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TMCNet:  POLYCOM INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 14, 2013]

POLYCOM INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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," "OBJECTIVE," "STRATEGY," "GOAL," "SHOULD," "VISION," "DESIGNED," 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 global leader in open, standards-based unified communications and collaboration ("UC&C") solutions for voice and video collaboration. Our solutions are powered by the Polycom ® RealPresence® Platform, comprehensive software infrastructure and rich application programming interfaces ("APIs") that interoperate with a broad set of communication, business, mobile, and cloud applications and devices to deliver secure face-to-face video collaboration across different environments. With Polycom® RealPresence® video and voice solutions, from infrastructure to endpoints for all environments, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, communicate, and collaborate through a high-definition visual experience from their desktops, meeting rooms, classrooms, home offices, mobile devices, web browsers, and specialized solutions such as video carts for healthcare applications. By removing the barriers of distance and time, connecting experts to where they are needed most, and creating greater trust and understanding through visual connection, we enable people to make better decisions faster and to increase their productivity while saving time and money and being environmentally responsible.

41-------------------------------------------------------------------------------- Table of Contents We sell our solutions globally through a high-touch sales model that leverages our broad network of channel partners, including distributors, value-added resellers, system integrators, leading communications services providers, and retailers. We manufacture our products through an outsourced model optimized for quality, reliability, and fulfillment agility.

We believe important drivers for the adoption of Polycom UC&C solutions include: • growth of video as a preferred method of communication everywhere, • increasing presence of video on the desktop, • growth of video-capable mobile devices (including tablets and smartphones), • expansion of social business tools with integrated web-based video collaboration, • adoption of UC&C by small and medium businesses and governments globally, • growth of the number of teleworkers globally, • emergence of Bring Your Own Device (BYOD) programs in businesses of all sizes, • demand for UC&C solutions for business-to-business communications and the move of consumer applications into the business space, and • continued commitment by organizations and individuals to reduce their carbon footprint and expenses by choosing remote connectivity over travel.

We believe we are uniquely positioned as the UC&C ecosystem partner of choice through our strategic partnerships, support of open standards, innovative technology and customer-centric go-to-market capabilities.

In 2012, we made strategic investments and executed on five key strategic imperatives to capture the emerging network effect of UC&C adoption by enterprise, public sector, service providers, SMBs, mobile and remote employees, and social business users. These five key strategic imperatives included: • Cloud-Based UC&C solutions; • Mobile UC&C solutions; • Focused Ecosystem Partnerships; • Polycom®RealPresence® Platform; and • Growth Markets.

On December 4, 2012, we completed the sale of our enterprise wireless voice solutions ("EWS") business to a third party. The decision to divest EWS reflects our focus on initiatives that we expect to extend our leadership in our core unified communications business. The products and services that comprise our core unified communications business have historically experienced stronger sales growth and higher gross margins than our EWS products and services. Our EWS product portfolio, which was part of the UC personal devices product category, included Wi-Fi and DECT handsets, related infrastructure and accessories, and generated revenues of approximately $71.1 million, $93.6 million and $99.6 million, in 2012, 2011, and 2010, respectively. We have reported the results of operations and financial position of EWS as discontinued operations within the consolidated statements of operations and balance sheets for all periods presented. See Note 3 of Notes to Consolidated Financial Statements for further discussion of our discontinued operations. The following discussion of our results of operations is based upon the results from our continuing operations unless otherwise indicated.

Revenues for 2012 were $1.4 billion, a decrease of $9.6 million, or 1%, from 2011. On a year-over-year basis, our total product revenues declined while service revenues increased in all of our segments. The decrease in product revenues was primarily a result of lower sales of our UC group systems products and UC platform 42 -------------------------------------------------------------------------------- Table of Contents products, partially offset by an increase in product revenues from UC personal devices products. The increase in service revenues was driven primarily by increased maintenance revenues on a larger installed base, as well as an increase in managed service revenues as a result of our acquisition of the Hewlett-Packard visual collaboration ("HPVC") business in the third quarter of 2011.

Revenues decreased across all of our segments in 2012 as compared to 2011. Our Americas, EMEA, and APAC segment revenues, which accounted for 49%, 25%, and 26%, respectively, of our revenues in 2012, all decreased by 1%, as compared to 2011. Our Americas segment revenues were negatively impacted, in part, by lower U.S. Federal and public sector revenues. The decline in EMEA segment revenues was driven by a difficult macroeconomic environment. The decline in our APAC segment revenues was due primarily to reduced government spending and elongated sales cycles, particularly in China. Over the past several quarters, we have seen increased conservatism from our China end users and partners due to the current government transition. We believe this conservatism will persist through the first quarter of 2013. See Note 15 of Notes to Consolidated Financial Statements for further information on our segments, including a summary of our segment revenues, segment contribution margin and segment accounts receivable.

The discussion of results of operations at the consolidated level is also followed by a discussion of results of operations by segment for the three years ended December 31, 2012.

During 2012, we experienced a slight decline in total revenues compared to revenue growth of 25% in 2011 and 28% in 2010. We believe the revenue decline was due to several factors, including a company and industry transition from point products to solution selling which resulted in some customers requiring additional time to consider a more UC&C-centric strategy versus point product or end point only deployments; lower revenues in our EMEA segment impacted by the recent economic conditions in Europe; and lower spending in other key geographies such as China, India, Australia and the United States.

Operating margins decreased by 9 percentage points in 2012 as compared to 2011.

These decreases are primarily due to operating expenses increasing in absolute dollars by 13% year-over-year while revenues were down 1% year-over-year.

Operating expenses increased as a percentage of revenues to 59% in 2012 from 52% in 2011. The increases in operating expenses in both absolute dollars and as a percentage of revenues were primarily due to increased headcount-related costs, including stock-based compensation, increased restructuring costs, including the consolidation of certain facilities, and increased sales and marketing expenses as a result of our recent rebranding and product launches, as well as increased telemarketing expenses. These increases were in continuing support of our key strategic initiatives and in anticipation of revenue growth. Gross margins were two percentage points lower in 2012 as compared to 2011, which also contributed to the lower operating margins. Lower gross margins were primarily due to lower overall revenue levels and change in product mix in 2012 as compared to 2011.

During 2012, we generated approximately $187.0 million in cash flow from operating activities which, after the impact of cash received from sale of our wireless business, cash paid for share repurchases, and other financing and investing activities described in further detail under "Liquidity and Capital Resources," resulted in a $101.6 million net increase in our total cash and cash equivalents.

43 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Years Ended December 31, 2012 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, 2012 2011 2010 Revenues Product revenues 75 % 81 % 84 % Service revenues 25 % 19 % 16 % Total revenues 100 % 100 % 100 % Cost of revenues Cost of product revenues as % of product revenues 41 % 39 % 38 % Cost of service revenues as % of service revenues 41 % 39 % 47 % Total cost of revenues 41 % 39 % 39 % Gross profit 59 % 61 % 61 % Operating expenses Sales and marketing 33 % 30 % 33 % Research and development 15 % 14 % 12 % General and administrative 7 % 6 % 7 % Acquisition-related costs 1 % 1 % - % Amortization of purchased intangibles 1 % - % - % Restructuring costs 2 % 1 % 1 % Litigation reserves and payments - % - % - % Total operating expenses 59 % 52 % 53 % Operating income - % 9 % 8 % Interest and other income (expense), net - % - % (1 )% Income from continuing operations before provision for income taxes - % 9 % 7 % Provision for income taxes 3 % - % 1 % Income (loss) from continuing operations, net of income taxes (3 )% 9 % 6 % Income from operations of discontinued operations, net of taxes 1 % 1 % - % Gain from sale of discontinued operations, net of taxes 3 % - % - % Net income 1 % 10 % 6 % Revenues We manage our business primarily on a geographic basis, organized into three geographic segments. Our net revenues, which include product and service revenues, for each segment are summarized in the following table: Increase (Decrease) From Year Ended December 31, Prior Year $ in thousands 2012 2011 2010 2012 2011 Americas $ 689,099 $ 693,288 $ 586,475 (1 )% 18 % % of revenues 49 % 49 % 52 % EMEA $ 345,723 $ 347,703 $ 274,228 (1 )% 27 % % of revenues 25 % 25 % 25 % APAC $ 357,806 $ 361,198 $ 258,169 (1 )% 40 % % of revenues 26 % 26 % 23 % Total revenues $ 1,392,628 $ 1,402,189 $ 1,118,872 (1 )% 25 % 44 -------------------------------------------------------------------------------- Table of Contents Total revenues for 2012 were $1.4 billion, a decrease of $9.6 million, or 1%, from 2011. The overall decrease in revenues in 2012 from 2011 was due to decreases in product revenues of $95.6 million, or 8%, largely offset by increases in service revenues of $86.0 million, or 33%, in 2012 as compared with 2011. Product revenues decreased in 2012 primarily as a result of decreases in revenues from UC group systems, and, to a lesser extent, decreases in UC platform revenues, partially offset by increased product revenues from UC personal devices. The increases in service revenues were primarily due to increased maintenance revenues on larger installed base and increased managed service revenues as a result of the HPVC business acquisition that we completed in the third quarter of 2011.

