POLYCOM INC
10-K, 1997-03-26
TELEPHONE & TELEGRAPH APPARATUS
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                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549
                                   ---------------

                                      FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934
For the fiscal year ended    December 31, 1996
                                          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      333-2296
                                                           -------------

                                    POLYCOM, INC.
- --------------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)


         Delaware                                                    94-3128324
- --------------------------------------------------------------------------------
(State or other jurisdiction                (I.R.S. Employer identification No.)
of incorporation or organization)

2484 Junction Avenue, San Jose, California                                 95134
- --------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code    (408) 526-9000
                                                  -----------------------------

             SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                         NONE

          SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, $0.0005 PAR VALUE, PER SHARE

    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   XX            No
                                                ------             ------

    Indicated by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [  ]

    The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $33,772,000 as of March 17, 1997, based upon
the closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for January 31, 1997.  Shares of Common Stock held by each executive
officer and director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates.  This determination of
executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.

    19,132,213  shares of the Registrant's $0.0005 par value Common Stock were
outstanding as of March 17, 1997.

                         DOCUMENTS INCORPORATED BY REFERENCE.
    Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III.  Such Proxy Statement
will be filed within 120 days of the fiscal year covered by this Annual Report
on Form 10-K.


<PAGE>

ITEM 1. BUSINESS

    Polycom, Inc. (the "Company") develops, manufactures and markets
audioconferencing and dataconferencing products that facilitate meetings at a
distance. With its SoundStation product line, the Company believes it has
established itself as a leading provider of audioconferencing equipment designed
for group use. SoundStation is a high quality, full-duplex, easy-to-use
audioconferencing solution. The SoundStation products are designed to operate
with local telephone systems throughout the world and the Company has obtained
regulatory approval for SoundStation's use in 25 countries. The Company's
technologies permit its SoundStation products to achieve audioconferencing
communications quality that approaches handset communications quality. More than
100,000 SoundStation systems had been shipped as of December 31, 1996, and the
Company believes SoundStation is the best selling product in the group
audioconferencing market.

    The Company's innovative ShowStation dataconferencing product, introduced
in November 1995, enables real-time exchange of data and other images over
ordinary phone lines via the rapidly emerging T.120 dataconferencing protocol
standard. ShowStation is a cost-effective, easy-to-use, high resolution
dataconferencing solution that enables groups in multiple locations to
simultaneously view, edit and annotate paper or electronic documents and data in
a lights-on environment.

    Polycom's products integrate advanced telecommunications, acoustic, image
capture and processing technologies. The Company sells its products globally
through its direct sales force and maintains marketing and sales relationships
with Lucent Technologies, British Telecom, Fujitsu Ltd., MCI Communications
Corp., Italtel Telematica S.p.A, PictureTel, Sprint North Supply, Siemens AG and
Singapore Telecom, which collectively represented approximately 27% of the
Company's net revenues in 1996, and with other resellers and OEMs.

    The Company was incorporated in December 1990 in Delaware and has a
wholly-owned subsidiary, Polyspan Teleconferencing B.V., a corporation organized
under the laws of the Netherlands.  The Company's principal executive offices
are located at 2584 Junction Avenue, San Jose, California 95134.  Its telephone
number is (408) 526-9000.  As used in this report, "Polycom" and the "Company"
refer to Polycom, Inc. and its subsidiary.

INDUSTRY BACKGROUND

    The telecommunications industry has experienced substantial growth in
recent years. Voice communications have expanded with the proliferation of
cellular phones and voice mail and the emergence of high speed switching
technologies, while the data communications infrastructure has been widely
expanded through the implementation of fax machines, corporate WANs and the
growing use of the Internet. One of the fastest growing segments of the
telecommunications market is equipment and services for teleconferencing, which
includes audioconferencing, videoconferencing and dataconferencing.
Dataconferencing is the sharing of data and documents by groups in multiple
locations over standard telephone lines which has been enabled by the recent
adoption of the T.120 protocol standard.

    Numerous factors are driving the growth of the teleconferencing market,
including the development of a global economy, the internationalization of
business organizations, the development of "extended enterprises" of companies
and their suppliers, customers and other business partners and the increasing
corporate emphasis on team projects and group and interoffice communication. As
a result, tools such as voicemail, E-mail and fax machines that allow workers to
communicate more effectively and facilitate business interactions have become
vital to improving productivity in most organizations. To enhance the real-time
exchange of information when face-to-face meetings are not possible or
practical, companies are increasingly seeking advanced teleconferencing
solutions to facilitate meetings at a distance.

    The relative utility of different teleconferencing media for a particular
type of group interaction depends on the importance of information content and
relationship building for that interaction.


                                          2

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Audioconferencing is the essential component of all teleconferencing. In the
audioconferencing market, key enablers such as the audio bridging services
provided by AT&T, MCI, Sprint and other carriers are expanding the use of
audioconferencing as a medium for meetings at a distance and have increased
demand for high quality audioconferencing equipment. For instance, a fifty-point
analyst call that would not have been contemplated only a few years ago is now
commonplace in the investor community. However, despite the widespread adoption
of audioconferencing, the equipment used for audioconferencing has generally
suffered from technology and performance weaknesses. Desktop and built-in
speakerphones, which are the most widely used audioconferencing devices, often
fail to provide clear verbal information exchange as voice transmissions echo,
are distorted and are frequently clipped due to a lack of full-duplex technology
(the ability for both parties to talk and be heard simultaneously). Early
conference speakerphones designed for group use suffer from these same quality
shortcomings. Businesses and other organizations need audioconferencing
equipment that provides high quality, full-duplex sound, is easy to install and
use and is compliant with telecommunications protocols in business centers
around the world.

    Since the adoption of the H.320 videoconferencing protocol standard in
1990, organizations have further accelerated the adoption of videoconferencing
as a way to conduct group meetings at a distance. Videoconferencing enhances
remote meetings by permitting groups in disparate locations to see each other
and by making body language visible. However, videoconferencing equipment is not
designed to be optimal for data exchange. The relatively poor resolution
provided by current videoconferencing technology limits its effectiveness for
meetings where the real-time exchange and annotation of printed or
computer-generated information such as graphs, spreadsheets, engineering
diagrams or other detailed data is required.

    The T.120 dataconferencing protocol is now emerging and being implemented
as an industry standard. Although the T.120 standard has been adopted by a large
number of the world's leading technology and telecommunications companies, such
as AT&T, British Telecom, IBM, Intel, Microsoft Corporation ("Microsoft") and
NEC Corporation ("NEC"), many of which are currently in the process of
implementing the standard in their products or services, the market has
historically lacked equipment implementing the standard that solves growing
dataconferencing needs. Businesses and other organizations require affordable,
easy-to-use, high resolution dataconferencing solutions that enable groups in
multiple locations to simultaneously view, edit and annotate paper or electronic
documents and data in a lights-on environment.


THE POLYCOM SOLUTION

    Polycom develops, manufactures and markets audioconferencing and
dataconferencing products that facilitate meetings at a distance. The Company's
SoundStation product line is a family of audioconferencing products that provide
near handset quality communications. SoundStation products are easy-to-use, and
the Company's echo cancellation and acoustic technologies minimize background
echoes, word clipping and distortion. Users can engage in natural, free-flowing
discussions without having to shout to be heard or strain to hear what others
are saying. Because of the Company's patented full-duplex, echo cancellation
technology and the distinctive triangular design of the SoundStation products,
the Company believes SoundStation is the best selling product in the group
audioconferencing market. The SoundStation is configurable, and has been
approved for use with the local telephone systems in 25 countries.

    Polycom's ShowStation dataconferencing products enable real-time exchange
of data and other images between groups or individuals engaged in an
audioconference or videoconference. ShowStation provides a cost-effective method
for two or more groups or individuals that are separated by a distance to view,
edit and annotate paper and electronic documents and data in real-time over
standard telephone lines in a lights-on environment. ShowStation incorporates
high resolution imaging, data compression and communications technology in a
compact, easy-to-use unit that includes pen-based editing capabilities and
supports mouse-based editing from remote personal computers.


                                          3

<PAGE>

PRODUCTS

AUDIOCONFERENCING

    Polycom's audioconferencing products are designed to overcome the poor
audio problems associated with traditional speaker phones by providing high
quality, full-duplex, easy-to-use audio.

    SOUNDSTATION. SoundStation, the Company's first product, which was
introduced in September 1992, is a high quality, digital, full-duplex
audioconferencing system that operates over ordinary telephone lines. It
provides clear, two-way voice communications with no echoes, clipping or
distortion. Users can engage in natural, free-flowing discussions without having
to shout to be heard or strain to hear what others are saying. SoundStation's
three built-in unidirectional microphones pick up sound from around the room
while limiting reverberation. The unit's central foam-encased speaker and
advanced DSP and integrated software technology eliminate acoustic feedback
while broadcasting sound at sufficient volume and clarity to be heard up to 30
feet away.

    SoundStation has a distinctive design which the Company believes is widely
associated with high-quality audioconferencing. SoundStation is connected via a
single cord to a power transformer that plugs into a standard electrical outlet
and a telephone cord that connects to a standard telephone outlet. Due to its
inherent simplicity, customers are able to self-install and immediately begin
using the SoundStation. The North American list price for SoundStation is $499.

    SOUNDSTATION EX. SoundStation EX contains all of the technology and
physical elements of the SoundStation but also offers two connectors for
extendable microphones. The microphones can extend up to six feet in each
direction allowing the SoundStation EX to accommodate larger conference rooms.
Each extended microphone also contains a mute button and LED mute indicator. An
optional wireless lapel microphone is available for the SoundStation EX that
provides flexibility for stand-up presenters. The North American list price for
SoundStation EX ranges from $799 to $1,299, depending on options.

Polycom also manufactures private label versions of its SoundStation products
for Lucent Technologies, British Telecom and KPN Royal PTT Nederland, N.V.
pursuant to OEM relationships.

    SOUNDSTATION PREMIER. Incorporating the latest in DSP technology, the
SoundStation Premier is designed with a 70 MIP DSP.  This allows individually
echo canceled microphones, thereby lowering conference room reverberation or the
echo experienced with most speakerphones.  The Premier's microphone switching
technology turns on and off each microphone depending on who is talking.  With
the additions of an LCD display, caller ID, and infrared remote control, the
SoundStation Premier provides a complete full duplex business conference phone
solution. The North American list price for SoundStation Premier ranges from
$1,295 to $1,895, depending on options.

    SOUNDPOINT AND SOUNDPOINT PC.  SoundPoint, Polycom's first desktop
conference phone adjunct product is designed for the office environment.  The
SoundPoint product is connected between the telephone line and an analog
telephone set, and provides near handset quality full duplex conversations.  A
special version of this SoundPoint is manufactured for direct communication to
Lucent's Definity telephone sets,  pursuant to the Lucent OEM relationship.  The
SoundPoint PC variant is designed for desktop video conferencing and Internet
telephony applications.  The SoundPoint PC is connected to a personal computer
video codec or sound card, through a standard set of audio jacks and includes a
handset when more privacy is desired. The North American list price for
SoundPoint and SoundPoint PC is $299.


                                          4

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    Sales of the SoundStation product line have accounted for substantially all
of the Company's net revenues through December 31, 1996, and the Company
anticipates that such sales will continue to account for a substantial majority
of its net revenues at least through the year ending December 31, 1997. The
market for the Company's SoundStation products is subject to technological
change, new product introductions by the Company or its competitors, and
continued market acceptance of the SoundStation product line. Any factor
adversely affecting the demand or supply for the SoundStation product line could
materially adversely affect the Company's business, financial condition or
results of operations.


DATACONFERENCING

    Polycom's dataconferencing products are designed to allow for the real-time
exchange of data and other images between groups or individuals engaged in an
audioconference or videoconference. By integrating audioconferencing and
dataconferencing, the Company's products are designed to significantly enhance
the productivity of workers, allowing them to conduct meetings remotely with a
level of data exchange that the Company believes has traditionally been possible
only through a personal meeting.

    SHOWSTATION. ShowStation, the Company's first dataconferencing product, is
a fully integrated, easy-to-use unit that can exchange and project data,
documents and images using ordinary telephone lines between ShowStations or
exchange data, documents and images using ordinary telephone lines with any
personal computers that utilize T.120 dataconferencing protocol software, such
as the DataBeam software that is distributed by the Company. Working in tandem
with the SoundStation, ShowStation provides a cost-effective method for two or
more groups or individuals that are separated by a distance to simultaneously
view, discuss, edit and annotate paper or electronic documents and data in a
lights-on environment. Multipoint dataconferences are possible through
connections generally established by a dataconferencing bridge service, such as
ConferTech International, Inc. or MCI Telecommunications Corporation, that merge
multiple network connections so that each participant can communicate with all
other participants. ShowStation incorporates advanced imaging, data compression
and communications technology utilizing over 250,000 lines of code into a
compact and easy-to-use unit.

    ShowStation captures an image of the original document using an integrated
camera or receives data from a personal computer and displays a high-resolution
image on a flat-panel LCD display. Light is then projected through the LCD panel
and onto a screen for local viewing, without having to dim conference room
lights. Simultaneously, the image is compressed and transmitted over a standard
telephone line using the T.120 open standard protocol to other ShowStations or
certain T.120-compliant computer or projection devices where the image is
decompressed and projected. The images can then be annotated in real-time by the
transmitting person or any of the document recipients using an integrated
computer pen or mouse-based editing from remote personal computers and saved in
memory for review and printing. Pen or mouse annotations can be seen
simultaneously by all parties participating in the dataconference and each
ShowStation can print the image and all annotations on a printer connected via a
serial cable.

    To facilitate PC-connectivity to ShowStation products, Polycom supplies,
for a fee, copies of DataBeam's T.120 communications software, which can then be
loaded onto a PC. The Company anticipates that the T.120 protocol will be
incorporated into future versions of Windows and other operating systems so that
any computer running such operating system will be able to participate in a
dataconference with a ShowStation over an ordinary telephone line. The North
American list price for ShowStation ranges from $9,995 to $11,995 depending on
options.

         ShowStation is designed to be integrated with SoundStation such that
dial and mute functions of both the SoundStation and ShowStation can be
controlled with the ShowStation keypad, permitting local preview and discussion
prior to transmission to other parties in the dataconference. Additionally,
ShowStation contains a microphone in the projection arm that works in
conjunction with SoundStation in order to improve the audio reception of the
presenter.


