POLYCOM INC, 10-Q, 1998-08-19

POLYCOM INC
10-Q, 1998-08-19
TELEPHONE & TELEGRAPH APPARATUS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JULY 5, 1998

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

For the transition period from _______ to ________

COMMISSION FILE NUMBER 0-27130

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

DELAWARE 94-3128324
-------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

2584 JUNCTION AVENUE, SAN JOSE, CA. 95134-1902
------------------------------------ -------------------------------
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code, is (408) 474-2900)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
--- ---

There were 29,422,327 shares of the Company's Common Stock, par value $.0005,
outstanding on August 7, 1998.

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POLYCOM, INC.

INDEX

REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998

Page
Number
------

PART I FINANCIAL INFORMATION

Item 1 Financial Statements:

Condensed Consolidated Balance Sheets as of June 30,
1998 and December 31, 1997. . . . . . . . . . . . . . . . .3

Condensed Consolidated Statements of Operations for
the Three and Six Month Periods Ended June 30, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . . . . .4

Condensed Consolidated Statements of Cash Flows for
the Six Month Periods Ended June 30, 1998 and June 30,
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Notes to Condensed Consolidated Financial Statements. . . .6

Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 11

PART II OTHER INFORMATION

Item 1 - Legal Proceedings . . . . . . . . . . . . . . . 22
Item 2 - Changes in Securities . . . . . . . . . . . . . 22
Item 3 - Defaults Upon Senior Securities . . . . . . . . 23
Item 4 - Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 23
Item 5 - Other Information . . . . . . . . . . . . . . . 24
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . 24

SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

June 30, December 31,
1998 1997
----------- --------------
(Unaudited)

<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,631 $12,486
Short-term investments 5,983 5,184
Accounts receivable, net of allowance for doubtful
accounts of $438 at June 30, 1998 and
December 31, 1997 16,017 8,135
Inventories 15,530 9,915
Other current assets 2,541 2,930
---------- ----------
Total current assets 53,702 38,650
Fixed assets, net 5,681 4,528
Other assets 652 351
---------- ----------
Total assets $60,035 $43,529
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $14,030 $11,552
Accrued and other current liabilities 7,864 5,694
---------- ----------
Total current liabilities 21,894 17,246
---------- ----------
Stockholders' equity:
Common stock 17 17
Additional paid-in capital 60,986 52,602
Notes receivable from stockholders --- (24)
Accumulated deficit (22,862) (26,312)
---------- ----------
Total stockholders' equity 38,141 26,283
---------- ----------
Total liabilities and stockholders' equity $60,035 $43,529
---------- ----------
---------- ----------
</TABLE>

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

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

Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Net revenues $ 26,040 $ 11,500 $ 44,071 $ 22,010
Cost of net revenues 13,127 6,148 22,309 11,801
------------ ------------ ------------ ------------
Gross profit 12,913 5,352 21,762 10,209
------------ ------------ ------------ ------------

Operating expenses:

Sales and marketing 5,116 2,967 9,141 5,847
Research and development 3,387 3,292 6,925 6,405
General and administrative 1,360 1,019 2,402 1,813
Acquisition expenses --- 340 185 340
------------ ------------ ------------ ------------
Total operating expenses 9,863 7,618 18,653 14,405
------------ ------------ ------------ ------------

Operating income/(loss) 3,050 (2,266) 3,109 (4,196)

Interest income, net 261 297 502 590
Other income/(expense), net (5) 0 (3) 16
------------ ------------ ------------ ------------
Income/(loss) before taxes 3,306 (1,969) 3,608 (3,590)

Provision for income taxes 151 47 158 83
------------ ------------ ------------ ------------

Net income/(loss) $ 3,155 $ (2,016) $ 3,450 $ (3,673)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Basic net income/(loss) per share $ 0.12 $ (0.10) $ 0.13 $ (0.18)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Dilutive net income/(loss) per share $ 0.10 $ (0.10) $ 0.11 $ (0.18)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Weighted average shares outstanding for basic EPS 27,402 20,034 26,810 19,912
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding for dilutive EPS 33,181 20,034 31,763 19,912
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

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

4
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POLYCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

Six Months Ended
June 30, June 30,
1998 1997
---------- ----------

<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 3,450 $ (3,673)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 1,434 902
Provision for excess and obsolete inventories 595 412
Value of stock options to outside consultants 58 ---
Changes in assets & liabilities:
Accounts receivable (7,882) 1,666
Inventories (6,210) (1,151)
Prepaid expenses and other current assets 389 (873)
Deposits and other assets (301) ---
Accounts payable 2,478 1,894
Accrued and other liabilities 2,795 (2)
---------- ----------
Net cash used in operating activities (3,194) (825)
---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (2,587) (1,467)
Proceeds from sale and maturity of short term investments 4,035 7,353
Purchases of short term investments (4,834) (2,255)
---------- ----------
Net cash provided by/(used in) investing activities (3,386) 3,631
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of repurchases 8,326 7,797
Repayment of stockholder notes receivable, net 24 ---
Proceeds from line of credit borrowings 3,451 260
Repayment of line of credit borrowings (4,076) (50)
---------- ----------
Net cash provided by financing activities 7,725 8,007
---------- ----------
Net increase in cash and cash equivalents 1,145 10,813
Cash and cash equivalents, beginning of year 12,486 11,253
---------- ----------
Cash and cash equivalents, end of period $ 13,631 $ 22,066
---------- ----------
---------- ----------
</TABLE>

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

5
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POLYCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION

The condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statements of operations for the three and six month periods ending
June 30, 1998 and 1997 and condensed consolidated statements of cash flows for
the six month periods ending June 30, 1998 and 1997 have been prepared by the
Company without audit. The condensed consolidated balance sheet at December 31,
1997 has been derived from the audited financial statements at that date.

The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at June 30, 1998 and for all periods presented have been made.

The Company uses a 52-53 week fiscal year. As a result, a fiscal year may not
end as of the same day as the calendar period. However, for convenience of
presentation, the accompanying consolidated financial statements have been shown
as ending on June 30, and December 31 of each applicable period. Due to timing,
1998 is a 53 week fiscal year. Consequently, the first quarter of 1998 had 14
weeks rather than the usual 13 weeks.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. These condensed financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Report on Form 10-K dated March 13, 1998 and filed
with the Securities and Exchange Commission.

This Report on Form 10-Q contains forward looking statements that involve risks
and uncertainties, including possible fluctuations in quarterly results; the
market acceptance of ShowStation IP and the risks associated with this emerging
market; the market acceptance of ViewStation; the impact of competitive products
and pricing; the profitability of the videoconferencing and dataconferencing
product lines; the successfulness of new audio and video products; the schedule
of and costs associated with the manufacturing production ramp of the
ShowStation IP product; uncertainties relating to the integration of operations
of ViaVideo Communications, Inc.; effects of the acquisition on existing
business partnerships; the impact of the legal proceedings involving VTEL and
Datapoint and the other risks detailed from time to time in the Company's SEC
reports, including the Form 10-K dated March 13, 1998.

2. INVENTORIES

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

June 30, Dec 31,
1998 1997
---- ----
<S> <C> <C>
Raw Materials $ 1,065 $ 2,526
Finished Goods 14,465 7,389
$ 15,530 $ 9,915
-------- -------
-------- -------
</TABLE>

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3. BANK LINE OF CREDIT

The Company has a $5.0 million bank revolving line of credit under an agreement
with Silicon Valley Bank. Borrowings under the line are unsecured and bear
interest at the bank's prime rate (8.5% at June 30, 1998). The agreement allows
for an additional facility of $5.0 million upon request of Polycom and payment
of associated fees. Borrowings under the line are subject to certain financial
covenants and restrictions on indebtedness, equity distributions, financial
guarantees, business combinations and other related items. The line expires in
October 1999. There were no borrowings under the line at June 30, 1998.

