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

Overview

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

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

The shift from circuit-switched telephony networks to Internet Protocol (IP) based networks is enabling new technologies and continues to be a significant driver for Polycom's collaborative communications markets and for our business. High Definition (HD) voice, video, and content is another key driver for Polycom. This

significant improvement in quality provided by HD is enabling telepresence and other communications models that we believe approximate in-person communications. Strategically, Polycom is investing most of its research, development, sales, and marketing efforts into delivering a superior IP-based, HD collaborative communications solution, using Polycom proprietary technology in the evolving, standards-based IP communications environment. Our goal is to deliver best-of-breed HD collaborative communications solutions that integrate into any call management system or unified communications environment.

Revenues were $1.1 billion in 2008, an increase of 15% over 2007 revenues of $929.9 million. The increase in revenues primarily reflects increased sales volumes of our video solutions and voice communications solutions products and, to a lesser extent, increases in service revenues. In 2008, excluding the impact of the SpectraLink acquisition on 2007 growth rates, we experienced slower growth than in 2007, particularly in North America and our voice product lines due in part to the global economic conditions, as well as increased competition. In the fourth quarter of 2008, our total net revenues declined by 5% sequentially from the third quarter of 2008 and were essentially flat compared to the fourth quarter of 2007, while North America experienced sequential and year-over-year declines of 12% and 6%, respectively, and our worldwide voice product revenues declined by 12% sequentially and 13% year-over year. Our Video Solutions, Voice Communications Solutions and Services segment revenues grew 14%, 13% and 26%, respectively, over 2007, and accounted for 52%, 33% and 15%, respectively, of our revenues in 2008. See Note 14 of Notes to Consolidated Financial Statements for further information on our segments, including a summary of our segment revenues, segment contribution margin, segment inventory and revenue by geography.

We believe our voice communications solutions products are more susceptible to general economic conditions than our other products, which has lead to longer sales cycles for our voice products and in the fourth quarter of 2008 we experienced year-over-year declines in voice product revenues. In particular, while we believe that our video product lines may be better able to sustain the impact of current economic conditions and recessionary and other factors, our voice products do not provide the same return on investment profile that we believe our video products provide to customers who are curtailing travel and other related expenditures in a down economy, making our voice products more susceptible to the current economic downturn. Further, although we believe our video solutions products offer a rapid return on investment, tightened corporate budgets and capital expenditures in this economic environment will likely negatively impact our video solutions product revenues.

Gross margins decreased in 2008 over 2007 primarily as a result of acquisition-related charges related to the SpectraLink acquisition, such as amortization of purchased intangibles and decreased margins on our Voice Communications Solutions products due to a shift in product mix toward lower margin VoIP and wireless products and HDX and RPX products and away from higher margin infrastructure products. These effects were partially offset by increased margins on our Services revenues.

Operating margins increased in 2008 over 2007 primarily as a result of cost control measures implemented during the fourth quarter of 2008. From time to time, in order to control operating expenses in any given quarter, we may take actions to reduce costs such as delay or limit the scope of marketing programs and other projects, impose travel restrictions, request employees to use paid time off or implement other cost control measures. We may also periodically benefit from one-time expense adjustments. During the fourth quarter of 2008, operating expenses decreased sequentially from the third quarter of 2008 by approximately $20 million, including approximately $7 million related to cost control measures, approximately $5 million in stock-based compensation expense and approximately $5 million from the benefit of one-time expense adjustments.

During 2008, we generated approximately $167.0 million in cash flow from operating activities which, after the impact of investing, share repurchases and other financing activities described in further detail under "Liquidity and Capital Resources," resulted in a $113.9 million net decrease in our total cash and cash equivalents.

On January 5, 2007, we completed our acquisition of Destiny Conferencing Corporation, or Destiny. Destiny designed and manufactured immersive telepresence solutions. Polycom incorporated Destiny's products into its RPX telepresence offering prior to the acquisition under the terms of an OEM Distribution Agreement between the companies. These products also became the foundation for our TPX telepresence offering. As a result of the acquisition, we now own several patents core to telepresence. Destiny's results of operations are included in our results of operations as part of our Video Solutions and Services segments from January 5, 2007, the date of acquisition.

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

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

The discussion of results of operations at the consolidated level is followed by a discussion of results of operations by segment for the three years ended December 31, 2008.