                                          5

<PAGE>

    ShowStation can also be connected via an RS-232 interface (standard 
computer connection) to PictureTel's videoconferencing systems. With this 
configuration, ShowStation will operate as a peripheral to the 
videoconferencing system with call control performed by the videoconferencing 
system. This enables the user of the PictureTel videoconferencing system to 
conduct a meeting in which the participants simultaneously can see and hear 
one another by use of the videoconferencing system and view, edit and 
annotate a document using a ShowStation. Polycom manufactures a private label 
version of ShowStation for PictureTel pursuant to an OEM relationship. As of 
December 31, 1996, pursuant to the terms of this OEM Agreement, subject to 
certain unit volume requirements and other limitations, PictureTel has an 
exclusive worldwide right to distribute the version of the ShowStation 
product which is designed to interface with PictureTel's video conferencing 
systems. However, Polycom may distribute such modified ShowStation products 
directly to end users through its direct sales force, and British Telecom may 
distribute ShowStation products outside of North America. The Company expects 
that PictureTel will market the private label version of the ShowStation to 
current PictureTel videoconferencing customers and to customers who intend to 
use a PictureTel videoconferencing system with the ShowStation product. 
Although the Company expects PictureTel's marketing and sales effort with 
respect to the private label version of the ShowStation products to compete 
to some extent with the Company's marketing and sales efforts, the Company 
intends to minimize to the extent possible direct conflicts, including by 
supporting PictureTel's efforts with its significant videoconferencing 
customers.

    The Company's future growth is substantially dependent on net revenues
generated from sales of the Company's ShowStation products. In November 1995,
the Company began customer shipments of its ShowStation products.
Dataconferencing is an emerging market and there can be no assurance that it
will develop sufficiently to enable the Company to achieve broad commercial
acceptance of its ShowStation products. Because the dataconferencing market is
relatively new and evolving, and because current and future competitors are
likely to introduce competing dataconferencing products, it is difficult to
predict the rate at which demand for the Company's ShowStation products will
grow, if at all, or to predict the level of future growth, if any, of the
dataconferencing market. If the dataconferencing market fails to grow, or grows
more slowly than anticipated, the Company's business, operating results and
financial condition will be materially adversely affected. Although there are
currently no products in the dataconferencing market that offer all of the same
functions and features as the ShowStation products, there are products that
enable users to participate in a dataconference and other products, such as
multimedia presentation products, that are not designed primarily for
dataconferencing but can be used to provide a dataconferencing solution. There
can be no assurance that the market for dataconferencing products with the
functions and features of the ShowStation products will achieve broad commercial
acceptance or that the market for the Company's ShowStation product will grow.

    Even if the market for dataconferencing products does develop, there can be
no assurance that the Company's ShowStation products will achieve commercial
success within such market. Due to the unique nature of the ShowStation
products, the Company believes it will be required to incur significant expenses
for sales and marketing, including advertising, to educate potential customers
as to the desirability of ShowStation. The Company also expects to incur
substantially longer sales cycles with respect to its ShowStation products than
has been the case for the SoundStation products. In addition, the list price of
the ShowStation products, which is significantly higher than the SoundStation
product, could significantly limit consumer acceptance of the ShowStation
products. Furthermore, given the significant differences between the
SoundStation and ShowStation products, the Company is developing new
distribution channels for the ShowStation products and there can be no assurance
that the Company will be successful selling ShowStation through these
distribution channels. In addition, the Company's ShowStation products comply
with certain layers of the emerging T.120 standard. Increasing market acceptance
and longevity of the T.120 standard is in part a function of user acceptance and
the incorporation of the T.120 standard into personal computer operating
systems, teleconferencing appliances and the network infrastructure and is
therefore difficult to predict. Because of the Company's focus on the T.120
standard, the Company's operating results would be materially adversely affected
if another technology were to significantly challenge or replace the emerging
T.120 industry standard. Broad commercialization of the Company's ShowStation
products will require the Company to overcome significant technological and
market development obstacles, many of which may not be currently foreseen.


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    The Company's ShowStation products are extremely complex and because of the
recent introduction of these products, the Company has had limited experience
with respect to the performance and reliability of these products, and the
Company and its contract manufacturer have had limited experience manufacturing
these products. If the Company's ShowStation products have performance,
reliability or quality problems or shortcomings, then the Company may experience
reduced orders, higher manufacturing costs and additional warranty and service
expenses which would have a material adverse effect on the Company's business,
financial condition and results of operations. For example, the Company chose to
stop shipments of its ShowStation products from mid-January 1996 through the end
of February 1996 to correct software and other technical problems identified by
initial customers. There can be no assurance that ShowStation will be able to
achieve or sustain commercial acceptance, that sales of the ShowStation products
will account for a material part of the Company's net revenues or that the
Company will be able to achieve volume manufacturing. Failure of the ShowStation
to achieve or sustain commercial acceptance, or of the Company or its contract
manufacturer to achieve volume manufacturing would have a material adverse
effect on the Company's business, financial condition and results of operations.


TECHNOLOGY

    Polycom intends to continue to invest in and leverage its core technologies
to develop and introduce audioconferencing and dataconferencing product
enhancements and new products. The Company's core technologies include the
following:

    ECHO CANCELLATION. Traditional speakerphone architectures employ
suppression technology to compensate for the echo problems resulting from the
feedback caused by microphones and speakers being located in close proximity.
Suppressors solve the problem by only allowing one side of the telephone
connection to talk at a time. Historically, this has been done by using simple
metrics to locally determine which side is speaking more loudly. This often
causes numerous problems during the course of a natural conversation such as
words or even entire phrases being clipped off because both ends of the call
were speaking simultaneously. Polycom's patented DSP software solves this
problem by building and continually updating a model of how the sound waves
reflect off the walls and obstructions in a room. This software, comprised of
over 10,000 lines of assembly microcode, then calculates an echo canceling
signal that is subtracted from the microphone signal, thereby removing the
echoes while still allowing both the speaker and the microphone to remain on at
the same time.



    ACOUSTICS TECHNOLOGY. The design and interaction of transducers within a
full-duplex audio device significantly impacts the effectiveness of the digital
echo canceling systems and the sound quality. Working with carefully designed
algorithms and electronics, Polycom develops and designs proprietary speaker and
microphone enclosure systems that are a critical part of high-clarity,
audioconferencing systems.

    IMAGE PROCESSING TECHNOLOGY. Polycom has invested a significant amount of
its research and development efforts on the design and implementation of high
resolution document cameras that provide XGA resolution (1024 x 768 pixels)
images in a compact package. XGA resolution was achieved by developing a method
by which two television resolution charge coupled devices ("CCDs") are seamed
together to form a single high resolution image. Significant advancements in
fine scale device alignment and mounting as well as in high speed DSP software
to compensate for lens blurring, non-uniform lighting conditions and natural CCD
device variations were required to achieve the target. The result is a cost
effective document scanning system that captures and displays type sizes as
small as 10 points.


                                          7

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    IMAGE COMPRESSION TECHNOLOGY. Polycom uses the international standard known
as Joint Bi-Level Image Group ("JBIG") to achieve rapid image transmission
rates. The Company employs certain modes of this algorithm to enable images to
be transmitted incrementally, allowing an image to achieve legibility within a
minimum time. Polycom was the editor of, and principal contributor to, the T.126
layer of the T.120 protocol for still-image transfer that incorporated JBIG and
optimizations utilized in ShowStation. Polycom developed a high performance
implementation of this algorithm for incorporation into DataBeam's standard
T.120 toolkit to enable throughput to be achieved even if a low-end computer is
used to compress and send images over standard telephone lines. DataBeam's T.120
toolkit has been licensed by numerous other software and hardware providers.

    OPTO-MECHANIC TECHNOLOGY. To achieve "lights on" LCD projection and high
resolution image capture, the Company has developed core technologies in optical
systems, including LCD cooling for uniformity, light collection efficiency and
light source cooling for extended lamp life with minimal sound. This has
resulted in a projected image that is uniformly illuminated and viewable with
normal room lighting.

    COMMUNICATION PROTOCOLS. The Company is a leader in the development and
adoption of the T.120 protocol standard for dataconferencing devices. The T.120
protocol standard separates multipoint conferencing services into several layers
that address data conferencing through various communications networks. These
layers are generally implemented in software and control the manner in which
data is communicated and is processed and presented to the end user. Layers of
T.120 functionality are being developed and deployed by numerous major
international communications companies. In conjunction with this standardization
process, Polycom co-founded the Consortium for Audiographic Teleconferencing
Standards in order to encourage broad industry coordination and advocacy of
T.120 technology, thereby encouraging the development of the availability of
desktop software and bridging services to support the Company's product
offerings. This organization was merged with the advocacy body for H.320, the
video conferencing standard, to become the International Multimedia
Teleconferencing Consortium ("IMTC") with the broader goal of insuring
industry-wide H.320 and T.120 interoperability, integration and advocacy.
Additionally, the Personal Conferencing Work Group ("PCWG") recently merged into
the IMTC. A representative of Polycom sits on the board of directors of this
consortium, which includes companies such as AT&T, IBM, Intel, Microsoft and
PictureTel, each of which has incorporated, or announced its intention to
incorporate, various layers of the T.120 standard into their products.

    TELEPHONY INTERFACES. Polycom has developed a single telephone network
interface circuit that is configurable either by the Company or its resellers so
that the Company's products will comply with various international telephone
network requirements. The Company's SoundStation product is currently approved
for use in 25 countries. The Company believes this will expedite the regulatory
approval of new audio conferencing and dataconferencing products globally.


                                          8

<PAGE>

SALES AND DISTRIBUTION

    The Company markets its SoundStation and ShowStation products primarily to
Fortune 1000 companies through a national account program both directly and in
coordination with its resellers and also markets its products directly to
certain U.S. government organizations through a General Services Administration
("GSA") contract. The Company believes that most of its national account
customers have placed multiple orders for products from the Company.  As of
December 31, 1997, Polycom had over 294 signed national accounts. The Company
believes that it is important to maintain a close working relationship with
these large customers in order to meet their demands for sales and support on a
multinational basis. The Company sells its products in North America through a
select group of approximately 41 resellers, including Lucent Technologies,
ConferTech International, Inc., MCI Communications Corp., Hello Direct, Inc.,
PictureTel, ROLM Corporation, Sprint North Supply and EISI.  Many of these
resellers sell a variety of teleconferencing products and/or services and, with
Polycom's products, offer a complete teleconferencing product portfolio. One of
these resellers, Hello Direct, sells a competing audioconferencing product which
it purchases from Gentner and relabels under the Hello Direct name. In addition
to working through resellers, the Company also sells its products directly
through a salesforce comprised of a national account group and an inside sales
group. The national account managers focus on strategic selling and the
development of major account relationships, while inside sales representatives
devote time to pursuing the sales opportunities within a signed national
account. In order to minimize channel conflict with resellers, the national
account managers are compensated on a channel-neutral basis and are responsible
for resolving any channel conflict in the field. To complement its direct sales
efforts, the Company runs direct response advertising in in-flight magazines and
selected business publications. The Company maintains North American sales
offices in the metropolitan areas of Boston, Chicago, Vienna Virginia,
Cleveland, Dallas, New York and San Jose.

    The Company sells its SoundStation and ShowStation products primarily
through resellers. The Company's resellers accounted for approximately 74%, 71%
and 67% of the Company's net revenues in 1994, 1995 and 1996, respectively.
ConferTech International, Inc. accounted for 14% and 11% of net revenues in 1994
and 1995, respectively, and 2Confer/Mutare, Inc. accounted for 11% in 1994.  No
other customer or reseller accounted for more than 10% of the Company's net
revenues during the periods indicated and no customer or reseller accounted for
more than 10% of net revenues in 1996. Resellers generally offer products of
several different companies, including products that compete with the Company's
products. Accordingly, these resellers may give higher priority to products of
other suppliers, thus reducing their efforts to sell the Company's products.
Agreements with resellers may be terminated at any time. A reduction in sales
effort or termination of a distribution relationship by one of the Company's
resellers could have a material adverse effect on future operating results. Use
of resellers also entails the risk that resellers will build up inventories in
anticipation of a growth in sales. If such sales growth does not occur as
anticipated by these resellers, these resellers may substantially decrease the
amount of product ordered in subsequent quarters, causing or contributing to
fluctuations in the Company's future operating results. Furthermore, although
the Company takes steps to reduce channel conflict, sales by the Company's
direct sales force to potential and current customers of these resellers could
have an adverse effect on the Company's reseller relationships. The
teleconferencing distribution industry has historically been characterized by
rapid change, including consolidations and financial difficulties of certain
resellers and the emergence of alternative distribution channels. In addition,
there is an increasing number of companies competing for access to these
channels. The loss or ineffectiveness of any of the Company's major resellers
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to successfully sell its
products through any new channels that the Company may be required to develop as
a result of the foregoing or any other factors. The Company commenced customer
shipments of ShowStation in November 1995 and continues to develop a
distribution network for this product. There can be no assurance that the
Company will be able to successfully develop a distribution network for
ShowStation.


                                          9

<PAGE>

    The Company has historically focused its international sales efforts in
regions of the world where it believes customers have begun to invest
significantly in teleconferencing equipment and services. These regions
currently include the United Kingdom, France, Germany, Italy, Japan, Australia
and parts of Southeast Asia. The Company intends to significantly expand its
international distribution network. The principal international resellers of the
Company's products currently include British Telecom, Dynamic Communications,
Ltd., Genedis, Hibino Corporation, Italtel Telematica S.p.A., PTT Telecom,
Siemens AG, Singapore Telecom and Telenor.

    The Company's net revenues from international sales represented
approximately 23%, 24% and 23% of the Company's total net revenues in the years
ended December 31, 1994, 1995 and 1996, respectively.  The reduction in the
percentage of international net revenues from the 1995 year resulted from
initial sales of new products, which were sold primarily in North America.
International sales are subject to a number of risks, including changes in
foreign government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable, difficulty in
staffing and managing foreign operations and political and economic instability.
Sales to international resellers are usually made in U.S. dollars in order to
minimize the risks associated with fluctuating foreign currency exchange rates.
Fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. In addition, the costs
associated with developing international sales may not be offset by increased
sales in the short term, or at all.

CUSTOMER SERVICE AND SUPPORT

    The Company believes that service and support are critical components of
customer satisfaction. The Company maintains and supports products sold directly
by the Company to its North American customers, while resellers maintains and
provides technical support to their end-user customers. The Company operates a
toll-free Technical Service Center "hotline" to provide a full range of
telephone support to its North American resellers and to the Company's end-user
customers. If an issue cannot be resolved remotely or through product repair and
return, the Company or its reseller dispatches a service engineer to the
customer site. Internationally, customer service is provided to the end-user by
either the Company or local resellers.