4. PER SHARE INFORMATION

The Company prepares earnings/(loss) per share information using the guidelines
of the Statement of Financial Standards No. 128 (SFAS 128), "Earnings Per
Share". SFAS 128 requires net income/(loss) per share to be presented under two
calculations, Basic EPS and Diluted EPS. Basic net income/(loss) per share is
computed using the weighted average number of common shares outstanding during
the periods presented. Diluted net income/(loss) per share is computed using
common and dilutive common equivalent shares outstanding during the periods
represented. Common equivalent shares, including shares issued under the Stock
Option Plan which are subject to repurchase, shares offered through the
Company's Stock Option Plan and warrants, are included in the computation of
diluted net income per share as their effect is dilutive for the three months
and six months ended June 30, 1998. Common equivalent shares are not included
in the computation of fully diluted net loss per share as their effect is
antidilutive for the three months and six months ended June 30, 1997.

In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted EPS is provided as follows
(in thousands except per share amounts).

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- ----------------------
<S> <C> <C> <C> <C>
Numerator - basic and diluted EPS
Net income/(loss) $3,155 $(2,016) $3,450 $(3,673)
-------------------------- ----------------------
Denominator - Basic EPS
Common stock outstanding 27,402 20,034 26,810 19,912
-------------------------- ----------------------
Total Shares used in calculation of Basic EPS 27,402 20,034 26,810 19,912
-------------------------- ----------------------
Basic net income/(loss) per share $0.12 $(0.10) $0.13 $(0.18)
-------------------------- ----------------------
-------------------------- ----------------------

Denominator - Diluted EPS
Denominator - Basic EPS 27,402 20,034 26,810 19,912
Effect of Dilutive Securities:
Common stock options 3,055 --- 2,671 ---
Stock subject to repurchase 1,746 --- 1,745 ---
Warrants 978 --- 537 ---
-------------------------- ----------------------
Total Shares used in calculation of Diluted EPS 33,181 20,034 31,763 19,912
-------------------------- ----------------------
Diluted net income/(loss) per share $0.10 $(0.10) $0.11 $(0.18)
-------------------------- ----------------------
-------------------------- ----------------------
</TABLE>

Stock options to purchase 1,327,362 shares of common stock, 2,156,264 shares of
common stock subject to repurchase and warrants to purchase 2,000,000 shares of
common stock were outstanding at June 30, 1997 but were not included in the
computation of diluted net income (loss) per share as their effect was
antidilutive.

7
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5. FIRST AND SECOND AGREEMENTS WITH 3M

In March 1997, the Company entered into a joint marketing and development
agreement (The First Agreement) with Minnesota Mining and Manufacturing Company
("3M"). Under the terms of this agreement, 3M provided $3.0 million in funding
to Polycom for certain deliverables related to the development of
dataconferencing products and may also provide shared technology resources for
the development of future products. Additionally, Polycom granted 3M exclusive
private-label rights in certain distribution channels to the products developed
under this agreement subject to certain minimum volumes. In 1997, Polycom
recorded the $3.0 million as revenue, $1.0 million in each of the first three
quarters of 1997, based on delivery of the items specified in the contract.
Further, 3M received warrants to purchase up to 2,000,000 shares of the
Company's common stock at an exercise price of $7.50 per share. The warrants
expire in March 1999, which may be extended until March 2000 depending on the
delivery of Polycom's first product developed under the agreement. 3M also has
certain rights of first offer under its stock warrant agreement with Polycom
which gives 3M the right, for a period of 45 days after the Effective Time, to
purchase additional shares of Polycom Common Stock at a purchase price of $7.50
per share. On February 19, 1998, 3M exercised this option and purchased
approximately one million shares of Polycom common stock for a consideration of
approximately $7.6 million. As a result of the purchase, 3M owns approximately
3.5% of outstanding Polycom common stock.

In June 1997, the Company entered into a second joint marketing and development
agreement (The Second Agreement) with 3M. Under this agreement, 3M provided
$2.5 million in funding to Polycom for certain deliverables related to the
development of videoconferencing products and may also provide shared technology
resources for the development of future products. Polycom granted 3M exclusive
private-label rights in certain distribution channels to the products developed
under this agreement. In the three months ended March 31, 1998 and the three
months ended June 30, 1998, the Company received, and recognized as revenue,
$1.5 million and $1.0 million, respectively, under this agreement, using the
percentage of completion methodology.

6. ACQUISITION OF VIAVIDEO COMMUNICATIONS, INC.

On January 2, 1998, the Company completed the acquisition of ViaVideo
Communications, Inc., ("ViaVideo")' whereby a wholly owned subsidiary of
Polycom, Inc. was merged with and into ViaVideo. ViaVideo was a development
stage company that designs and develops high quality, low cost, easy to use,
group videoconferencing systems that utilize advanced video and audio
compression technologies along with Internet/Web-based features. Approximately
8.7 million shares of Polycom common stock were exchanged for all of the issued
and outstanding capital stock of ViaVideo. In addition, outstanding stock
options to purchase ViaVideo common stock were converted into options to
purchase approximately 1.1 million shares of Polycom common stock. The
transaction was treated as a pooling of interests for financial reporting
purposes and, consequently, all prior period figures have been restated as if
the combined entity existed for all periods presented. All intercompany
transactions between the two companies have been eliminated in consolidation.
Polycom and ViaVideo Communications had the same fiscal year ends of December 31
and activity from the start of the current fiscal period to the merger date was
not material. Further, there were no adjustments required to conform accounting
policies between the two companies.

7. LEASE COMMITMENTS

On November 15, 1997, the Company entered into a two year operating lease for
23,248 square feet of a building in Austin, Texas. The space is being used
primarily as the offices for the engineering and marketing organization
associated with the videoconferencing product line. The lease associated with
this building will expire on December 31, 1999 and the minimum annual payments
under this lease are as follows: 1998 - $424,373; 1999 - $439,543.

8
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8. LITIGATION

On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in the U. S.
District Court in Travis County, Texas against ViaVideo, a subsidiary of
Polycom, and its founders (who were formerly employed by VTEL). On May 27, 1998
VTEL amended its suit to add Polycom as a defendant. In the lawsuit, VTEL
alleges breach of contract, breach of confidential relationship, disclosure of
proprietary information, and related allegations. ViaVideo and Polycom have
answered the suit, denying in their entirety VTEL's allegations. If ViaVideo
or Polycom were found to have infringed upon the proprietary rights of VTEL or
any other third party, the companies could be required to pay damages, cease
sales of the infringing products, discontinue such products or such other
injunctive relief a court may determine, any of which could have a material
adverse effect on Polycom's business, financial condition or results of
operations. On April 22, 1998, Polycom filed a declaratory relief action
against VTEL in the Superior Court of Santa Clara County, California seeking a
declaration that Polycom has not infringed on any proprietary rights of VTEL.
VTEL has filed a response to Polycom's complaint asking that the complaint be
dismissed or stayed in favor of the Texas suit.

On October 2, 1997, Datapoint Corporation filed a complaint against Intel
Corporation for infringement of two U.S. patents related to videoconferencing
network technology in the U.S. District Court in Dallas, Texas. On November 25,
1997, the complaint was amended to include several additional defendants, and
Datapoint also filed a motion for certification of the action as a class action.
No ruling occurred relative to the motion for class action certification.
Although neither Polycom nor its subsidiary ViaVideo had been served as a
defendant in any Datapoint complaints, both Polycom and ViaVideo were named as
putative class members in the Datapoint motion for class action certification
along with over 500 other companies. This case has subsequently been dismissed
by stipulation and an order entered by the court to that effect.

The Company will vigorously defend against these claims. While litigation is
inherently uncertain, Polycom believes that the ultimate resolution of this
matter beyond that provided in its balance sheet as of June 30, 1998, will not
have a material adverse effect on the Company's financial position.

