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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _________ to _________ Commission file number 0-28180 SPECTRALINK CORPORATION  Delaware
    
    84-1141188(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)5755 Central Avenue, Boulder, Colorado
    
    80301-2848(Address of principal executive office)
    
    (Zip code)
 303-440-5330
(Issuers telephone number) (Former name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o Applicable only to corporate issuers:
As of July 31, 2004, there were 19,187,138 shares outstanding of SpectraLink Corporations Common Stock  par value per share $0.01.




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SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX PagePart I
    
    
    
    Financial InformationItem 1
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets at
June 30, 2004 and December 31, 2003 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4
    
    Controls and Procedures
    
    
    28Part II
    
    
    
    Other InformationItem 1
    
    Legal Proceedings
    
    
    29Item 4
    
    Submission of
Matters to a Vote of Security Holders
    
    
    30Item 6
    
    Exhibits and Reports on Form 8-K(a) Exhibits
    
    
    31(b) Form 8-K
    
    
    31Signatures
    
    
    
    
    32Exhibit Index
    
    
    
    
    33Certification by John H. Elms Pursuant to Section 302Certification by David I. Rosenthal Pursuant to Section 302Certification by John H. Elms Pursuant to Section 906Certification by David I. Rosenthal Pursuant to Section 906
  2




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PART I   ITEM 1 
 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 (In thousands, except per share amounts)
(Unaudited)
ASSETS
 June 30,
    
    December 31,2004
    
    2003CURRENT ASSETS:Cash and cash equivalents
    
    $
    52,976
    
    
    $
    51,861Trade accounts receivable, net of allowance of $346 and $341, respectively
    
    
    14,886
    
    
    
    14,470Income taxes receivable
    
    
    134
    
    
    
    204Inventories, net
    
    
    10,322
    
    
    
    7,653Deferred income taxes  current portion
    
    
    1,788
    
    
    
    1,562Other
    
    
    1,239
    
    
    
    800Total current assets
    
    
    81,345
    
    
    
    76,550PROPERTY AND EQUIPMENT, at cost:Furniture and fixtures
    
    
    2,688
    
    
    
    2,312Equipment
    
    
    9,785
    
    
    
    9,245Leasehold improvements
    
    
    1,018
    
    
    
    98913,491
    
    
    
    12,546Less  accumulated depreciation
    
    
    (9,160
    )
    
    
    (8,463
    )Net property and equipment
    
    
    4,331
    
    
    
    4,083DEFERRED INCOME TAXES, net of current portion
    
    
    153
    
    
    
    151OTHER
    
    
    477
    
    
    
    387TOTAL ASSETS
    
    $
    86,306
    
    
    $
    81,171LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,434
    
    
    $
    1,453Accrued payroll, commissions and employee benefits
    
    
    1,917
    
    
    
    3,114Accrued sales, use and property taxes
    
    
    684
    
    
    
    724Accrued warranty expenses
    
    
    711
    
    
    
    493Other accrued expenses
    
    
    2,810
    
    
    
    2,269Deferred revenue
    
    
    7,492
    
    
    
    6,319Total current liabilities
    
    
    15,048
    
    
    
    14,372LONG-TERM LIABILITIES
    
    
    227
    
    
    
    250TOTAL LIABILITIES
    
    
    15,275
    
    
    
    14,622STOCKHOLDERS EQUITY:Preferred stock, 5,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 50,000 shares authorized, 23,213 and 22,800 shares
issued, respectively, and 19,284 and 18,871 shares outstanding, respectively
    
    
    231
    
    
    
    227Additional paid-in capital
    
    
    75,191
    
    
    
    71,010Retained earnings
    
    
    25,003
    
    
    
    24,706Treasury stock, 3,929 shares, at cost
    
    
    (29,394
    )
    
    
    (29,394
    )TOTAL STOCKHOLDERS EQUITY
    
    
    71,031
    
    
    
    66,549TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    86,306
    
    
    $
    81,171
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003SALES:Product Sales, net
    
    $
    15,664
    
    
    $
    14,895
    
    
    $
    30,870
    
    
    $
    26,172Service Sales
    
    
    4,461
    
    
    
    3,740
    
    
    
    8,568
    
    
    
    7,032Net Sales
    
    
    20,125
    
    
    
    18,635
    
    
    
    39,438
    
    
    
    33,204COST OF SALES:Cost of Product Sales
    
    
    4,849
    
    
    
    4,130
    
    
    
    9,256
    
    
    
    7,338Cost of Service Sales
    
    
    2,518
    
    
    
    1,797
    
    
    
    4,959
    
    
    
    3,569Total Cost of Sales
    
    
    7,367
    
    
    
    5,927
    
    
    
    14,215
    
    
    
    10,907Gross Profit
    
    
    12,758
    
    
    
    12,708
    
    
    
    25,223
    
    
    
    22,297OPERATING EXPENSES:Research and Development
    
    
    2,303
    
    
    
    2,101
    
    
    
    4,368
    
    
    
    4,004Marketing and Selling
    
    
    5,709
    
    
    
    5,904
    
    
    
    11,660
    
    
    
    10,987General and Administrative
    
    
    1,593
    
    
    
    1,062
    
    
    
    2,810
    
    
    
    2,057Total Operating Expenses
    
    
    9,605
    
    
    
    9,067
    
    
    
    18,838
    
    
    
    17,048INCOME FROM OPERATIONS
    
    
    3,153
    
    
    
    3,641
    
    
    
    6,385
    
    
    
    5,249INVESTMENT INCOME AND OTHER:Interest Income
    
    
    117
    
    
    
    116
    
    
    
    233
    
    
    
    238Other Income (Expense), net
    
    
    (11
    )
    
    
    (47
    )
    
    
    30
    
    
    
    (74
    )Total Investment Income and Other
    
    
    106
    
    
    
    69
    
    
    
    263
    
    
    
    164INCOME BEFORE INCOME TAXES
    
    
    3,259
    
    
    
    3,710
    
    
    
    6,648
    
    
    
    5,413INCOME TAX EXPENSE
    
    
    1,238
    
    
    
    1,410
    
    
    
    2,526
    
    
    
    2,057NET INCOME
    
    $
    2,021
    
    
    $
    2,300
    
    
    $
    4,122
    
    
    $
    3,356BASIC EARNINGS PER SHARE (Note 4)
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.18BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    19,090
    
    
    
    18,340
    
    
    
    19,010
    
    
    
    18,460DILUTED EARNINGS PER SHARE (Note 4)
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.18DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    19,650
    
    
    
    18,570
    
    
    
    19,720
    
    
    
    18,690
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Six Months EndedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,122
    
    
    $
    3,356Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    771
    
    
    
    527Provision for bad debts
    
    
    55
    
    
    
    36Provision for excess and obsolete inventories
    
    
    220
    
    
    
    332Income tax benefit from the exercise of stock options
    
    
    588
    
    
    
    56Deferred income taxes
    
    
    (228
    )
    
    
    Changes in
operating assets and liabilities:Increase in trade accounts receivable
    
    
    (471
    )
    
    
    (1,522
    )Increase in inventories
    
    
    (2,889
    )
    
    
    (328
    )Increase in other assets and income taxes receivable
    
    
    (459
    )
    
    
    (491
    )(Decrease) increase in accounts payable
    
    
    (19
    )
    
    
    243Increase in accrued liabilities, income taxes payable and
deferred revenue
    
    
    689
    
    
    
    1,677Net cash provided by operating activities
    
    
    2,379
    
    
    
    3,886CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,019
    )
    
    
    (1,194
    )Net cash used in investing activities
    
    
    (1,019
    )
    
    
    (1,194
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligation
    
    
    (17
    )
    
    
    (6
    )Proceeds from exercises of common stock options
    
    
    3,276
    
    
    
    159Proceeds from issuances of common stock
    
    
    321
    
    
    
    297Dividends paid
    
    
    (3,825
    )
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (3,688
    )Net cash used in financing activities
    
    
    (245
    )
    
    
    (3,238
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,115
    
    
    
    (546
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    51,861
    
    
    
    44,211CASH AND CASH EQUIVALENTS, end of period
    
    $
    52,976
    
    
    $
    43,665SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    2,291
    
    
    $
    1,498SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:Assets acquired under long-term obligation
    