From a segment perspective, total revenues decreased across all segments in 2012 as compared to 2011. Our Americas, EMEA, and APAC segment revenues decreased by $4.2 million, $2.0 million, and $3.4 million, respectively, in 2012 as compared to 2011, a sequential decline of 1% year-over-year in each segment. The decreases were driven by decreased revenues across many of our key geographic markets, including the United States, Australia, Brazil, the Nordics, the Middle East/Africa and Turkey, India, Japan, and China. Overall, product revenues decreased and service revenues increased across all segments in 2012 as compared to 2011.

Total revenues for 2011 were $1.4 billion, an increase of $283.3 million, or 25%, over 2010, driven by increases in both product and services revenues.

Product revenues increased by $200.9 million, or 21%, and service revenues increased by $82.4 million, or 45%, in 2011 as compared with 2010. The increase in revenues in 2011 from 2010 was across all segments, most predominantly in the APAC segment, primarily as a result of investments made in our go-to-market capabilities which resulted in increased sales volumes while average selling prices remained relatively stable and, to a lesser extent, driven by revenues from the HPVC acquisition in the third quarter of 2011. Our Americas, EMEA, and APAC segment revenues increased by $106.8 million, or 18%, $73.5 million, or 27%, and $103.0 million, or 40%, respectively, in 2011 as compared to 2010.

These increases were driven by increased revenues across many of our key geographic markets, including the United States, China, Australia, Brazil, Russia, the United Kingdom, India, Germany, and the Nordics.

In 2012, 2011, and 2010, one channel partner, ScanSource Communications, in our Americas segment accounted for 14% of our total revenues. 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 revenues or segment 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.

In addition to the primary view on a geographic basis, we also track revenues by groups of similar products and services for various purposes. The following table presents revenues for groups of similar products and services: Increase (Decrease) From Year Ended December 31, Prior Year $ in thousands 2012 2011 2010 2012 2011 UC group systems $ 956,153 $ 971,753 $ 795,807 (2 )% 22 % UC personal devices 180,939 175,673 139,449 3 % 26 % UC platform 255,536 254,763 183,616 - 39 % Total revenues $ 1,392,628 $ 1,402,189 $ 1,118,872 (1 )% 25 % UC group systems include all immersive telepresence, group video and group voice systems products and the related service elements. The decrease in UC group systems of $15.6 million, or 2%, in 2012 from 2011 was primarily driven by decreases in sales of our group video systems products and related services in all our geographic segments and, to a lesser extent, by decreases in sales of our group voice systems products and related services in our Americas and EMEA segments. Those decreases were partially offset by increases in sales 45-------------------------------------------------------------------------------- Table of Contents of our immersive telepresence products and related services across all segments, and, to a lesser extent, an increase in sales of group voice systems products and related services in our APAC segment. The increase in UC group systems of $175.9 million, or 22%, in 2011 from 2010 was primarily driven by increases in sales of our group video and our immersive telepresence products and related services and, to a lesser extent, increases in revenues from our group voice products and related services.

UC personal devices include desktop video devices and desktop voice products and the related service elements. The increase in UC personal devices of $5.3 million, or 3%, in 2012 from 2011 was primarily due to increased sales of our desktop voice products and related services in our Americas and EMEA segments, partially offset by decreased revenues from desktop video products and related services in all our geographic segments and, to a lesser extent decreased revenues from desktop voice products and related services in APAC. The increase in UC personal devices of $36.2 million, or 26%, in 2011 over 2010 was primarily due to increased sales of our desktop voice products and related services in all our geographic segments, driven by the continued adoption of VoIP.

UC platform includes our RealPresence platform hardware and software products and the related service elements. UC platform revenues remained relatively flat in 2012 as compared to 2011, primarily due to increases in revenues from our Americas and APAC segments being largely offset by decreases in revenues from our EMEA segment. The increase in UC platform revenues of $71.1 million, or 39%, in 2011 over 2010 was driven by increased revenues from our UC platform products and related services in all our segments.

Cost of Revenues and Gross Margins Increase (Decrease) From Year Ended December 31, Prior Year $ in thousands 2012 2011 2010 2012 2011 Product cost of revenues $ 426,369 $ 439,995 $ 353,273 (3)% 25% % of product revenues 41 % 39 % 38 % 2pts 1pt Product gross margins 59 % 61 % 62 % (2)pts (1)pt Service cost of revenues $ 142,827 $ 103,930 $ 85,317 37% 22% % of service revenues 41 % 39 % 47 % 2pts (8)pts Service gross margins 59 % 61 % 53 % (2)pts 8pts Total cost of revenues $ 569,196 $ 543,925 $ 438,590 5% 24% % of total revenues 41 % 39 % 39 % 2pts - Total gross margin 59 % 61 % 61 % (2)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, royalty payments, amortization 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 $3.6 million, $2.5 million, and $2.3 million for the years ended December 31, 2012, 2011, and 2010, respectively. Cost of product revenues at the segment level consists of the standard cost of product revenues and does not include items such as warranty expense, royalties, and the allocation of overhead expenses, including facilities and IT costs.

Overall, product gross margins decreased by 2 percentage points in 2012 as compared to 2011, primarily due to lower than expected product sales, and increases in amortization of purchased intangibles and royalties, partially offset by lower warranty expense. From a segment perspective, product gross margins decreased in our Americas and APAC segments and increased in our EMEA segment in 2012 as compared to 2011.

46-------------------------------------------------------------------------------- Table of Contents Overall, product gross margins decreased by 1 percentage point in 2011 as compared to 2010, primarily due to increases in warranty expenses and royalties, amortization of purchased intangibles and other cost of sales, partially offset by higher product revenues. From a segment perspective, product gross margins increased slightly as a percentage of revenue in our EMEA and APAC segments and remained flat in our Americas segment in 2012 as compared to 2011.

Our December 31, 2012, finished goods inventory levels were higher than the December 31, 2011 levels and inventory turns decreased from 6.4 turns at December 31, 2011 to 5.7 turns at December 31, 2012. The decreased inventory turns were as a result of higher inventory levels in 2012 as compared to 2011 primarily due to an increase in UC group product inventories related to our new product introductions. Inventory turns in the future may fluctuate depending on our ability to reduce lead times, changes in product mix, the flexibility required to respond to the increased demands of our growing business, and the sustainability of the global economic recovery.

Cost of Service Revenues and Service Gross Margins Cost of service revenues consists primarily of material and direct labor, including stock-based compensation costs, depreciation, and an allocation of overhead expenses, including facilities and IT costs. The majority of our service revenues are related to maintenance agreements on new product sales, and the renewal of existing maintenance agreements, as well as managed services offerings. Cost of service revenues and service gross margins included charges for stock-based compensation of $6.6 million, $3.8 million, and $3.8 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Overall, service gross margins decreased by 2 percentage points in 2012 from 2011. The decrease was primarily due to the lower margin managed services business we acquired as part of the HPVC acquisition in 2011. Direct spending costs increased primarily as a result of increased headcount-related costs, including stock-based compensation costs, as well as IT and facilities allocations as a result of a 21% increase in services organization headcount from December 31, 2011 to December 31, 2012. Service gross margins decreased in our EMEA and APAC segments, but were up in the Americas segment in 2012 as compared to 2011.