9. PREFERRED SHARE PURCHASE RIGHTS PLAN

On July 15, 1998, pursuant to a Preferred Shares Rights Agreement between
Polycom, Inc. and BankBoston N.A., as Rights Agent, the Company's Board of
Directors declared a dividend of one right to purchase one one-thousandth of a
share of the Company's Series A Preferred Stock for each outstanding share of
Common Stock, par value of $0.0005 per share, of the Company. The dividend is
payable on July 31, 1998 to stockholders of record as of the close of business
on that day. Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A Preferred at an exercise price
of $90.00, subject to adjustment. The Rights become exercisable (the
"Distribution Date") upon the earlier of: (i) fifteen days following the first
date a public announcement by the Company or an Acquiring Person that an
Acquiring Person has become such (the "Shares Acquisition Date") and (ii)
fifteen days (or such later date as may be determined by the Board of Directors)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer, the consummation of which would result in a person or
group becoming an Acquiring Person. A person or group of affiliated or
associated persons that beneficially owns, or has the right to acquire
beneficial ownership of, 20% or more of the outstanding Common Shares is
referred to as an "Acquiring Person." The Rights will expire on the earliest of
(i) July 15, 2008 (the "Final Expiration Date") or (ii) redemption or exchange
of the Rights as described below.

Unless the Rights are earlier redeemed, in the event that a person becomes an
Acquiring Person (a "Triggering Event"), each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person or any affiliate of the Acquiring Person, which will thereafter
be void) will thereafter have the right to receive, upon exercise, Common Shares
having a value equal to two times the Purchase Price. The Company may instead
substitute cash, assets or other securities for the Common Shares for which the
Rights would have been exercisable.

9
<PAGE>

Similarly, unless the Rights are earlier redeemed, in the event that, after a
Triggering Event, (i) the Company is acquired in a merger or other business
combination transaction, or (ii) 50% or more of the Company's assets or earning
power are sold (other than in transactions in the ordinary course of business),
proper provision must be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person or any affiliate of the Acquiring Person, which will thereafter
be void) will thereafter have the right to receive, upon exercise, shares of
common stock of the acquiring company having a value equal to two times the
Purchase Price.

At any time after a Triggering Event and prior to the acquisition by any person
or entity of beneficial ownership of 50% or more of the Company's outstanding
Common Shares, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by the Acquiring Person), in whole or in part, at an
exchange ratio of one Common Share per Right.

At any time on or prior to the close of business on the earlier of (i) the
Shares Acquisition Date and (ii) the Final Expiration Date of the Rights, the
Company may redeem the Rights in whole, but not in part, at a price of $0.005
per Right.

10. COMPREHENSIVE INCOME

Effective March 31, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. As the components of
comprehensive income are not material, the Company has not reflected the
additional reporting and display provisions of SFAS No. 130 in the accompanying
financial statements.

11. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company for the year ended 1998 and the Company is currently
determining the impact of adoption.

10
<PAGE>

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

THIS MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER SECTIONS OF THIS DOCUMENT CONTAIN FORWARD-LOOKING
STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS, AND ASSUMPTIONS MADE BY
MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," "TARGETS" AND VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT, IF NOT
IMPOSSIBLE, TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS AND UNCERTAINTIES INCLUDING POTENTIAL FLUCTUATIONS IN RESULTS AND FUTURE
GROWTH RATES, IF AT ALL; THE SUCCESSFUL LAUNCH OF NEW PRODUCTS AND MANUFACTURING
RAMP OF THE VIEWSTATION, SHOWSTATION IP AND OTHER NEW PRODUCTS; THE MARKET
ACCEPTANCE OF VIEWSTATION, SHOWSTATION IP AND OTHER NEW PRODUCTS; THE SUCCESS OF
3M IN ESTABLISHING AND MAINTAINING CHANNELS FOR THE VIEWSTATION 128, VIEWSTATION
512 AND SHOWSTATION IP PRODUCTS; THE PROFITABILITY OR EVEN POSITIVE GROSS MARGIN
OF THE DATACONFERENCING PRODUCT LINE; DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL
CHANGE; UNCERTAINTIES RELATING TO THE INTEGRATION OF OPERATIONS OF VIAVIDEO
COMMUNICATIONS, INC.; EFFECTS OF THE ACQUISITION ON EXISTING BUSINESS
PARTNERSHIPS; DEPENDENCE ON THIRD PARTY DISTRIBUTORS; RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS; DEPENDENCE ON RESEARCH AND DEVELOPMENT; EXISTING AND
NEW COMPETITION; DEPENDENCE ON THIRD PARTY MANUFACTURERS; DEPENDENCE ON
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS; DEPENDENCE ON THIRD-PARTY
LICENSES; DEPENDENCE ON PERSONNEL; THE IMPACT OF LEGAL PROCEEDINGS INVOLVING
VTEL AND DATAPOINT AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
SEC REPORTS, INCLUDING THE COMPANY'S CURRENT REPORT ON FORMS 8-K FILED WITH THE
COMMISSION JANUARY 16, 1998 AND JULY 22, 1998, AND ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 UNDER "OTHER FACTORS AFFECTING FUTURE
OPERATIONS" ON PAGES 25 THROUGH 28 AND ELSEWHERE IN THE FORM 10-K. UNLESS
REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, INVESTORS SHOULD CAREFULLY REVIEW THE RISK FACTORS
AND OTHER INFORMATION SET FORTH IN THE REPORTS AND OTHER DOCUMENTS THE COMPANY
FILES FROM TIME TO TIME WITH THE COMMISSION.

OVERVIEW

Polycom was incorporated in December 1990 to develop, manufacture and
market audioconferencing, dataconferencing and videoconferencing products that
facilitate meetings at a distance. Polycom was engaged principally in research
and development from inception through September 1992, when it began volume
shipments of its first audioconferencing product, SoundStation. As of June 30,
1998, Polycom's audioconferencing product line consisted principally of the
SoundStation, SoundStation EX, SoundStation Premier, SoundStation Premier EX and
SoundPoint. Polycom began shipping its first dataconferencing product,
ShowStation, in November 1995. In March 1998, Polycom began shipments of its
next generation ShowStation, the ShowStation IP. On January 2, 1998, the
Company completed the acquisition of ViaVideo Communications, Inc.,
("ViaVideo"), a development stage company that designs and develops high
quality, low cost, easy to use, group videoconferencing systems that utilize
advanced video and audio compression technologies along with Internet/Web-based
features. Polycom's ViewStation products (ViewStation 128kbps version and
ViewStation 512kbps version) are the first product offerings resulting from this
merger. The Company commenced first customer shipments of the ViewStation 128
in February 1998 and the ViewStation 512 in April 1998.

11
<PAGE>

Polycom markets its products domestically and internationally through a
network of value-added resellers ("VARS"), original equipment manufacturers
("OEMS"), and retailers and also sells its audioconferencing products through
its direct sales force. Through June 30, 1998, Polycom has derived a majority of
its net revenues from sales of its SoundStation products. Polycom anticipates
that sales of its SoundStation product line will continue to account for over
half of the Company's net revenues at least through the year ending December 31,
1998. Any factor adversely affecting the demand or supply for the SoundStation
product line could materially adversely affect Polycom's business, financial
condition, cash flows or results of operations.

From inception through the nine month period ended September 30, 1995, the
Company incurred losses from operations, primarily as a result of its
investments in the development of its products and the expansion of its sales
and marketing, manufacturing and administrative organizations. The Company
achieved profitability in the fourth quarter of 1995 and generated net income in
fiscal 1996. The Company incurred a quarterly operating loss in each quarter of
1997 as a result of investments in the next generation dataconferencing product,
the videoconferencing product line and the sales and marketing function. The
Company intends to continue to invest significantly in research and development
and the Company's infrastructure in 1998. Although, Polycom plans to generate
operating income, excluding acquisition expenses, through 1998, there can be no
assurance that the Company will achieve its operating plans or achieve
profitable operations in any subsequent period.