    The Company generally warrants its products for 12 months and offers
24-month dataconferencing and 60-month audioconferencing warranties to national
accounts. As of December 31, 1996, the Company's warranty expense has not been
significant, although the Company may experience higher warranty claims in the
future. The Company offers a variety of installation, maintenance and extended
warranty services that are fulfilled either directly by the Company or by an
authorized reseller.

RESEARCH AND DEVELOPMENT

    The Company believes that its future success depends in part on its ability
to continue to enhance its existing products and to develop new products that
maintain technological competitiveness. The Company's current development
efforts are focused on both the audioconferencing and dataconferencing
businesses. In the audioconferencing market, the Company is developing
SoundStation product line extensions into the higher and the lower end of the
market. In the dataconferencing market, the Company is devoting significant
resources to developing enhancements of its ShowStation products. The Company
intends to expand upon this new product platform through the development of
ShowStation options, upgrades and future product generations. There can be no
assurance, however, that these products will be made commercially available as
expected or otherwise on a timely and cost-effective basis or that, if
introduced, these products will achieve market acceptance. Furthermore, there
can be no assurance that these products will not be rendered obsolete by
changing technology or new product announcements by other companies.


                                          10

<PAGE>

The Company believes that the structure of its development group represents a
significant competitive advantage for the Company. The development staff
includes product marketing personnel in order to maintain channel and customer
input throughout the development phase. This team structure is the basis for an
integrated process designed to enable the Company to develop superior products
with minimum time-to-market. Additionally, the development staff focuses on the
Company's core technologies and outsources other development tasks such as
industrial design. This structure is designed to enable the Company to devote
its key resources to technological advancement in its primary areas of business.

    Research and development expenses were approximately $5.5 million, $6.9
million and $7.6  million for the years ended 1994, 1995 and 1996, respectively.
The Company believes that significant investments in research and development
are required to remain competitive since technological competitiveness is key to
its future success. As a consequence, the Company intends to continue to make
substantial investments in product and technology development. The Company also
intends to continue to drive the adoption of the emerging T.120 protocol and
other teleconferencing industry standards.

    The audioconferencing and dataconferencing markets are subject to rapid
technological change, frequent new product introductions and enhancements,
changes in end-user requirements and evolving industry standards. The Company's
ability to remain competitive in this market will depend in significant part
upon its ability to successfully develop, introduce and sell new products and
enhancements on a timely and cost-effective basis. The success of the Company in
developing new and enhanced products depends upon a variety of factors,
including new product selection, timely and efficient completion of product
design, timely and efficient implementation of manufacturing, assembly and test
processes, product performance at customer locations and development of
competitive products and enhancements by competitors. The Company is currently
engaged in the development of several new products and extensions of the
SoundStation and ShowStation products into both the higher and lower ends of the
market, and expects to continue to invest significant resources in new product
development and enhancements to current and future products. In addition, the
Company's introduction of ShowStation and other new products could result in
higher warranty claims, product returns and manufacturing, sales and marketing
and other expenses that could materially adversely affect the Company's
business, financial condition, cash flows or results of operations. There can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or enhancements. The inability of the
Company to introduce new products or enhancements on a timely and cost-effective
basis that contribute significantly to net revenues could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. In the past, the Company has experienced delays from time
to time in the introduction of certain of its products. In particular, 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
six 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, new product or technology introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products or new products. Further, from time to time, the
Company may announce new products, capabilities or technologies that have the
potential to replace the Company's existing product or future products. There
can be no assurance that announcements of product enhancements or new product
offerings by the Company or its competitors will not cause customers to defer or
stop purchasing the Company's products.


                                          11

<PAGE>

COMPETITION

    The market for teleconferencing products is highly competitive and 
subject to rapid technological change, regulatory developments and emerging 
industry standards. The Company expects competition to persist and increase 
in the future. In the audioconferencing market segment, the Company's major 
competitors include Coherent Communications Systems Corporation, NEC, Gentner,
and other companies that offer lower cost full duplex speakerphones such as 
U.S. Robotics and Hello Direct, Inc., (one of the Company's resellers). Hello 
Direct, Inc. offers a competitive product under the Hello Direct name through 
an OEM relationship with Gentner. Most of these companies have substantially 
greater financial resources and production, marketing, engineering and other 
capabilities than the Company with which to develop, manufacture, market and 
sell their products. In addition, all major telephony manufacturers produce 
hands-free speakerphone units that are a lower cost, lower quality 
alternative to the Company's audioconferencing products.

    In the dataconferencing market segment, the Company's major competitors
include LiveWorks (a wholly-owned subsidiary of the Xerox Corporation)
Microfield Graphics, Inc. and SMART Technologies, Inc., which have substantially
greater financial resources and production, marketing, engineering and other
capabilities than the Company with which to develop, manufacture, market and
sell their products. In addition, in this market segment, videoconferencing,
PC-based communications solutions and multimedia presentation products may be an
alternative for certain applications.

    The Company believes its ability to compete depends on such factors as
reputation, quality, customer support and service, price, features and functions
of products, ease of use, reliability, and marketing and distribution channels.
The Company believes it competes favorably with respect to each of these
factors. There can be no assurance that the Company will be able to compete
successfully in the future with respect to any of the above factors.

    The Company expects its 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 the
Company's competitors could cause a significant decline in sales or loss of
market acceptance of the Company's existing products and future products. For
example, U.S. Robotics introduced an audioconferencing product that is being
sold at a price substantially lower than the Company's list price for
SoundStation. The Company believes that the possible effects from this new
competition may be the reduction in the prices of its products and its other
competitors' products or the introduction of additional lower priced competitive
products. For example, although such reduction was not in direct response to the
introduction of a lower priced audioconferencing product by U.S. Robotics, the
Company recently reduced the North American list price of its SoundStation
product line by 37% which resulted in lower gross margins. The Company expects
this increased competitive pressure may lead to intensified price-based
competition, resulting in lower prices and gross margins which would materially
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to compete
successfully.


                                          12

<PAGE>

MANUFACTURING

    The Company's manufacturing operations consist primarily of materials
planning and procurement, test development and manufacturing engineering. The
Company subcontracts the manufacture of its SoundStation products to Flextronics
International, Ltd., a global third party contract manufacturer. Flextronics is
ISO 9002 approved and has British Approvals Board for Telecommunications
("BABT") registration. The Company's products are quality tested by automated
test equipment with final functional tests performed on equipment and with
processes developed or approved by the Company.

    The Company manufactures its SoundStation, SoundStation Premier and
ShowStation product lines at the San Jose, CA facility of Flextronics, a third
party contract manufacturer.  The Company is currently evaluating the transfer
of SoundStation and SoundStation Premier to a lower cost manufacturing region
and will likely undertake a transfer of the manufacturing of these product lines
during the second and third quarters of 1997.  The Company  manufactures its
SoundPoint product through General Electronics (H.K.) Ltd., a Hong Kong based
contract manufacturer.  The Company and Flextronics are both located in the San
Francisco Bay area, which has in the past and may in the future experience
significant, destructive seismic activity that could damage, destroy or disrupt
the Company's or Flextronics' manufacturing or other facilities or their
respective operations. The Company maintains no earthquake insurance for damages
or business interruptions. In the event that the Company or its contract
manufactures were to experience financial or operational difficulties that are
not covered by insurance, it would adversely affect the Company's results of
operations until the Company could establish sufficient manufacturing supply
through an alternative source, and the effect of such reduction or interruption
in supply on results of operations would be material. The Company believes that
there are a number of alternative contract manufacturers that could produce the
Company's products, but in the event of a reduction or interruption of supply,
for any reason, it would take a significant period of time to qualify an
alternative subcontractor and commence manufacturing, which would have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.

    Certain key components used in the Company's products are currently
available from only one source and others are available from only a limited
number of sources. Components currently available from only one source include
certain key integrated circuits and optical elements. The Company also obtains
certain plastic housings, metal castings and other components from suppliers
located in Hong Kong and China, and any  political or economic instability in
that region in the future, including the transfer of authority over Hong Kong in
1997, or future import restrictions, may cause delays or an inability to obtain
such supplies. The Company has no supply commitments from its suppliers and
generally purchases components on a purchase order basis either directly or
through its contract manufacturer. The Company and the Company's contract
manufacturer have had limited experience purchasing volume supplies of
components for its SoundStation and ShowStation products, and some of the
components included in these products, such as microprocessors and other
integrated circuits, have from time to time been subject to limited allocations
by suppliers, and there can be no assurance that the Company will not in the
future be subject to component supply allocations that would adversely affect
the Company's operating results. In the event that the Company or its contract
manufacturer were unable to obtain sufficient supplies of components or develop
alternative sources as needed, the Company's operating results could be
materially adversely affected. Moreover, operating results could be materially
adversely affected by receipt of a significant number of defective components,
an increase in component prices or the inability of the Company to obtain lower
component prices in response to competitive price reductions.

    Because of the generally short cycle between order and shipment and because
the majority of the Company's net revenues in each quarter results from orders
booked in that quarter, the Company generally operates with minimal backlog and
does not believe it is indicative of future sales levels.


                                          13

<PAGE>

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

    While the Company relies on a combination of patent, copyright, trademark
and trade secret laws and confidentiality procedures to protect its proprietary
rights, the Company believes that factors such as technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. The
Company currently has seven United States patents issued covering the
SoundStation and ShowStation designs, the concept and function of the
ShowStation and certain echo cancellation technology that expire in 2007, 2008,
2011 and 2012. In addition, the Company currently has six United States patents
pending, five foreign patents issued, which expire in 2001, 2003, 2010, 2012 and
2017, and fifteen foreign patent applications pending. Polycom and SoundStation
are registered trademarks of the Company, and ShowStation is a trademark of the
Company in the U.S. and various countries. According to federal and state law,
the Company's trademark protection will continue for as long as the Company
continues to use its trademark in connection with the products and services of
the Company. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which only afford
limited protection. There can be no assurance that others will not independently
develop similar proprietary information and techniques or gain access to the
Company's intellectual property rights or disclose such technology or that the
Company can meaningfully protect its intellectual property rights. In addition,
there can be no assurance that any patent or registered trademark owned by the
Company will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications will be issued with
the scope of the claims sought by the company, if at all. Furthermore, there can
be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights.

    Litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. There can be no assurance that infringement or invalidity
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to be true, will not materially adversely affect the Company's
business, financial condition, cash flows and results of operations. If any
claims or actions are asserted against the Company, the Company may seek to
obtain a license under a third party's intellectual property rights. There can
be no assurance, however, that a license will be available under reasonable
terms or at all. In addition, the Company could decide to litigate such claims,
which could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition, cash flows or
results of operations.

    The Company incorporates into its ShowStation products software licensed
from third parties, including certain communications software which is licensed
from DataBeam Corporation and digitizer and pen software which is licensed from
Scriptel Corporation. The DataBeam Corporation license agreement will terminate
in March 2001 if either party has given notice at least 90 days prior to that
time of its desire to terminate the agreement. The Scriptel agreement terminates
June 30, 1998 but may be extended for six month periods upon mutual agreement of
the parties. There can be no assurance that these third-party software licenses
will continue to be available to the Company on commercially reasonable terms.
The termination or impairment of these software licenses could result in delays
or reductions in new product introductions or product shipments until equivalent
software could be developed, licensed and integrated, which would materially
adversely affect the Company's business, financial condition, cash flows, and
results of operations.


                                          14

<PAGE>

EMPLOYEES

    As of December 31, 1996 the Company employed a total of 138 persons,
including 56 in sales, marketing and customer support, 44 in product
development, 16 in manufacturing and 22 in finance and administration. Of these,
five employees were located in the U.K., two were located in Singapore, one was
located in Hong Kong and the remainder were located in the United States. None
of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes its relationship with its employees
is good.

    The Company believes that its future success will depend in part on its
continued ability to hire, assimilate and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
loss of any key employee, the failure of any key employee to perform in his or
her current position or the Company's inability to attract and retain skilled
employees, as needed, could materially adversely affect the Company's business,
financial condition, cash flows or results of operations.


ITEM 2. PROPERTIES

    The Company's headquarters are located in a 52,000 square foot facility in
San Jose, California pursuant to a lease which expires in December 1998. The
Company has two options to extend the lease for terms of one (1) year. This
facility accommodates corporate administration, research and development,
marketing, sales and customer support as well as a new product manufacturing
area. The Company also leases, on a short term basis, sales office space in the
metropolitan areas of Boston, Chicago, Vienna Virginia, Dallas, New York,
London,  Munich, Hong Kong and Singapore. The Company believes that its current
facilities are adequate to meet its needs for the foreseeable future. The
Company believes that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed.

ITEM 3.  LEGAL PROCEEDINGS

    The Company commenced litigation against U.S. Robotics on October 27, 1995
in the U.S. District Court, Northern District of California, to protect the
Company's intellectual property from infringement resulting from the
introduction by U.S. Robotics of a full-duplex speakerphone that has
substantially the same physical appearance as the Company's SoundStation
product. The Company alleged infringement of the Company's design patent for the
SoundStation design as well as infringement of the Company's tradedress,
dilution, unfair competition and violation of the Lanham Act.  On January 14,
1996, the Company and U.S. Robotics announced that they had resolved their
differences in relation to the lawsuit pending between them in a confidential
settlement, and have agreed to dismiss the lawsuit and all claims with
prejudice.

Any future litigation involving the Company, whether as plaintiff or defendant,
regardless of the outcome, may result in substantial costs and expenses to the
Company and significant diversion of effort by the Company's technical and
management personnel. In addition, there can be no assurance that claims will
not be asserted against the Company in any other case and there can be no
assurance that litigation, either instituted by or against the Company, will not
be necessary to resolve issues that may arise from time to time in the future
with other competitors. Furthermore, there can be no assurance that the
Company's efforts to protect its intellectual property through litigation will
prevent duplication of the Company's technology or products. Any such litigation
could have a material adverse effect upon the Company's business, financial
condition, cash flows or results of operations.


                                          15

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    The Company did not submit any matters to a vote of stockholders during the
fourth quarter of 1996.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK

    Price Range of Common Stock

    The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "PLCM."  Prior to its initial public offering on
April 29, 1996, there was no public market for the Company's Common Stock.  The
following table sets forth the high and low closing sales prices for the Common
Stock as reported by Nasdaq for the periods indicated.  These prices do not
include retail mark-ups, mark-downs or commissions.