Overall, service gross margins increased by 8 percentage points in 2011 over 2010. Services gross margins increased in all of our geographic segments primarily as a result of increased revenues from our maintenance services and decreased costs as a percentage of revenue associated with the delivery of services due to higher productivity of services employees, improvements in product quality and lower outside services.

Total Cost of Revenues and Total Gross Margins Overall, total gross margins as a percentage of revenues decreased by 2 percentage points in 2012 as compared to 2011, due to decreases in both product and service gross margins, as discussed under Cost of Product Revenues and Product Gross Margins and Cost of Services Revenues and Service Gross Margins.

Total gross margins as a percentage of revenues remained flat in 2011 as compared to 2010.

We expect gross margins to remain relatively flat in the near term as compared to 2012. Forecasting future gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Our cost of revenues as a percentage of revenue can vary significantly based upon a number of factors such as the following: uncertainties surrounding revenue levels, including future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, and related production level variances; competition; the extent to which new services sales accompany our product sales, as well as maintenance renewal rates; changes in technology; changes in product mix; variability of stock-based compensation costs; the potential of royalties to third parties; utilization of our professional services personnel as we develop our professional services practice and as we make investments to expand our professional services offerings; increasing costs for freight and repair costs; our 47-------------------------------------------------------------------------------- Table of Contents ability to achieve greater efficiencies in the installations of our immersive telepresence products; manufacturing efficiencies of subcontractors; manufacturing and purchase price variances; warranty and recall costs and the timing of sales. In addition, we may experience higher prices on commodity components that are included in our products. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower-than-anticipated revenues.

Sales and Marketing Expenses Increase (Decrease) Year Ended December 31, From Prior Year $ in thousands 2012 2011 2010 2012 2011 Expenses $ 464,353 $ 428,829 $ 371,488 8 % 15 % % of Total Revenues 33 % 30 % 33 % 3pts (3 )pts Sales and marketing expenses consist primarily of salaries and commissions for our sales force, including stock-based compensation costs, advertising and promotional expenses, product marketing expenses, and an allocation of overhead expenses, including facilities and IT costs. Sales and marketing expenses, except for direct sales and marketing expenses, are not allocated to our segments. Sales and marketing expenses included charges for stock-based compensation of $36.8 million, $27.0 million, and $25.2 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Sales and marketing expenses increased by 3 percentage points as a percentage of revenue and increased by 8% in absolute dollars in 2012 as compared to 2011, due primarily to increased compensation-related costs, including commissions and stock-based compensation costs. Other factors contributing to the increase include consulting and outside services related to our recent rebranding and product launches, as well as increased telemarketing expenses. Facilities and IT allocations also increased. These increases were partially offset by a decrease in training expenses.

Sales and marketing expenses as a percentage of revenues decreased by 3 percentage points but increased in absolute dollars by 15% in 2011 as compared to 2010, due primarily to increased headcount and compensation-related costs, including commissions. Sales and marketing headcount increased by 11% from December 31, 2010 to December 31, 2011. Depreciation and facilities allocations also increased as a result of headcount increases, as well as due to the expansion of our demonstration center capabilities in support of our go-to-market strategy.

We expect our sales and marketing expenses to remain relatively flat in absolute dollars in the near term. Expenses will fluctuate depending on revenue levels achieved, as certain expenses, such as commissions, are determined based on revenues achieved.

Forecasting sales and marketing expenses as a percentage of revenue is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter. Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we market new products. Sales and marketing expenses may also fluctuate due to increased international expenses and the impact of changes in foreign currency exchange rates. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues.

48 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Year Ended December 31, Increase From Prior Year $ in thousands 2012 2011 2010 2012 2011 Expenses $ 208,510 $ 190,322 $ 137,965 10 % 38 % % of Total Revenues 15 % 14 % 12 % 1pt 2pts Research and development costs are expensed as incurred and consist primarily of compensation costs, including stock-based compensation costs, outside services, expensed materials, depreciation and an allocation of overhead expenses, including facilities and IT costs. Research and development costs are not allocated to our segments. Research and development expenses included charges for stock-based compensation of $20.2 million, $14.9 million, and $9.7 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Research and development expenses increased by $18.2 million, or 10%, in 2012 as compared to 2011, and increased by 1 percentage point, as a percentage of revenues, in 2012 as compared to 2011. The increase in absolute dollars was primarily due to increased compensation costs associated with increased headcount and compensation-related costs, including stock-based compensation, increased outside services and development expenses in support of our key strategic initiatives. Research and development headcount increased by 3% from December 31, 2011 to December 31, 2012. Depreciation and overhead allocations also increased in 2012 over 2011 as a result of headcount increases and increased capital investments in support of our development projects.

Research and development expenses increased by $52.4 million, or 38%, in 2011 as compared to 2010, and increased by 2 percentage points, as a percentage of revenues, in 2011 as compared to 2010. The increase in absolute dollars was primarily due to increased compensation costs associated with increased headcount and increased development expenses in support of our key strategic initiatives, including our strategic partnerships as part of our UC&C ecosystem, cloud-based and mobile UC&C solutions and RealPresence platform hardware and software products. Research and development headcount increased by 41% from December 31, 2010 to December 31, 2011. Depreciation and overhead allocations also increased in 2011 over 2010 as a result of headcount increases and increased capital investments in support of our development projects.

We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies and products to combat competitive pressures, such as the new Scalable Video Coding standard to address the device, application and network requirements of mobile, SMB and consumer networks, and other technologies incorporated into our next-generation products.

We are also investing more heavily in research and development as a result of increased business opportunities with strategic partners, and mobile and service provider customers as a result of our strategic initiatives in these areas. We expect that research and development expenses in absolute dollars will remain relatively flat in the near term but will fluctuate depending on the timing and number of development activities in any given quarter. Research and development expenses as a percentage of revenue is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter. In order to control expenses in any given quarter, we have from time to time taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues.

General and Administrative Expenses Increase (Decrease) Year Ended December 31, From Prior Year $ in thousands 2012 2011 2010 2012 2011 Expenses $ 98,285 $ 81,661 $ 73,379 20 % 11 % % of Total Revenues 7 % 6 % 7 % 1pt (1 )pt 49 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses consist primarily of compensation costs, including stock-based compensation costs, professional service fees, allocation of overhead expenses, including facilities and IT costs, and litigation costs and bad debt expense. General and administrative expenses are not allocated to our segments. General and administrative expenses included charges for stock-based compensation of $21.6 million, $15.7 million, and $12.8 million for the years ended December 31, 2012, 2011, and 2010, respectively.

General and administrative expenses increased by $16.6 million, or 20%, in 2012 as compared to 2011, and increased by 1 percentage point as a percentage of revenues in 2012 as compared to 2011. The increase in absolute dollars was primarily due to increased compensation-related costs including stock-based compensation. General and administrative headcount increased by 14% from December 31, 2011 to December 31, 2012. The remaining increases in general and administrative expenses were attributed to increases in legal and bad debt expenses and allocation expenses as a result of increased headcount and our new headquarters building in San Jose, California.

General and administrative expenses increased in absolute dollars by $8.3 million, or 11%, but decreased by 1 percentage point as a percentage of revenue in 2011 as compared to 2010. The primary driver of the increase in absolute dollars was related to the 14% increase in headcount and related increases in compensation and other headcount-related expenses, including increased overhead allocations. This increase was partially offset by decreased expenses for legal and outside services. Further, in 2010, we incurred severance, legal and other costs associated with our CEO transition in May 2010.

Significant future charges due to costs associated with litigation or uncollectability of our receivables could increase our general and administrative expenses and negatively affect our profitability in the quarter in which they are recorded. Additionally, predicting the timing of litigation and bad debt expense associated with uncollectible receivables is difficult. The increase in international revenues has resulted in longer credit terms and increased credit risk, which could result in an increased level of bad debt expense in the future. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors.

We expect that our general and administrative expenses will remain relatively flat in absolute dollar amounts in the near term, but could fluctuate depending on the level and timing of additional investments required to support strategic initiatives. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues.

Acquisition-related Costs We expense all acquisition and other transaction related costs as incurred.

These costs generally include fees for outside legal and accounting services and other integration services. In addition, we have incurred costs related to planning and executing the divestiture of our enterprise wireless solutions business that was announced in May 2012 and closed in December 2012, including legal costs associated with enforcing the terms of the agreement. We have spent and will continue to spend significant resources identifying and acquiring businesses.