    $
    21
    
    
    $
    127
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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SPECTRALINK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited) 1. Basis of Presentation The accompanying condensed consolidated financial statements as of June
30, 2004 and December 31, 2003, and for the three and six months ended June 30,
2004 and 2003, have been prepared from the books and records of SpectraLink
Corporation and its wholly owned subsidiary, SpectraLink International
Corporation (together SpectraLink or the Company) and are unaudited. In
managements opinion, these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present
SpectraLinks financial position, results of operations and cash flows for the
periods presented. The results of operations for the period ended June 30,
2004, are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending December 31, 2004. The financial statements should be read in conjunction with the audited
financial statements and notes thereto as of and for the year ended December
31, 2003, which are included in SpectraLinks Annual Report on Form 10-K. The
accounting policies utilized in the preparation of the financial statements
herein presented are the same as set forth in SpectraLinks annual financial
statements. Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. 2. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion (APB) No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation defines a fair value
based method of accounting for stock options and similar equity instruments.
As allowed by SFAS 123, the Company has continued to apply APB No. 25 to
account for its employee stock based compensation plans and has adopted the
disclosure requirements of SFAS 123 and Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, an amendment of SFAS 123. Had the Company determined compensation
expense for its stock-based compensation plans based on fair value at the date
of grant under SFAS 123, the Companys consolidated net income, and basic and
diluted earnings per share, would have been the pro forma amounts as follows: Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per
    
    (in thousands, except pershare amounts)
    
    share amounts)Net Income, as reported
    
    $
    2,021
    
    
    $
    2,300
    
    
    $
    4,122
    
    
    $
    3,356Deduct stock based employee compensation
expense under the fair value based method,
net of related tax effect:Compensation expense for stock options
    
    
    (952
    )
    
    
    (588
    )
    
    
    (1,407
    )
    
    
    (1,169
    )Compensation expense for the stock purchase plan
    
    
    (38
    )
    
    
    (39
    )
    
    
    (83
    )
    
    
    (81
    )Net Income, pro forma
    
    $
    1,031
    
    
    $
    1,673
    
    
    $
    2,632
    
    
    $
    2,106Earnings Per Share:Basic  as reported
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.18Basic  pro forma
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.14
    
    
    $
    0.11Diluted  as reported
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.18Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.11
 For SFAS 123 purposes, the fair value of each option grant is estimated as
of the date of grant using the Black-Sholes option pricing model with the
following weighted average assumptions used for grants: risk-free interest
rates of 2.52% and 2.05% for the three months and six months ended June 30,
2004, respectively and 1.29% and 1.45% for the three months and six months ended
June 30, 2003, respectively; expected lives of (net of 6




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forfeitures) of 1.65 years and 1.67 years for the three and six months
ended June 30, 2004, respectively and 1.78 years for the three months and six
months ended June 30, 2003, respectively; a $0.10 per share dividend for the
three months and six months ended June 30, 2004, respectively and no dividends
for the three months and six months ended June 30, 2003; and expected
volatility of 74% and 77% for the three months and six months ended June 30,
2004, respectively and 80% and 83% for the three months and six months ended
June 30, 2003, respectively. The fair value of each purchase right under the
employee stock purchase plan is estimated, for disclosure purposes, on the date
of grant using the Black-Sholes model with the following assumptions: a $0.10
per share dividend for the three months and six months ended June 30, 2004,
respectively and no dividends for the three months and six months ended June
30, 2003; an expected life of six months; expected volatility of 77% for the
three months and six months ended June 30, 2004 and 80% and 81% for the three
months and six months ended June 30, 2003, respectively; and a risk-free
interest rate of 2.52% for the three months and six months ended June 30, 2004
and 1.29% for the three months and six months ended June 30, 2003. 3. Inventories Inventories include the cost of raw materials, direct labor and
manufacturing overhead, and is stated at the lower of cost (first-in,
first-out) or market. Inventories as of June 30, 2004 and December 31, 2003,
consisted of the following: June 30,
    
    December 31,2004
    
    2003(In thousands)Raw materials
    
    $
    4,588
    
    
    $
    3,276Work in progress
    
    
    
    
    
    
    25Finished goods
    
    
    5,734
    
    
    
    4,352$
    10,322
    
    
    $
    7,653
 The reserve for potential excess and/or obsolete inventories was $761,000
and $591,000 as of June 30, 2004 and December 31, 2003, respectively. 4. Earnings Per Share Basic earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share is determined by dividing the net income by the sum
of the weighted average number of common shares outstanding, and if not
anti-dilutive, the effect of outstanding stock options and/or other common
stock equivalents as determined utilizing the treasury stock method.
Potentially dilutive common stock options excluded from the calculation of
dilutive income per share because they were anti-dilutive, totaled 952,244 and
1,803,970 for the three months ended June 30, 2004 and 2003, respectively, and
607,605 and 1,824,627 for the six months ended June 30, 2004 and 2003,
respectively. A reconciliation of the numerators and denominators used in
computing earnings per share is as follows: Three months ended June 30,(In thousands, except per share amounts)2004
    
    2003Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per ShareBasic EPS
    
    $
    2,021
    
    
    
    19,090
    
    
    $
    0.11
    
    
    $
    2,300
    
    
    
    18,340
    
    
    $
    0.13Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    540
    
    
    
    (0.01
    )
    
    
    
    
    
    
    219
    
    
    
    (0.01
    )Diluted EPS
    
    $
    2,021
    
    
    
    19,650
    
    
    $
    0.10
    
    
    $
    2,300
    
    
    
    18,570
    
    
    $
    0.12
 7




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Six months ended June 30,(In thousands, except per share amounts)2004
    
    2003Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per ShareBasic EPS
    
    $
    4,122
    
    
    
    19,010
    
    
    $
    0.22
    
    
    $
    3,356
    
    
    
    18,460
    
    
    $
    0.18Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    697
    
    
    
    (0.01
    )
    
    
    
    
    
    
    206
    
    
    
    Diluted EPS
    
    $
    4,122
    
    
    
    19,720
    
    
    $
    0.21
    
    
    $
    3,356
    
    
    
    18,690
    
    
    $
    0.18
 5. Product Warranties and Service The Company provides warranties against defects in materials and
workmanship for its products generally ranging from 90 days to 15 months, but
in limited cases up to 24 months. At the time the product is shipped, the
Company establishes a provision for estimated expenses of providing service
under these warranties based on historical warranty experience. A summary of
activity for accrued product warranty and service is as follows: Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)
    
    (In thousands)Beginning Balance, Accrued Product Warranty and
Service
    
    $
    594
    
    
    $
    282
    
    
    $
    493
    
    
    $
    274Additions to the accrual for product warranties
    
    
    358
    
    
    
    239
    
    
    
    672
    
    
    
    384Reductions for incurred warranty charges
    
    
    (241
    )
    
    
    (117
    )
    
    
    (454
    )
    
    
    (254
    )Ending Balance, Accrued Product Warranty and Service
    
    $
    711
    
    
    $
    404
    
    
    $
    711
    
    
    $
    404
 6. Advertising Costs The Company expenses all advertising costs as they are incurred.
Advertising expense for the three months ended June 30, 2004 and 2003, were
approximately $171,000 and $185,000, respectively, and $339,000 and $318,000
for the six months ended June 30, 2004 and 2003, respectively. 7. Stockholders Equity During the six months ended June 30, 2004, the Company did not repurchase
any shares of outstanding common stock. During the second quarter of 2003, the
Company repurchased 220,600 shares of outstanding common stock (now classified
as treasury stock) at a cost of $1,899,000. For the six months ended June 30,
2003, the Company repurchased 447,100 shares of outstanding common stock (now
classified as treasury stock) at a cost of $3,688,000. In addition, in July
2004, we announced that our Board of Directors approved the re-initiation of
our stock repurchase program. Under our stock repurchase plan, we may
repurchase up to an additional 2.070 million shares of our common stock.
During the second quarter of 2004, the Company paid a quarterly cash
dividend of $0.10 per share for a total of $1,925,000 to holders of common
stock. For the six months ended June 30, 2004, the Company paid two cash
dividends of $0.10 per share for a total of $3,825,000. The Company did not
pay any dividends during the six months ended June 30, 2003. 8. Legal Proceedings On January 14, 2002, SpectraLink issued a press release announcing
preliminary financial results for the fourth quarter of 2001 and revising
downward its estimates for year 2002 results of operations. Shortly after the
press release, the Companys stock price declined and the Company and certain
of its officers and directors were named as defendants in four lawsuits filed
between February 7, 2002 and March 6, 2002, three of which were filed in the
United States District Court for the District of Colorado and one of which was
filed in the Colorado District Court for the City and County of Denver. In
each of the lawsuits, plaintiffs, who purport to be purchasers or holders of
SpectraLink common stock, initially sought to assert claims either on behalf of
a class of persons who purchased securities in SpectraLink between July 19,
2001 and January 11, 2002, or in the case of two of the lawsuits (one filed 8