         FISCAL YEAR 1996                                     HIGH        LOW
                                                              ----        ---

         Second Quarter (commencing April 30, 1996). . .     10 3/4      6 5/8
         Third Quarter . . . . . . . . . . . . . . . . .      9 1/4      5 5/8
         Fourth Quarter. . . . . . . . . . . . . . . . .     7 3/16      3 3/4

         FISCAL YEAR 1997
         First Quarter (through March 17, 1997). . . . .    5 11/16      3 1/2


    On March 17, 1997, the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $4.00 per share.  As of such date,
there were approximately 149  stockholders of record for the Company's Common
Stock.

    DIVIDEND POLICY

    The Company has never declared or paid any dividends on its capital stock
and does not intend to pay any dividends in the foreseeable future.  The Company
currently intends to retain its earnings, if any, for the growth and development
of its business.  Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will depend upon the earnings
of the Company, its financial condition, capital requirements and such other
factors as the Company's Board of Directors may deem relevant.


                                          16

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

    The following selected consolidated financial data should be read in
conjunction with the Company's audited consolidated financial statements and
related notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
Form10-K.  The consolidated statement operations data for the years ended
December 31, 1994, 1995 and 1996 and the consolidated balance sheet data at
December 31, 1995 and 1996, are derived from, and are qualified by reference to,
the consolidated financial statements included elsewhere in this Form 10-K have
been audited by Coopers & Lybrand L.L.P. The consolidated balance sheet data at
December 31, 1992, 1993 and 1994 and the consolidated statement of operations
data for the period from December 13, 1990 (date of inception) to December 31,
1991 and for the years ended December 31, 1992 and 1993 are derived from audited
consolidated financial statements which have also been audited by Coopers &
Lybrand L.L.P.



SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>



                                                                                 DECEMBER 31,
                                                           -----------------------------------------------
(in thousands, except per share amount)               1992          1993         1994         1995        1996
- ---------------------------------------
OPERATING DATA:
<S>                                                   <C>          <C>          <C>          <C>          <C>
Net revenues                                          $ 1,398      $ 8,669      $15,025      $24,944      $37,032
Costs and expenses:
  Cost of net revenues                                    840        3,725        6,211       10,859       17,698
  Sales and marketing                                   1,398        2,917        5,307        7,073        9,095
  Research and development                              2,390        4,253        5,527        6,852        7,574
  General and administrative                              595          801        1,140        1,819        2,148
                                                          ---          ---        -----        -----        -----
Operating income (loss)                                (3,825)      (3,027)      (3,160)      (1,659)         517
Taxes, interest and other, net                             84           30          197           57          966
                                                           --           --          ---           --          ---
Net income (loss)                                     $(3,741)     $(2,997)     $(2,963)     $(1,602)      $1,483
                                                      --------     --------     --------     --------      ------
                                                      --------     --------     --------     --------      ------

Net income (loss) per share                            $(1.09)      $(0.79)      $(0.73)      $(0.37)       $0.08

Weighted average common shares and common
share equivalents outstanding                           3,435        3,781        4,054        4,332       18,898


                                                                                 DECEMBER 31,
                                                           -----------------------------------------------
                                                      1992         1993         1994         1995        1996
CONSOLIDATED BALANCE SHEET DATA:                                          (IN THOUSANDS)
Cash, cash equivalents and short-term investments     $ 5,807      $ 8,196      $ 5,792      $ 6,261     $ 19,649
Working capital                                         5,518        8,273        5,442        7,829       27,957
Total assets                                            7,261       11,888       10,778       18,000       37,720
Notes payable, less current portion                       126          494          757        1,178            -
Convertible redeemable preferred stock                 11,347       17,380       17,380       22,360            -
Total stockholders' equity (deficit)                   (5,175)      (8,169)     (11,088)     (12,640)      31,221

</TABLE>
 (1) For an explanation of shares used in computing pro forma net income (loss)
    per share, see Note 2 of Notes to Consolidated Financial Statements.

                                          17

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
OVERVIEW

    Polycom 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. The Company began selling
SoundStation internationally in January 1993.  The Company commenced shipments
domestically of an enhanced version of this product, SoundStation EX, in March
1994 and commenced international shipments in November 1994. In September 1996,
the Company introduced  the first of its desktop audioconferencing products,
SoundPoint.  In November 1996, the Company began shipping its new, premium
audioconferencing product, SoundStation Premier. Through December 31, 1996, the
Company derived a substantial majority of its net revenues from sales of its
SoundStation products. The Company began customer shipments of its first
dataconferencing product, ShowStation, in November 1995. 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 factors 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.

    In January 1997, the Company announced plans to divisionalize the Company
along the 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 the business' general manager.  Business unit alignments were also
made in the Company's sales, marketing, and general and administrative
organizations.

    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, but has generated only 
a small operating income in each quarter through the fourth quarter of 1996.  
The Company intends to continue to invest significantly in research and 
development, and plans to operate with an operating loss or break-even 
results through the third quarter of 1997.  There can be no assurance that 
the Company will achieve its operating plans or achieve profitable operations 
in any subsequent period. The Company's net revenues have grown primarily 
through new product introduction, increased market acceptance of its 
established audioconferencing product line, 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, its historical gross margin levels, or its historical declines in 
operating expenses as a percentage of net revenues, will be sustainable or 
indicative of future operating results. For example, the Company believes 
that the 37% price reduction in the list price of its SoundStation product 
line, effective December 1996 for resellers and January 1997 for end user 
customers, negatively impacted the Company's net revenues and gross margins 
in the fourth quarter of 1996 and will continue to negatively impact net 
revenues and gross margins in 1997. The Company expects that gross margins 
will continue to decline significantly in the future as a result of several 
factors, including low to negative gross margins for the Company's 
first-generation ShowStation dataconferencing products, the 37% reduction in 
the list price 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 competitive price pressures and 
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, the Company's 
limited operating history and limited resources, among other factors, make 
the prediction of future operating results difficult if not impossible.

                                          18

<PAGE>

    This Form 10-K contains forward-looking statements that involve risks and
uncertainties.  The Company's actual results may differ materially from the
results discussed in the forward-looking statements.  Factors that might cause
such a difference include, but are not limited to, those discussed in "Other
Factors Affecting Future Operations."

RESULTS OF OPERATIONS

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

                                                      YEAR ENDED DECEMBER 31,
                                                     ------------------------
                                                     1994      1995      1996
                                                     ----      ----      ----
Net revenues . . . . . . . . . . . . . . . . . . .    100%      100%      100%
Cost of net revenues . . . . . . . . . . . . . . .     41        44        48
                                                     ----      ----      ----
   Gross profit. . . . . . . . . . . . . . . . . .     59        56        52
                                                     ----      ----      ----
Operating expenses:
 Sales and marketing . . . . . . . . . . . . . . .     35        28        25
 Research and development. . . . . . . . . . . . .     37        28        20
 General and administrative. . . . . . . . . . . .      8         7         6
                                                     ----      ----      ----
   Total operating expenses. . . . . . . . . . . .     80        63        51
                                                     ----      ----      ----
Operating income (loss). . . . . . . . . . . . . .    (21)       (7)        1
Interest income, net . . . . . . . . . . . . . . .      1         1         2
Litigation settlement income, net. . . . . . . . .     --        --         1
Other income (expense) . . . . . . . . . . . . . .     --        --        --
                                                     -----     -----     -----
Income (loss) before provision for income taxes. .    (20)       (6)        4
Provision for income taxes . . . . . . . . . . . .     --        --        --
                                                     -----     -----     -----
Net income (loss). . . . . . . . . . . . . . . . .    (20)%      (6)%       4%
                                                     -----     -----     -----
                                                     -----     -----     -----


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

Audioconferencing:
<S>                                                  <C>        <C>        <C>
Net revenues . . . . . . . . . . . . . . . . . . .   $15,025    $23,814    $32,242
Cost of net revenues . . . . . . . . . . . . . . .     6,211      9,906     12,629
                                                     -------    -------    -------
   Gross profit. . . . . . . . . . . . . . . . . .    $8,814    $13,908    $19,613
                                                     -------    -------    -------
                                                     -------    -------    -------
   Gross margin. . . . . . . . . . . . . . . . . .       59%        58%        61%

Dataconferencing:
Net revenues . . . . . . . . . . . . . . . . . . .       n/a     $1,130     $4,790
Cost of net revenues . . . . . . . . . . . . . . .       n/a        953      5,069
                                                         ---     ------    -------
   Gross profit                                          n/a       $177      $(279)
                                                                -------    -------
                                                                -------    -------
   Gross margin. . . . . . . . . . . . . . . . . .                  16%        (6)%

</TABLE>
 

                                          19

<PAGE>

    NET REVENUES. The Company's net revenues increased 66% from $15.0 million 
in 1994 to $24.9 million in 1995 and increased 49% to $37.0 million in 1996. 
Net revenues increased in each period primarily due to increased unit sales, 
resulting primarily from new product introductions and the increased market 
acceptance of the Company's audioconferencing product line, and, to a lesser 
extent, through the expansion of the Company's North American and 
international distribution networks, offset in part by a decline in the list 
price of its SoundStation products. The Company reduced the list price for 
its SoundStation products three separate times, effective July 1, 1994, 
January 1, 1996, and January 1, 1997, and expects increased competitive 
pressure to lead to intensified price-based competition, resulting in lower 
prices that could materially adversely affect the Company's net revenues.  
During 1996, the Company derived a substantial majority of its net revenues 
from sales of its SoundStation product family. ConferTech International, Inc. 
accounted for 14% and 11% of net revenues in 1994 and 1995, respectively, and 
2Confer/Mutare, Inc. accounted for 11% of net revenues in 1994. No other 
customer or reseller accounted for more than 10% of the Company's net 
revenues during the periods indicated and no customer or reseller accounted 
for more than 10% of net revenues in 1996. International net revenues 
accounted for 23%, 24%, and 23% of total net revenues for 1994, 1995, and 
1996, respectively. See Note 13 of Notes to Consolidated Financial Statements 
for business segment information. The reduction in the percentage of 
international net revenues for 1996 from 1995 resulted from initial sales of 
the SoundPoint and SoundStation Premier product families, which were 
introduced first in North America. 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. 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 have been denominated in U.S. currency; 
however, the Company expects that in the future more international sales may 
be denominated in local currencies.

    Net revenues by division:  The Company's audioconferencing net revenues
increased 58% from $15.0 million in 1994 to $23.8 million in 1995 and increased
35% to $32.2 million in 1996.  The Company's dataconferencing net revenues
increased 336% from $1.1 million in 1995 to $4.8 million in 1996. The Company's
first dataconferencing products began shipping in November 1995 and did not have
any net revenues prior to this time.

    GROSS PROFIT. Cost of net revenues consists primarily of manufacturing 
costs of the Company and the Company's contract manufacturer, warranty 
expense, and allocation of overhead expenses. Gross margin represented 59%, 
56%, and 52% of net revenues for 1994, 1995, and 1996, respectively. The 
decrease in gross margins for 1995 and for 1996 was principally due to the 
shift in product mix from the higher margin SoundStation product family to 
the lower margin ShowStation and, in 1996, the SoundStation Premier and 
SoundPoint product family introductions. The audioconferencing gross margin 
was positively impacted by cost reductions in the manufacturing cost of the 
SoundStation product line, partially offset by the negative impact of the 
reduction in the price of the Company's SoundStation product line announced 
in the first quarter of 1996 and the price reduction of the SoundStation 
product line to the resellers in December 1996.  Gross margins on the 
dataconferencing product line were negatively impacted by manufacturing 
start-up costs associated with the launch of the ShowStation product in 1995 
through mid-1996, at which point the manufacture of the product was 
transferred to the Company's contract manufacturer.  Gross margins on the 
dataconferencing product line were also negatively impacted by the lower than 
planned unit volume and significant manufacturing variances through the 
fourth quarter of 1996.  The Company expects that gross margins will continue 
to decline significantly in the future as a result of several factors, 
including low to negative gross margins for the Company's dataconferencing 
products during the manufacturing ramp-up of the first-generation ShowStation 
products, the 37% reduction in the list price of the SoundStation product


                                          20

<PAGE>

line, the introduction of the lower margin SoundPoint desktop product line, 
and continuing competitive price pressure in the audioconferencing and 
dataconferencing markets.  The Company's historical price reductions have 
been driven by competitive price pressures and 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, 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, gross margin may be affected by 
price competition and changes in unit volume, product cost, and warranty 
expenses. Gross margin 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 
higher gross margin on direct sales than on sales through indirect channels 
and higher gross margin on international revenues than on North American 
revenues. If sales through resellers, especially OEMs, increase as a 
percentage of total revenues, the Company's gross margin will be adversely 
impacted.

    Gross profit by division:  The Company's audioconferencing gross margin
represented 59%, 58%, and 61% of net revenues for 1994, 1995, and 1996,
respectively. The Company's dataconferencing gross margin represented 16% and
(6)% of net revenues for 1995 and 1996, respectively. The Company's first
dataconferencing products began shipping in November 1995 and did not have any
cost of net revenues prior to this time.

    SALES AND MARKETING. Sales and marketing expenses consist primarily of 
salaries and commissions, advertising and promotional expenses, allocation of 
overhead expenses, and customer service and support costs. Sales and 
marketing expenses were $5.3 million, $7.1 million, and $9.1 million for 
1994, 1995, and 1996, respectively, representing 35%, 28%, and 25% of net 
revenues for each respective period. The increase in absolute dollars in each 
of these periods was primarily related to the expansion of the Company's 
sales and marketing organization, particularly the increase in the direct 
sales and associated costs, and increased commission expenses related to 
higher sales volumes and the launch of the Company's dataconferencing 
business. 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 products, the Company incurred significant expenses during 1996 
to develop a worldwide sales presence for the ShowStation product and 
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. In addition, the Company is continuing to 
invest in the market launch of its new SoundPoint and SoundStation Premier 
product lines.  In order to improve its sales processing systems, the Company 
plans to make a significant investment to implement a new sales and service 
information system over the next two fiscal years.

    RESEARCH AND DEVELOPMENT. Research and development expenses consist 
primarily of compensation costs, consulting fees, allocation of overhead 
expense, supplies, depreciation of equipment, and product marketing expenses. 
Research and development expenses were $5.5 million, $6.9, million and $7.6 
million for 1994, 1995, and 1996, respectively, representing 37%, 28%, and 
20% of net revenues for each respective period. The increase in dollar amount 
in research and development expenses in each of these periods was primarily 
attributable to increased staffing and associated support required to expand 
and enhance the Company's dataconferencing and audioconferencing product 
lines. As of December 31, 1996, all research and development costs have been 
expensed as incurred. The Company believes that technological leadership is 
critical to its success and is committed to continuing a high level of 
research and development, especially in the development of the planned, next 
generation ShowStation product.  As a consequence, the Company intends to 
significantly increase the absolute amount of its research and development 
expenses in the future.


