Commitments and Contingencies: Litigation:

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. In addition, from time to time, third parties assert patent or trademark infringement claims against the Company in the form of letters and other forms of communication. We do not believe that any of these legal proceedings or claims are likely to have a material adverse effect on our consolidated results of operations, financial condition or cash flows.

On September 23, 2002, a suit captioned Collaboration Properties, Inc. v. Polycom, Inc. was filed in the United States Court in the Northern District of California. The complaint alleged that Polycom’s ViewStation, ViaVideo, iPower, WebOffice and MGC products infringe four U.S. Patents owned by plaintiff. The complaint sought unspecified compensatory and exemplary damages for past and present infringement and to permanently enjoin Polycom from infringing on the patents in the future. On November 12, 2004, the Company entered into a settlement agreement (the “Settlement Agreement”) with Avistar Communications, Inc. (“Avistar”) and

Collaboration Properties, Inc., a wholly-owned subsidiary of Avistar (“CPI”), pursuant to which Polycom and CPI settled the following patent infringement litigation matter between them: Collaboration Properties, Inc. v. Polycom, Inc., Case No. 02-CV-04591 (N.D. Cal.). Under the terms of the Settlement Agreement, Polycom agreed to pay Avistar a one-time amount of $27.5 million, and CPI agreed to dismiss all claims in the litigation with prejudice. In addition to the Settlement Agreement, we, Avistar and CPI entered into a patent cross-license agreement whereby non-exclusive, fully paid-up, worldwide patent licenses to the respective patent portfolios of each party and its subsidiaries were granted by us and our subsidiaries to Avistar and its subsidiaries, including CPI, and by Avistar and its subsidiaries to us and our subsidiaries. We incurred a one-time charge of $20.8 million in 2004 and recorded $6.7 million as a prepaid license and expect to amortize this prepaid license through the third quarter of 2013, the expiration date of the patents-in-suit.

During the first quarter of 2002, we reached a settlement with a former PictureTel customer. The dispute involved certain services provided by PictureTel in 2001 and amounts owed to us for providing these services. The amount received was net of legal fees incurred to litigate and settle the case.

Standby Letters of Credit:

The Company has several standby letters of credit totaling approximately $4.5 million which were issued to guarantee certain of the Company’s office lease obligations and other contractual obligations.

License Agreements:

The Company enters into various license agreements in the normal course of business and the cost of these agreements are amortized over the expected life of the respective agreements. The cost of these agreements and the amounts amortized in the years presented, both combined and individually, are not significant.

Leases:

The Company leases certain office facilities and equipment under noncancelable operating leases expiring between 2005 and 2017. As of December 31, 2004, the following future minimum lease payments, net of estimated sublease income are due under our current lease obligations. For example, the Company has an approximately 152,000 square foot building which is fully subleased to a third party for which the sublease runs

concurrent with its lease obligation. As a result, the Company is not currently showing a lease obligation related to this facility. If this sublease were to be terminated, or if the tenant defaulted on payment, the Company would incur additional lease payments that would negatively impact its operating results and overall cash flows. In addition to these minimum lease payments, the Company is contractually obligated under the majority of its operating leases to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance. This table excludes leases expiring or subject to cancellation within twelve months subsequent to December 31, 2004 (in thousands):

Gross Minimum Lease Payments Estimated Sublease Receipts Net Minimum Lease Payments Projected Annual Operating Costs

Year ending December 31,

2005 . . . $14,139 $ (827) $13,312 $ 4,206 2006 . . . 13,699 (697) 13,002 4,071 2007 . . . 9,227 (376) 8,851 2,923 2008 . . . 5,526 — 5,526 1,358 2009 . . . 5,166 — 5,166 1,289 Thereafter . . . 15,166 — 15,166 3,548 Total payments . . . $62,923 $(1,900) $61,023 $17,395

The Company is currently headquartered in an approximately 50,000 square foot facility in Pleasant on, California pursuant to a lease which expires in May 2012. This facility accommodates executive and administrative operations. The Company’s facility in Milpitas, California houses research and development, manufacturing, marketing, sales and customer support operations for primarily our voice business. This facility is approximately 102,000 square feet and is leased through January 2007.

The majority of the Company’s video and service operations are located in approximately 183,000 square feet in Andover, Massachusetts pursuant to a lease that expires in September 2014 and approximately 62,000 square feet in Austin, Texas pursuant to a lease that expires in November 2011. The network systems operations occupy approximately 40,000 square feet in Petach Tikva, Israel and 32,000 square feet in Atlanta, Georgia, which is also shared with our installed voice business. The Company’s audio network systems operations are located in an approximately 84,000 square foot leased facility located in Westminster, Colorado. In addition, the Company leases space in North Vancouver, Canada for the VoIP development operation and in Burlington, Massachusetts for our advanced voice development operations. See Note 5 for discussion on a lease amendment signed in December 2003 and the termination and payment agreements signed in June 2004 related to the Andover, Massachusetts facility.

The Company leases an approximately 55,000 square foot facility in Tracy, California which is used as the North American and Latin American distribution center. Further, the Company utilizes space at a manufacturing contractor in Thailand and the Company’s European distribution contractor in the United Kingdom and

Netherlands to provide Asian and European distribution and repair centers.

Included in the noncancelable operating leases are those assumed as part of the acquisition of PictureTel. The Company has identified vacated or redundant PictureTel leased facilities that the company intends to terminate or sublease and has recognized them as a liability assumed in a purchase combination. The liability is valued at the estimated net present value of the lease commitments. The estimated net present value of the cost of terminating these leases net of any estimated sublease rent is $9.1 million of which $5.6 million is classified as a current liability and $3.5 million is classified as a long term liability on the consolidated balance sheets.

Rent expense, including the effect of any future rent escalations or rent holiday periods, is recognized on a straight-line basis over the term of the lease. Rent expense for the years ended December 31, 2004, 2003 and

2002 was $17.8 million, $16.5 million and $14.6 million, respectively. The short-term deferred lease obligation included in other accrued liabilities was $0.3 million and $0.2 million as of December 31, 2004 and 2003, respectively. The long-term deferred lease obligation included in other long-term liabilities was $1.3 million and $1.0 million as of December 31, 2004 and 2003, respectively. In the event the Company does not exercise its option to extend the term of any of its leases, or if any of its leases expire, the Company will likely incur certain costs to restore the properties to conditions in place at the time of commencement of the lease. The Company is unable to estimate the fair value of these restoration costs as these costs can not be determined until the end of the lease term and at times can be based on the landlord’s discretion and subsequent negotiations between the landlord and the Company.