During 2012, we recorded $14.1 million of acquisition-related costs, primarily associated with planning and executing the divestiture of our enterprise wireless solutions business. See Note 3 of Note to Consolidated Financial Statements for further information. During 2011, we recorded $9.7 million of acquisition-related costs. These costs were primarily related to our acquisition of Accordent which closed in March 2011, our acquisition of HPVC which closed in July 2011, and our acquisition of ViVu which closed in October 2011. No such activities occurred in 2010. See Note 2 of Notes to Consolidated Financial Statements for further information.

50-------------------------------------------------------------------------------- Table of Contents Amortization of Purchased Intangibles In 2012, 2011, and 2010, we recorded $9.8 million, $5.5 million, and $1.4 million, respectively, in operating expenses for amortization of purchased intangibles acquired in our acquisitions. In addition to the amounts recorded as operating expenses in 2012, 2011 and 2010, we recorded amortization expenses totaling $7.6 million, $5.7 million, and $2.6 million, respectively, related to certain technology intangibles in cost of product revenues. The sequential increases year-over-year from 2010 to 2012 were primarily due to the amortization of purchased intangibles acquired from Accordent in the first quarter of 2011, from HPVC in the third quarter of 2011, and from ViVu in the fourth quarter of 2011. Purchased intangible assets are being amortized to expense over their estimated useful lives, which range from several months to six years.

We evaluate our purchased intangibles for possible impairment on an ongoing basis. When impairment indicators exist, we perform an assessment to determine if the intangible asset has been impaired and to what extent. The assessment of purchased intangibles impairment is conducted by first estimating the undiscounted future cash flows to be generated from the use and eventual disposition of the purchased intangibles and comparing this amount with the carrying value of these assets. If the undiscounted cash flows are less than the carrying amounts, impairment exists, and future cash flows are discounted at an appropriate rate and compared to the carrying amounts of the purchased intangibles to determine the amount of the impairment. No impairment charges were recognized for all periods presented.

Restructuring Costs In 2012, 2011, and 2010, we recorded $22.0 million, $9.4 million, and $8.1 million, respectively, related to restructuring actions which resulted from the consolidation of certain facilities and the elimination or relocation of various positions as part of restructuring plans approved by management. These actions are generally intended to streamline and focus our efforts and more properly align our cost structure with our projected revenue streams.

In 2012, we completed the consolidation and elimination of certain facilities in order to gain efficiencies, including the combination of our headquarters in San Jose and Santa Clara, California into one new location in San Jose, California.

As a result, we recorded approximately $8.9 million (net of $2.8 million of deferred rent) in restructuring charges related to idle facilities upon vacating these facilities in the second quarter of 2012. In addition, we recorded approximately $13.1 million of charges, primarily for severance and other employee benefits, related to restructuring actions approved by management in October 2011 and July 2012. The action plan approved in July 2012 resulted in the elimination of approximately four percent of our global workforce, enabling us to focus resources on our product development and product launch initiatives.

In 2011, we completed the consolidation of our Colorado facilities and began the transition of certain engineering and product management and related support functions in our Andover, Massachusetts facility to other locations in order to achieve efficiencies. Restructuring charges relating to these actions primarily included costs for idle facilities and, to a lesser extent, severance and relocation costs for impacted individuals. Additionally, in October 2011, we committed to a restructuring plan designed to better align and allocate resources to more strategic growth areas of the business. These actions were primarily related to the reorganization of our global go-to-market and other organizations. The restructuring plan resulted in the elimination of approximately seven percent of our global workforce with the majority of the reductions taking effect in the fourth quarter of 2011 and first quarter of 2012, enabling the creation of new positions that better aligned with our strategic initiatives. In 2011, we recorded approximately $8.7 million of restructuring charges related to severance and other employee benefits and $0.7 million related to idle facilities.

In 2010, we committed to several restructuring plans to eliminate, relocate positions, or to enable the hiring of additional positions to better align with the execution of our strategic initiatives. The restructuring plans included the elimination of approximately two percent of our global workforce. As a result of the actions taken in 2010, we recorded restructuring charges of $8.1 million during 2010, primarily related to severance and other employee termination benefits.

See Note 7 of Notes to Consolidated Financial Statements for further information on restructuring costs.

51 -------------------------------------------------------------------------------- Table of Contents We currently expect to record additional restructuring charges of between $10.0 million and $15.0 million in 2013, primarily related to the elimination or consolidation of certain facilities to gain efficiencies. In the first quarter of 2013, we also currently expect to record restructuring charges between approximately $4.0 million and $6.0 million related to severance and other employee termination benefits, primarily related to the elimination or relocation of engineering positions as a result of downsizing our Burnaby, Canada location.

In the future, we may take additional restructuring actions to gain operating efficiencies or reduce our operating expenses, while simultaneously implementing additional cost containment measures and expense control programs. Such restructuring actions are subject to significant risks, including delays in implementing expense control programs or workforce reductions and the failure to meet operational targets due to the loss of employees or a decrease in employee morale, all of which would impair our ability to achieve anticipated cost reductions. If we do not achieve the anticipated cost reductions, our business could be harmed.

Litigation Reserves and Payments We recorded $1.2 million in 2010 in litigation reserves and payments in the Consolidated Statements of Operations related to the settlement of legal matters during the period. There were no such expenses in 2012 and 2011. See Note 9 of Notes to Consolidated Financial Statements for further information.

We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. These matters are subject to inherent uncertainties and management's view of these matters may change in the future and could result in charges that would have a material adverse impact on our financial position, our results of operations, or our cash flows.

Interest and Other Income (Expense), Net Interest and other income (expense), net, consists primarily of interest earned on our cash and cash equivalents and investments less bank charges resulting from the use of our bank accounts, gains and losses on investments, non-income related taxes and fees as well as foreign exchange related gains and losses.

Interest and other income (expense), net, was a net expense of $3.9 million, $1.7 million, and $7.9 million in 2012, 2011, and 2010, respectively.

The increase in net expenses in interest and other income (expense), net, in 2012 from 2011 was primarily due to higher non-income related taxes and bank charges as well as higher foreign exchange related losses in 2012 as compared to 2011, partially offset by an increase in interest income. The decrease in net expenses in interest and other income (expense), net, in 2011 from 2010 was primarily due to a write-down in 2010 of other-than temporarily impaired investments that did not recur in 2011, partially offset by a decrease in interest income.

Interest and other income (expense), net, will fluctuate due to changes in interest rates and returns on our cash and investments, any future impairment of investments, foreign currency rate fluctuations on un-hedged exposures, fluctuations in costs associated with our hedging program and timing of non-income related taxes and license fees. The cash balance could also decrease depending upon the amount of cash used in any future acquisitions, our stock repurchase activity and other factors, which would also impact our interest income.

Provision for Income Taxes from Continuing Operations Year Ended December 31, 2012 2011 2010 Income tax expense from continuing operations $ 38,056 $ 5,246 $ 12,159 Effective tax rate 1,523.5 % 4.0 % 15.4 % 52 -------------------------------------------------------------------------------- Table of Contents The increase in the effective tax rate in 2012 as compared to 2011 was related primarily to $38.8 million in federal and state taxes recorded on $103.3 million related to the tax consequences of a global restructuring project affecting the existing legal entity structure that is designed to accommodate the trend towards more software and virtual based solutions versus our traditional hardware distribution model. In addition to taxes recorded related to the global restructuring, the effective tax rate was also impacted by the benefit of entities in countries with tax rates lower than the U.S. statutory rate, an increase in non-deductible share based compensation, an increase in non-deductible acquisition and divestiture related expenses, a decrease in reserve reversals and the expiration of the federal research and development tax credit in 2012 as compared to 2011.

The decrease in the effective tax rate in 2011 as compared to 2010 was due to a relative increase in foreign earnings which are subject to lower tax rates, an increase in U.S. research and development tax credits, and an increase in the release of uncertain tax positions inclusive of related interest and penalties of $8.9 million in 2011 as compared to $4.9 million in 2010, partially offset by U.S. taxes accrued on the intercompany sale of intellectual properties.