                                          21

<PAGE>

    GENERAL AND ADMINISTRATIVE. General and administrative expenses consist 
of compensation costs, allocation of overhead expense, and outside legal and 
accounting expenses. General and administrative expenses were $1.1 million, 
$1.8 million, and $2.1 million for 1994, 1995, and 1996, respectively, 
representing 8%, 7%, and 6% of net revenues for each respective period. The 
increase in dollar amount in each period was primarily due to increased 
staffing to support the Company's growth and, during 1996, to costs related 
to the patent litigation. 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.

    INTEREST INCOME, NET.  Interest income consists of interest earned on the 
Company's cash equivalents and short-term investments, net of interest 
expense for the Company's bank debt facilities.  Interest income, net was 
$175,000, $189,000, and $784,000 for 1994, 1995, and 1996, respectively, 
representing 1%, 1%, and 2% of net revenues for each respective period.  The 
increase in interest income, net in 1996 over the prior two years was 
primarily due to the increase in the Company's cash equivalents and 
short-term investments resulting from the Company's initial public offering.

    PROVISION FOR INCOME TAXES. 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
Company incurred a net loss and consequently paid no federal or state income
taxes in either 1994 or 1995.  In  1996 the Company provided for income tax
of $108,000 for federal and certain foreign alternative minimum taxes. As of
December 31, 1996, the Company had approximately $6.4 million in federal net
operating loss carryforwards and $790,000 in federal 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
believes that its initial public offering on April 29, 1996, triggered a change
in ownership pursuant to the Internal Revenue Code of 1986, as amended, such
that the annual limitation for utilization of federal net operating loss
carryforwards is approximately $7.1 million.

    The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced. See Note 11
of Notes to Consolidated Financial Statements.

OTHER FACTORS AFFECTING FUTURE 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 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 
reductions in the list price of its SoundStation products has  had a negative 
impact on net revenues and gross margin. The Company also expects that gross 
margin will continue to decline as a result of such price reductions and 
several other factors, including lower gross margin for the Company's 
dataconferencing products as well as continuing competitive price pressure in 
the audioconferencing market. 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, and the dataconferencing line of products, 
currently comprised of the ShowStation product, and upon any new products or 
product enhancements. There can be no assurance that the Company will be


                                          22

<PAGE>
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 has significant 
backlog fluctuations 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 orders 
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 for the quarter are 
difficult to predict. 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.

LIQUIDITY AND CAPITAL RESOURCES

    As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $9.5 million,  short-term investments of
$10.1  million, and a $4.0 million revolving bank line of credit from Silicon
Valley Bank (of which $3.3 million was available as of December 31, 1996) which
expires on April 15, 1997. The Company is negotiating an extension term to the
line of credit although there can be no assurance that the Company will be
successful in extending the term of the line of credit. The line of credit was
modified in December 1995 and currently provides for borrowings up to the lesser
of (i) $4.0 million, or (ii) the sum of 80% of eligible domestic and government
accounts receivable and 50% of eligible foreign accounts receivable minus the
sum of the aggregate outstanding face amount of all letters of credit issued
under the line. Eligible accounts receivable are defined as receivables
outstanding less than 90 days. Borrowings under the line bear interest at the
bank's prime rate plus 1.0% (9.25% at December 31, 1996), and are collateralized
by substantially all of the Company's assets. The line of credit facility
contains provisions that require the maintenance of certain financial ratios and
profitability requirements. As of December 31, 1996, the Company was in
compliance with these covenants. See Note 8 of Notes to Consolidated Financial
Statements.

    The Company used cash in operating activities totaling $2.3 million, $3.3 
million, and $2.3 million for the years ended 1994, 1995, and 1996, 
respectively. The use of cash in 1994 and 1995  was primarily attributable to 
operating losses and increased levels of accounts receivable and inventories, 
partially offset by an increase in accounts payable and accrued liabilities. 
The use of cash in 1996 was attributable to increased levels of accounts 
receivable and inventories, partially offset by an increase in accounts 
payable and accrued liabilities. The increase in accounts receivable in 1994 
and 1995 was primarily due to  increased revenues. In addition, the 1995 and 
1996 increase in accounts receivable was impacted by the concentration of 
sales late in the quarter resulting from a number of factors, including the 
Company's decision to interrupt shipments of ShowStation products for a 
six-week period, delays in the production and shipment of SoundStation 
products during the Company's transition to a new contract manufacturer in 
1995 and the introduction of the SoundStation Premier in the fourth quarter 
of 1996. Inventories increased in each of the last three years as the Company 
built up its finished goods inventory of its audioconferencing product lines 
to support increased sales levels and its raw materials inventory in support 
of the introduction and launch of the dataconferencing product line and the 
transfer of the SoundStation product line manufacturing to Flextronics in the 
first quarter of 1996. The increase in provision for excess and obsolete 
inventories in 1996 was directly related to increased inventory levels.

                                          23
<PAGE>

    The Company used $41,000, $3.5 million, and $9.1 million of net cash in
investing activities during 1994, 1995, and 1996, respectively, to purchase
property and equipment and during 1995 and  1996 to purchase short-term
investments. Financing activities provided $4.5  million and $17.4  million of
net cash during 1995  and 1996, respectively, due primarily to the issuance of
Preferred Stock in 1995 and the issuance of Common Stock in the Company's
initial public offering in 1996. Financing activities used $28,000 in 1994 due
primarily to the repayment of notes payable and capital lease obligations,
offset in part by the issuance of notes payable.

    The Company has no material commitments other than obligations under its
revolving bank line of credit facility and operating leases. The Company
estimates that 1997 capital expenditures will be approximately $4.5 million. See
Notes 7 and 8 of Notes to Consolidated Financial Statements.

    The Company may in the future 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 financings 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.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 16(a).


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

    Not applicable.


                                          24


<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(A) EXECUTIVE OFFICERS

The executive officers of the Company, and their ages as of December 31, 1996,
are as follows:
 
<TABLE>
<CAPTION>

    NAME                      AGE                      POSITION
    ----                      ---                      --------
<S>                           <C>  <C>
Brian L. Hinman. . . . . .    35   Chief Executive Officer and Chairman of the Board of Director
Robert C. Hagerty. . . . .    44   President, Chief Operating Officer and Director
Michael R. Kourey. . . . .    37   Vice President, Finance and Administration, Chief
                                   Financial Officer, and Secretary
Ardeshir Falaki. . . . . .    38   Vice President Engineering - Dataconferencing
Alan D. Hagedorn . . . . .    48   Vice President Manufacturing
Robert A. Lien (1) . . . .    47   Vice President Worldwide Sales and Service
Gilbert J. Pearson . . . .    48   Vice President Engineering - Audioconferencing
- ------------------

</TABLE>
 
(1) Robert A. Lien succeeded Evan J. McDowell, who left the Company in January
1997.

    BRIAN L. HINMAN is a founder of the Company and serves as the Chief
Executive Officer and as Chairman of the Board of Directors. Mr. Hinman
co-founded PictureTel, a leading manufacturer of videoconferencing equipment, in
August 1984. At PictureTel, he served as the Vice President of Engineering from
August 1984 until January 1991 and as a member of the Board of Directors from
August 1984 to December 1989. He is a co-founder and director of the
International Multimedia Teleconferencing Consortium, Inc. which is dedicated to
the International Telecommunications Union standards of H.320 and T.120 for
video and dataconferencing. Mr. Hinman holds seven U.S. patents in the
teleconferencing field. Mr. Hinman also holds a B.S.E.E. from the University of
Maryland and an S.M.E.E. from Massachusetts Institute of Technology.

     ROBERT C. HAGERTY joined the Company in January 1997 and serves as the
President and Chief Operating Officer and as a member of the Board of Directors.
Prior to joining Polycom, Mr. Hagerty served as President of Stylus Asset, Ltd.,
a document management company from November 1995 to December 1996.  From July
1993 to October 1995, Mr. Hagerty served in various executive management
positions of Logitech, Inc.  Prior to that time, Mr. Hagerty served in various
executive management positions at Conner Peripherals, Inc., Ampex Corporation,
and Digital Equipment Corporation.  Mr. Hagerty holds a B.S. in Operations
Research and Industrial Engineering from the University of Massachusetts,
Amherst and an M.A. in Management from St. Mary's College of California.

    MICHAEL R. KOUREY joined the Company in July 1991 and served as the
Company's Vice President, Finance and Operations until January 1995. Mr. Kourey
assumed the offices of Secretary in June of 1993 and served as Treasurer from
June 1993 until March of 1997. Since January 1995, he has served as Vice
President, Finance and Administration and Chief Financial Officer of the
Company. Prior to joining Polycom, Mr. Kourey was employed by Verilink
Corporation, a supplier of T1 nodal connecting telecommunications equipment,
where he served as the Vice President of Operations from July 1990 to May 1991
and the Director of Materials from April 1989 to June 1990. From January 1984 to
April 1989, he served in various manufacturing management positions at David
Systems, Inc., a voice and data communications equipment company. Mr. Kourey
holds a B.S. in Managerial Economics from the University of California, Davis
and an M.B.A. from the University of Santa Clara.


                                          25

<PAGE>

    ROBERT A. LIEN joined the Company in December 1991, and served as the
Company's Director, North American Sales until September 1994.  In September
1994, Mr. Lien was named Vice President, North American Sales.  Since January
1997, Mr. Lien has served as Vice President, Worldwide Sales and Service.  From
March 1989 to December 1991, Mr. Lien served as the Director of Sales for Boston
Technology.  Prior to that time, Mr. Lien held various sales management
positions at telecommunications and computer companies.  Mr. Lien holds a
B.S.E.E. from the University of Minnesota.

    ARDERSHIR FALAKI joined the Company in April 1996, as Vice President,
Dataconferencing Engineering.  From March 1988 to April 1996, Mr. Falaki served
in various engineering management roles at PictureTel Corporation, including the
position of Director, Performance Products, Group Systems Division.  Prior to
joining PictureTel, Mr. Falaki held engineering management positions at Siemens
AG.  Mr. Falaki holds a B.S.E.E. from Northeastern University and an M.S.E.E.
from the University of Massachusetss, Dartmouth.

    GILBERT J. PEARSON joined the Company in February 1994, and served as the
Company's Manager of Audio systems until December 1994.  In December 1994, Mr.
Pearson was named Director Hardware Development until January 1997.  In January
1997, Mr. Pearson was named Vice President, Audioconferencing Engineering.  From
September 1987 to June 1990, Mr. Pearson served as the Director of Engineering
and Vice President/General Manager of Harris Corporation, Video Systems
Operation.  From October 1981 to July 1986, Mr. Pearson was employed by
Compression Labs, Inc., a leading videoconferencing equipment supplier, where he
served as Vice President of Engineering.  Mr. Pearson holds a B.S.E.E. from the
University of Adelaide, Australia.

    ALAN D. HAGEDORN joined the Company in September 1996 as the Vice
President, Manufacturing.  Prior to Polycom, Mr. Hagedorn served as the Vice
President of Manufacturing at Amati Communications, Inc. from February 1995 to
September 1996.  From September 1988 to February 1995, Mr. Hagedorn was employed
by Network Computing Devices, Inc. where he served as Vice President of
Manufacturing.  Mr. Hagedorn holds a B.A. in Management from California State
University, Fullerton.

(b) DIRECTORS - The information required by this item is included in the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders and is
incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

    The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders and is incorporated herein
by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT

    The information required by this item is included under the captions
"Ownership of Securities" in the Company's Proxy Statement for the 1996 Annual
Meeting of Stockholders and is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is included under the captions
"Certain Transactions"" in the Company's Proxy Statement for the 1996 Annual
Meeting of Stockholders and is incorporated herein by reference.


                                          26

<PAGE>

                                       PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K.

(a) The following documents are filed as part of this Report:

    1.   Financial Statements.
                                                                            PAGE
         Report of Coopers & Lybrand L.L.P., Independent Accountants. . . . F-1
         Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . F-2
         Consolidated Statements of Operations. . . . . . . . . . . . . . . F-3
         Consolidated Statements of Stockholders' Equity (Deficit). . . . . F-4
         Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . F-5
         Notes to Consolidated Financial Statements . . . . . . . . . . . . F-6

    2.   Financial Statement Schedule.  The following Financial Statement
         Schedule of the Registration is filed as part of this Report:

         Schedule II - Valuation and Qualifying Accounts.

         Schedules not listed above have been omitted because the information
         required to be set forth therein is not applicable or is shown in the
         financial statements or notes thereto.

    3.   Exhibits.

         The following Exhibits are filed as part of, or incorporated by
         reference into, this Report:

EXHIBIT NO.                       DESCRIPTION
- -----------                       -----------
      1.1(1)       Form of Underwriting Agreement.
      3.1(1)       Restated Certificate of Incorporation of the Registrant, as
                   currently in effect.
      3.2(1)       Form of Amended and Restated Certificate of Incorporation to
                   be filed prior to the closing of the  offering made pursuant
                   to this Registration Statement.
      3.3(1)       Bylaws of the Registrant, as amended and currently in effect.
      3.4(1)       Form of Amended and Restated Bylaws to be effective upon the
                   effectiveness of this Registration Statement.
      4.1(1)       Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
      4.2(1)       Specimen Common Stock certificate.
      4.3(1)       Amended and Restated Investor Rights Agreement, dated May 17,
                   1995, among the Registrant and the Investors named therein.
      5.1(1)       Opinion of Brobeck, Phleger & Harrison LLP regarding the
                   legality of the securities being issued.
     10.1(1)       Form of Indemnification Agreement entered into between the
                   Registrant and each of its directors and officers.
     10.2(1)       The Registrant's 1991 Stock Option Plan and forms of
                   agreements thereunder.
     10.3(1)       The Registrant's 1996 Stock Incentive Plan and forms of
                   agreements thereunder.
     10.4(1)       The Registrant's Employee Stock Purchase Plan and forms of
                   agreements thereunder.
     10.5(1)       Lease Agreement by and between the Registrant and Orchard
                   Investment Company Number 701 dated June 24, 1993, as
                   amended, regarding the space located at 2584 Junction Avenue.