In March 1997, Polycom entered into a joint marketing and development
agreement (the "FIRST AGREEMENT") with 3M. Under the agreement, 3M provided
$3.0 million in funding to Polycom for certain deliverables related to the
development of the next generation dataconferencing product and may also provide
shared technology resources for the development of future products. Through
December 31, 1997, Polycom recorded the $3.0 million as revenue, $1.0 million in
each of the first three quarters of 1997, based on delivery of the items
specified in the contract. The amounts were recognized as revenue using the
percentage of completion methodology. Additionally, Polycom granted 3M exclusive
private-label rights in certain distribution channels to the products developed
under this agreement subject to certain minimum volumes. Further, 3M received
warrants to purchase up to 2,000,000 shares of Polycom's common stock at an
exercise price of $7.50 per share. The warrants expire in March 1999. At the
time of grant, the warrants were valued using the Black-Scholes model and were
determined to have a value of $40,000. 3M also has certain rights of first offer
under its stock warrant agreement with Polycom which will give 3M the right, for
a period of 45 days after the Effective Time, to purchase additional shares of
Polycom Common Stock at a purchase price of $7.50 per share. In February 1998,
3M exercised this option and purchased approximately one million shares of
Polycom common stock for a consideration of approximately $7.6 million. As a
result of the purchase, 3M owns approximately 3.5% of outstanding Polycom common
stock.

In June 1997, the Company entered into a second joint marketing and
development agreement (The "SECOND AGREEMENT") with 3M. Under this agreement,
3M provided $2.5 million in funding to Polycom for certain deliverables related
to the development of videoconferencing products and may also provide shared
technology resources for the development of future products. Polycom will grant
3M exclusive private-label rights in certain distribution channels to the
products developed under this agreement. In the three months ended March 31,
1998 and the three months ended June 30, 1998, the Company received, and
recognized as revenue, $1.5 million and $1.0 million, respectively, under this
agreement, using the percentage of completion methodology.

On July 21, 1998, the Company announced that Robert C. Hagerty, previously
Polycom's president and COO, was appointed the role of president and CEO. Brian
L. Hinman, formerly chairman and CEO, will continue as chairman with a focus on
Polycom's long range strategy and will be employed by Polycom on a part-time
basis.

12
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of net revenues 50% 53% 51% 54%
---------- ---------- ---------- ----------
Gross profit 50% 47% 49% 46%
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 20% 26% 21% 26%
Research and development 13% 29% 16% 29%
General and administrative 5% 9% 5% 8%
Acquisition expenses 0% 3% 0% 2%
---------- ---------- ---------- ----------
Total operating expenses 38% 67% 42% 65%
---------- ---------- ---------- ----------
Operating income/(loss) 12% (20%) 7% (19%)

Interest income, net 1% 3% 1% 3%
Other income/(expense), net 0% 0% 0% 0%
---------- ---------- ---------- ----------
Income/(loss) before taxes 13% (17%) 8% (16%)

Provision for Income Taxes 1% 1% 0% 1%
---------- ---------- ---------- ----------
Net income/(loss) 12% (18%) 8% (17%)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

NET REVENUES

Total net revenues were $26.0 million in the second quarter of 1998
compared to $11.5 million in the second quarter of 1997, an increase of 126%.
The increase was due, in large part, to the revenues generated from the sales of
the ViewStation 128 product, which began shipping in February 1998, to sales of
the ViewStation 512, which began shipping in April of 1998, and, to lesser
extent, increases in the SoundStation, SoundStation Premier and ShowStation IP
product lines. The ViewStation product sales were made primarily to resellers
with sell-through to end-users expected over the next several months, although
there can be no assurances that this will happen. Further, Polycom recorded
$1.0 million in revenue associated with the deliverables under the Second 3M
agreement compared to $1.0 million in the first quarter of 1997 associated with
the deliverables under the First 3M agreement.

For the first six months of 1998, total net revenues were $44.1 million, an
increase of $22.1 million or 100%, compared to the same period in 1997. The
increase was due mainly to the revenues generated from the sales of the
ViewStation 128 and ViewStation 512, which began shipping in 1998. In addition,
sales volume increases in the SoundStation and SoundStation Premier product
lines over the same period last year contributed to the revenue increase.
Further, Polycom recorded $2.5 million in revenue in the first six months of
1998 associated with the deliverables under the Second 3M agreement compared to
$2.0 million in the same period of 1997 associated with the deliverables under
the First 3M agreement.

During the first six months of 1998 and 1997, the Company derived a
majority of its net revenues from sales of its SoundStation product family. In
the three months ended June 30, 1998 Lucent Technologies accounted for 14% of
the Company's net revenues. For the six months of 1998, Lucent Technologies
accounted for 11% of the Company's net revenues. No other customer or reseller
accounted for more than 10% of the Company's net revenues in the three months
and six months ended June 30, 1998. No customer or reseller accounted for more
than 10% of the Company's net revenues during the same periods for 1997.

13
<PAGE>

International net revenues for the second quarter of 1998 accounted for 22%
of total net revenues for the Company, down from 24% in the second quarter of
1997. International net revenues for the first six months of 1998 accounted for
22% of total net revenues for the Company, no change from the same period of
1997. The decrease in international revenue as a percentage of total net
revenues for the second quarter was due to the introduction of the ViewStation
products which were initially sold in North America and to overall weakness in
the Asian economy. The Company anticipates that international sales will
continue to account for a significant portion of total net revenues for the
foreseeable future. International sales are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable and potentially adverse tax
consequences. The Company depends on third party resellers for a substantial
portion of its international sales. Certain of these third party resellers also
act as resellers for competitors of the Company that can devote greater effort
and resources to marketing competitive products. The loss of certain of these
third party resellers could have a material adverse effect on the Company's
business and results of operations. Additionally, 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. Further, the ongoing
economic problems in the Asian market could adversely offset the Company's
profitability if such economic problems continue. In addition, sales in Europe
and certain other parts of the world typically are adversely affected in the
third quarter of each calendar year as many customers reduce their business
activities during the summer months. These seasonal factors may have an adverse
effect on the Company's business, results of operations and financial condition.
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 materially adversely affected. There can be no
assurance that the Company will be able to maintain or increase international
market demand for the Company's products. To date, a substantial majority of
the Company's international sales has been denominated in U.S. currency;
however, the Company expects that in the future more international sales may be
denominated in local currencies and, therefore, subject to currency fluctuation
risks.

COST OF NET REVENUES

Cost of net revenues consists primarily of the Company's manufacturing
organization, contract manufacturers, tooling depreciation, warranty expense and
an allocation of overhead expenses. The cost of net revenues represented 50%
and 53% of net revenues for the second quarters of 1998 and 1997, respectively.
The decrease in the cost of net revenues percentage is due to lower product
costs associated with the SoundStation product line and overall favorable
manufacturing variances due to the new ViewStation product family, offset
slightly by unfavorable product costs and manufacturing variances associated
with the ShowStation IP product.

For the first six months of 1998 the cost of net revenues percentage was
51%, compared to 54% for the same period in 1997. The decrease was again due to
lower SoundStation product costs and favorable variances due to the new
ViewStation product family. Additionally, the cost of net revenues percentage
was lower due to higher revenue from the 3M agreements which has low associated
costs.

The Company has lowered product prices in the past which was driven by the
Company's desire to expand the market for its products, and the Company may
further reduce prices or introduce new products that carry higher costs relative
to price in order to further expand the market or to respond to competitive
pricing pressures, although there can be no assurance that such actions by the
Company will expand the market for its products or be sufficient to meet
competitive pricing pressures. In the future, the cost of net revenues
percentage may be affected by price competition and changes in unit volume
shipments, product costs and warranty expenses. The cost of net revenues
percentage may also be impacted by the mix of distribution channels used by the
Company, the mix of products sold and the mix of international versus North
American revenues. The Company typically realizes lower cost of net revenue
percentages on direct sales than on sales through indirect channels. If sales
through resellers, especially OEMs, increase as a percentage of total revenues,
the Company's cost of net revenues percentage will be adversely impacted.

14
<PAGE>

As discussed earlier, the Company began shipping the ShowStation IP product
in late March 1998. To date, the Company has not achieved the target level of
volume production from the contract manufacturer for this product. The failure
to meet volume production expectations has negatively affected this product's
cost of net revenues percentage and, consequently, its profitability. Although
the Company is currently addressing these delays with the contract manufacturer,
further production problems could continue to negatively impact the cost of net
revenues percentage. If this happens, the Company's profitability could be
materially adversely affected.