As of December 31, 2012, we had approximately $1.9 million in tax effected net operating losses, $1.4 million in tax effected capital loss carryforwards and $13.0 million in tax effected credit carryforwards. The capital and net operating loss carryforward assets and tax credit carryforwards begin to expire in 2015. Included in the net deferred tax asset balance is a $3.2 million valuation allowance related primarily to research credits in a jurisdiction with a history of credits in excess of taxable profits. See Note 14 of Notes to Consolidated Financial Statements for further information.

We provide for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside of the U.S. At December 31, 2012, the cumulative amount of earnings upon which U.S. income tax has not been provided is approximately $320.0 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated to the U.S.

In 2012, we recorded reserve reductions of $10.0 million, $0.8 million of which was paid in settlement of a multi-year state tax audit, and $5.7 million of which was due to a reduction in unrecognized tax benefits for research credits from acquired companies. The expiration of statutes of limitation in both the U.S. and foreign jurisdictions also resulted in reserve releases of $3.5 million.

In 2011, we recorded reserve releases of $8.1 million, $6.9 million of which was due to the resolution of multi-year tax audits. The expiration of statutes of limitation in both the U.S. and foreign jurisdictions resulted in reserve releases of $0.8 million, and $0.4 million in reduction in reserves was due to changes in foreign exchange rates.

In 2010, the California Franchise Tax Board completed its audit of the 2005 and 2006 tax years. The audit resulted in a payment of $0.8 million. Certain other audit issues were also settled during the year resulting in the release of accrued taxes of $1.5 million. Additionally, $3.4 million in tax reserves related to the cost sharing of stock based compensation were released as an adjustment to stockholders' equity, $0.7 million in tax reserves were released due to changes in foreign exchange rates during the year, and $2.1 million in tax reserves were released due to the expiration of statutes of limitation in both the U.S. and foreign jurisdictions.

As of December 31, 2012, we have $23.0 million of unrecognized tax benefits compared to $32.4 million at December 31, 2011. By the end of 2013, uncertain tax positions may be reduced as a result of a lapse of the applicable statutes of limitations. We anticipate that the reduction would approximate $2.5 million.

The reserve releases would be recorded as adjustments to tax expense in the period released.

We recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2012 and 2011, we had approximately $1.5 million and $2.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.

53 -------------------------------------------------------------------------------- Table of Contents Our future effective income tax rate depends on various factors, such as changes in tax legislation, accounting principles, or interpretations thereof, the geographic composition of our pre-tax income, non tax-deductible expenses incurred in connection with acquisitions, amounts of tax-exempt interest income and research and development credits as a percentage of aggregate pre-tax income, final resolution of the tax impact from the exercise of incentive stock options and the issuance of shares under the employee stock purchase plan, and the effectiveness of our tax planning strategies. For example, on January 2, 2013, the "American Taxpayer Relief Act of 2012" was signed into law. It provides for an extension of the federal research credit retroactive for 2012 and extended through 2013. The impact of the 2012 federal research credit will be reflected in the first quarter of 2013 and is estimated to be in the range of $2.0 million to $2.5 million. We believe that our future effective tax rate may be more volatile as a result of these factors.

We are also subject to the periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our net income and financial condition, possibly materially.

Segment Information Our business is organized around four major geographic theatres: North America, Central America/Latin America ("CALA"), Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC"). For reporting purposes, we aggregate North America and CALA into one segment named Americas and report EMEA and APAC as separate segments. The segments are determined in accordance with how management views and evaluates its business and allocates its resources, and based on the criteria as outlined in the authoritative guidance.

A description of our products and services, as well as annual financial data, for each segment can be found in the Business section of this Form 10-K and Note 15 of Notes to Consolidated Financial Statements. The discussions below include the results of each of our segments for the years ended December 31, 2012, 2011, and 2010. Segment contribution margin includes all segment revenues less the related cost of sales and direct marketing and sales expenses. Management allocates some infrastructure costs such as facilities and IT costs in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and to allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include corporate manufacturing costs, sales and marketing costs other than direct sales and marketing, stock-based compensation costs, research and development costs, general and administrative costs, such as legal and accounting costs, acquisition-related integration costs, amortization of purchased intangible assets, restructuring costs, and interest and other income (expense), net.

54-------------------------------------------------------------------------------- Table of Contents The following is a summary of the financial information for each of our segments for the fiscal years ended December 31, 2012, 2011, and 2010 (in thousands): Americas EMEA APAC Total 2012: Revenue $ 689,099 $ 345,723 $ 357,806 $ 1,392,628 % of total revenue 49 % 25 % 26 % 100 % Contribution margin 273,937 142,915 150,962 567,814 % of segment revenue 40 % 41 % 42 % 41 % 2011: Revenue $ 693,288 $ 347,703 $ 361,198 $ 1,402,189 % of total revenue 49 % 25 % 26 % 100 % Contribution margin 280,259 141,421 175,242 596,922 % of segment revenue 40 % 41 % 49 % 43 % 2010: Revenue $ 586,475 $ 274,228 $ 258,169 $ 1,118,872 % of total revenue 52 % 25 % 23 % 100 % Contribution margin 231,898 95,178 117,679 444,755 % of segment revenue 40 % 35 % 46 % 40 % Americas Increase (Decrease) Year Ended December 31, From Prior Year $ in thousands 2012 2011 2010 2012 2011 Revenues $ 689,099 $ 693,288 $ 586,475 (1 )% 18 % Contribution margin $ 273,937 $ 280,259 $ 231,898 (2 )% 21 % Contribution margin as % of Americas revenues 40 % 40 % 40 % - - Our Americas segment revenues decreased by 1% in 2012, as compared to 2011, primarily due to decreased revenues in the United States and Brazil, partially offset by increases in Canada and Mexico. The decrease in Americas segment revenues was driven by decreases in revenues from our UC group systems, partially offset by increases in UC personal devices and UC platform revenues.

Decreases in UC group systems revenues in the Americas were primarily driven by decreased group voice and group video revenues, which were partially offset by increased immersive telepresence revenues as a result of the 2011 HPVC acquisition. Increases in UC personal devices revenues were primarily driven by increased desktop voice sales resulting from continued adoption of VoIP, partially offset by decreased desktop video revenues. UC platform revenues growth was as a result of increased sales of our RealPresence products and services.

Our Americas segment revenues increased by 18% in 2011 as compared with 2010, primarily due to increased revenues in the United States and Brazil, partially offset by decreases in Canada and Mexico. The increase in revenues was driven by increases in our UC group systems, UC personal devices and UC platform revenues.

Increases in UC group systems revenues in the Americas were primarily driven by increased group voice revenues, increased group video revenues, and increased immersive telepresence revenues. Increases in UC personal devices revenues were primarily driven by increased desktop voice sales resulting from continued adoption of VoIP, partially offset by decreased desktop video revenues. UC platform revenues growth was as a result of increased sales of our RealPresence products and services.

In 2012, 2011, and 2010, one channel partner in our Americas segment accounted for 27% of our Americas net revenues for all periods. We believe it is unlikely that the loss of any of our channel partners would have a 55-------------------------------------------------------------------------------- Table of Contents 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.

Contribution margin as a percentage of America's segment revenues remained flat in 2012 as compared to 2011, primarily due to gross margins being relatively flat while direct sales and marketing expenses as a percentage of revenues increased slightly from 2011 to 2012, resulting in less than a percentage point change in contribution margin. The increase in direct sales and marketing expenses was primarily due to increased compensation related costs in 2012 as compared to 2011.

Contribution margin as a percentage of America's segment revenues remained flat in 2011 as compared to 2010, primarily due to increased gross margins being offset by an increase in direct sales and marketing expenses as a percentage of revenues.

EMEA Increase (Decrease) Year Ended December 31, From Prior Year $ in thousands 2012 2011 2010 2012 2011 Revenues $ 345,723 $ 347,703 $ 274,228 (1) % 27 % Contribution margin 142,915 $ 141,421 $ 95,178 1 % 49 % Contribution margin as % of EMEA revenues 41 % 41 % 35 % - 6pts Our EMEA segment revenues decreased by 1% in 2012 as compared to 2011, primarily due to lower sales of UC platform products and related services and UC personal devices products and related services, partially offset by increased sales of UC group system products and related services. UC platform revenues decreased as a result of lower sales of our RealPresence products and services. UC personal devices revenues decreased primarily due to decreases in desktop video revenues, partially offset by an increase in desktop voice revenues. UC group systems revenues increased primarily due to an increase in immersive telepresence revenues as a result of the HPVC acquisition in 2011, partially offset by lower group video and group voice revenues. The overall decline in EMEA segment revenues was primarily due to the current economic conditions in the region.