                                          27

<PAGE>

     10.6(2)       Amended and Restated Development, Volume Purchase and
                   Distribution Agreement, dated December 22, 1995, by and
                   between PictureTel Corporation and Polycom, Inc.
  10.7(1)(2)       Sublicense Agreement, dated March 31, 1994, by and between
                   DataBeam Corporation and Polycom, Inc.
  10.8(1)(2)       Amended and Restated General Distribution Agreement, dated
                   February 14, 1996, by and between DataBeam Corporation and
                   Polycom, Inc.
  10.9(1)(2)       Manufacturing Agreement, dated December 14, 1995, by and
                   between Polycom, Inc. and Flextronics Technologies, Inc.
  0.10(1)(2)       Volume Purchase Agreement, dated March 1, 1994, as amended,
                   by and between Scriptel Corporation and Polycom, Inc.
  0.11(1)(2)       Volume Purchase Agreement, dated March 29, 1996, by and
                   between Scriptel Corporation and Polycom, Inc.
    10.12(1)       Stock Pledge Agreement and Note Secured by Stock Pledge
                   Agreement, each dated June 9, 1995, by and between Polycom,
                   Inc. and Patrick P. Day.
    10.13(1)       Series D Preferred Stock Purchase Agreement and Amended and
                   Restated Investor Rights Agreement dated May 17, 1995.
        11.1       Computation of Earnings Per Share.
     21.1(1)       Subsidiaries of the Registrant.
     24.1(1)       Power of Attorney.
        27.1       Financial Data Schedule.

(1) Previously filed.
(2) Confidential treatment requested as to certain portions of these documents.

(b) REPORTS ON FORM 8-K.

A report on Form 8-K was filed on May 14, 1996, regarding the Company v.
U.S. Robotics.

A report on Form 8-K was filed October 22, 1996, regarding changes in the 
Company's engineering management.

A report on Form 13-D was filed on December 3, 1996, regarding the open 
market purchase of Company stock by certain Company executives.


                                          28

<PAGE>

                                      SIGNATURES

    Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on this 26th day of March, 1997.

                                       POLYCOM, INC.


                                       By:  /S/ Michael R. Kourey
                                            -----------------------------------
                                            Michael R. Kourey

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


                                          29

<PAGE>

                                  POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

    That the undersigned officers and directors of Polycom, Inc., a Delaware
corporation, do hereby constitute and appoint Brian L. Hinman and Michael R.
Kourey, and each of them, the lawful attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.

    IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

    Pursuant to the requirements of the Securities Act of 1934, as amended,
this Form 10K has been signed below by the following persons in the capacities
and on the dates indicated.
 
<TABLE>
<CAPTION>



Signature                         Title                                        Date
- ---------                         -----                                        ----
<S>                               <C>                                            

/s/ Brian L. Hinman               Chief Executive Officer                      March 26, 1997
- ------------------------------    and Chairman of the Board of                               
Brian L. Hinman                   Director (Principal Executive Officer)                     

/s/ Robert C. Hagerty             President, Chief Operating Officer           March  26, 1997
- ------------------------------    and Director
Robert C. Hagerty                 

/s/ Michael R. Kourey             Vice President, Finance and                  March  26, 1997
- ------------------------------    Administration, Chief Financial
Michael R. Kourey                 Officer and Secretary (Principal
                                  Financial and Accounting Officer)

/s/ Bandel Carano                 Director                                     March  26, 1997
- ------------------------------    
Bandel Carano

/s/ Stanley J. Meresman           Director                                     March  26, 1997
- ------------------------------    
Stanley J. Meresman

/s/ John P. Morgridge             Director                                     March  26, 1997
- ------------------------------    
John P. Morgridge

/s/ James R. Swartz               Director                                     March  26, 1997
- ------------------------------    
James R. Swartz

</TABLE>


                                          30

<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS



    In connection with our audits of the consolidated financial statements of
Polycom, Inc. and subsidiary as of December 31, 1996, 1995 and 1994, and for
each of the three years in the period ended December 31, 1996, which financial
statements are included in this Annual Report on Form 10-K, we have also audited
the financial statements schedule listed in Item 16(a) herein.

    In our opinion, the financial statement schedule, when considered in
relation to the basis financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.




COOPERS & LYBRAND L.L.P.
San Jose, California
January 24, 1997


                                          31

<PAGE>

                                     SCHEDULE II


                                    POLYCOM, INC.
                          VALUATION AND QUALIFYING ACCOUNTS
                                    (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               BALANCE AT                             BALANCE AT
                                               BEGINNING                                END OF
                    DESCRIPTION                OF PERIOD   ADDITIONS   DEDUCTIONS (A)   PERIOD
                    -----------                ---------   ---------   --------------   ------
<S>                                            <C>         <C>         <C>            <C>
Allowance for doubtful accounts receivable:
Year ended December 31, 1994
  Allowance for Doubtful Accounts. . . . . .     $103         $102          $(5)         $200
  Provision for Obsolete Inventory . . . . .      $61          $77         $(38)         $100

Year ended December 31, 1995
  Allowance for Doubtful Accounts. . . . . .     $200         $255          $(7)         $448
  Provision for Obsolete Inventory . . . . .     $100         $561        $(316)         $345

Year ended December 31, 1996
  Allowance for Doubtful Accounts. . . . . .     $448           $1          $(1)         $443
  Provision for Obsolete Inventory . . . . .     $345         $560        $(184)         $721

</TABLE>

(A) Uncollectible accounts written-off or disposal of unusable or damaged raw
materials.


                                          32

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors
Polycom, Inc.:

We have audited the accompanying consolidated balance sheets of Polycom, Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1996.  These consolidated
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Polycom, Inc. and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.



Coopers & Lybrand L.L.P.

San Jose, California
January 24, 1997


                                       F1

<PAGE>

                                  POLYCOM, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)
                                      ____

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             -----------------------
                              ASSETS                                           1996           1995
                                                                             --------       --------
<S>                                                                          <C>            <C>
Current assets:
     Cash and cash equivalents                                               $  9,548       $  3,539
     Short-term investments                                                    10,101          2,722
     Accounts receivable, net of allowance for doubtful
       accounts of $443 and $448 in 1996 and 1995, respectively                 6,965          3,171
     Inventories                                                                7,458          5,308
     Prepaid expenses and other current assets                                    384            191
                                                                             --------       --------

          Total current assets                                                 34,456         14,931

Fixed assets, net                                                               3,164          2,970
Deposits and other assets                                                         100             99
                                                                             --------       --------

             Total assets                                                    $ 37,720       $ 18,000
                                                                             --------       --------
                                                                             --------       --------

               LIABILITIES, CONVERTIBLE REDEEMABLE
                PREFERRED STOCK AND STOCKHOLDERS'
                         EQUITY (DEFICIT)

Current liabilities:
     Notes payable                                                           $      -       $  1,485
     Accounts payable                                                           4,307          3,852
     Accrued payroll and related liabilities                                      880            777
     Other accrued liabilities                                                  1,312            988
                                                                             --------       --------

             Total current liabilities                                          6,499          7,102

Notes payable, less current portion                                                 -          1,178
                                                                             --------       --------

Total liabilities                                                               6,499          8,280
                                                                             --------       --------

Commitments (Note 7).

Convertible redeemable preferred stock:
     Series A through D, $.001 par value:
          Authorized:  none in 1996 and 13,200,244 shares in 1995
          Issued and outstanding:  none in 1996 and 13,069,857
            shares in 1995 (Liquidation value:  $22,462)                            -         22,360
                                                                             --------       --------
     Stockholders' equity (deficit):
     Preferred stock, $.001 par value:
          Authorized:  5,000,000 shares
          Issued and outstanding:  none in 1996 and 1995                            -            -
     Common stock, $0.0005 par value:
          Authorized:  50,000,000 shares in 1996 and 20,000,000
            shares in 1995
          Issued and outstanding:  19,144,058 shares in 1996
            and 3,670,046 in 1995                                                  10              2
     Additional paid-in capital                                                42,521            285
     Notes receivable from stockholders                                           (29)          (163)
     Accumulated deficit                                                      (11,281)       (12,764)
                                                                             --------       --------


             Total stockholders' equity (deficit)                              31,221        (12,640)
                                                                             --------       --------

                Total liabilities, convertible redeemable
                  preferred stock and stockholders' equity (deficit)         $ 37,720       $ 18,000
                                                                             --------       --------
                                                                             --------       --------
</TABLE>


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

                                       F2

<PAGE>

                                  POLYCOM, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                      ____

                                                      Year Ended December 31,
                                               --------------------------------
                                                 1996        1995        1994
                                               --------    --------    --------
Net revenues                                   $ 37,032    $ 24,944    $ 15,025
Cost of net revenues                             17,698      10,859       6,211
                                               --------    --------    --------

     Gross profit                                19,334      14,085       8,814
                                               --------    --------    --------

Operating expenses:

     Sales and marketing                          9,095       7,073       5,307
     Research and development                     7,574       6,852       5,527
     General and administrative                   2,148       1,819       1,140
                                               --------    --------    --------

          Total operating expenses               18,817      15,744      11,974
                                               --------    --------    --------

          Operating income (loss)                   517      (1,659)     (3,160)

Interest income                                     884         361         283
Interest expense                                   (100)       (172)       (108)
Litigation settlement income, net                   303           -           -
Other income (expense)                              (13)       (132)         22
                                               --------    --------    --------

          Income (loss) before
          provision for income taxes              1,591      (1,602)     (2,963)

Provision for income taxes                          108           -           -
                                               --------    --------    --------

             Net income (loss)                 $  1,483    $ (1,602)   $ (2,963)
                                               --------    --------    --------
                                               --------    --------    --------

Net income (loss) per share                    $   0.08    $  (0.37)   $  (0.73)
                                               --------    --------    --------
                                               --------    --------    --------

Shares used in per share calculation             18,898       4,332       4,054
                                               --------    --------    --------
                                               --------    --------    --------


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

                                       F3

<PAGE>

                                  POLYCOM, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                        (in thousands, except share data)
                                      ____



<TABLE>
<CAPTION>
                                                                                       Notes
                                                   Common Stock       Additional    Receivable
                                                 ------------------    Paid-In         from       Accumulated
                                                 Shares      Amount    Capital     Stockholders     Deficit       Total
                                                 ------      ------   ----------   ------------   -----------     -----
<S>                                             <C>          <C>      <C>          <C>            <C>           <C>
Balances, December 31, 1993                     2,613,595    $    1    $     29                    $ (8,199)    $ (8,169)
Issuance of common stock under stock
   option plan                                    385,206         -          60       $   (9)             -           51
Repurchase of common stock                        (42,751)        -          (7)           -              -           (7)
Net loss                                                -         -           -            -         (2,963)      (2,963)
                                               ----------    ------    --------       ------       --------     --------

Balances, December 31, 1994                     2,956,050         1          82           (9)       (11,162)     (11,088)
Issuance of common stock under stock
   option plan                                    720,591         1         204         (154)             -           51
Repurchase of common stock                         (6,595)        -          (1)           -              -           (1)
Net loss                                                -         -           -            -         (1,602)      (1,602)
                                               ----------    ------    --------       ------       --------     --------

Balances, December 31, 1995                     3,670,046         2         285         (163)       (12,764)     (12,640)
Issuance of common stock through:
   Initial public offering, net of issuance
      cost of $996                              2,500,000         2      19,927            -              -       19,929
   Conversion of preferred shares              13,069,857         6      22,354            -              -       22,360
   Exercise of stock options under stock
      option plan                                 138,738         -          68          (17)             -           51
     Exercise of warrants                          22,500         -           -            -              -            -
Payment of stockholder notes receivable                 -         -           -          151              -          151
Repurchase of common stock                       (257,083)        -        (113)           -              -         (113)
Net income                                              -         -           -            -          1,483        1,483
                                               ----------    ------    --------       ------      ---------     --------

Balances, December 31, 1996                    19,144,058    $   10    $ 42,521       $  (29)     $ (11,281)    $ 31,221
                                               ----------    ------    --------       ------      ---------     --------
                                               ----------    ------    --------       ------      ---------     --------
</TABLE>


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

                                       F4

<PAGE>

                                  POLYCOM, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                      ____

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                ---------------------------------------
                                                                                   1996          1995           1994
                                                                                ----------    ----------     ----------
<S>                                                                             <C>           <C>            <C>
Cash flows from operating activities:
     Net income (loss)                                                          $    1,483    $   (1,602)    $   (2,963)
     Adjustments to reconcile net income (loss) to net cash used in
        operating activities:
        Loss on disposition of fixed assets                                              -             -             10
        Depreciation and amortization                                                1,513           944            701
        Provision for doubtful accounts                                                  1           255            102
        Provision for excess and obsolete inventories                                  560           561             77
        Changes in assets and liabilities:
           Accounts receivable                                                      (3,795)       (1,459)          (309)
           Inventories                                                              (2,710)       (4,570)        (1,046)
           Prepaid expenses and other current assets                                  (193)          (78)            58
           Deposits and other assets                                                    (1)          (36)           (34)
           Accounts payable                                                            455         1,876            522
           Accrued liabilities                                                         427           823            547
                                                                                ----------    ----------     ----------
               Net cash used in operating activities                                (2,260)       (3,286)        (2,335)
                                                                                ----------    ----------     ----------

Cash flows from investing activities:
     Acquisition of fixed assets                                                    (1,707)         (758)           (44)
     Proceeds from disposition of fixed assets                                           -             -              3
     Purchase of short-term investments                                             (9,964)       (2,722)             -
     Sale of short-term investments                                                  2,585             -              -
                                                                                ----------    ----------     ----------
               Net cash used in investing activities                                (9,086)       (3,480)           (41)
                                                                                ----------    ----------     ----------

Cash flows from financing activities:
     Proceeds from initial public offering, net of issuance costs                   19,929             -              -
     Net proceeds from sale of convertible redeemable preferred stock                    -         4,980              -
     Proceeds from issuance of notes payable                                         4,314         1,470            290
     Repayment of notes payable and capital lease obligation                        (6,977)       (1,987)          (362)
     Repayment of stockholder notes receivable                                         151             -              -
     Proceeds from issuance of common stock, net of repurchases                        (62)           50             44
                                                                                ----------    ----------     ----------
               Net cash provided by (used in) financing activities                  17,355         4,513            (28)
                                                                                ----------    ----------     ----------

Net increase (decrease) in cash and cash equivalents                                 6,009        (2,253)        (2,404)
Cash and cash equivalents, beginning of period                                       3,539         5,792          8,196
                                                                                ----------    ----------     ----------
Cash and cash equivalents, end of period                                        $    9,548    $    3,539     $    5,792
                                                                                ----------    ----------     ----------
                                                                                ----------    ----------     ----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the period for interest                                   $      121    $      170     $      110

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING:
     Fixed assets financed by notes payable                                     $        -    $     1612     $      812
     Common stock issued for notes receivable                                   $       17    $      154     $        9
     Conversion of preferred shares to common stock                             $   22,360             -              -
</TABLE>


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

                                       F5

<PAGE>

                                  POLYCOM, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      -----



1.   FORMATION AND BUSINESS OF THE COMPANY:

     Polycom, Inc. and subsidiary (the "Company"), a Delaware corporation, is
     engaged in the development, manufacturing and marketing of teleconferencing
     equipment.  The Company's products are distributed and serviced globally.
     The Company sells its products through its direct salesforce and maintains
     marketing and sales relationships with major telecommunications carriers,
     value-added resellers, telecommunications supply and catalog distributors,
     a leading videoconferencing equipment supplier, and telecommunications
     specialists.