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in the United States District Court and one in the Colorado District Court),
derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United
States District contained essentially identical claims alleging that
SpectraLink and certain of its officers and directors violated Sections 10(b)
and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as a result
of alleged public misstatements and omissions, accompanied by insider stock
sales made in the months prior to the decline in the price of SpectraLinks
stock after the January 14, 2002 press release. In the cases brought as
derivative actions, the plaintiffs allege that the officers and directors of
SpectraLink violated fiduciary duties owed to SpectraLink and its stockholders
under state laws by allowing and/or facilitating the issuance of these same
alleged public misstatements and omissions, misappropriating nonpublic
information for their own benefit, making insider stock sales, wasting
corporate assets, abusing their positions of control, and mismanaging the
corporation. The plaintiffs in these derivative cases allege that SpectraLink
has and will continue to suffer injury as a result of these alleged violations
of duty for which the officers and directors should be liable. The cases are designated as follows: Wilmer Kerns, Individually And On
Behalf of All Others Similarly Situated, Plaintiff, vs. SpectraLink
Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States
District Court Civil Action Number 02-D-0263); Danilo Martin Molieri,
Individually and On Behalf of All Others Similarly Situated, Plaintiff, v.
SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants
(United States District Court Civil Action Number 02-D-0315); Evie Elennis,
derivatively on behalf of SpectraLink Corporation, Plaintiff(s), v. Bruce M.
Holland, Anthony V. Carollo, Jr., Gary L. Bliss, Michael P. Cronin, Nancy K.
Hamilton and John H. Elms, Defendants), and SpectraLink Corporation, Nominal
Defendant (United States District Court Civil Action Number 02-D-0345); and
Roger Humphreys, Derivatively on Behalf of Nominal Defendant SpectraLink
Corporation, Plaintiff, v. Carl D. Carman, Anthony V. Carollo, Jr., Bruce M.
Holland, Burton J. McMurtry, Gary L. Bliss, Michael P. Cronin, John H. Elms,
and Nancy K. Hamilton, Defendants (Colorado District Court Case. No. 02CV1687). The Kerns and Molieri purported class actions were consolidated, and the
plaintiffs filed a Consolidated Amended Complaint in these Consolidated
Actions. In January of 2003, the Court denied a motion to dismiss that amended
pleading, and discovery commenced. The Court certified a class of all
purchasers of publicly traded common stock of SpectraLink from April 19, 2001
through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs
in these Consolidated Actions moved the court for permission to file a second
consolidated amended class action, which would have deleted certain of the
original claims, would have extended the class period so that it would commence
on February 1, 2001 instead of April 19, 2001, and would have added more detail
on claims relating to alleged improper revenue recognition. The Company filed
an opposition to that motion. On March 5, 2004, the Magistrate Judge entered
his Order denying plaintiffs motions, and plaintiffs appealed that decision to
the district court. On April 16, 2004, the parties to these Consolidated Actions held a
mediation in San Francisco. The parties entered into a Memorandum of
Understanding settling the case for $1.5 million, subject to certain terms and
conditions, including approval by the Court . The Court granted preliminary
approval to the settlement, and a final hearing for approval of the settlement
has been scheduled for October 7, 2004. The settlement will be paid for
through insurance proceeds. The Consolidated Actions have been stayed in
light of the settlement. The two derivative actions were stayed pending resolution of the motion to
dismiss in the consolidated class action, and plaintiffs counsel in the
Elennis derivative action filed an unopposed motion for relief from the stay
and filed an amended complaint and then a corrected amended complaint. Prior
to the entry of the stays in each of the derivative cases, the defendants had
filed motions to dismiss. In August of 2003, Defendants moved to dismiss the
amended and corrected Elennis complaint. The Court denied that motion on March
22, 2004. No discovery has been conducted in either of the derivative actions.
The Company is currently engaged in settlement discussions with the derivative
plaintiffs in light of the settlement of the Consolidated Actions. SpectraLink believes that the lawsuits are without merit and it intends to
vigorously defend itself and its officers and directors if the two derivative
cases are not settled in light of the settlement of the Consolidated Actions,
and/or if the settlement of the Consolidated Actions is not given final
approval by the Court. SpectraLink does not believe that its interests and
that of the named officers and directors are adverse to each other as of this
time. However, no assurance can be given that SpectraLink will be successful
in defending the claims being asserted in these suits, or that the interests of
the various parties will remain aligned. If the settlement of the Consolidated
Actions is not approved and the derivative cases are not settled, and
SpectraLink was then unsuccessful in its defense of these suits, it could be
required to make significant payments to its stockholders and their lawyers,
which could have a material adverse effect on SpectraLinks business, financial
condition and results of operations. In addition, the litigation could result
in substantial costs, divert managements attention and resources, or
ultimately result in the interests of SpectraLink becoming adverse to those of
certain of its officers and directors. In either case, SpectraLinks business
could be adversely affected, even if the plaintiffs are not successful in their
claims against SpectraLink and/or its officers and directors. 9




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The Company has incurred a loss related to the directors and officers
insurance deductible of which the majority of the expense was reflected in
2002. As noted, the settlement of the Consolidated Actions will be funded by
insurance proceeds. Based on current facts and circumstances, the Company is
unable to estimate future losses, if any, it may incur if the cases are not
settled, after considering the amounts that will be covered by insurance. SpectraLink is not presently a party to any other material pending legal
proceedings of which it is aware. 10




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##### Table of Contents



PART I   ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECTRALINK CORPORATION AND SUBSIDIARY This Form 10-Q contains forward-looking statements within the context of
Section 21E of the Securities Exchange Act of 1934, as amended. Each and every
forward-looking statement involves a number of risks and uncertainties, which
are described in this report. The actual results that we achieve may differ
materially from those described in any forward-looking statement due to such
risks and uncertainties. Certain statements in this Form 10-Q, as well as
statements made by us in periodic press releases, oral statements made by our
officials to analysts and stockholders in the course of presentations about us,
and conference calls following earnings releases, constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 (the Reform Act). Words such as believes, anticipates, expects,
intends, could, might, and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. These projections and forward-looking statements are based on
assumptions, which are believed reasonable but are, by their nature, inherently
uncertain. In all cases, results could differ materially from those projected.
Accordingly, caution should be taken not to place undue reliance on any such
forward-looking statements since such statements speak only as of the date of
the making of such statements. Some of the important factors that could cause
actual results to differ from any of these projections or other forward-looking
statements are detailed below, and in other reports filed by us under the
Securities Exchange Act of 1934. Certain risks and uncertainties relating to
forward-looking statements are set forth below in Managements Discussion and
Analysis of Financial Condition and in Item 3 under the caption
Forward-Looking Statement Factors. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report, except as may be required under law. You
should not place undue reliance on these forward-looking statements, which
apply only as of the date of this quarterly report on Form 10-Q. Business Description and Overview We commenced operations in April 1990 to design, manufacture and sell
unlicensed wireless telephone communication systems for businesses. Our
product portfolio consists of two product categories differentiated by the
wireless technology implemented: Link WTS and NetLink Wireless Telephones.
Link WTS targets organizations that require a dedicated wireless voice solution
for their on-premises mobile workforce. NetLink Wireless Telephones target
organizations that want both a wireless voice and wireless data solution on a
single network. Because of the recent advances in wireless local area network
(LAN) technology, a significant portion of our development efforts will focus
on our existing NetLink products as well as new products that operate on a
wireless LAN. For the three months ended June 30, 2004, our revenue was $20.1 million,
which was the most revenue that we have ever recorded in a fiscal quarter, and
earnings per diluted share were $0.10 on net income of $2.0 million. This
represents a 8% growth in quarterly year-over-year revenue and a
decrease of 12% in quarterly year-over-year net income. A driver of revenue
growth for the three months ended June 30, 2004 was the increased sales of
NetLink Wireless Telephones. Sales of this product line grew to 45% of total
product revenue or approximately $7 million. This was a 124% increase for the
three months ended June 30, 2004 compared to the same period in 2003. For the
three months ended June 30, 2004, Link Wireless Telephone Systems represented
55% of total product revenue or approximately $8.6 million. Although we expect
Link revenue to fluctuate from quarter to quarter, we believe that revenue from
this legacy product may increase from or remain consistent with the amount
recognized in the three months ended June 30, 2004. We intend to continue to
support the Link product line because of the ongoing demand from our customer
base, which is interested in a purpose built voice-only wireless telephone
system. Our ongoing success is dependent upon our ability to build solid
partnerships and relationships. The second quarter 2004 represented the
beginning of a transition period in which we began our move from a North
American-oriented niche market provider to a mainstream player in partnership
with large telecommunications manufacturers worldwide. During the second
quarter of 2004, we concluded an agreement with Siemens AG to become our newest
Original Equipment Manufacturer (OEM) partner. We now have OEM relationships
with the top four global telephony providers (Avaya, Nortel, Alcatel and
Siemens) in addition to our relationships with NEC and Inter-Tel. Our OEM
Management Office, established in 2003, will continue to seek relationships
that will not only distribute our products but also co-brand and private label
these products. The goal of this strategy is to provide greater exposure to our
products through the reach these partners have with their customers. These
relationships also help to establish an international presence for our
products. For the three months ended June 30, 2004, international revenue
accounted for over 5% of product sales, a significant increase from previous
quarters. Our OEM partners are 11