Revenues were down in the Nordic countries, the Middle East and Turkey, Eastern Europe, and Spain, partially offset by increases in Benelux and Germany.

Our EMEA segment revenues increased by 27% in 2011 as compared with 2010 primarily due to broad-based growth throughout most of EMEA, being led by growth in Russia, UK, Germany and Nordic countries, partially offset by a decrease in Spain. The increase in revenues was across all our product groups. Increases in UC group systems revenues in EMEA was primarily driven by increased group video revenues, increased immersive telepresence revenues and increased group voice revenues. UC platform growth was as a result of increased sales of the products and services that comprise our RealPresence platform. Increases in UC personal devices revenues were primarily driven by increased desktop voice sales resulting from continued adoption of VoIP technology and an increase in desktop video revenues.

In 2012, 2011 and 2010, one channel partner in our EMEA segment accounted for 11%, 11%, and 13% of our EMEA net revenues, respectively.

Contribution margin as a percentage of EMEA segment revenues remained flat in 2012 as compared to 2011, primarily due to slightly higher gross margins, which resulted in less than a percentage point change in contribution margin. Direct sales and marketing expenses were flat in absolute dollars and as a percentage of revenue in 2012 as compared to 2011. The increase in gross margins was driven primarily by higher product gross margins, partially offset by lower service gross margins.

56 -------------------------------------------------------------------------------- Table of Contents Contribution margin as a percentage of EMEA segment revenues was 41% in 2011 as compared to 35% in 2010. The contribution margin as a percentage of revenue increased primarily due to lower direct sales and marketing expenses as a percentage of revenues and, to a lesser extent, higher gross margins. Direct sales and marketing expenses increased in absolute dollars, but decreased as a percentage of revenues. The increases in absolute dollars were primarily due to increased headcount, partially offset by a decrease in marketing program investments. The decrease as a percentage of revenue was primarily due to increased productivity of our sales force. The increase in gross margins was driven primarily by a decrease in cost of services as a percentage of revenues and a mix shift toward higher margin products in our RealPresence platform product offerings.

APAC Increase (Decrease) Year Ended December 31, From Prior Year$ in thousands 2012 2011 2010 2012 2011 Revenues $ 357,806 $ 361,198 $ 258,169 (1 )% 40 % Contribution margin $ 150,962 $ 175,242 $ 117,679 (14 )% 49 % Contribution margin as % of APAC revenue 42 % 49 % 46 % (7 )pts 3pts Our APAC segment revenues decreased by 1% in 2012 as compared to 2011 primarily due to decreased UC group systems and UC personal devices revenues, partially offset by increased UC platform revenues. Decreases in UC group systems revenues in APAC were primarily driven by decreased group video revenues, partially offset by increases in immersive telepresence revenues as a result of the 2011 HPVC acquisition and in group voice revenues. Decreases in UC personal devices revenues were primarily driven by decreases in desktop video revenues and, to a lesser extent, desktop voice revenues. Increases in UC platform revenues were as a result of increased sales of our RealPresence platform products and services.

Revenues decreased in Australia, India, Japan, and China, partially offset by an increase in Korea. The overall decline in our APAC segment revenues was primarily due to reduced government spending and elongated sales cycles.

Our APAC segment revenues increased by 40% in 2011 as compared to 2010 primarily due to investments made in our go-to-market capabilities. Revenues from China, Australia, and India contributed to the strong growth in APAC in 2011. The increase in revenues was driven by increases our UC group systems, UC platform revenues, and, to a lesser extent, and UC personal devices revenues. Increases in UC group systems revenues in APAC were primarily driven by increased group video revenues, and to a lesser extent, increased immersive telepresence revenues as a result of the HPVC acquisition in 2011 and increased group voice revenues. UC platform revenues growth was as a result of increased sales of our RealPresence platform products and services. Increases in UC personal devices revenues were primarily driven by increased desktop voice sales resulting from continued adoption of VoIP technologies.

In 2012, 2011, and 2010, two channel partners in our APAC segment, in aggregate, accounted for 33%, 33%, and 29%, respectively, of our APAC net revenues.

Contribution margin as a percentage of APAC segment revenues was 42% in 2012 as compared to 49% in 2011. The contribution margin as a percentage of revenue decreased primarily due to lower gross margins and higher direct sales and marketing expenses as a percentage of revenues. The decrease in gross margins was due to a decrease in service gross margins and, to a lesser extent, lower product gross margins driven primarily by a product mix shift and increased discounting. Direct sales and marketing expenses increased both in absolute dollars and as a percentage of revenue, primarily due to increased headcount-related expenses.

Contribution margin as a percentage of APAC segment revenues was 49% in 2011 as compared to 46% in 2010. The contribution margin as a percentage of revenues increased primarily due to higher gross margins and 57-------------------------------------------------------------------------------- Table of Contents lower sales and marketing expenses as a percentage of revenues. The increase in gross margins was driven primarily by a decrease in cost of services as a percentage of revenues while product gross margin as a percentage of revenues increased slightly. The increase in gross margins was driven primarily by a decrease in cost of services as a percentage of revenues and a mix shift toward higher margin products in our RealPresence platform product offerings. Direct sales and marketing expenses, while increasing in absolute dollars, decreased as a percentage of revenues. The decrease in sales and marketing expense as a percentage of revenues was due to spending mix and investments focused in lower cost areas.

Discontinued Operations On May 10, 2012, we entered into a Purchase and Sale Agreement (the "Purchase Agreement") with Mobile Devices Holdings, LLC, a Delaware limited liability corporation ("Mobile Devices"), pursuant to which we would divest EWS to an affiliate of Sun Capital Partners, Inc. On October 22, 2012, the Purchase Agreement was amended (the "Amended Purchase Agreement"). Per the terms of the Amended Purchase Agreement, Mobile Devices would acquire SpectraLink Corporation ("SpectraLink"), a wholly-owned subsidiary of Polycom, by purchasing all of the outstanding stock and an intercompany note of SpectraLink from Polycom. On December 4, 2012, we completed the disposition of the assets of our EWS business to Mobile Devices and received cash consideration of approximately $50.7 million, resulting in a gain on sale of the discontinued operations, net of taxes, of $35.4 million.

The decision to divest EWS reflects our focus on initiatives that extend our leadership in our core unified communications business. The products and services that comprise our core unified communications business have historically experienced stronger sales growth and higher gross margins than our EWS products and services. Our EWS product portfolio, which was previously included in our UC personal devices product category, includes Wi-Fi and DECT handsets and related infrastructure and accessories, which were primarily sold in our Americas and EMEA segments. As a result, we have reported the results of operations and financial position of EWS as discontinued operations within the consolidated statements of operations and balance sheets for all periods presented. See Note 3 of Notes to Condensed Consolidated Financial Statements for a further discussion of our discontinued operations.

Summarized results from discontinued operations were as follows (in thousands): Year ended December 31, 2012 2011 2010 Revenues $ 71,133 $ 93,609 $ 99,617 Income from discontinued operations 15,973 16,066 3,483 Income tax provision 6,085 6,160 1,729 Net income from discontinued operations $ 9,888 $ 9,906 $ 1,754 Revenues from discontinued operations for 2012 were $71.1 million, a decrease of $22.5 million, or 24%, from 2011. The decrease was primarily due to the 2012 revenues including only a period of 11 months through the closure of the EWS sale transaction as compared to the 12-month period for 2011. Revenues from discontinued operations for 2011 were $93.6 million, a decrease of $6.0 million, or 6%, from 2010. The decrease in wireless revenues was the result of decreasing demand for wireless related products and services. Wireless revenues were down in 2012 as compared to 2011 and in 2011 as compared to 2010 in the Americas and EMEA segments. Wireless revenues in our APAC segment were not significant.

Net income from discontinued operations was essentially flat in 2012 as compared to 2011, and increased by $8.2 million in 2011 as compared to 2010. The increase in 2011 from 2010 was primarily due to improvements in gross margin and a decrease in operating expenses in 2011 from 2010. The improvement in wireless gross margins was due to a lower mix of sales of lower margin products.