 2.  SUMMARY OF SELECTED ACCOUNTING POLICIES:

          FISCAL YEAR:

          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 year.  For
          convenience of presentation, the accompanying consolidated
          financial statements have been shown as ending on December 31 of
          each applicable period.

          PRINCIPLES OF CONSOLIDATION:

          The consolidated financial statements include the accounts of the
          Company and its wholly owned subsidiary.  All significant
          intercompany balances and transactions have been eliminated.

          USE OF ESTIMATES:

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

          CASH AND CASH EQUIVALENTS:

          The Company considers all highly liquid investments with original
          maturities of 90 days or less at the time of purchase to be cash
          equivalents.


                                    Continued

                                       F6

<PAGE>

2.   SUMMARY OF SELECTED ACCOUNTING POLICIES, continued:

          SHORT-TERM INVESTMENTS:

          Short-term investments are classified as available for sale and are
          carried at fair value.  Unrealized holding gains and losses on such
          securities are reported net of related taxes as a separate
          component of stockholders' equity.  Realized gains and losses on
          sales of all such securities are reported in earnings and computed
          using the specific identification cost method.

          INVENTORIES:

          Inventories are stated at the lower of cost or market.  Cost is
          determined on a standard cost basis which approximates the first-in,
          first-out ("FIFO") method.  Appropriate consideration is given to
          obsolescence, excessive levels, deterioration and other factors in
          evaluating net realizable value.

          FIXED ASSETS:

          Fixed assets are stated at cost less accumulated depreciation and
          amortization.  Depreciation is provided on a straight-line basis
          over the estimated useful lives of the assets, which is two to
          three years.  Amortization of leasehold improvements is computed
          using the straight-line method over the shorter of the remaining
          lease term or the estimated useful life of the related assets,
          typically three to five years.

          Disposals of capital equipment are recorded by removing the costs
          and accumulated depreciation from the accounts.  Gains or losses
          are included in the results of operations.

          CARRYING VALUE OF LONG-LIVED ASSETS:

          The Company writes-off the carrying value of long-lived assets to
          the extent estimated future undiscounted cash flows are not
          sufficient to recover the carrying value of these assets over their
          remaining useful lives.

          REVENUE RECOGNITION:

          The Company recognizes revenue from gross product sales, less a
          provision for estimated future customer returns, upon shipment to
          the customer, upon fulfillment of acceptance terms, if any, and
          when no significant contractual obligations remain outstanding.

          RESEARCH AND DEVELOPMENT EXPENDITURES:

          Research and development expenditures are charged to operations as
          incurred.


                                    Continued

                                       F7

<PAGE>

2.   SUMMARY OF SELECTED ACCOUNTING POLICIES, continued:

          ADVERTISING:

          The Company expenses the production costs of advertising as the
          expenses are incurred.  The production costs of advertising consist
          primarily of magazine advertisements, agency fees and other direct
          production costs.

          The advertising expense for the years ended December 31, 1996, 1995
          and 1994 was $1,570,000, $1,281,000 and $1,094,000, respectively.

          CAPITALIZED SOFTWARE:

          Statement of Financial Accounting Standards No. 86, "Accounting for
          the Costs of Computer Software to be Sold, Leased or Otherwise
          Marketed, " requires capitalization of certain software development
          costs subsequent to the establishment of technological feasibility.
          Based on the Company's product development process, technological
          feasibility is established upon completion of a working model.
          Costs incurred between completion of the working model and the
          point at which the product is ready for initial shipment have been
          insignificant.  Accordingly, all software development costs have
          been expensed as incurred.

          INCOME TAXES:

          Income taxes are accounted for under Statement of Financial
          Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for
          Income Taxes".  Under SFAS No. 109, deferred tax assets and
          liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement
          carrying amounts of existing assets and liabilities and their
          respective tax basis.   Deferred tax assets and liabilities are
          measured using enacted tax rates expected to apply to taxable
          income in the years in which those temporary differences are
          expected to be recovered or settled.  Valuation allowances are
          established when necessary to reduce deferred tax assets to the
          amount expected to be realized.

          TRANSLATION OF FOREIGN CURRENCIES:

          The Company's foreign consolidated subsidiary is considered to be
          an extension of the U.S. operation and the functional currency is
          the U.S. dollar.  Accordingly, monetary assets and liabilities are
          translated at year-end exchange rates while nonmonetary items are


                                    Continued

                                       F8

<PAGE>

2.   SUMMARY OF SELECTED ACCOUNTING POLICIES, continued:

          translated at historical rates.  Income and expense accounts are
          translated at the average rates in effect during the year, except
          for depreciation and cost of revenue which are translated at
          historical rates.   Foreign exchange gains and losses have not been
          significant to date and have been recorded in results of
          operations.

          COMPUTATION OF NET INCOME (LOSS) PER SHARE:

          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 (including shares
          issued under the stock option plan which we are subject to
          repurchase) are excluded from the computation of net loss per share
          as their effect is antidilutive.  For those periods prior to the
          initial public offering date, pursuant to the Securities and
          Exchange Commission Staff Accounting Bulletins, common and common
          equivalent shares issued at prices below the public offering price
          during the 12 months immediately preceding the offering date have
          been included in the calculation as if they were outstanding for
          all periods prior to the offering date (using the treasury stock
          method and the initial public offering price).

          FAIR VALUE OF FINANCIAL INSTRUMENTS:

          Carrying amounts of certain of the Company's financial instruments
          including cash and cash equivalents, accounts receivable, accounts
          payable and other accrued liabilities approximate fair value due to
          their short maturities.  Based on borrowing rates currently
          available to the Company for loans with similar terms, the carrying
          value of notes payable approximates fair value.  Estimated fair
          values for short-term investments, which are separately disclosed
          elsewhere, are based on quoted market prices for the same or similar
          instruments.

          STOCK BASED COMPENSATION:

          Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
          "Accounting for Stock-Based Compensation," encourages, but does not
          require companies to record compensation cost for stock-based
          compensation plans at fair value.  The Company has chosen to
          continue to account for employee stock options using the intrinsic
          value method prescribed by APB Opinion No. 25, "Accounting for
          Stock Issued to Employees."  Accordingly, compensation cost for
          stock options is measured as the excess, if any, of the quoted
          market price of the Company's stock at the date of the grant over
          the amount an employee must pay to acquire the stock.

                                    Continued

                                       F9

<PAGE>

2.   SUMMARY OF SELECTED ACCOUNTING POLICIES, continued:

          RECENT PRONOUNCEMENTS:

          In June 1996, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
          "Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities."  This statement provides accounting
          and reporting standards for, among other things, the transfer and
          servicing of financial assets, such as factoring receivables with
          recourse.  This statement is effective for transfers and servicing
          of financial assets occurring after December 31, 1996, and is to be
          applied prospectively.  Earlier or retroactive application is not
          permitted.  The Company believes the adoption of this statement will
          not have an impact on the financial condition or results of
          operations of the Company, as the Company does not factor its
          receivables.

3.   SHORT-TERM INVESTMENTS:

          Short-term investments at December 31, 1996 and 1995 comprise (in
          thousands):

<TABLE>
<CAPTION>
                                      Fair           Cost
                                      Value          Basis             Maturity Dates
                                    ---------      ---------    ----------------------------
<S>                                 <C>             <C>         <C>
Commercial paper                    $   1,676       $   1,676   February 1997 - March 1997
Corporate notes                         8,425           8,425   January 1997 - December 1997
                                    ---------       ---------

Balance at December 31, 1996        $  10,101       $  10,101
                                    ---------       ---------
                                    ---------       ---------

Commercial paper                    $   1,103       $   1,103   April 1996
Corporate notes                         1,619           1,619   April 1996 - July 1996
                                    ---------       ---------

Balance at December 31, 1995        $   2,722       $   2,722
                                    ---------       ---------
                                    ---------       ---------
</TABLE>


During 1996 and 1995, there were no realized gains or losses on the disposal of
short-term investments.


                                    Continued

                                       F10

<PAGE>

4.   INVENTORIES:

     Inventories consist of the following (in thousands):

                                                                 December 31,
                                                           --------------------
                                                             1996        1995
                                                           --------    --------

          Raw materials                                    $  3,252    $  2,355
          Work in process                                         -         650
          Finished goods                                      4,206       2,303
                                                           --------    --------

                                                           $  7,458    $  5,308
                                                           --------    --------
                                                           --------    --------

5.   FIXED ASSETS:

     Fixed assets, net, consist of the following (in thousands):

                                                                December 31,
                                                           --------------------
                                                             1996        1995
                                                           --------    --------

          Computer equipment and software                  $  2,980    $  2,096
          Equipment, furniture and fixtures                   1,600       1,187
          Tooling equipment                                   1,944       1,426
          Leasehold improvements                                401         509
                                                           --------    --------
                                                              6,925       5,218
          Less accumulated depreciation and amortization     (3,761)     (2,248)
                                                           --------    --------
                                                           $  3,164    $  2,970
                                                           --------    --------
                                                           --------    --------

6.   BUSINESS RISKS AND CREDIT CONCENTRATION:

     The Company has four product lines, the SoundStation, SoundStation Premier,
     SoundPoint and the ShowStation, which serve the audioconferencing and
     dataconferencing markets, respectively.  Virtually all of the Company's net
     revenues are derived from sales of the SoundStation products.  Any factor
     adversely affecting demand or supply for the SoundStation products could
     materially adversely affect the Company's business and financial
     performance.  Although the Company began volume shipments of the
     ShowStation products in November 1995, the market for dataconferencing
     products is only beginning to emerge, and there can be no assurance that it
     will develop sufficiently to enable the Company to achieve broad commercial
     acceptance of its ShowStation products.


                                    Continued

                                       F11

<PAGE>

6.   BUSINESS RISKS AND CREDIT CONCENTRATION, continued:

     Currently, the Company subcontracts the manufacturing of its SoundStation,
     SoundStation Premier, and ShowStation products through one U.S. 
     Subcontractor and SoundPoint products through a Hong Kong Subcontractor. 
     The Company believes that there are a number of alternative contract 
     manufacturers that could produce the Company's products, but in the event 
     of a reduction or interruption of supply it could take a significant 
     period of time to qualify an alternative subcontractor and commence 
     manufacturing.  The effect of such reduction or interruption in supply 
     on results of operations would be material.

     The Company's cash and cash equivalents are maintained with two
     international investment management companies, and are invested in the form
     of demand deposit accounts, money market accounts, commercial paper and
     government securities.

     The Company markets its products to distributors and end-users throughout
     the world.  Management performs ongoing credit evaluations of the Company's
     customers and maintains an allowance for potential credit losses, but
     historically has not experienced any significant losses related to
     individual customers or group of customers in any particular geographic
     area.

 7.  COMMITMENTS:

          LICENSE AGREEMENT:

          The Company entered into an agreement to license software to be
          incorporated into its ShowStation products.  Under the agreement, the
          Company is obligated to pay quarterly minimum license fees, ranging
          from $15,000 to $35,000 through the year 2001.  The Company may cancel
          the agreement at any time, provided the Company has paid a minimum of
          $200,000 in connection with the agreement.  As of December 31, 1996,
          the Company had paid $100,000 of the minimum license fees.

          LEASES:

          The Company leases certain office facilities and equipment under
          noncancelable leases expiring between 1997 and 1998.  Future
          minimum lease payments are as follows (in thousands):


                                    Continued

                                       F12

<PAGE>

                                                          Operating
                                                            Leases
                                                          ---------
               Year Ending December 31,
               ------------------------
               1997                                       $     458
               1998                                             442
               1999                                              11
                                                          ---------
               Minimum future lease payments              $     911
                                                          ---------
                                                          ---------

          In December 1994, the Company amended its headquarters office lease
          agreement and expanded its facilities.  The lease on the expanded
          facilities can be terminated sooner under an option which may be
          exercised by the Company any time after January 1997.  Under the terms
          of the lease, the Company is responsible for related maintenance,
          taxes and insurance.

          Rent expense for the years ended December 31, 1996, 1995 and 1994 was
          $475,000, $433,000 and $205,000, respectively.

8.   CREDIT ARRANGEMENTS:

     The Company has available a revolving line of credit with a bank for the
     lesser of $4,000,000 or the sum of 80% of eligible domestic trade accounts
     receivable and 50% of foreign trade accounts receivable, as defined, less
     the sum of the aggregate outstanding face amount of all letters of credit
     issued under the line.  The line of credit expires in April 1997.
     Borrowings under the line of credit bear interest at the lender's current
     index rate plus 1% (9.25% at December 31, 1996).  The weighted average
     interest rates for the years ended December 31, 1996 and 1995 were 9.5% and
     9.24%, respectively.

     Additionally, the Company may borrow under its term loan facilities with a
     bank, of which no amounts were available or utilized as of December 31,
     1996.  At December 31, 1995, the Company had borrowings of $2,663,000.
     Borrowings under these facilities are payable in monthly installments and
     bear interest ranging from 8.00% to 11.50%.

     All borrowings are collateralized by substantially all assets of the
     Company.  The Company must meet certain financial ratios, as well as
     maintain minimum tangible net worth and quarterly maximum cumulative
     losses.  The agreements also require that the Company provide certain
     financial information to the lender on a periodic basis and restrict the
     Company from paying any cash dividends without the bank's consent.