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primarily focused on selling NetLink Telephones, and, if their sales increase,
we expect that NetLink revenue will also increase and we expect sales through
our OEM partners to become a larger percentage of product sales. For the three months ended June 30, 2004, revenue through our traditional
distribution channels accounted for 61% of product revenue, OEM partners
contributed 18% of product revenue and 21% was from direct sales. Although, the
vast majority of sales during the three months ended June 30, 2004 occurred in
North America, international sales grew during the three months ended June 30,
2004 as compared to the preceding fiscal quarter. Our target vertical markets
currently focus on home improvement, grocery, and other retail store chains,
hospitals, nursing homes, distribution centers, manufacturing and service
centers, corporate offices, government and education. For the six months ended June 30, 2004, we used $3,825,000 of our cash to
pay a cash dividend to our stockholders. In addition, in July 2004, we
announced that our Board of Directors approved the re-initiation of our stock
repurchase program. Under our stock repurchase plan, we may repurchase up to an
additional 2.070 million shares of our common stock. On a continual basis,
management will evaluate options for utilizing our cash in an effort to
maximize returns to our shareholders, including paying quarterly dividends and
making purchases under our stock repurchase program. For the three months ended June 30, 2004, our overall gross margin was
63%, which is in the middle our anticipated 2004 range of 60 to 65%. We
realize relatively lower margins on products sold through OEM relationships
because OEMs typically demand higher discounts. We expect OEM sales to
increase as a percentage of our total sales, and if this occurs, we will
experience downward pressure on gross margins from historical amounts ranging
from 66 to 69%. Another factor that will directly affect gross margins is
product mix. The NetLink e340 handset carries a much lower margin than any
other of our products as it has a lower average selling price. As a result, if
we succeed in penetrating new enterprise markets, and sales of the NetLink e340
handset increase as a result, gross margins will decline. These two factors
may potentially push gross margins below the anticipated range of 60 to 65%. Results of Operations Net Sales % ChangeJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003Net sales
    
    For the three months ended
    
    $
    20,125,000
    
    
    
    8.0
    %
    
    $
    18,635,000For the six months ended
    
    $
    39,438,000
    
    
    
    18.8
    %
    
    $
    33,204,000
 Product Sales, Net.We derive our product revenue principally from the
sale of wireless, on-premises telephone systems. Product sales for the three months ended June 30, 2004 increased 5.2% to
$15,664,000 from $14,895,000 for the same period last year. Product sales for
the six months ended June 30, 2004 increased 18.0% to $30,870,000 from
$26,172,000 for the same period last year. The increase in product sales for
the three months and six months ended June 30, 2004 was primarily due to an
increase in NetLink sales, including sales of this product to our OEMs. For
the three months and six months ended June 30, 2004, NetLink product revenue
was approximately $7.0 million and $11.7 million, respectively, compared to
$3.1 million and $6.0 million, respectively, for the same periods last year.
For the three months and six months ended June 30, 2004, Link product revenue
was approximately $8.6 million and $19.2 million, respectively, compared to
$11.8 million and $20.1 million, respectively, for the same periods last year. Service Sales. We derive our service revenue principally from the
installation and service of wireless on-premises telephone systems. Service
sales represented 22.2% of total net sales in the quarter ended June 30, 2004
compared to 20.1% in the quarter ended June 30, 2003. For the six months
ended June 30, 2004 and 2003, service sales were 21.7% and 21.2% of total net
sales, respectively. Service sales for the three months ended June 30, 2004 increased 19.3% to
$4,461,000 from $3,740,000 in the same period last year. Service sales for
the six months ended June 30, 2004 increased 21.8% to $8,568,000 from
$7,032,000 in the same period last year. The increase in service sales was
primarily due to increased revenue from 12




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maintenance contracts relating to products previously sold to a larger
installed base of customers, which continue to use our products and purchase
our maintenance contracts. Service sales also increased due to additional
time and material service repairs and training. The
following table summarizes sales to a major customer (a customer that
represented more than 10% of our revenue): Three Months Ended
    
    Six Months EndedSales to Major Customer
    
    June 30,
    
    June 30,(As a Percentage of Net Sales)
    
    2004
    
    2003
    
    2004
    
    2003Customer A:
    
    
    15.2
    %
    
    
    11.4
    %
    
    
    13.1
    %
    
    
    10.6
    %
 As of June 30, 2004 and December 31, 2003, two customers and one customer,
respectively, represented more than 10% of our trade accounts receivable. The
first customer represented 14.1% and 16.7%, and the second customer represented
12.2% and 0%, respectively, of trade accounts receivable as of June 30, 2004
and December 31, 2003. Total Cost of Sales % ChangeJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003Total cost of sales
    
    For the three months ended
    
    $
    7,367,000
    
    
    
    24.3
    %
    
    $
    5,927,000For the six months ended
    
    $
    14,215,000
    
    
    
    30.3
    %
    
    $
    10,907,000
 Cost of Product Sales.Our cost of product sales consists primarily of
direct material, direct labor, product packaging, third party royalties, and
manufacturing overhead. In the three months ended June 30, 2004, cost of product sales increased
by 17.4% to $ 4,849,000 from $4,130,000 in the same period last year. Cost of
product sales as a percentage of product sales, net was 31.0% and 27.7% for the
three months ended June 30, 2004 and 2003, respectively. Gross profit from
product sales, net increased 0.5% to $10,815,000 for the three months ended
June 30, 2004 from $10,765,000 in the same period last year. In the six months
ended June 30, 2004, cost of product sales increased 26.1% to $9,256,000 from
$7,338,000 in the same period last year. Cost of product sales as a percentage
of product sales, net was 30.0% and 28.0% for the six months ended June 30,
2004 and 2003, respectively. Gross profit from product sales, net increased
14.8% to $21,614,000 for the six months ended June 30, 2004 from $18,834,000 in
the same period last year. For the three months ended June 30, 2004 and 2003, gross profit from
product sales, net as a percentage of product sales, net, was 69.0% and 72.3%,
respectively. For the six months ended June 30, 2004 and 2003, gross profit
from product sales, net, as a percentage of product sales, net, was 70.0% and
72.0%, respectively. For the three months and six months ended June 30, 2004 compared to the
same periods last year, gross margin from product sales, net decreased
primarily for the following reasons. First, OEM sales, which typically have
larger discounts, grew to 18% of total product revenue in the second quarter
of 2004, a significant increase over previous periods. Second, we had an
increase in NetLink sales which carry lower margins. For example, in the
second quarter of 2004, the selling price of the average NetLink deal was
approximately 38% lower than the equivalent average Link deal. Third, in the
second quarter of 2004 we experienced an increase in material costs for flash
memory as a result of manufacturer allocation. This situation contributed to a
price rise from the mid-$3.00 range to more than $10.00 accounting for an
average cost increase in NetLink handsets of between $5.00 and $6.00 per unit.
We have seen the price come back to the $3.00 range again, but there can be no
assurance that prices will remain low and that this flash memory component will
come off of allocation. Cost of Service Sales.Our cost of service sales consists primarily of
employee-related costs and the associated costs incurred to provide
installation, maintenance, training, and product repair and support. Cost of service sales for the three months ended June 30, 2004 increased
by 40.1% to $2,518,000 from $1,797,000 in the same period last year. Cost of
service sales as a percentage of service sales was 56.4% for the three months
ended June 30, 2004 compared to 48.0% for the same period last year. Gross
profit from service sales remained constant at $1,943,000 for the three months
ended June 30, 2004 and 2003, respectively. For the three months ended 13