Operating expenses of discontinued 58-------------------------------------------------------------------------------- Table of Contents operations decreased by $9.2 million in 2011, compared to the prior year, as we continued to reduce spending in our wireless business as a result of a smaller revenue base in our wireless products.

Liquidity and Capital Resources As of December 31, 2012, our principal sources of liquidity included cash and cash equivalents of $477.1 million, short-term investments of $197.2 million and long-term investments of $50.3 million. Substantially all of our short-term and long-term investments are comprised of U.S. government and agency securities and corporate debt securities. See Note 8 of Notes to Consolidated Financial Statements for further information on our short-term and long-term investments.

We also have outstanding letters of credit totaling approximately $7.6 million, which are in place to satisfy certain of our facility lease requirements as well as other legal, tax, and insurance obligations.

Our total cash and cash equivalents and investments held in the United States totaled $302.8 million as of December 31, 2012, and the remaining $421.8 million was held by various foreign subsidiaries outside of the United States.

If we would need to access our cash and cash equivalents and investments held outside of the United States in order to fund acquisitions, share repurchases or our working capital needs, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

We generated cash from operating activities totaling $187.0 million in 2012, $299.6 million in 2011, and $143.4 million in 2010. The decrease in cash provided from operating activities in 2012 from 2011 was due primarily to lower net income, as adjusted for non-cash income and expenses, increased inventory, a decrease in accounts payable, and a smaller increase in other accrued liabilities and deferred revenue. Partially offsetting these negative effects were decreases in accounts receivables.

The increase in cash provided from operating activities in 2011 over 2010 was due primarily to higher net income, as adjusted for non-cash income and expenses, decreased inventory, a smaller increase in prepaid expenses and other current assets, and a higher increase in accounts payable, other accrued liabilities and deferred revenue, and taxes payable. Partially offsetting these positive effects were increases in accounts receivables, and deferred taxes.

The total net change in cash and cash equivalents for the year ended December 31, 2012 was an increase of $101.6 million. The primary sources of cash were $187.0 million from operating activities, $50.4 million of net cash proceeds from the sale of our EWS business, $25.8 million associated with the exercise of stock options and purchases under the employee stock purchase plan and $9.3 million in excess tax benefits from stock-based compensation. The primary uses of cash during this period were $67.3 million for purchases of property and equipment, $67.9 million for purchases of our common stock, $31.1 million for purchases of investments, net of proceeds from investments, and $4.6 million of additional payments made for acquisitions of certain additional equipment.

Our days sales outstanding, or DSO, metric was 50 days at December 31, 2012 compared to 49 days at December 31, 2011. We expect to continue to experience upward pressure on our DSO as a result of the increase in international receivables, which typically have longer payment terms. DSO could vary as a result of a number of factors such as fluctuations in revenue linearity, a change in the mix of international receivables, and increases in receivables from service providers and government entities which also have customarily longer payment terms. DSO could also be negatively impacted if our partners experience difficulty in financing purchases, which results in delays in payment to us.

Our December 31, 2012 finished goods inventory levels were higher than the December 31, 2011 levels and inventory turns decreased to 5.7 turns at December 31, 2012 from 6.4 turns at December 31, 2011. The decreased inventory turns were as a result of higher inventory levels in 2012 as compared to 2011 primarily due to an 59 -------------------------------------------------------------------------------- Table of Contents increase in UC group product inventories related to our new product introductions. Inventory turns in the future may fluctuate depending on our ability to reduce lead times, as well as changes in product mix. Our inventory turns may also decrease in the future as a result of the flexibility required to respond to the increased demands of our growing business and the sustainability of the global economic recovery.

Cash used for purchases of property and equipment decreased slightly to $67.3 million in 2012 from $69.3 million in 2011. We expect our purchases of property and equipment in 2013 to increase due to upgrades to our Enterprise Resource Planning ("ERP") systems and continued support of our strategic alliances and new product offerings.

We enter into foreign currency forward contracts, which typically mature in one month, to hedge our exposure to foreign currency fluctuations of foreign currency-denominated receivables, payables, and cash balances. We record on the balance sheet at each reporting period the fair value of our foreign currency forward contracts and record any fair value adjustments in results of operations. Gains and losses associated with currency rate changes on contracts are recorded in interest and other income (expense), net, offsetting transaction gains and losses on the related assets and liabilities. Additionally, our hedging costs can vary depending on the size of our hedging program, on whether we are purchasing or selling foreign currency relative to the U.S. dollar and on interest rate spreads between the U.S. and other foreign markets.

Additionally, we also have a hedging program that uses foreign currency forward contracts to hedge a portion of anticipated revenues and operating expenses denominated in the Euro and British Pound as well as operating expenses denominated in Israeli Shekels. At each reporting period, we record the fair value of our unrealized forward contracts on the balance sheet with related unrealized gains and losses as a component of accumulated other comprehensive income (loss), a separate element of stockholders' equity. Realized gains and losses associated with the effective portion of the foreign currency forward contracts are recorded within revenue or operating expense, depending upon the underlying exposure being hedged. Any excluded and ineffective portions of a hedging instrument would be recorded in interest and other income (expense), net.

From time to time, the Board of Directors has approved plans for us to purchase shares of our common stock in the open market. During the years ended December 31, 2012, 2011, and 2010, we purchased approximately 5.1 million, 2.0 million, and 4.8 million shares, as adjusted for the stock split, respectively, of our common stock in the open market for cash of $55.0 million, $40.0 million, and $69.2 million, respectively. Our Board of Directors approved an increase in the current share repurchase authorization to include the $49.7 million net proceeds from the sale of our EWS business. As of December 31, 2012, we were authorized to purchase up to an additional $72.8 million under the 2008 share repurchase plan. See Note 12 of Notes to our Consolidated Financial Statements for a discussion of the accounting for our common stock repurchases and the related reduction to retained earnings included in stockholders' equity in our consolidated balance sheet.

At December 31, 2012, we had open purchase orders related to our contract manufacturers and other contractual obligations of approximately $144.7 million primarily related to inventory purchases. We also currently have commitments that consist of obligations under our operating leases. In the event that we decide to cease using a facility and seek to sublease such facility or terminate a lease obligation through a lease buyout or other means, we may incur a material cash outflow at the time of such transaction, which will negatively impact our operating results and overall cash flows. In addition, if facilities rental rates decrease or if it takes longer than expected to sublease these facilities, we could incur a significant further charge to operations and our operating and overall cash flows could be negatively impacted in the period that these changes or events occur.

60-------------------------------------------------------------------------------- Table of Contents These purchase commitments and lease obligations are reflected in our Consolidated Financial Statements once goods or services have been received or at such time when we are obligated to make payments related to these goods, services or leases. In addition, our bank has issued letters of credit totaling approximately $7.6 million, which are used to secure the leases on some of our offices as well as other legal, tax, and insurance obligations. The table set forth below shows, as of December 31, 2012, the future minimum lease payments due under our current lease obligations. There is no sublease income netted in the amounts below, as the amounts are not material. In addition to these minimum lease payments, we are contractually obligated under the majority of our operating leases to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance. Our contractual obligations as of December 31, 2012 are as follows (in thousands): Minimum Projected Lease Annual Other Long- Purchase Payments Operating Costs Term Liabilities CommitmentsYear ending December 31, 2013 $ 26,090 $ 5,772 $ - $ 144,710 2014 29,783 3,647 3,239 - 2015 24,298 2,774 2,387 - 2016 20,554 1,964 3,724 - 2017 17,249 1,141 2,472 - Thereafter 53,867 2,009 10,257 - Total payments $ 171,841 $ 17,307 $ 22,079 $ 144,710 As of December 31, 2012, we have $23.0 million of unrecognized tax benefits compared to $32.4 million at December 31, 2011. By the end of 2013, uncertain tax positions may be reduced as a result of a lapse in the applicable statutes of limitations. We anticipate that the reduction would approximate $2.5 million.

The reserve releases would be recorded as adjustments to tax expense in the period released.

We believe that our available cash, cash equivalents and investments will be sufficient to meet our operating expenses and capital requirements for at least the next twelve months. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing, debt financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.