Results of Operations for the Three Years Ended December 31, 2008

The following table sets forth, as a percentage of total revenues (unless indicated otherwise), consolidated statements of operations data for the periods indicated.

                                                           Year Ended December 31,
                                                         2008          2007       2006
 Revenues
 Product revenues                                           85 %          87 %      88 %
 Service revenues                                           15 %          13 %      12 %

 Total revenues                                            100 %         100 %     100 %
 Cost of revenues
 Cost of product revenues as % of product revenues          41 %          40 %      36 %
 Cost of service revenues as % of service revenues          49 %          50 %      53 %

 Total cost of revenues                                     42 %          41 %      38 %

 Gross profit                                               58 %          59 %      62 %

 Operating expenses
 Sales and marketing                                        28 %          26 %      25 %
 Research and development                                   13 %          15 %      17 %
 General and administrative                                  6 %           7 %       7 %
 Acquisition-related costs                                   0 %           0 %       0 %
 Purchased in-process research and development               0 %           1 %       0 %
 Amortization and impairment of purchased intangibles        0 %           1 %       1 %
 Restructure costs                                           1 %           0 %       0 %
 Litigation reserves and payments                            1 %           0 %       0 %

 Total operating expenses                                   49 %          50 %      50 %

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

 Income before provision for income taxes                    9 %           9 %      15 %
 Provision for income taxes                                  2 %           2 %       4 %

 Net income                                                  7 %           7 %      11 %

Revenues



                                                                             Increase
                                                                            From Prior
                                           Year Ended December 31,             Year
    $ in thousands                      2008         2007        2006      2008     2007
    Video Solutions                  $   560,062   $ 493,279   $ 412,699     14 %     20 %
    Voice Communications Solutions   $   353,698   $ 313,202   $ 188,004     13 %     67 %
    Services                         $   155,560   $ 123,427   $  81,682     26 %     51 %

    Total Revenues                   $ 1,069,320   $ 929,908   $ 682,385     15 %     36 %

Total revenues for 2008 were $1.1 billion, an increase of $139.4 million, or 15%, over 2007. In 2008, excluding the impact of the SpectraLink acquisition on 2007 growth rates, we experienced slower growth than in 2007, particularly in our voice communication product lines due in part to the global economic conditions, as well as increased competition. The increase in revenues primarily reflects increased sales volumes of our video solutions and voice communications solutions products and, to a lesser extent, an increase in service revenues.

Revenues from our wireless voice products acquired in the SpectraLink acquisition accounted for approximately $25.8 million of the year over year increase and are included in the Voice Communications Solutions and Services segments.

Video Solutions segment revenues include revenues from sales of our video communications and infrastructure product lines. Revenue from video communications products increased to $481.4 million for 2008 from $408.3 million in 2007, an 18% increase, primarily due to an increase in sales volumes and average selling prices of our group video products, which consisted primarily of our VSX and HDX product families. Revenues from our infrastructure products for 2008 were $78.7 million, a decrease of 7% compared to 2007 revenues of $85.0 million, due primarily to decreases in our voice infrastructure revenues, which was only partially offset by increases in revenues from our video infrastructure products. Voice Communications Solutions product revenues increased primarily as a result of increases in revenues from our Voice-over-IP products, as well as a full year of revenues from our wireless voice products acquired in the SpectraLink acquisition during the last week of the first quarter of 2007. Services segment revenues increased primarily as a result of increases in revenues from our video communications products, increases in revenues related to products acquired in the SpectraLink acquisition and, to a lesser extent, increases in video infrastructure services.

Total revenues for 2007 were $929.9 million, an increase of $247.5 million, or 36%, over 2006. Revenues from our wireless voice products acquired in the SpectraLink acquisition accounted for approximately $113.5 million of the year over year increase. The remaining increase in revenues primarily reflects increased sales volumes of our video and voice communications solutions products and, to a lesser extent, an increase in service revenues. Infrastructure product revenues were essentially flat.

Video Solutions segment revenues include revenues from sales of our video communications and infrastructure product lines. Revenue from video communications products increased to $408.3 million for 2007 from $327.5 million in 2006, a 25% increase, primarily due to an increase in sales volumes and average selling prices of our group video products, which consisted primarily of our VSX and HDX product families. Revenues from our infrastructure products for 2007 were $85.0 million, essentially flat compared to 2006 revenues of $85.2 million, due primarily to increases in revenues from our video infrastructure and software product sales being substantially offset by decreases in our voice infrastructure revenues. Infrastructure product revenues were impacted by a decrease in video infrastructure product average selling prices, due in part to increased competition. Voice Communications Solutions product revenues increased primarily as a result of revenues from our wireless voice products acquired in the SpectraLink acquisition, as well as increases in sales volumes of our Voice-over-IP and circuit switched products. Services revenues increased primarily due to increases in voice-related services as a result of the acquired SpectraLink product lines, as well as increased video-related services and video infrastructure services.