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##### Table of Contents



June 30, 2004 and 2003, respectively, gross profit from service sales, as a
percentage of service sales, decreased to 43.6% from 52.0%. Cost of service sales for the six months ended June 30, 2004 increased by
38.9% to $4,959,000 from $3,569,000 in the same period last year. Cost of
service sales as a percentage of service sales was 57.9% for the six months
ended June 30, 2004 compared to 50.8% for the same period last year. Gross
profit from service sales increased by 4.2% to $3,609,000 for the six months
ended June 30, 2004 from $3,463,000 for the same period last year. For the six
months ended June 30, 2004 and 2003, respectively, gross profit from service
sales, as a percentage of service sales, decreased to 42.1% from 49.2%. For the three months and six months ended June 30, 2004 compared to the
same periods last year, gross profit from service sales decreased primarily
because we increased headcount to support future growth. In addition, our
travel costs were higher to install, train and support our customer base.
Further, we had higher inventory write-offs due to a more proactive stance of
removing older products from the field at the time they are returned for
repair. Finally, we experienced an increase in costs for materials primarily
related to an increase in product volume and freight primarily related to an
increase in product volume and fuel surcharges. Gross Profit % ChangeJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003Gross Profit
    
    For the three months ended
    
    $
    12,758,000
    
    
    
    0.4
    %
    
    $
    12,708,000For the six months ended
    
    $
    25,223,000
    
    
    
    13.1
    %
    
    $
    22,297,000
 For the three months ended June 30, 2004, our gross profit margin (gross
profit as a percentage of net sales) decreased to 63.4% from 68.2% in the same
period last year. For the six months ended June 30, 2004, our gross profit
margin (gross profit as a percentage of net sales) decreased to 64.0% from
67.2% in the same period last year. The decrease in gross profit margin was
primarily due to increased OEM sales, which typically have larger discounts, an
increase in NetLink sales which have lower margins, and an increase in material
costs primarily due to a price increase for a key component of our NetLink
handsets. In addition, gross margin decreased due to a decrease in service
gross margin as we increased our service infrastructure to support future
growth. Operating Expenses Research and Development % ChangeJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003Expenses
    
    For the three months ended
    
    $
    2,303,000
    
    
    
    9.6
    %
    
    $
    2,101,000Percentage of total net sales for the three months ended
    
    
    11.4
    %
    
    
    
    
    
    
    11.3
    %For the six months ended
    
    $
    4,368,000
    
    
    
    9.1
    %
    
    $
    4,004,000Percentage of total net sales for the six months ended
    
    
    11.1
    %
    
    
    
    
    
    
    12.1
    %
 Research and development expenses consist primarily of employee costs,
professional services, and supplies necessary to develop new products, enhance
existing products and reduce the cost of our systems. We expect that research
and development expenses will be approximately 10% to 12% of net sales for
fiscal 2004. For the three months ended June 30, 2004 compared to the same period last
year, the increase in dollars spent was primarily due to increases in salaries
and employee benefits related to increases in headcount and merit raises. For the six months ended June 30, 2004 compared to the same period last
year, the increase in dollars spent was primarily due to increases in salaries
and employee benefits related to increases in headcount and merit raises. In
addition, depreciation expense increased as we purchased research and
development test equipment. The percentage of net sales decreased from the
prior year due to an increase in sales. 14




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##### Table of Contents



Marketing and Selling June 30, 2004
    
    % Change2003 to 2004
    
    June 30, 2003Expenses
    
    For the three months ended
    
    $
    5,709,000
    
    
    
    (3.3
    )%
    
    $
    5,904,000Percentage of total net sales for the three months ended
    
    
    28.4
    %
    
    
    
    
    
    
    31.7
    %For the six months ended
    
    $
    11,660,000
    
    
    
    6.1
    %
    
    $
    10,987,000Percentage of total net sales for the six months ended
    
    
    29.6
    %
    
    
    
    
    
    
    33.1
    %
 Marketing and selling expenses consist primarily of salaries and other
expenses for personnel, commissions, travel, advertising, tradeshows, sales
meetings and market research. The decrease in dollars spent for the three months ended June 30, 2004
compared to the same period last year for both domestic and international
sales, was primarily related to costs incurred for sales meetings that were
held in the first quarter in 2004 compared to being held in the second quarter
in 2003, a decrease in commission expenses related to sales incentives offered
in the second quarter of 2003 but not offered in 2004 and a decrease in
tradeshow expenses (as we launched our new NetLink products in April 2003). The
decrease in expenses was offset by an increase in salaries and employee
benefits to hire new personnel and to retain existing personnel, executive
recruiting costs to hire a new Vice President of Sales and Marketing and
increases related to travel. Marketing and selling expenses as a percentage of
net sales decreased from the prior year due to an increase in sales. The increase in dollars spent for the six months ended June 30, 2004
compared to the same period last year for both domestic and international
sales, was primarily due to an increase in salaries and employee benefits to
hire new personnel and to retain existing personnel, executive recruiting costs
to hire a new Vice President of Sales and Marketing and increases related to
telephone, travel and legal fees, as we negotiated and finalized several OEM
agreements in the first quarter of 2004. The increase in expenses was offset by
a decrease in marketing and promotional costs including tradeshow expenses (as
we launched our new NetLink products in April 2003), and commission expenses
related to sales incentives offered in the second quarter of 2003 but not
offered in 2004. Marketing and selling expenses as a percentage of net sales
decreased from the prior year due to an increase in sales. General and Administrative June 30, 2004
    
    % Change2003 to 2004
    
    June 30, 2003Expenses
    
    For the three months ended
    
    $
    1,593,000
    
    
    
    50.0
    %
    
    $
    1,062,000Percentage of total net sales for the three months ended
    
    
    7.9
    %
    
    
    
    
    
    
    5.7
    %For the six months ended
    
    $
    2,810,000
    
    
    
    36.6
    %
    
    $
    2,057,000Percentage of total net sales for the six months ended
    
    
    7.1
    %
    
    
    
    
    
    
    6.2
    %
 General and administrative expenses consist primarily of salaries and
other expenses for management, finance, accounting, contract administration,
order processing, investor relations, and human resources, as well as legal and
other professional services. The increase in dollars spent for the three months ended June 30, 2004
compared to the same period last year, was primarily due to costs (including
legal) incurred for compliance with the Sarbanes-Oxley Act of 2002 and
recruiting and hiring costs for our new Chief Financial Officer. Other
increases in costs were related to increasing our infrastructure to support
future growth, which resulted in increased headcount, salaries and employee
benefits to hire and retain personnel, as well as increases in insurance, and
consulting and professional fees related to international accounting and board
member fees. The increase in dollars spent for the six months ended June 30, 2004
compared to the same period last year, was primarily due to costs (including
legal) incurred for compliance with the Sarbanes-Oxley Act of 2002 and
recruiting and hiring costs for our new Chief Financial Officer. Other
increases in costs were related to increasing our infrastructure to support
future growth, which resulted in increased headcount, salaries and employee
benefits to hire 15




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##### Table of Contents



and retain personnel, as well as increases in insurance, and consulting and
professional fees related to international accounting and board member fees. Other Non-Operating Income and Expenses June 30, 2004
    
    % Change2003 to 2004
    
    June 30, 2003Expenses
    
    For the three months ended
    
    $
    106,000
    
    
    
    53.6
    %
    
    $
    69,000Percentage of total net sales for the three months ended
    
    
    0.5
    %
    
    
    