In late 1997 and early 1998, the Company began using its contract
manufacturer in Thailand as its main source of refurbishing SoundStation and
ViewStation service inventory. Through the end of June 1998, the transition had
not been completed, thereby, increasing the cost of this function. It is
expected that improvements will be realized later in the year; however, there
can be no assurances that this will occur. If the transition is not completed
during this time period or if, when complete, the transition does not produce
the desired results, the Company's cost of net revenues percentage could
increase.

SALES AND MARKETING EXPENSES

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, INCREASE/ JUNE 30, JUNE 30, INCREASE/
$ IN THOUSANDS 1998 1997 (DECREASE) 1998 1997 (DECREASE)
- -------------- ---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Expenses $5,116 $2,967 72 % $9,141 $5,847 56 %

% of Net Revenues 20 % 26 % (6 %) 21 % 26 % (5 %)
</TABLE>

Sales and marketing expenses consist primarily of salaries and commissions,
advertising and promotional expenses, an allocation of overhead expenses and
customer service and support costs. The expense increase in the second quarter
of 1998 over the second quarter of 1997 and for the six months ended June 30,
1998 compared to the same period of 1997 was primarily related to increased
investment in the videoconferencing sales effort. As mentioned previously, the
Company only began selling the ViewStation in 1998 and, consequently, had little
sales and marketing expense in the comparable periods of 1997 associated with
these products.

The Company expects to continue to increase its sales and marketing
expenses in absolute dollar amounts in an effort to expand North American and
international markets, market new products and establish and expand distribution
channels. In particular, due to the innovative nature of the ShowStation,
ShowStation IP and ViewStation products, the Company believes it will be
required to incur significant additional expenses for sales and marketing,
especially advertising, to educate potential customers as to the desirability of
ShowStation, ShowStation IP and ViewStation. In addition, the Company is
currently evaluating a significant investment in the European market which will
decentralize the marketing and sales effort for this region, thereby, increasing
the absolute dollars spent in this area. Also, Polycom is currently expanding
the service organization to provide expanded and improved support for its video
and data products which will increase the Company's sales and marketing
expenses. Further, the launch of a new Multipoint Conferencing Unit (MCU)
product line, which assist connections to existing videoconferencing bridging
services, will cause an increase in the Company's sales and marketing expenses.

RESEARCH AND DEVELOPMENT EXPENSES

% of Net Revenues 13 % 29 % (16 %) 16 % 29 % (13 %)
</TABLE>

15
<PAGE>

Research and development expenses consist primarily of compensation costs,
consulting fees, an allocation of overhead expense, supplies and depreciation.
The expense increase for the second quarter of 1998 over the second quarter of
1997 and for the first six months of 1998 compared to the same period of 1997
were primarily attributable to development expenses for the ViewStation products
and, to a lesser extent, to increases in the audioconferencing product line.
These increases were offset somewhat by lower expenses associated with the
dataconferencing line as the large investments in next generation ShowStation IP
made in 1997 begin to normalize.

The Company believes that technological leadership is critical to its
success and is committed to continuing a high level of research and development.
Consequently, the Company intends to increase its research and development
expenses in absolute dollars in the future.

GENERAL AND ADMINISTRATIVE EXPENSES

% of Net Revenues 5 % 9 % (4) % 5 % 8 % (3 %)
</TABLE>

General and administrative expenses consist primarily of compensation
costs, an allocation of overhead expense, and outside legal and accounting
expenses. The increase in general and administrative expenses in absolute
dollars for the three and six months ended June 30, 1998 versus the same periods
of 1997 is primarily due to increased staffing and infrastructure to support the
Company's growth.

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 supporting
a larger company, created by the completion of the acquisition of ViaVideo.

ACQUISITION EXPENSES

For the six months ended June 30, 1998, the Company incurred expenses
totaling $0.2 million related to the acquisition of ViaVideo Communications,
Inc. For the three and six months ended June 30, 1997, the Company incurred
$0.3 million of expenses related to the acquisition. A significant portion of
these charges were for outside legal, accounting and consulting services.
Management does not anticipate any further material ViaVideo Communications,
Inc. acquisition related expenses throughout the remainder of this fiscal year;
however, there can be no assurances that this will happen or that the future
charges will not be material.

INTEREST INCOME, NET AND OTHER EXPENSES, NET

Interest income, net consists of interest earned on the Company's cash
equivalents and short-term investments net of any interest expense. For the
second quarter of 1998, interest income, net was $0.3 million, a decrease of 12%
from the second quarter of 1997. For the six months ended June 30, 1998,
interest income, net was $0.5 million, a decrease of 15% from the comparable
period of 1997. These decreases were due to lower levels of cash available for
investment.

The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." The current quarter's profitable results
generated minimal federal and state income taxes in the first quarter of 1998.
Throughout the remainder of 1998 and beyond, to the extent the Company realizes
profitable results, the Company will generate higher federal and state income
tax expense, although there can be no assurance the Company will achieve
profitable results. As of June 30, 1998, the Company had approximately $1.3

16
<PAGE>

million in federal net operating loss carryforwards and $2.1 million in tax
credit carryforwards. The future utilization of the Company's net operating
loss carryforwards may be subject to certain limitations upon certain changes in
ownership.

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

OTHER FACTORS AFFECTING FUTURE OPERATIONS

Polycom's net revenues have grown primarily through increased market
acceptance of its established SoundStation, SoundStation Premier and ViewStation
product lines, other new product introductions and through the expansion of
Polycom's North American and International distribution networks. While Polycom
has experienced growth in net revenues in recent quarters, it does not believe
that the historical growth rates in net revenues will be sustainable nor are
they indicative of future operating results. For example, Polycom believes that
the 37% price reduction in the North American list price of its SoundStation
product line, effective December 1996 for resellers and January 1997 for end
user customers, and the 30% price reduction for SoundStation products sold
internationally effective April 1997, negatively impacted Polycom's net revenues
and profitability in 1997. Polycom believes that profitability could continue
to be negatively affected in the future as a result of several factors including
low to negative gross margins for Polycom's ShowStation and ShowStation IP
dataconferencing products, inventory value loss related to the ShowStation and
SoundPoint inventories if it is determined that the units cannot be sold for at
least carrying cost, the reduction in the list prices of the SoundStation
product line and continuing competitive price pressure in the conferencing
equipment market. Although price reductions have been driven by Polycom's desire
to expand the market for its products, and Polycom 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 Polycom will expand
the market for its products or be sufficient to meet competitive pricing
pressures. In addition, costs related to the merger with ViaVideo, and its
integration into Polycom, expense growth related to the activities of the
combined entities and costs related to the introduction of the new
ShowStation IP, ViewStation and SoundStation Satellite products could negatively
impact future profitability. Also, the impacts of pending or future litigation
against Polycom or ViaVideo, including the suit filed by VTEL against ViaVideo
as mentioned in Polycom's Form 8-K filed on September 9, 1997 and the suit filed
by Datapoint, as discussed in Polycom's Form 8-K filed on January 2, 1998,
beyond that already provided in the Company's Balance Sheet as of June 30, 1998,
are difficult to predict at this time. Further, Polycom's limited operating
history and limited resources, among other factors, make the prediction of
future operating results difficult if not impossible.

In the past Polycom has experienced delays from time to time in the
introduction of certain new products and enhancements and expects that such
delays may occur in the future. For instance, the introduction of ShowStation
was delayed by approximately eighteen months from the originally anticipated
date of introduction because of unforeseen technical challenges and difficulties
in building core technologies and, for approximately nine weeks in the first
quarter of 1996, shipments were interrupted in order to correct software and
other technical problems identified by initial customers. In addition,
SoundStation Premier first customer shipments were delayed from its original
shipment target of September 1996 to November 1996 and ShowStation IP was
delayed from its original shipment target of September 1997 to its first
customer shipment date of March 1998 due to engineering and manufacturing
start-up issues. Any similar delays in the future could have a material adverse
effect on Polycom's results of operations.