International sales, which are defined as revenues outside of Canada and the U.S., accounted for 47%, 44% and 43% of total revenues for 2008, 2007 and 2006, respectively. On a regional basis, North America, Europe, Asia Pacific and Latin America accounted for 53%, 26%, 18% and 3%, respectively, of our total 2008 revenues. North America, Europe, Asia Pacific and Latin America revenues increased 8%, 29%, 17% and 23%, respectively, in 2008 over 2007. Revenues in North America, Europe, Asia Pacific and Latin America increased in 2008 over 2007 as a result of an increase in video solutions and voice communication product revenues and increased services revenues. In 2008, we experienced slower growth than in 2007, particularly in North America due in part to the global economic conditions, as well as increased competition.

On a regional basis, North America, Europe, Asia Pacific and Latin America accounted for 56%, 24%, 17% and 3%, respectively, of our total 2007 revenues. North America, Europe, Asia Pacific and Latin America revenues increased 35%, 44%, 31% and 40%, respectively, in 2007 over 2006. Excluding SpectraLink revenues, North America and Europe increased 13% and 24%, respectively, in 2007 over 2006. Asia Pacific and Latin America were not significantly impacted by SpectraLink revenues in 2007. Revenues in North America, Europe, Asia Pacific and Latin America increased in 2007 over 2006 primarily as a result of an increase in video and voice communication product revenues, and to a lesser extent, increased services and infrastructure revenues.

In 2008, one channel partner accounted for 11% of our Video Solutions segment revenues. No one channel partner accounted for more than 10% of our total net revenues or of our Voice Communications Solutions or Services segment revenues in 2008. In 2007, no one channel partner accounted for more than 10% of our total net revenues or of our Video Solutions, Voice Communications Solutions or Services segment revenues. In 2006, one channel partner accounted for 10% of our total net revenues and of our Video Solutions segment revenues. No one channel partner accounted for more than 10% of our Voice Communications Solutions or Services segment revenues in 2006. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our consolidated net revenues or segment net revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a material adverse impact during the transition period. We also sell our voice infrastructure products directly to end-users and the revenues in the Video Solutions segment from end-users are subject to more variability than our revenues from our reseller customers.

We typically ship products within a short time after we receive an order and, therefore, backlog is not necessarily a good indicator of future revenues. As of December 31, 2008, we had $60.5 million of order backlog as compared to $57.7 million at December 31, 2007. We include in backlog open product orders which we expect to ship or services which we expect to bill and record revenue for in the following quarter. Once billed, unrecorded service revenue is included in deferred revenue. We believe that the current level of backlog will continue to fluctuate primarily as a result of the level and timing of orders received and customer delivery dates requested outside of the quarter. The level of backlog at any given time is also dependent in part on our ability to forecast revenue mix and plan our manufacturing accordingly and ongoing service deferrals as service revenues increase as a percent of total revenue. In addition, orders from our channel partners are based in part on the level of demand from end-user customers. Any decline or uncertainty in end-user demand could negatively impact end-user orders, which in turn could negatively affect orders from our channel partners in any given quarter. As a result, our backlog could decline from current levels.

Cost of Revenues and Gross Margins



                                                                             Increase
                                                                         (Decrease) From
                                     Year Ended December 31,                Prior Year
   $ in thousands               2008          2007          2006        2008          2007
   Product Cost of Revenues   $ 374,119     $ 322,988     $ 218,810        16 %         48 %
   % of Product Revenues             41 %          40 %          36 %       1  pt        4  pts
   Product Gross Margins             59 %          60 %          64 %      (1 )pt       (4 )pts
   Service Cost of Revenues   $  76,179     $  61,599     $  43,114        24 %         43 %
   % of Service Revenues             49 %          50 %          53 %      (1 )pt       (3 )pts
   Service Gross Margins             51 %          50 %          47 %       1  pt        3  pts
   Total Cost of Revenues     $ 450,298     $ 384,587     $ 261,924        17 %         47 %
   % of Total Revenues               42 %          41 %          38 %       1  pt        3  pts
   Total Gross Margin                58 %          59 %          62 %      (1 )pt       (3 )pts