    
    
    
    0.4
    %For the six months ended
    
    $
    263,000
    
    
    
    60.4
    %
    
    $
    164,000Percentage of total net sales for the six months ended
    
    
    0.7
    %
    
    
    
    
    
    
    0.5
    %
 Investment income is the result of our investment in money market,
investment-grade debt securities, government securities, and corporate bonds,
while reduced by typical banking fees. The increase in other income was primarily due to a refund for certain
banking fees. Income Tax June 30, 2004
    
    % Change2003 to 2004
    
    June 30, 2003Income tax expenseFor the three months ended
    
    $
    1,238,000
    
    
    
    (12.2
    )%
    
    $
    1,410,000Percentage of total net sales for the three months ended
    
    
    6.2
    %
    
    
    
    
    
    
    7.6
    %Effective tax rate for the three months ended
    
    
    38.0
    %
    
    
    
    
    
    
    38.0
    %For the six months ended
    
    $
    2,526,000
    
    
    
    22.8
    %
    
    $
    2,057,000Percentage of total net sales for the six months ended
    
    
    6.4
    %
    
    
    
    
    
    
    6.2
    %Effective tax rate for the six months ended
    
    
    38.0
    %
    
    
    
    
    
    
    38.0
    %
 The decrease in income tax expense for the three months ended June 30,
2004 compared to the same periods last year was primarily related to a decrease
in pretax income. The increase in income tax expense for the six months ended
June 30, 2004 compared to the same periods last year was primarily related to
an increase in pretax income. Liquidity and Capital Resources Six Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003Cash from operating activities
    
    $
    2,379,000
    
    
    $
    3,886,000Cash used in investing activities
    
    
    (1,019,000
    )
    
    
    (1,194,000
    )Cash used in financing activities
    
    
    (245,000
    )
    
    
    (3,238,000
    )
 We have funded our operations since inception with cash provided by
operations, supplemented by equity financing and leases on capital equipment.
As of June 30, 2004, we had $52,976,000 of cash and cash equivalents. During
the second quarter of 2004, we paid a quarterly cash dividend of $0.10 per
share for a total of $1,925,000 to holders of common stock and we
intend to use some of our cash provided by operations to pay future quarterly
dividends during a period of time to be determined by the Board of Directors.
In addition, in July 2004, we announced that our Board of Directors approved
the re-initiation of our stock repurchase program. Under our stock repurchase
plan, we may repurchase up to an additional 2.070 million shares of our common
stock. On a continual basis, management will evaluate options for utilizing
our cash in an effort to maximize returns to our shareholders, including paying
quarterly dividends and making repurchases under our stock repurchase program. During the six month period ending June 30, 2004, the cash we generated
from operations of $2,379,000, consisted principally of net income of
$4,122,000 and was reduced principally by an increase in inventories of
$2,889,999 that related to a build up of inventory for sales anticipated, but
not completed, OEM orders shipped subsequent to June 30, 2004 and expanded
product mix. The cash we generated from operations also included adjustments
for depreciation and amortization, income tax benefit from exercises of stock
options, deferred income taxes and provisions for bad debt and excess and
obsolete inventories that reconcile net income to cash generated by 16




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operating activities, as well as increases in accrued liabilities and deferred
revenue and was offset by increases in trade accounts receivable, other assets
and income tax receivable, and a decrease in accounts payable. Investing activities used cash of $1,019,000 for purchases of property and
equipment primarily related to purchases of research and development test
equipment, manufacturing tooling and molds for the desktop docking station for
our NetLink product and office equipment. We used $245,000 of cash in financing activities during the six month
period ended June 30, 2004, which was a direct result of the issuance and
payment of cash dividends of $3,825,000 and payments on obligations of $17,000.
These cash outflows were offset by proceeds of $3,597,000 received from common
stock option exercises and purchases of common stock under our employee stock
purchase plan. As of June 30, 2004, we had no debt outstanding, and there were no
off-balance sheet arrangements, unconsolidated subsidiaries, commitments or
guarantees, except as disclosed in the notes to the consolidated financial
statements included in the 2003 Form 10-K or as noted in the Aggregate
Contractual Obligations and Commercial Commitments section. Stockholders
equity at June 30, 2004 was $71,031,000, which represented 82.3% of total
assets. As of June 30, 2004, we had working capital of $66,297,000 compared to
$62,178,000 at December 31, 2003. The increase in working capital of $4,119,000
occurred primarily from cash flows from operations and proceeds from common
stock option exercises, offset by the purchases of capital assets and the cash
dividends paid. As of June 30, 2004, our current ratio (ratio of current
assets to current liabilities) was 5.41:1, compared with a current ratio of
5.33:1 as of December 31, 2003. We believe that our current cash, cash equivalents and cash generated from
operations will be sufficient, based on our presently anticipated needs, to
fund necessary capital expenditures, to provide adequate working capital, pay
dividends, repurchase shares of our common stock and to finance our expansion
for the foreseeable future (next 12 months). There can be no assurance,
however, that we will not require additional financing. There can be no
assurance that any additional financing will be available to us on acceptable
terms, or at all, when required by us. If additional funds were to be raised
through the sale of equity securities, additional dilution to the existing
stockholders would be likely to result. Aggregate Contractual Obligations and Commercial Commitments We incur various contractual obligations and commercial commitments in our
normal course of business. Such obligations and commitments consist primarily
of the following: Lease Commitments.We lease our facilities under noncancelable operating
lease arrangements that expire at various dates through 2007. We have other
obligations for office equipment that expire at various dates through 2008. Purchase Commitments.We incur various purchase obligations with vendors
and suppliers for the purchase of inventory, as well as goods and services, in
the normal course of business. These obligations are generally evidenced by
purchase orders with delivery dates from six to twelve months from the purchase
date, and in certain cases, purchase orders that contain
non-cancelable/non-returnable terms and conditions associated with these
purchase arrangements. We are committed to accept delivery of such materials
pursuant to such purchase orders subject to various contract provisions, which
allow us to delay receipt of such orders. Such orders may or may not include
cancellation costs payable by us. In the past, we have been required to take
delivery of materials from our suppliers that were in excess of demand
requirements and we have previously recognized charges and expenses related to
such excess material, related primarily to engineering changes. If we are not
able to adequately manage our supply chain and adjust such commitments for
changes in demand, we may incur additional inventory expenses related to excess
and obsolete inventory. Such expenses could have a material adverse effect on
our business, financial condition and results of operations. Indemnifications. We provide indemnifications of varying scope and size
to certain customers against claims of intellectual property infringement made
by third parties arising from the use of our products. We evaluate estimated
losses for such indemnifications under SFAS 5, Accounting for Contingencies, as
interpreted by FASB Interpretation 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others(FIN 45). We consider such factors as the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. To date, we have not encountered material costs 17




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as a result of such obligations and have not accrued any liabilities related to
such indemnifications in our financial statements. As of June 30, 2004, expected future cash payments related to contractual
obligations and commercial commitments were as follows: 2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalOperating leases
    
    $
    606,000
    
    
    $
    1,025,000
    
    
    $
    827,000
    
    
    $
    279,000
    
    
    $
    
    
    
    $
    2,737,000Purchase commitments
    
    
    467,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,000Other obligations
    
    
    17,000
    
    
    
    34,000
    
    
    
    35,000
    
    
    
    35,000
    
    
    
    12,000
    
    
    
    133,000Total contractual
obligations and
commercial
commitments
    
    $
    1,090,000
    
    
    $
    1,064,000
    
    
    $
    862,000
    
    
    $
    314,000
    
    
    $
    12,000
    
    
    $
    3,342,000
 We believe our existing cash balances and funds expected to be generated
from future operations will be sufficient to satisfy these contractual
obligations and commercial commitments and that the ultimate payments
associated with these commitments will not have a material adverse effect on
our liquidity position. Critical Accounting Policies and Estimates Below is a summary of our most critical accounting policies and estimates.
We determined the critical accounting principles by considering accounting
policies that involve the most complex or subjective decisions or assessments.
This discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements and related notes beginning on page
3 of this report and in conjunction with our consolidated financial statements
and related notes included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, which was filed with the U.S. Securities and
Exchange Commission on March 11, 2004 (2003 Form 10-K). Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. 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. We evaluate our estimates, on an on-going basis, including
those related to revenue recognition, receivables, product warranty
obligations, inventories and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We consider an accounting estimate to be critical if:  
    
    It requires us to make assumptions about matters that were
uncertain at the time of making the estimate, and
    
    Changes in the estimate or assumptions in the estimate could
have a material impact on our financial condition or results of
operations. 18




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The following table presents information about the nature and rationale for
our critical accounting policies and estimates used in the preparation of
our consolidated financial statements: Financial Statement
Caption(s)
    
    Critical Estimate
Item
    
    Nature of Estimates
Required
    
    Assumptions/Approaches
Used
    
    Key FactorsSales and deferred
revenue
    
    Collectibility is
reasonably assured,
persuasive evidence
of an arrangement
exists, delivery has
occurred or services
rendered and sellers
price to the buyer is
fixed or determinable
    
    We are required to
estimate the
collectibility of invoiced
amounts based upon our
assessment of the ability
of the customer to pay.
    
