due to a lower level 
of cash available for investment.  For the first nine months of 1997, 
interest income, net was $0.8 million compared to $0.5 million in the same 
period of 1996.  This increase was due to the increase in the Company's cash 
equivalents and short-term investments as a result of its initial public 
offering in the second quarter of 1996.  In addition, interest expense 
recorded in 1997 is insignificant due to the reduction in debt after the 
initial public offering. 

    The Company accounts for income taxes in accordance with the Financial 
Accounting Standards Board's Statement of Financial Accounting Standards No. 
109 "Accounting for Income Taxes."  The current quarter's break-even results 
generated minimal federal and state income taxes in 1997.  In the fourth 
quarter of 1997 and beyond, the Company expects to realize increasingly 
profitable results which will generate higher federal and state income tax 
expense, although there can be no assurance the Company will achieve 
profitable results. As of December 31, 1996, the Company had approximately 
$6.4 million in federal net operating loss carryforwards and $790,000 in tax 
credit carryforwards.  The future utilization of the Company's net operating 
loss carryforwards may be subject to certain limitations upon certain changes 
in ownership. 

    The Company has established a valuation allowance against its deferred 
tax assets due to the uncertainty surrounding the realization of such assets. 
Management evaluates the recoverability of the deferred tax assets and the 
level of the valuation allowance on a quarterly basis.  At such time it is 
determined that it is more likely than not that deferred tax assets are 
realizable, the valuation allowance will be appropriately reduced.

OTHER FACTORS AFFECTING FUTURE OPERATIONS

    The Company's net revenues have grown primarily through increased market 
acceptance of its established audioconferencing product line, new product 
introductions and, to a lesser extent, through the expansion of the Company's 
North American and International distribution networks.  While the Company 
has experienced growth in net revenues in recent quarters, it does not 
believe that the historical growth rates in net revenues will be sustainable 
nor are they indicative of future operating results. For example, the Company 
believes that the 37% price reduction in the North American list price of its 
SoundStation product line, effective December 1996 for resellers and January 
1997 for end user customers, and the 30% price reduction for SoundStation 
products sold internationally effective April 1997, negatively impacted the 
Company's net revenues and gross margins in the third quarter and first nine 
months of 1997 and will continue to negatively impact net revenues and gross 
margins throughout 1997.  The Company believes that gross margins could 
continue to be negatively affected in the future as a result of several 
factors including low to negative gross margins for the Company's ShowStation 
and ShowStation IP dataconferencing products, inventory value loss related to 
the ShowStation inventory if it is determined that the units cannot be sold 
for at least carrying cost, the reduction in the list prices of the 
SoundStation product line, the introduction of the lower margin SoundPoint 
desktop product line and continuing competitive price pressure in the 
audioconferencing and dataconferencing markets.  Although price reductions 
have been driven by the Company's desire to expand the market for its 
products, and the Company expects that in the future it may further reduce 
prices or introduce new products that carry lower margins in order to further 
expand the market or to respond to competitive pricing pressures, there can 
be no assurance that such actions by the Company will expand the market for 
its products or be sufficient to meet competitive pricing pressures.  In 
addition, costs related to the merger with ViaVideo Communications, Inc., 
expense growth related to the activities of the combined entities and costs 
related to the introduction of the new ShowStation IP, ViewStation, a 
videoconferencing product by ViaVideo Communications, Inc., and SoundStation 
Satellite products could negatively impact future profitability.  Also, the 
impact of pending or future litigation against Polycom or ViaVideo 
Communications, Inc., including the suit filed by VTEL Corporation against 
ViaVideo Communications, Inc. as mentioned in the Company's Form 8-K filed on 
September 9, 1997, is difficult to predict at this time.  Further, the 
Company's limited 

                                                                            16

<PAGE>

operating history and limited resources, among other factors, make the 
prediction of future operating results difficult if not impossible. 

    In the past the Company has experienced delays from time to time in the 
introduction of certain new products and enhancements and expects that such 
delays may occur in the future.  For instance,  the introduction of 
ShowStation was delayed by approximately eighteen months from the originally 
anticipated date of introduction because of unforeseen technical challenges 
and difficulties in building core technologies and, for approximately nine 
weeks in the first quarter of 1996, shipments were interrupted in order to 
correct software and other technical problems identified by initial 
customers.  In addition, SoundStation Premier first customer shipments were 
delayed from its original shipment target of September 1996 to November 1996 
and ShowStation IP was delayed from September 1997 to its targeted first 
customer shipment date of December 1997 due to engineering issues.  Any 
similar delays could have a material adverse effect on the Company's results 
of operations.