Polycom'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 next generation of ShowStation products, the ViewStation, and other new
product introductions and product enhancements by Polycom or its competitors,
the prices of Polycom'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 and cost of warranty claims, changes in Polycom's
distribution network, the level of royalties to third parties and changes in
general economic

17
<PAGE>

conditions. In addition, competitive pressure on pricing or demand levels in a
given quarter could adversely affect Polycom's operating results for such
period, and such price pressure over an extended period could materially
adversely affect Polycom's long-term profitability. Polycom'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 products, the ShowStation line of products, the ViewStation product line, and
any new products or product enhancements. There can be no assurance that
Polycom will be able to increase unit sales volumes of existing products,
introduce and sell new products or reduce its costs as a percentage of net
revenues.

Polycom typically ships products within a short time after receipt of an
order, and historically has not had a significant backlog; however, backlog may
fluctuate significantly from period to period. As a result, backlog at any point
in time is not a good indicator of future net revenues and net revenues for any
particular quarter cannot be predicted with any degree of accuracy. Accordingly,
Polycom's expectations for both short- and long-term future net revenues are
based almost exclusively on its own estimate of future demand and not on firm
customer orders. In addition, Polycom has in the past received orders and
shipped a substantial percentage of the total products sold during a particular
quarter in the last few weeks of the quarter. In some cases, these orders have
consisted of distributor stocking orders and Polycom has from time to time
provided special incentives for distributors to purchase more than the minimum
quantities required under their agreements with Polycom. Additionally, a
majority of Polycom's net revenues are from sales to resellers who sell the
products through to end users. If these resellers are unable to sell through
their inventory of Polycom products in a given quarter, it could affect the
volume of Polycom's sales to these resellers in future quarters. This is
especially true for new product channel shipments, such as the ViewStation 512
shipments, in the second quarter of 1998. Therefore, Polycom has been
uncertain, throughout most of each quarter, as to the level of revenues it will
achieve in the quarter and the impact that distributor stocking orders will
have on revenues and profitability 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, profitability is difficult to predict.
The Company also depends on third party resellers for a substantial portion of
its revenue. Certain of these third party resellers also act as resellers for
competitors of the Company that can devote greater effort and resources to
marketing competitive products. The loss of certain of these third party
resellers could have a material adverse effect on the Company's business and
results of operations. Further, there can be no guarantee that Polycom's
contract manufacturers will be able to meet product demand before a quarter
ends. Polycom anticipates that this pattern of sales may continue in the future
with the exception that the Company may reduce and ultimately eliminate the end
of quarter incentives offered to distributors. If the Company chooses to
eliminate or reduce stocking incentive programs, quarterly revenue may be
materially adversely affected. Expense levels are based, in part, on these
estimates and, since Polycom 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 Polycom's products in the future. Due to all of the
foregoing factors, it is likely that in some future quarter Polycom's operating
results will be materially below the expectations of public market analysts and
investors. In such event, the price of Polycom's Common Stock would likely be
materially adversely affected.

Polycom has a significant inventory of monochrome ShowStation products
which it plans to sell in Latin America over the next several quarters.
Additionally, Polycom has a significant inventory of SoundPoint PC products
which it plans to reduce throughout the next several quarters. There can be no
assurance that Polycom will be successful in the sale of these products. The
failure to successfully sell such inventory would have a material adverse effect
on Polycom's business, financial condition and results of operations.

The markets for videoconferencing products are characterized by changing
technology, evolving industry standards and frequent new product introductions.
The success of Polycom's new ViewStation products is dependent on several
factors, including proper new product definition, product cost, timely
completion and introduction of new products, differentiation of new products
from those of Polycom's competitors and market acceptance of these products.
Additionally, properly addressing the complexities associated with ISDN
compatibility, reseller training, technical and sales support as well as field
support are also factors affecting the Company's success in this market.
Polycom is attempting to address the need to develop new products through its
internal development efforts and joint developments with other companies. There
can be no assurance that Polycom will successfully identify new
videoconferencing

18
<PAGE>

product opportunities and develop and bring new videoconferencing products to
market in a timely manner, or that videoconferencing products and technologies
developed by others will not render Polycom's ViewStation products or
technologies obsolete or noncompetitive. The failure of Polycom's new
videoconferencing products development efforts would have a material adverse
effect on Polycom's business, financial condition and results of operations.

Polycom subcontracts the manufacture for its SoundStation, SoundStation
Premier and ViewStation product families to International Manufacturing
Services, Inc. ("IMS"), a global third party contract manufacturer. Polycom
uses IMS's Thailand facilities and should there be any disruption in supply due
to recent economic and political difficulties in Thailand and Asia, such
disruption would have a material adverse effect on Polycom's business, financial
condition and result of operations. In addition, operating in the international
environment exposes Polycom to certain inherent risks, including unexpected
changes in regulatory requirements and tariffs, difficulties in staffing and
managing foreign operations and potentially adverse tax consequences all of
which could have a material adverse effect on Polycom's business, financial
condition and result of operations.

Polycom completed the acquisition of ViaVideo Communications, Inc. on
January 2, 1998. Polycom acquired ViaVideo with the expectation that the
acquisition would result in operating and strategic benefits, including
operating cost reductions and product development, marketing and sales
synergies. If the operations of ViaVideo are not successfully combined with
those of Polycom in a coordinated, timely and efficient manner, Polycom's
business, financial condition and results of operations would be materially
adversely effected. The integration of ViaVideo's product offerings and
operations with Polycom's product offerings and operations and the coordination
of ViaVideo's sales and marketing efforts with those of Polycom will require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could have
a material adverse affect on Polycom's business, financial condition or results
of operations. The difficulties of assimilation may be increased by the
necessity of integrating personnel with disparate business backgrounds and
combining two different corporate cultures. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on the combined operations. As a result of
the acquisition, Polycom's operating expenses will significantly increase in
absolute dollars. Should the expected revenues from ViaVideo products not occur,
or occur later or in an amount less than expected, the higher operating expenses
could have a material adverse affect on the business, financial condition and
results of operations of Polycom. Failure to achieve the anticipated benefits of
the acquisition or to successfully integrate the operations of the companies
could have a material adverse effect upon the business, operating results or
financial condition of Polycom. Additionally, there can be no assurance that
Polycom will not incur additional material charges in future quarters to reflect
additional costs associated with the acquisition.

The acquisition could cause customers and potential customers of Polycom or
ViaVideo to delay or cancel orders for products as a result of customer
concerns and uncertainty over product evolution, integration and support of
ViaVideo's products with Polycom's products. Such a delay or cancellation of
orders could have a material adverse effect on the business, financial
condition or results of operations of Polycom.

Polycom currently has agreements with certain videoconferencing equipment
providers whereby these equipment suppliers resell Polycom's SoundPoint PC
products along with their videoconferencing products. Polycom and these
equipment suppliers are competitors in the teleconferencing market and, as
such, there can be no assurance that they will enter into future agreements to
resell or supply any of the Company's new or enhanced teleconferencing
products. Further, certain current Polycom video products and other video
products under development at Polycom are directly competitive with the products
of these suppliers, and thus competition between Polycom and the other
suppliers is likely to increase, resulting in a strain on the existing
relationship between the companies. If this occurs, it could limit the
contribution that these relationships could have on the financial results of
operations of Polycom.

Polycom's operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure and other events beyond Polycom's
control. Additionally, most of Polycom's operations are currently located in the
San Francisco Bay Area, an area that is susceptible to earthquakes. Polycom does
not carry sufficient business interruption insurance to compensate Polycom for
losses that may

19
<PAGE>

occur, and any losses or damages incurred by Polycom could have a material
adverse effect on its business, financial condition or operating results.

Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. They could fail or create
erroneous results unless corrected so that they can process data related to the
year 2000. The Company relies on its systems, applications and devices in
operating and monitoring all major aspects of its business, including financial
systems (such as general ledger, accounts payable and payroll modules), customer
services, infrastructure, embedded computer chips, networks and
telecommunications equipment and end products. The Company also relies on
external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governments, both domestically and
globally, directly for accurate exchange of data and indirectly. The Company's
current estimate is that the costs associated with the Year 2000 issue, and the
consequences of incomplete or untimely resolution of the Year 2000 issue, will
not have a material adverse affect on the result of operations or financial
position of the Company in any given year. However, despite the Company's
efforts to address the Year 2000 impact on its internal systems, the Company is
not sure that it has fully identified such impact and that it can resolve it
without disruption of its business and without incurring significant expense.
In addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company interacts.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1998, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $19.6 million, an increase
of $1.9 million from December 31, 1997. Additionally, on October 17, 1997, the
Company re-established a $5.0 million revolving bank line of credit from Silicon
Valley Bank which had previously expired on April 15, 1997. This line of credit
allows for an additional facility of $5.0 million available upon request by the
Company and contingent upon payment of associated fees.

The Company used $3.2 million in cash from operating activities for the
first six months of 1998 compared to a use of $0.8 million in cash from
operating activities for the same period in 1997. The reduction in cash from
operating activities was due primarily to an increase in trade accounts
receivable and additional purchases of inventory. These cash uses were offset
by an improved net income before non-cash expenses in the first six months of
1998 over the same period in 1997 as well as a larger increase in accrued
liabilities and accounts payable.

The total net change in cash and cash equivalents for the first six months
of 1998 was an increase of $1.1 million. The primary source of cash was
proceeds totaling $7.6 million from a stock purchase from 3M. The primary uses
of cash during the first six months of 1998 were $3.2 million from operating
activities, purchases of property, plant and equipment of $2.6 million and net
payment of line of credit borrowings of $0.6 million. The use of cash from
operating activities was the result of an increase in trade accounts receivable
and an increase in inventories, offset by a positive net income before non-cash
expenses and an increase in accounts payable and accrued liability balances.

The Company's material commitments consist of obligations under its
revolving bank line of credit, operating leases and a $250,000 stand-by letter
of credit which has been issued to guarantee certain of the Company's
contractual obligations. The Company also maintains from time to time
commercial letters of credit as payments for the importation of certain
products. The amounts do not exceed $100,000 and are outstanding less than 120
days. The Company estimates that 1998 capital expenditures will total
approximately $7.0 million.

The Company believes that its available cash, cash equivalents and bank
line of credit will be sufficient to meet the Company's operating expenses and
capital requirements through at least December 31, 1998. Thereafter, it cannot
be determined with any degree of certainty how successful the Company will be at
growing the market for its products, if at all. If there is substantial growth
and, as a result, the Company goes beyond current acceptable liquidity levels or
if the financial results were to violate the financial covenants of the bank
line of credit, Polycom may require additional funds to support its working

20
<PAGE>

capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. There
can be no assurance that additional financing will be available at all or that,
if available, such financing will be obtainable on terms favorable to the
Company and would not be dilutive. The Company's future liquidity and cash
requirements will depend on numerous factors, including introduction of new
products and potential product family, business or technology acquisitions.

21
<PAGE>

PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS

On September 3, 1997, VTEL Corporation ("VTEL") filed a lawsuit in
the U. S. District Court in Travis County, Texas against ViaVideo,
a subsidiary of Polycom, and its founders (who were formerly
employed by VTEL). On May 27, 1998 VTEL amended its suit to add
Polycom as a defendant. In the lawsuit, VTEL alleges breach of
contract, breach of confidential relationship, disclosure of
proprietary information, and related allegations. ViaVideo and
Polycom have answered the suit, denying in their entirety VTEL's
allegations. If ViaVideo or Polycom were found to have infringed
upon the proprietary rights of VTEL or any other third party, the
companies could be required to pay damages, cease sales of the
infringing products, discontinue such products or such other
injunctive relief a court may determine, any of which could have a
material adverse effect on Polycom's business, financial condition
or results of operations. On April 22, 1998, Polycom filed a
declaratory relief action against VTEL in the Superior Court of
Santa Clara County, California seeking a declaration that Polycom
has not infringed on any proprietary rights of VTEL. VTEL has
filed a response to Polycom's complaint asking that the complaint
be dismissed or stayed in favor of the Texas suit.

On October 2, 1997, Datapoint Corporation filed a complaint against
Intel Corporation for infringement of two U.S. patents related to
videoconferencing network technology in the U.S. District Court in
Dallas, Texas. On November 25, 1997, the complaint was amended to
include several additional defendants, and Datapoint also filed a
motion for certification of the action as a class action. No
ruling occurred relative to the motion for class action
certification. Although neither Polycom nor its subsidiary
ViaVideo had been served as a defendant in any Datapoint
complaints, both Polycom and ViaVideo were named as putative class
members in the Datapoint motion for class action certification
along with over 500 other companies. This case has subsequently
been dismissed by stipulation and an order entered by the court to
that effect.

The Company will vigorously defend against these claims. While
litigation is inherently uncertain, Polycom believes that the
ultimate resolution of this matter beyond that provided in its
balance sheet as of June 30, 1998, will not have a material adverse
effect on the Company's financial position.

Item 2. CHANGES IN SECURITIES

On July 15, 1998, pursuant to a Preferred Shares Rights Agreement
between Polycom, Inc. and BankBoston N.A., as Rights Agent, the
Company's Board of Directors declared a dividend of one right to
purchase one one-thousandth of a share of the Company's Series A
Preferred Stock for each outstanding share of Common Stock, par
value of $0.0005 per share, of the Company. The dividend is payable
on July 31, 1998 to stockholders of record as of the close of
business on that day. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series A
Preferred at an exercise price of $90.00, subject to adjustment.
The Rights become exercisable (the "Distribution Date") upon the
earlier of: (i) fifteen days following the first date a public
announcement by the Company or an Acquiring Person that an
Acquiring Person has become such (the "Shares Acquisition Date")
and (ii) fifteen days (or such later date as may be determined by
the Board of Directors) following the commencement of, or
announcement of an intention to make, a tender offer or exchange
offer, the consummation of which would result in a person or group
becoming an Acquiring Person. A person or group of affiliated or
associated persons that beneficially owns, or has the right to
acquire beneficial ownership of, 20% or more of the outstanding
Common Shares is referred to as an "Acquiring Person." The Rights
will expire on the earliest of (i) July 15, 2008 (the "Final
Expiration Date") or (ii) redemption or exchange of the Rights as
described below.

22
<PAGE>

Unless the Rights are earlier redeemed, in the event that a person
becomes an Acquiring Person (a "Triggering Event"), each holder of
a Right which has not theretofore been exercised (other than Rights
beneficially owned by the Acquiring Person or any affiliate of the
Acquiring Person, which will thereafter be void) will thereafter
have the right to receive, upon exercise, Common Shares having a
value equal to two times the Purchase Price. The Company may
instead substitute cash, assets or other securities for the Common
Shares for which the Rights would have been exercisable.

Similarly, unless the Rights are earlier redeemed, in the event
that, after a Triggering Event, (i) the Company is acquired in a
merger or other business combination transaction, or (ii) 50% or
more of the Company's assets or earning power are sold (other than
in transactions in the ordinary course of business), proper
provision must be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by
the Acquiring Person or any affiliate of the Acquiring Person,
which will thereafter be void) will thereafter have the right to
receive, upon exercise, shares of common stock of the acquiring
company having a value equal to two times the Purchase Price.

At any time after a Triggering Event and prior to the acquisition
by any person or entity of beneficial ownership of 50% or more of
the Company's outstanding Common Shares, the Board of Directors of
the Company may exchange the Rights (other than Rights owned by the
Acquiring Person), in whole or in part, at an exchange ratio of one
Common Share per Right.

At any time on or prior to the close of business on the earlier of
(i) the Shares Acquisition Date and (ii) the Final Expiration Date
of the Rights, the Company may redeem the Rights in whole, but not
in part, at a price of $0.005 per Right.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

The Company distributed its Definitive Proxy Statement, Proxy and
Annual Report to Stockholders on or about April 21, 1998 to each
stockholder of record on April 3, 1998, for its Annual Meeting of
Stockholders held May 21, 1998 (the "Annual Meeting"). At the
Company's Annual Meeting, the Stockholders were asked to consider
four proposals.