    We determine whether
collectibility is reasonably
assured based on possible credit
deterioration, the customers
ability to sell through the
products purchased and the
relationship we have with our
customer. 
Our
revenue recognition policy
is based on complex and
dynamic rules established by
the Securities and Exchange
Commission and other
governing bodies. These rules
require us to make judgments
with regard to post delivery
obligations. When post
delivery obligations exist,
revenue is deferred until such
obligations are fulfilled or until
we have established sufficient
history to estimate the cost of
our obligation.
    
     Customer ability
to pay 

Customer ability
to sell to end-userFinancial Statement
Caption(s)
    
    Critical Estimate
Item
    
    Nature of Estimates
Required
    
    Assumptions/Approaches
Used
    
    Key FactorsAccounts receivable
    
    Collectibility of
invoiced amounts
    
    Estimating the
collectibility of
accounts receivable
requires us to make
judgments about the
credit quality and
economic viability of
customers based on
information available to
us.
    
    We use all applicable
information available at the
time of credit issuance, such as
D&B, payment history, or
financial information provided
by the customer. 
For
ongoing customers and past
due balances, discussions
with our customers to
determine if economic
conditions have deteriorated,
resulting in an impairment of
their ability to make payments. 
We
maintain a provision for
estimated credit losses based
upon our historical experience
and any specific customer
collection issues that we have
identified.
    
    Historical
experience
regarding payment
history Customer
creditworthiness Monitoring
collections and
payments from
customers Deterioration of
customers
economic condition
after date of invoice Changes in credit
loss rates from
historical rates used
 19




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##### Table of Contents



Financial Statement
Caption(s)
    
    Critical Estimate
Item
    
    Nature of Estimates
Required
    
    Assumptions/Approaches
Used
    
    Key FactorsCost of goods sold and
Inventories
    
    Obsolete,
unmarketable or
excess inventory
    
    Estimating obsolete,
unmarketable or excess
inventory requires us to
forecast future demand
and market conditions.
    
    We base our estimate on the
difference between the cost of
held inventory and the expected
market value of the inventory.
    
     Product lifecycle 

Evaluation of
customer demand
for various product
types 

Analysis of
inventory on hand
with no estimated
future demand from
customer baseFinancial Statement
Caption(s)
    
    Critical Estimate
Item
    
    Nature of Estimates
Required
    
    Assumptions/Approaches
Used
    
    Key FactorsDeferred income taxes
    
    Recoverability of
deferred tax assets
    
    We are required to
estimate whether
recoverability of
deferred tax assets is
more likely than not
based on forecasts of
taxable earnings in the
related tax jurisdictions.
    
    We use historical and projected
future operating results,
including a review of the
eligible carryforward period,
tax planning opportunities and
other relevant considerations.
    
     Tax law changes 

Variances in
future projected
profitability,
including by taxing
entityFinancial Statement
Caption(s)
    
    Critical Estimate
Item
    
    Nature of Estimates
Required
    
    Assumptions/Approaches
Used
    
    Key FactorsWarranty
    
    Warranty obligations
    
    Estimating warranty
liability requires us to
forecast and use
historical data as a basis
for future product
failure rates, material
usage and service
delivery costs.
    
    We base our estimate on
historical and current trends of
product failure rates, repair cost
per unit and service delivery
costs. 
We
have contractual
commitments to various
customers that require us to
incur costs to repair an
epidemic defect. Historically
we have not experienced
significant costs related to
epidemic failure. Costs would
be accrued for epidemic defect
when an epidemic defect is
identified and the costs of
repair can be reasonably
estimated.
    
     Monitoring and
evaluating the
quality of
component
suppliers 

Actual historical
return rates at the
time of sale and
updating estimates
throughout the
warranty period 

Monitoring our
customer base for
possible epidemic
defects 

Estimated failure
rates; repair costs
per unit; and service
delivery costs
 In addition, there are other items within our financial statements that
require estimation, but are not as critical as those discussed above.
Revisions to any of the discussed estimates, or other non-critical items, could
have a significant effect on our consolidated financial statements. Recently Issued or Proposed Accounting Pronouncements On March 31, 2004, the FASB issued a proposed Statement, Share-Based
Payment, which addresses the accounting for share-based payment transactions.
The proposed Statement would eliminate the ability to account for 20




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share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees, and generally would require instead that such
transactions be accounted for using a fair-value-based method. Since we
currently report stock-based compensation using the intrinsic-value method,
should the FASB require companies to expense stock-based compensation on
fair-value measurements rather than allow voluntary reporting, this potential
change could reduce our future earnings or increase future losses. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
due to changes in United States interest rates. These exposures are directly
related to our normal operating and funding activities. As of June 30, 2004,
we have not used derivative instruments or engaged in hedging activities, and
have not been currently impacted significantly by fluctuations in foreign
currency exchange rates. Interest Rate Risk As part of our cash management strategy, at June 30, 2004, we had cash and
cash equivalents of approximately $52,976,000 mainly in the form of bank demand
deposits and money markets. We have completed a market risk sensitivity
analysis of these cash and cash equivalents based on an assumed 1% point
increase in interest rates. If market rates had increased or decreased 1%
during the six month period ended June 30, 2004, interest income would have
increased or decreased by approximately $262,000. FORWARD-LOOKING STATEMENT FACTORS Certain statements in this Form 10-Q, as well as statements made by us in
periodic press releases, oral statements made by our officials to analysts and
stockholders in the course of our presentations, and conference calls following
earnings releases, constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Reform Act).
Words such as believes, anticipates, expects, intends, could, might, and
similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. These projections
and forward-looking statements are based on assumptions, which are believed
reasonable but are, by their nature, inherently uncertain. In all cases,
results could differ materially from those projected. Accordingly, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date of the making of
such statements. Some of the important factors that could cause actual results
to differ from any of these projections or other forward-looking statements are
detailed below and in other reports filed by us under the Securities Exchange
Act of 1934. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise after the
date of this report. The factors discussed below are cautionary statements that identify important
factors that could cause actual results to differ materially from those
anticipated by the forward-looking statements contained in this report.  
    
    If we are unable to fulfill quarter end customer orders, then we
could lose revenue and customers.The volume of customer orders for
our products typically increases significantly at the end of each
quarter. Generally, sales in a given quarter are distributed
approximately as follows: 15% in the first month, 25% in the second
month, and 60% in the third month. We face significant challenges in
meeting this demand. It is difficult to ensure that we have the
resources available to meet any such increase in order volume since it
is very difficult to predict what the level of demand will be. We may
not have the personnel and/or systems necessary to fulfill the large
order volume or the ability to upgrade and develop our systems and
infrastructure to meet an increased order volume. If we are unable to
meet demand from our customers for our products in a cost effective
manner, then we might lose revenue and customers or incur increased
operating costs, either of which would harm our business.
    