    The Company's operating results have fluctuated in the past and may 
fluctuate in the future as a result of a number of factors, including market 
acceptance of the ShowStation, ShowStation IP and ViewStation, a 
videoconferencing product by ViaVideo Communications, Inc., products and 
other new product introductions and product enhancements by the Company or 
its competitors, the prices of the Company's or its competitors' products, 
the mix of products sold, the mix of products sold directly and through 
resellers, fluctuations in the level of international sales, the cost and 
availability of components, manufacturing costs, the level of warranty 
claims, changes in the Company's distribution network, the level of royalties 
to third parties and changes in general economic conditions. In addition, 
competitive pressure on pricing in a given quarter could adversely affect the 
Company's operating results for such period, and such price pressure over an 
extended period could materially adversely affect the Company's long-term 
profitability. The Company's ability to maintain or increase net revenues 
will depend upon its ability to increase unit sales volumes of its 
SoundStation, SoundStation Premier and SoundPoint families of 
audioconferencing products, the dataconferencing line of products, comprised 
of the ShowStation and ShowStation IP products, and the videoconferencing 
line of products, currently comprised of ViewStation, a videoconferencing 
product by ViaVideo Communications, Inc., and any new products or product 
enhancements. There can be no assurance that the Company will be able to 
increase unit sales volumes of existing products, introduce and sell new 
products or reduce its costs as a percentage of net revenues. 

    The Company typically ships products within a short time after receipt of 
an order, does not usually have a significant backlog and backlog fluctuates 
significantly from period to period.  As a result, backlog at any point in 
time is not a good indicator of future net revenues and net revenues for any 
particular quarter cannot be predicted with any degree of accuracy. 
Accordingly, the Company's expectations for both short- and long-term future 
net revenues are based in large part on its own estimate of future demand and 
not on firm customer orders. In addition, the Company has in the past 
received orders and shipped a substantial percentage of the total products 
sold during a particular quarter in the last several weeks of the quarter. In 
some cases, these orders have consisted of distributor stocking orders and 
the Company has from time to time provided special incentives for 
distributors to purchase more than the minimum quantities required under 
their agreements with the Company.  Therefore, the Company has been 
uncertain, even during most of the quarter, what level of revenues it will 
achieve in the quarter and the impact that distributor stocking orders will 
have on revenues and gross margins in that quarter and subsequent quarters.  
In addition, because a substantial percentage of product sales occur at the 
end of the quarter, product mix and therefore gross margins are difficult to 
predict.  Further, there can be no guarantee that the Company's contracted 
manufacturers will be able to meet product demand before the quarter ends.  
The Company anticipates that this pattern of sales will continue in the 
future. Expense levels are based, in part, on these estimates and, since the 
Company is limited in its ability to reduce expenses quickly if orders and 
net revenues do not meet expectations in a particular period, operating 
results would be adversely affected.  In addition, a seasonal demand may 
develop for the Company's products in the future.  Due to all of the 
foregoing factors, it is likely that in some future quarter the Company's 
operating results will be below the expectations of public market analysts 
and investors.  In such event, the price of the Company's Common Stock would 
likely be materially adversely affected.

                                                                            17

<PAGE>

    The Company's operations are vulnerable to interruption by fire, 
earthquake, power loss, telecommunications failure and other events beyond 
the Company's control.  Additionally, most of the Company's operations are 
currently located in the San Francisco Bay Area, an area that is susceptible 
to earthquakes.  The Company does not carry sufficient business interruption 
insurance to compensate the Company for losses that may occur, and any losses 
or damages incurred by the Company could have a material adverse effect on 
its business, financial condition or operating results.
                                           
                                           
LIQUIDITY AND CAPITAL RESOURCES

    As of September 30, 1997, the Company's principal sources of liquidity 
included cash, cash equivalents and short-term investments of $18.4 million, 
a decrease of $1.2 million from December 31, 1996.  Additionally, on October 
17, 1997, the Company re-established a $5.0 million revolving bank line of 
credit from Silicon Valley Bank which had previously expired on April 15, 
1997.  This line of credit allows for an additional facility of $5.0 million 
available upon request by the Company and contingent upon payment of 
associated fees. 

    The Company generated $0.3 million in cash from operating activities for 
the first nine months of 1997 versus a use of $1.5 million in cash for the 
same period in 1996.  The improvement in cash from operating activities was 
due primarily to improved collections of accounts receivable and larger 
accounts payable and accrued liability balances, offset somewhat by a net 
loss in the first nine months of 1997 compared to net income in the same 
period of 1996 and an increase in prepaid assets.

    The total net change in cash and cash equivalents for the first nine 
months of 1997 was an increase of $7.1 million.  The primary sources of cash 
were $0.3 million from operating activities, and net sales of investments of 
$8.3 million. The positive cash flow from operating activities was the result 
of higher accounts payable and accrued liability balances and a positive net 
income before non-cash items such as depreciation and increases to inventory 
reserves, offset by an increase in inventories, prepaid assets and accounts 
receivable.  The primary uses of cash during the first nine months of 1997 
were purchases of property, plant and equipment of $1.8 million.  The Company 
expects to continue to purchase additional equipment throughout the remainder 
of 1997. 

    The Company's material commitments consist of obligations under its 
revolving bank line of credit, operating leases and a $200,000 stand-by 
letter of credit which has been issued to guarantee certain of the Company's 
contractual obligations.  The Company estimates that 1997 capital 
expenditures will total approximately $3.0 million.