                                    Continued

                                       F13

<PAGE>

9.   CONVERTIBLE REDEEMABLE PREFERRED STOCK:

     In 1995, convertible redeemable preferred stock comprised the series
     designated as follows (in thousands, except share data):

<TABLE>
<CAPTION>
                                              Number of       Common
                              Number of        Shares         Shares
                               Shares        Issued and     Reserved for   Liquidation
                             Authorized      Outstanding     Conversion       Value
                            ------------    ------------    ------------   -----------
          <S>               <C>             <C>             <C>            <C>
          Series A             5,050,244       5,032,189       5,032,189     $   5,032
          Series B             4,300,000       4,246,000       4,246,000         6,369
          Series C             2,700,000       2,691,668       2,691,668         6,056
          Series D             1,150,000       1,100,000       1,100,000         5,005
                            ------------    ------------    ------------   -----------
                              13,200,244      13,069,857      13,069,857     $  22,462
                            ------------    ------------    ------------   -----------
                            ------------    ------------    ------------   -----------
</TABLE>


     The Convertible redeemable preferred stock had certain rights, preferences
     and privileges.  All of these preferred shares were converted to common
     stock as of the Initial Public Offering on April 29, 1996.

10.  STOCKHOLDERS' EQUITY:

          PREFERRED STOCK:

          In March 1996, the Company authorized 5,000,000 shares of preferred
          stock.  The Board of Directors has the authority to establish all
          rights and terms with respect to the preferred stock without future
          vote or action by the shareholders.

          INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK:

          In April 1996, the Company and a principal stockholder issued
          2,500,000 and 150,000 shares of common stock, respectively, in an
          initial public offering.  In connection with the initial public
          offering, all outstanding shares of preferred stock were converted
          into an aggregate of 13,069,857 shares of common stock.
          Additionally 22,500 shares of common stock were issued upon the net
          exercise of warrants for preferred stock.

          STOCK OPTION PLAN:

          The Board of Directors has reserved 3,125,000 shares of common
          stock under its 1996 Stock Option Plan (the "Plan") for issuance to
          employees and directors of the Company.  The 1996 Plan supersedes
          the 1991 Stock Option Plan.


                                    Continued

                                       F14

<PAGE>

10.  STOCKHOLDERS' EQUITY, continued:

          STOCK OPTION PLAN, continued:

          Under the terms of the Plan, options may be granted at prices not
          lower than fair market value at date of grant as determined by the
          Board of Directors.  The options are immediately exercisable upon
          the vesting, expire ten years from date of grant and the shares
          issued upon exercise of the options are generally subject to a
          right of repurchase by the Company upon termination of employment
          with the Company.  Option shares subject to repurchase normally
          vest at 20% after completing one year of service to the Company and
          the remaining amount equally over 48 months, until fully vested
          after five years.  Certain shares held by a founder of the Company
          vest as follows:  20% on date of grant and 6.25% of the remaining
          shares in equal installments upon the expiration of each three
          months of service completed thereafter.

          Activity under the Plan is as follows (in thousands, except share
          and per share data):

<TABLE>
<CAPTION>
                                                                        Outstanding Options
                                                             -----------------------------------------
                                                Shares         Number
                                               Available         of          Exercise
                                               for Grant       Shares          Price           Total
                                             ------------    ----------   --------------    ----------
<S>                                          <C>             <C>          <C>               <C>
Balances, December 31, 1993                       395,205       931,980    $0.01-$0.225     $    126
     Options granted                             (422,775)      422,775       $0.225              95
     Options exercised                                  -      (385,206)   $0.01-$0.225          (60)
     Options canceled                             156,520      (156,520)   $0.01-$0.225          (26)
                                             ------------    ----------                     -----------

Balances, December 31, 1994                       128,950       813,029    $0.01-$0.225          135
     Options reserved                             601,971
     Options granted                             (820,819)      820,819    $0.225-$4.75        1,062
     Options exercised                                  -      (720,591)    $0.01-$1.00         (205)
     Options canceled                             112,382      (112,382)    $0.01-$2.00          (19)
                                             ------------    ----------                     -----------

Balances, December 31, 1995                        22,484       800,875     $0.01-$4.75          973
     Options reserved                           2,361,072
     Options granted                           (1,035,829)    1,035,829     $4.75-$9.00        7,049
     Options exercised                                  -      (138,738)    $0.15-$7.20          (68)
     Options canceled                             202,803      (202,803)    $0.15-$9.00         (705)
                                             ------------    ----------                     -----------

Balances, December 31, 1996                     1,550,530     1,495,163     $0.01-$9.00     $  7,249
                                             ------------    ----------                     -----------
                                             ------------    ----------                     -----------
</TABLE>


          At December 31, 1996, 1,951,821 outstanding options were vested and
          216,359 shares of common stock acquired under the Plan were subject to
          repurchase.


                                    Continued

                                       F15

<PAGE>

10.  STOCKHOLDERS' EQUITY, continued:

          STOCK OPTION PLAN, continued:

          Consistent with the provisions of SFAS No. 123, the Company's net
          income or loss and net income or loss per share would have been
          adjusted to the pro forma amounts indicated below (IN THOUSANDS,
          EXCEPT PER SHARE AMOUNTS):


<TABLE>
<CAPTION>
                                                                       1996              1995
                                                                    ---------         ---------
               <S>                                                  <C>               <C>
               Net income (loss) - as reported                       $  1,483         $  (1,602)
               Net income (loss) - pro forma                         $    572         $  (1,690)
               Net income (loss) per share - as reported             $   0.08         $   (0.37)
               Net income (loss) per share - pro forma               $   0.03         $   (0.39)
</TABLE>


          The fair value of each option grant is estimated on the date of grant
          using the Black-Scholes model with the following weighted average
          assumptions by subgroup:

<TABLE>
<CAPTION>
                                                       Group A               Group B
                                                  ----------------      ----------------
               <S>                                <C>                   <C>
               Risk-free interest rate               4.98%-6.70%           4.98%-6.70%
               Expected life                              2                     1
               Expected dividends                         -                     -
               Expected volatility                    0.50-0.88             0.50-0.88
</TABLE>


          The weighted average expected life was calculated based on the
          vesting period and the exercise behavior of each subgroup.  Group
          A represents higher paid employees, while Group B represents
          lower paid employees.  The risk-free interest rate was calculated
          in accordance with the grant date and expected life calculated
          for each subgroup.


                                    Continued

                                       F16

<PAGE>

10.  STOCKHOLDERS' EQUITY, continued:

          STOCK OPTION PLAN, continued:

          The options outstanding and currently exercisable by exercise price
          at December 31, 1996 are as follows:


<TABLE>
<CAPTION>
                                                                               Options Currently
                               Options Outstanding                                Exercisable

               ------------------------------------------------------      ------------------------
                                              Weighted
                                               Average       Weighted                      Weighted
                                              Remaining       Average                       Average
                Exercise          Number     Contractual     Exercise      Exercisable     Exercise
                  Price         Exercisable     Life           Price         Number          Price
               -----------      -----------  -----------     --------      -----------     --------
               <S>              <C>          <C>             <C>           <C>             <C>
               $0.15-$0.34        325,767        7.53         $0.23         325,767          $0.23
               $1.00-$4.88        261,496        8.90         $3.41         228,746          $3.20
               $6.13-$6.13        325,050        9.85         $6.13               -              -
               $6.25-$6.38        339,750        9.62         $6.34               -              -
               $7.20-$9.00        243,100        9.32         $8.78          58,600          $8.18
</TABLE>


          WARRANTS:

          The Company had issued warrants to purchase up to 17,500 shares of
          Series A preferred stock and 8,333 shares of Series B preferred stock
          as partial consideration to obtain equipment lines of credit.  The
          warrants for Series A and Series B preferred stock were all exercised
          in conjunction with the Initial Public Offering.  There were no
          warrants outstanding as of December 31, 1996.


                                    Continued

                                       F17

<PAGE>

11.  INCOME TAXES:

     The Company's tax provision differs from the provision computed using
     statutory increased tax rates as follow (in thousands):

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                ---------------------------------------
                                                                                   1996          1995           1994
                                                                                ----------    ----------     ----------
        <S>                                                                     <C>            <C>           <C>
        Federal tax at statutory rate                                           $      541    $     (545)    $   (1,007)
        Permanent difference due to non-deductible expenses                             23            21               9
        Foreign taxes                                                                   45             -            -
        State taxes, net of federal benefit                                             93           (98)          (181)
        Research credit                                                               (197)         (254)          (360)
        Net operating losses and research credits not
           benefited (benefited)                                                      (460)          876          1,539
        Alternative minimum tax                                                         63             -            -
                                                                                ----------    ----------     ----------

                                                                                $      108    $        -     $      -
                                                                                ----------    ----------     ----------
                                                                                ----------    ----------     ----------
</TABLE>


     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets are presented below (in thousands):

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                ---------------------------------------
                                                                                   1996          1995           1994
                                                                                ----------    ----------     ----------
        <S>                                                                     <C>           <C>            <C>
        Fixed assets, principally due to differences in
           depreciation                                                         $      141    $     (105)    $       23
        Other accrued liabilities                                                    1,127         1,089            451
        State taxes (net of federal benefit)                                           239           179             40
        Capitalized research expenditures                                              419           547            293
        Net operating loss carryforwards                                             2,190         2,835          3,031
        Tax credit carryforwards                                                     1,200           943            510
        Valuation allowance                                                         (5,316)       (5,488)        (4,348)
                                                                                ----------    ----------     ----------
        Net deferred tax asset                                                  $        -    $        -     $      -

                                                                                ----------    ----------     ----------
                                                                                ----------    ----------     ----------
</TABLE>


                                    Continued

                                       F18

<PAGE>

11.  INCOME TAXES, continued:

     Due to the uncertainty surrounding the realization of the favorable tax
     attributes in future tax returns, the Company has placed a valuation
     allowance against its otherwise recognizable net deferred tax assets.  The
     valuation allowance decreased in 1996 by $172,000 and increased $1,140,000
     and $1,344,100 in 1995 and 1994, respectively.

     As of December 31, 1996, the Company has federal tax net operating loss
     carryforwards for tax purposes of approximately $6,400,000 and Federal tax
     credit carryforwards of $790,000.  These net operating loss carryforwards
     expire in the years 2007 through 2009 and the tax credit carryforwards
     expire in the years 2007 through 2011.  The Company has a state net
     operating loss carryover of approximately $164,000 which expires in 2001,
     and state tax credit carryforwards of approximately $410,000, which expires
     in the years 2007 through 2011.

     The future utilization of the Company's net operating loss carryforwards
     may be subject to certain limitations upon certain changes in ownership.

12.  NOTES RECEIVABLE FROM STOCKHOLDERS:

     During 1996, 1995 and 1994, the Company issued five notes receivable for
     purchases of common stock under its stock option plan totaling $17,000,
     $154,000 and $9,000, respectively.  As of December 31, 1996, the remaining
     balance of these notes was $29,000.  The loans bear interest ranging from
     6.25% to 7.53% per annum and mature from July 2004 to July 2005.

13.  BUSINESS SEGMENT INFORMATION:

     The Company operates in one industry segment and markets its products in
     North America and in foreign countries through its own direct sales
     organization and resellers.
     The Company's export net revenues are all denominated in U.S. dollars, and
     are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                ---------------------------------------
                                                                                   1996          1995           1994
                                                                                ----------    ----------     ----------
           <S>                                                                  <C>           <C>            <C>
           Europe                                                               $    5,159    $    3,560     $    1,984
           Asia Pacific and rest of world                                            3,399         2,391          1,529
                                                                                ----------    ----------     ----------

                                                                                $    8,558    $    5,951     $    3,513
                                                                                ----------    ----------     ----------
                                                                                ----------    ----------     ----------
</TABLE>


                                    Continued

                                       F19

<PAGE>

13.  BUSINESS SEGMENT INFORMATION, continued:

     Individual customers which comprise 10% or more of the Company's net
     revenues are as follows:

          Customers:                                   1995           1994
          ----------                                   -----          -----
          A                                             11 %           14 %
          B                                              -             11
                                                       ---            ---

                                                        11 %           25 %
                                                       ---            ---
                                                       ---            ---



     During 1996, there were no individual customers which comprised 10% or more
     of the Company's net revenues.




                                       F20


<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>
                                                                        YEAR ENDED
                                                                        December 31
                                                        -----------------------------------------
                                                            1994           1995           1996
                                                            ----           ----           ----
<S>                                                      <C>            <C>             <C>
PRIMARY & FULLY DILUTIVE
 Weighted average common shares outstanding                2,662          3,231         13,471
 Common equivalent shares from options and warrants           -              -             362
 Common equivalent shares from common stock
   subject to repurchase (2)                                (290)          (581)           507
 Common equivalent shares from convertible
   redeemable preferred stock and warrants                    -              -           3,997
 Common equivalent shares from options and
   convertible redeemable preferred stock (1)              1,682          1,682            561

                                                        -----------------------------------------
     Total shares                                          4,054          4,332         18,898
                                                        -----------------------------------------
                                                        -----------------------------------------

Net income (loss):
 Amount                                                  ($2,963)       ($1,602)        $1,483
                                                        ---------       --------       -------
                                                        ---------       --------       -------

 Per share                                                ($0.73)        ($0.37)        $ 0.08
                                                        ---------       --------       -------
                                                        ---------       --------       -------

</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 and six month
periods ended June 30, 1995 and 1996.

(2) Common stock issued under stock option plan which are subject to repurchase
are excluded from shares issued in the computation of net loss per share as
their effect is antidilutive.


                                          31

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
DATA SCHEDULE FOR 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                           9,548
<SECURITIES>                                    10,101
<RECEIVABLES>                                    6,965
<ALLOWANCES>                                       443
<INVENTORY>                                      7,458
<CURRENT-ASSETS>                                34,456
<PP&E>                                           6,925
<DEPRECIATION>                                   3,761
<TOTAL-ASSETS>                                  37,720
<CURRENT-LIABILITIES>                            6,499
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            10
<OTHER-SE>                                        (29)
<TOTAL-LIABILITY-AND-EQUITY>                    37,720
<SALES>                                         37,032
<TOTAL-REVENUES>                                37,032
<CGS>                                           17,698
<TOTAL-COSTS>                                   17,698
<OTHER-EXPENSES>                                18,817
<LOSS-PROVISION>                                     1
<INTEREST-EXPENSE>                                 100
<INCOME-PRETAX>                                  1,591
<INCOME-TAX>                                       108
<INCOME-CONTINUING>                              1,483
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     1,483
<EPS-PRIMARY>                                     0.08
<EPS-DILUTED>                                     0.08
        

</TABLE>


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