Cost of Product Revenues and Product Gross Margins

Cost of product revenues consists primarily of contract manufacturer costs, including material and direct labor, our manufacturing organization, tooling depreciation, warranty expense, freight expense, royalty payments, amortization and impairment of certain intangible assets, stock-based compensation costs and an allocation of overhead expenses, including facilities and IT costs. Cost of product revenues and product gross margins included charges for stock-based compensation of $2.4 million, $2.7 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Generally, Video Solutions segment products have a higher gross margin than products in our Voice Communications Solutions segment.

Overall, product gross margins decreased by 1 percentage point in 2008 as compared to 2007 which is due in part to an increase in the amortization of core and existing technology purchased intangibles as a result of the SpectraLink acquisition that we completed at the end of the first quarter of 2007 and to a shift in product mix toward lower margin Voice-over-IP, HDX and RPX products and away from higher margin infrastructure products, which was partially offset by a decrease in the impact of purchase accounting adjustments for the write up of certain inventory to its fair value at the time of the SpectraLink acquisition, which resulted in higher product costs being recorded for certain inventory sold in the first half of 2007.

Excluding costs which are not allocated to our segments, such as amortization of purchased intangibles, stock-based compensation expense and fair value adjustments to inventory related to acquisition accounting, gross margins decreased slightly in our Video Solutions and Voice Communications Solutions segments in 2008 compared to 2007. Gross margins in our Services segment increased slightly in 2008 compared to 2007. The fluctuation in these segments' gross margin was primarily due to changes in product mix. Video Solutions gross margins were negatively impacted by the decrease in revenues from our voice infrastructure products, which typically have higher gross margins than our video communications products. The lower Video Solutions gross margin was also due to lower video communications product gross margins attributable in part to new video product offerings, which typically have lower gross margins for a period of time after their introduction due to higher component costs, the technological complexity of the newer products and lower initial production volumes. We have a number of initiatives focused on value engineering the design of certain of our HDX products, which we began to see positively impact our gross margins in the third quarter of 2008. Value engineering is the process by which production costs are reduced through activities such as component redesign, board configuration, test processes, and transformation processes. We have launched a number of new products in recent quarters, including additional products in our HDX and RPX product lines, and newer products are becoming an increasing percentage of our revenues. For example, the HDX and RPX products accounted for almost half of our video communications product revenues in 2008 as compared to approximately 22% in 2007. Our Voice-over-IP handset products and the wireless products we acquired from SpectraLink have a lower gross margin than the consolidated gross margin of our other voice communications products. The change in mix toward our Voice-over-IP products, together with the increase in wireless product revenues, resulted in lower Voice Communications Solutions gross margins during 2008. Depending upon the product mix and sales volumes, Voice Communications Solutions gross margins could be lower in the future.

Overall, product gross margins decreased by 4 percentage points in 2007 as compared to 2006 which is due in part to the amortization of core and existing technology purchased intangibles as a result of our recent acquisitions and increased stock-based compensation costs. In addition, cost of product revenues increased as a result of the write-up of inventory to its fair value at the time of the acquisitions. These increased costs, which are not allocated to our segments, accounted for approximately 2 percentage points of the decrease in gross margin in 2007. Excluding these unallocated costs, gross margins decreased in both our Video Solutions and Voice Communications Solutions segments in 2007 versus the comparable 2006 period. The fluctuation in these segments' gross margin was primarily due to changes in product mix. Our Voice-over-IP handset products and the wireless products we acquired from SpectraLink have a lower gross margin than the consolidated gross margin of our other voice communications products which resulted in lower gross margins during 2007, and depending upon the product mix could result in lower Voice Communications Solutions gross margins in the future. Our gross margins on our wireless products were also negatively impacted by changes in our distribution model whereby we transitioned certain direct customers and resellers to purchase from our distributors and this negative impact may continue. The decrease in gross margins in our Video Solutions segment was primarily due to decreased margins on our video infrastructure products as a result of decreased average selling prices, substantially offset by higher gross margins on our group video systems.

Our December 31, 2008 finished goods inventory levels were significantly higher than the December 31, 2007 levels primarily as a result of lower revenues than planned, the difference in planned versus actual sales mix of products, as well . . .