The first proposal involved the election of directors. The
existing Board of Directors selected six nominees, all of whom ran
unopposed and all of whom were then serving as directors of the
Company. The nominees of the Board, and the voting results with
respect thereto, were:

<TABLE>
<CAPTION>
Votes Votes Votes Broker
Name For Against Abstaining Non-Votes
---- --- ------- ---------- ---------
<S> <C> <C> <C> <C>
Brian L. Hinman 21,606,878 9,875 0 0
Robert C. Hagerty 21,601,995 14,758 0 0
Bandel Carano 21,603,878 12,875 0 0
Stanley J. Meresman 21,592,866 23,887 0 0
John P. Morgridge 21,606,878 9,875 0 0
James R. Swartz 21,606,866 9,887 0 0
</TABLE>

The second proposal concerned amendments and restatements of the
Company's Amended and Restated Certificate of Incorporation
establishing 5,000,000 authorized shares of Preferred Stock, par value
$0.001 per share, and giving the Company's Board

23
<PAGE>

of Director's the authority to issue the Preferred Stock in one or
more series and to fix rights, preferences, privileges and
restrictions thereof. The results were:
<TABLE>
<S> <C>
For: 16,508,348
Against: 1,115,423
Abstentions: 58,392
Broker Non-Votes: 3,934,590
</TABLE>

The third proposal was to consider and act upon an amendment to the
Company's 1996 Stock Incentive Plan increasing the number of shares
granted to non-employee Directors under the automatic option grant
program. The results were:

<TABLE>
<S> <C>
For: 20,194,161
Against: 1,393,448
Abstentions: 29,144
Broker Non-Votes: 0
</TABLE>

The fourth and final proposal concerned the ratification of the
Company's independent accountants (PricewaterhouseCoopers) for the
fiscal year ending January 3, 1999. The following numbers are the
votes cast:

<TABLE>
<S> <C>
For: 21,594,405
Against: 3,462
Abstentions: 18,886
Broker Non-Votes: 0
</TABLE>

Item 5. OTHER INFORMATION

On July 21, 1998, the Company announced that Robert C. Hagerty,
previously Polycom's president and COO, was appointed the role of
president and CEO. Brian L. Hinman, formerly chairman and CEO, will
continue as chairman with a focus on Polycom's long range strategy and
will be employed by Polycom on a part-time basis.

The Securities and Exchange Commission has recently amended Rule
14a-4(c)(1) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As amended, Rule 14a-4(c)(1) provides
that where a stockholder proponent chooses not to use the procedures
set forth in Rule 14a-8 under the Exchange Act for placing such
stockholder's proposal in a company's proxy materials, a proxy may
confer discretionary authority to vote on a matter presented at an
annual meeting of stockholders if the proponent fails to notify the
company at least 45 days prior to the anniversary date of mailing of
the prior year's proxy statement. A statement conferring such
discretionary authority must be made in the proxy statement or proxy
for such annual meeting. The proxy statement for the Company's 1998
Annual Meeting of Stockholders was mailed to stockholders on April 21,
1998. Accordingly, if a proponent does not notify the Company on or
before March 7, 1999 of a proposal to be presented at the 1999 Annual
Meeting of Stockholders, the Company may use its discretionary voting
authority to vote on such proposal when and if presented at the 1999
Annual Meeting of Stockholders.

Item 6 EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits

<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ ----------------------------------------------------------------
<S> <C>
11.1 Statement of Computation of Earning (Loss) Per Share (contained in
Note 4 of Notes to Condensed Consolidated Financial Statements)
</TABLE>

24
<PAGE>

27 Financial Data Schedule

27.1 Restated Financial Data Schedule for the fiscal years ended
December 31, 1997 and December 31, 1996. These schedules are
restated for SFAS 128 and the pooling of interest transaction with
ViaVideo Communications, Inc.

27.2 Restated Financial Data Schedule for the three months ended
March 31, 1997, June 30, 1997 and September 30, 1997. These
schedules are restated for SFAS 128 and the pooling of interest
transaction with ViaVideo Communications, Inc.

</TABLE>

(b) Reports on Form 8-K:

A report on Form 8-K was filed on July 22, 1998, regarding the
Company's Board of Directors declaring a dividend of one right to
purchase one one-thousandth share of the Company's Series A Preferred
Stock for each outstanding share of Common Stock, par value of $0.0005
per share pursuant to a Preferred Shares Rights Agreement

25
<PAGE>

SIGNATURE

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

Dated: August 18, 1998 POLYCOM, INC.

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

<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,631
<SECURITIES> 5,983
<RECEIVABLES> 16,455
<ALLOWANCES> 438
<INVENTORY> 15,530
<CURRENT-ASSETS> 53,702
<PP&E> 12,840
<DEPRECIATION> 7,159
<TOTAL-ASSETS> 60,035
<CURRENT-LIABILITIES> 21,894
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 38,124
<TOTAL-LIABILITY-AND-EQUITY> 60,035
<SALES> 26,040
<TOTAL-REVENUES> 26,040
<CGS> 13,127
<TOTAL-COSTS> 13,127
<OTHER-EXPENSES> 9,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,306
<INCOME-TAX> 151
<INCOME-CONTINUING> 3,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,155
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.10

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
ANNUAL FINANCIAL STATEMENTS RESTATED FOR POOLING TRANSACTION WITH VIAVIDEO
COMMUNICATIONS, INC. AND SFAS 128 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-13-1996
<CASH> 12,486 11,253
<SECURITIES> 5,184 10,101
<RECEIVABLES> 8,573 6,687
<ALLOWANCES> 438 443
<INVENTORY> 9,915 7,458
<CURRENT-ASSETS> 38,650 36,173
<PP&E> 10,253 6,993
<DEPRECIATION> 5,725 3,764
<TOTAL-ASSETS> 43,529 39,510
<CURRENT-LIABILITIES> 17,246 6,649
<BONDS> 0 0
0 0
0 0
<COMMON> 17 14
<OTHER-SE> 26,266 32,847
<TOTAL-LIABILITY-AND-EQUITY> 43,529 39,150
<SALES> 46,630 37,032
<TOTAL-REVENUES> 46,630 37,032
<CGS> 25,255 17,698
<TOTAL-COSTS> 25,255 17,698
<OTHER-EXPENSES> 35,879 18,100
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (14,504) 1,234
<INCOME-TAX> 171 108
<INCOME-CONTINUING> (14,675) 1,126
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,675) 1,126
<EPS-PRIMARY> (0.73) 0.08
<EPS-DILUTED> (0.73) 0.06

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS OF POLYCOM, INC. RESTATED FOR
POOLING TRANSACTION WITH VIAVIDEO COMMUNICATIONS, INC. AND SFAS #128 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 12,977 22,066 21,253
<SECURITIES> 8,454 5,003 1,752
<RECEIVABLES> 5,790 5,277 7,207
<ALLOWANCES> 442 442 438
<INVENTORY> 7,719 8,197 9,225
<CURRENT-ASSETS> 35,881 41,567 40,765
<PP&E> 7,717 8,442 9,358
<DEPRECIATION> 4,197 4,647 5,157
<TOTAL-ASSETS> 39,769 45,736 45,325
<CURRENT-LIABILITIES> 8,299 8,741 11,233
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 14 17 17
<OTHER-SE> 31,456 36,978 34,075
<TOTAL-LIABILITY-AND-EQUITY> 39,769 45,736 45,325
<SALES> 10,510 11,500 12,507
<TOTAL-REVENUES> 10,510 11,500 12,507
<CGS> 5,653 6,148 6,755
<TOTAL-COSTS> 5,653 6,148 6,755
<OTHER-EXPENSES> 6,477 7,321 8,657
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (1,620) (1,969) (2,905)
<INCOME-TAX> 36 47 28
<INCOME-CONTINUING> (1,656) (2,016) (2,933)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,656) (2,016) (2,933)
<EPS-PRIMARY> (0.08) (0.10) (0.14)
<EPS-DILUTED> (0.08) (0.10) (0.14)

</TABLE>