Off-Balance Sheet Arrangements As of December 31, 2012, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our process used to develop estimates, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, stock compensation costs, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other 61-------------------------------------------------------------------------------- Table of Contents sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. See Note 1 of Notes to Consolidated Financial Statements for additional discussion of our accounting policies.

Revenue Recognition and Product Returns We recognize revenue when persuasive evidence of an arrangement exists, title and risk of loss have transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met. We generally recognize service revenues ratably over the service periods of one to five years or upon the completion of installation or professional services.

Some of our products are integrated with software that is essential to the functionality of the equipment. Additionally, we provide unspecified software upgrades and enhancements related to most of these products through maintenance contracts.

When a sale involves multiple deliverables, such as sales of products that include services, the multiple deliverables are evaluated to determine the unit of accounting, and the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price, if it exists, or third-party evidence ("TPE") of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.

Channel Partner Programs and Incentives We record estimated reductions to revenues for channel partner programs and incentive offerings including special pricing agreements, promotions and other volume-based incentives. If market conditions were to decline or competition were to increase further, we may take future actions to increase channel partner incentive offerings, possibly resulting in an incremental reduction of revenues at the time the incentive is offered. We accrue for co-op marketing funds as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues.

Warranty We provide for the estimated cost of product warranties at the time revenue is recognized. Our warranty obligation is affected by estimated product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revision of the estimated warranty liability would be required.

Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review our allowance for doubtful accounts quarterly by assessing individual accounts receivable over a specific aging and amount, and all other balances on a pooled basis based on historical collection experience. If the financial condition of our customers were to deteriorate, adversely 62-------------------------------------------------------------------------------- Table of Contents affecting their ability to make payments, additional allowances would be required. Delinquent account balances are written off after management has determined that the likelihood of collection is not probable.

Excess and Obsolete Inventory We record write-downs for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future product life-cycles, product demand and market conditions. If actual product life cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of or increase in that newly established cost basis.

Stock-based Compensation Expense Our stock-based compensation programs consist of grants of share-based awards to employees and non-employee directors, including stock options, restricted stock units and performance shares, as well as our employee stock purchase plan. We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The estimated fair value of these awards, including the effect of estimated forfeitures, is recognized as expense over the requisite service period, which is generally the vesting period. The fair values of stock option awards and shares purchased under the employee stock purchase plan are estimated at the grant date using the Black-Scholes option valuation model. The fair value of restricted stock units is based on the market value of our common stock on the date of grant. The fair value of performance shares is based on the market price of our stock on the date of grant and assumes that the performance criteria will be met and the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the probable outcome of performance-related conditions until the award vests. The fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of our stock among the Russell 2000 Index companies (for awards granted prior to 2011) and NASDAQ Composite Index companies (for awards granted in 2011 and 2012) over each performance period.

Changes in the underlying factors and assumptions utilized may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

Deferred and Refundable Taxes We estimate our actual current tax expense together with our temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance against these tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a valuation allowance in a period, we must include and expense the allowance within the tax provision in the consolidated statement of operations. As of December 31, 2012, we have $77.1 million in net deferred tax assets. Included in the net deferred tax asset balance is a $3.2 million valuation allowance related primarily to research credits in a jurisdiction with a history of credits in excess of taxable profits.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of factors, 63 -------------------------------------------------------------------------------- Table of Contents including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.

Fair Value Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As the basis for considering such assumptions, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, including our marketable securities and foreign currency contracts.

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include money market funds. Such instruments are generally classified within Level 1 of the fair value hierarchy.

The types of instruments valued based on other observable inputs include U.S.

Treasury securities and other government agencies, corporate bonds and commercial paper. Such instruments are generally classified within Level 2 of the fair value hierarchy.

As of December 31, 2012, our fixed income available-for-sale securities include U.S. Treasury obligations and other government agency instruments, corporate bonds, commercial paper, non-U.S. government securities and money market funds.

Included in available-for-sale securities are cash equivalents, which consist of investments with original maturities of three months or less and include money market funds.

The principal market where we execute our foreign currency contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and our counterparties are large money center banks and regional banks. Our foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources (specifically, spot exchange rates, LIBOR rates and credit default rates) and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy. For more information on the fair values of our marketable securities and foreign currency contracts see Note 8 of Notes to Consolidated Financial Statements.

Business Combinations We recognize separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments retrospectively to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.

64 -------------------------------------------------------------------------------- Table of Contents In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated fair values as of the date of acquisition. Subsequent to the measurement period or our final determination of the tax allowance's estimated value, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our Consolidated Statements of Operations.

Goodwill and Purchased Intangibles Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. We adopted the amended accounting guidance, which permits us to choose to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If based on this assessment we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

Our business is organized around four major geographic theatres: North America, Central America/Latin America ("CALA"), Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC") which were determined to be our reporting units in 2012 and 2011. For reporting purposes, we aggregate North America and CALA into one segment named Americas and report EMEA and APAC as separate segments.

In the fourth quarter of 2012, we performed this qualitative assessment for our four reporting units. Each reporting unit had an estimated fair value in excess of its carrying value by more than 50%, based on the valuation of our reporting segments performed in May 2012 in connection with the announcement of the divestiture of our EWS business. For each reporting unit, we weighed the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. The reporting unit specific factors that were considered included the results of the most recent impairment tests, as well as financial performance and changes to the reporting units' carrying amounts since the most recent impairment tests. For the industry in which the reporting units operate, we considered growth projections from independent sources and significant developments or transactions within the industry during 2012, where applicable. We concluded that each of the reporting unit specific and industry factors had either a positive or neutral impact on the fair value of each of the reporting units. We also determined that macroeconomic factors during 2012 did not have a significant impact on the discount rates and growth rates used for the valuation performed. Based on the qualitative assessment, we concluded that for the four reporting units, performing the two-step impairment test was unnecessary and that no impairment charge was required.

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from several months to six years. We annually assess whether any impairment indicators exist on purchased intangibles with finite lives.

Long-lived assets, including intangible assets with finite lives, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The assessment of purchased intangibles impairment is conducted by first estimating the undiscounted expected future cash flows to be generated from the use and eventual disposition of the purchased intangibles and comparing this amount with the carrying value of these assets. If the undiscounted cash flows are less than the carrying amounts, impairment exists, and future cash flows are discounted at an appropriate rate and compared to the carrying amounts of the purchased intangibles to determine the amount of the impairment.

There was no impairment charge recorded in 2012 or 2011 as no impairment indicators existed. Screening for and assessing whether impairment indicators exist or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires 65 -------------------------------------------------------------------------------- Table of Contents significant judgment. Additionally, changes in the high-technology industry occur frequently and quickly. Therefore, there can be no assurance that a charge to operations will not occur as a result of future goodwill and purchased intangible impairment tests.

Private Company Investments We periodically make strategic investments in companies whose stock is not currently traded on any stock exchange and for which no quoted price exists. The cost method of accounting is used to account for these investments as we hold a non-material ownership percentage. We review these investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to us that an impairment exists may be a significant decrease in the market value of the company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash flow losses combined with a history of operating or cash flow losses or projections and forecasts that demonstrate continuing losses associated with the company's future business plans. Impairment indicators identified during the reporting period could result in a significant write-down in the carrying value of the investment if we believe an investment has experienced a decline in value that is other than temporary. At both December 31, 2012 and 2011, our private company investments had a carrying value of $2.0 million and are recorded in "Other assets" in our Consolidated Balance Sheets.

Derivative Instruments The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and is subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We enter into derivatives only with counterparties that are among the largest U.S. banks, ranked by assets, in order to minimize our credit risk.

Recent Accounting Pronouncements In December 2011, the FASB issued an accounting standard update that requires disclosure of the effect or potential effect of offsetting arrangements on a company's financial position as well as enhanced disclosure of the rights of setoff associated with a company's recognized assets and liabilities. In January 2013, the FASB issued another accounting standard update to clarify the scope of the standard update issued in December 2011. These accounting standard updates are effective for reporting periods beginning on or after January 1, 2013. We do not believe that there will be a material impact on our consolidated financial statements upon the adoption of this guidance.

In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for us beginning in the first quarter of fiscal 2013. We do not believe that there will be a material impact on our consolidated financial statements upon the adoption of this guidance.

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