    The Company believes that its available cash, cash equivalents and bank 
line of credit will be sufficient to meet the Company's operating expenses 
and capital requirements through at least December 31, 1997.  Thereafter, the 
Company may require additional funds to support its working capital 
requirements or for other purposes and may seek to raise such additional 
funds through public or private equity financing or from other sources.  
There can be no assurance that additional financing will be available at all 
or that, if available, such financing will be obtainable on terms favorable 
to the Company and would not be dilutive.  The Company's future liquidity and 
cash requirements will depend on numerous factors, including introduction of 
new products and potential product family or technology acquisitions.

                                                                            18

<PAGE>


PART II       OTHER INFORMATION

Item 1.       LEGAL PROCEEDINGS

              Not Applicable

Item 2.       CHANGES IN SECURITIES

              Not Applicable

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

              Effective October 20, 1997, Allan White joined the Company as the
              Vice President of Marketing.  

Item 6        EXHIBITS AND REPORTS ON FORM 8-K

    (a)       List of Exhibits

NUMBER                  EXHIBIT                       
- ------        -----------------------------------------------------------------
11.1          Computation of Net Income/(Loss) per Common and Common Equivalent
              Share

  27          Financial Data Schedule


    (b)  Reports on Form 8-K:     
         
         On August 13, 1997, the Company filed a report on Form 8-K to report
         that it signed an agreement to acquire ViaVideo Communications, Inc.
         of Austin, Texas.


         On September 9, 1997, the Company filed a report on Form 8-K to report
         that VTEL Corporation filed suit against ViaVideo Communications, Inc.
         citing breach of contract, breach of confidential information,
         disclosure of proprietary information and related allegations.

                                                                            19

<PAGE>

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: November 12, 1997          POLYCOM, INC.


                                  /s/ Michael R. Kourey        
                                  -------------------------------
                                  Michael R. Kourey
                                  Chief Financial Officer
                                  (Duly Authorized Officer and Principal
                                  Financial and Accounting Officer)

                                                                            20


<PAGE>

                                                      EXHIBIT 11.1

                                    POLYCOM, INC.
                                           
                           COMPUTATION OF NET INCOME (LOSS)
                        PER COMMON AND COMMON EQUIVALENT SHARE
                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                           

<TABLE>
<CAPTION>


                                                              Three Months Ended        Nine Months Ended
                                                            ---------------------     ----------------------
                                                            Sept. 30,    Sept. 30,    Sept. 30,    Sept. 30,
                                                               1997         1996         1997         1996
                                                             --------     --------     --------     --------
<S>                                                         <C>          <C>           <C>          <C>
PRIMARY & FULLY DILUTED
  Weighted average common shares outstanding                   19,105       18,831       19,053       11,676
  Common equivalent shares from options and warrants              624          514            0          341
  Common equivalent shares from common stock
    subject to repurchase (2)                                      54          488            0          564
  Common equivalent shares from convertible 
    redeemable preferred stock and warrants                         0            0            0        5,329
  Common equivalent shares from options and 
    convertable redeemable preferred stock (1)                      0            0            0          747
                                                             --------     --------     --------     --------

     Total shares                                              19,783       19,833       19,053       18,657
                                                             --------     --------     --------     --------
                                                             --------     --------     --------     --------

Net income / (loss):
  Amount                                                     $     14     $    425    $  (1,072)    $    948

  Per share                                                  $      -     $   0.02    $   (0.06)    $   0.05

</TABLE>

- ---------------------

(1) Pursuant to the requirements of the Securities and Exchange Commission, 
common equivalent shares relating to stock options, using the treasury stock 
method and the initial public offering price of $9.00 per share, and common 
equivalent shares from convertible redeemable preferred stock using the 
if-converted method issued during the twelve months period prior to the 
initial public offering are included in the computation for the three month 
period and nine month period ended September 30, 1996.

(2) Common stock issued under a stock option plan which are subject to 
repurchase are excluded from shares issued in the computation of net loss per 
share for the nine months ended September 30, 1997 as their effect is 
antidilutive.

                                                                            21


<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JUL-01-1997
<PERIOD-END>                               SEP-30-1997
<CASH>                                          16,664
<SECURITIES>                                     1,752
<RECEIVABLES>                                    7,833
<ALLOWANCES>                                       438
<INVENTORY>                                      9,023
<CURRENT-ASSETS>                                36,014
<PP&E>                                           8,744
<DEPRECIATION>                                   5,097
<TOTAL-ASSETS>                                  40,020
<CURRENT-LIABILITIES>                            9,557
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            10
<OTHER-SE>                                      30,453
<TOTAL-LIABILITY-AND-EQUITY>                    40,020
<SALES>                                         12,507
<TOTAL-REVENUES>                                12,507
<CGS>                                            6,755
<TOTAL-COSTS>                                    6,755
<OTHER-EXPENSES>                                 5,738
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                     14
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                 14
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                        14
<EPS-PRIMARY>                                     0.00
<EPS-DILUTED>                                     0.00
        

</TABLE>


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