    Many of the orders for our products are realized at the end of
the quarter, which makes it difficult to estimate or adjust our
operating activities quickly in response to an unexpected increase or
decrease in customer demand.Due to the timing of orders from
customers, we have often recognized a substantial portion of our
revenue in the last month of a quarter. As a result, minor
fluctuations in the timing of orders and the shipment of products may,
in the future, cause operating results to vary significantly from
quarter to quarter. The demand for our products depends upon many
factors and is difficult to forecast. Significant unanticipated
fluctuations in demand could cause problems in our operations. The
lead-time required to assemble our systems is often longer than the
lead-time our customers provide to us for delivery of their product
requirements. Therefore, we often must place orders 21




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in advance of expected purchase orders from our customers. As a result,
we have only a limited ability to react to fluctuations in demand for
our products, which could cause it to have either too much or too little
inventory of a particular product. Further, the business relationship
which we have with Offshore Group to use a Mexico facility to assemble
our products may not be able to provide product in a timely manner.
Additionally, once we receive an order, it requires sufficient time to
complete the configuration of our product to the phone systems of the
customer.Our inability to satisfy customer demand in a timely manner would lead
to lost sales and impede our ability to increase our revenue.
Conversely, a large portion of our expenses, including rent and
salaries, is fixed and difficult to reduce. Our expenses are based in
part on expectations for our revenue. If our revenue does not meet our
expectations, the adverse effect of the revenue shortfall upon our
operating results may be acute in light of the fixed nature of our
expenses. It is possible that due to fluctuations in revenue, our
operating results could be below the expectations of securities analysts
and investors. For instance, our stock price declined substantially
after our preliminary announcement of second quarter 2004 results
reported in July 2004. In such an event, or in the event that adverse
market conditions prevail or are perceived to prevail either generally
or with respect to our business, the price of our common stock would
likely decline further.
    
    Our reliance on sole or limited sources of supply for many
components and equipment used in our manufacturing process.We rely on
sole or limited sources of supply for many components and equipment
used in our manufacturing process. The delay, inability, or refusal
of any of these suppliers to ship these components or equipment could
interrupt our manufacturing process and ability to manufacture
products in a timely manner to meet customer demand. The limited
number of sources for many of these components may also prevent us
from decreasing our reliance on certain suppliers and finding other
sources at competitive prices. Unforeseen price increases by any of
the sole or limited source suppliers could negatively impact product
margins and the financial performance of our company.
    
    Because many of our current and planned products are or will be
highly complex, they may contain defects or errors that are detectable
only after deployment in complex networks and which, if detected,
could have a negative effect on our business, operating results or
financial condition.Many of our complex products can only be fully
tested when deployed in commercial networks. As a result, end-users
may discover defects or errors or experience breakdowns in their
networks after the products have been deployed. If any of these
products contains defects, or has reliability, quality or
compatibility problems, our reputation might be damaged significantly
and customers might be reluctant to buy our products. These defects
could interrupt or delay sales. We may have to invest significant
capital and other resources to correct these problems. If we fail to
provide solutions to the problems, we will also incur product recall,
repair, warranty or replacement costs. These problems might also
result in claims against us by our customer or others. In addition,
the occurrence of any defects or errors in these products, could
result in: failure to achieve market acceptance and loss of market
share; cancellation of orders; difficulty in collecting accounts
receivable; increased service and warranty costs in excess of our
estimates; diversion of resources, and; increased insurance costs and
other losses to our business or to end-users.
    
    If we experience warranty failure that indicates either
manufacturing or design deficiencies, we may be required to recall
units in the field and/or stop producing and shipping such products
until the deficiency is identified and corrected.In the event of such
warranty failures, our business could be adversely affected resulting
in reduced revenue, increased costs and decreased customer
satisfaction. End-users have discovered errors in our products in the
past and may discover errors in our products in the future. In
addition, if our costs of remediating problems experienced by our
customers exceed the expectations used in developing our warranty
reserves, these costs may adversely affect our operating results.
Consequently, our warranty failure could have a material adverse
impact on our operations and financial results.
    
    Our ability to attract and retain personnel, including key
technical and management personnel.Much of the future success of our
company depends on the continued service and availability of skilled
personnel, including technical, marketing and staff positions.
Experienced personnel in the information technology industry are in
high demand and competition for their talents is intense. There can
be no assurance that we will be able to successfully retain and
attract the key personnel we need. Many of our key personnel receive
a total compensation package that includes stock options and other
equity awards. New regulations, volatility in the stock market and
other factors could diminish the value of our equity awards, putting
us at a competitive disadvantage or forcing us to use more cash
compensation. 22




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
    
    The risk of business interruption arising from our dependence on
our manufacturing facility located in Boulder, Colorado, and the
business relationship we have with Offshore Group to use a facility in
Empalme, Sonora, Mexico which provides assembly services.We are
highly dependent on our Boulder, Colorado manufacturing facility,
which is home to the majority of our manufacturing operations. We are
also highly dependent upon our business relationship with Offshore
Group to provide management services and a facility located in
Empalme, Sonora, Mexico that assembles our products. Any event that
may disrupt or indefinitely discontinue either of the facilities
capacity to manufacture, assemble and repair our products could
greatly impair our ability to generate revenues, fulfill orders and
attain financial goals. For instance, we may experience delays in the
receipt of assembled product from the facility in Mexico should the
border between the U.S. and Mexico close.
    
    Our ability to respond to rapid technological changes within the
on-premises wireless telephone industry.The wireless communications
industry is characterized by rapid technological change, short product
life cycles, and evolving industry standards. To remain competitive,
we must:  
    
    develop or gain access to new technologies in order to
increase product performance and function, reduce product size,
and maintain cost-effectiveness;
    
    develop new products for existing and emerging wireless
communications markets, and introduce such products in a timely
manner;
    
    implement emerging wireless standards quickly enough to
satisfy market demands and without significant product redesign;
    
    develop or obtain access to advanced wireless
networking capabilities as they become available; and
    
    design, develop and introduce competitive new products
on a timely basis. Due to the competitive nature of our business, any failure by us to
meet these challenges could materially and adversely affect our
business, reputation, and operating results.  
    
    Potential fluctuations in our future revenues, gross margins and
operating results.We have experienced, and may in the future
continue to experience, significant quarterly fluctuations in revenue,
gross margins and operating results due to numerous factors, some of
which are outside our control. Among other things, these factors
include:  
    
    changes in customer, geographic or product mix,
including mix of configurations within each product group;
    
    fluctuating market demand for, and declines in the average selling prices of, our products;
    
    the timing of and delay of significant orders from customers;
    
    seasonality in demand within our various sectors;
    
    increases in material or labor costs;
    
    excess inventory;
    
    obsolescence charges;
    
    changes in shipment volume;
    
    loss of cost savings due to changes in component
pricing or charges incurred due to inventory holding periods if
parts ordering does not correctly anticipate product demand;
    
    increases in price competition;
    
    changes in distribution channels including our OEM partners;
    
    increases in warranty costs; and
    
    introducing of new products and costs of entering new markets. For example, historically we have not operated with a significant order
backlog and a substantial portion of our revenue in any quarter has been
derived from orders booked and shipped in that quarter. Accordingly,
our revenue expectations are based almost entirely on our internal
estimates of future demand and not on firm customer orders. Planned
expense levels are relatively fixed in the short-term and are based in
large part on these estimates, and if orders and revenue do not meet
expectations, our revenues, gross margins and operating results could be
materially adversely affected. 23




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
    
    The continuing uncertainty about economic prospects in some
sectors of our target customer market, adversely impacts their
information technology spending and our business.Our business has
been adversely impacted by the continuing uncertainty about general
economic prospects in some sectors of our target customer market
within the United States and worldwide, because this uncertainty has
resulted in a decline in, or a failure to increase, their information
technology spending. Consumers of information technology in some of
these sectors continue to defer, and in some cases cancel, their
purchase decisions. Our operating results have been adversely affected
as a result. We expect the economic uncertainty to continue to
adversely impact our business and operating results for at least the
next few quarters and perhaps significantly longer. The adverse
impacts from economic uncertainty include longer sales cycles, lower
average selling prices, fewer large orders from a single customer and
reduced revenues.
    
    Changes in rules and regulations of the FCC and other regulatory
agencies.The wireless communications industry, regulated by the
Federal Communications Commission (FCC) in the United States and
similar government agencies in other countries, is subject to changing
political, economic, and regulatory influences. Regulatory changes,
including changes in the allocation of available frequency spectrum,
could significantly impact our operations in the United States and
internationally.
    
    We are dependent on indirect sales channels for most of our
revenue.A significant portion of our revenues are derived from a
variety of third-party business partners, including distributors,
resellers and OEMs. During the three months ended June 30, 2004,
sales of our products through our indirect distributors accounted for
79% of our revenue, of which 18% was contributed by our OEM partners.
Our contracts with third-party business partners do not require a
third-party business partner to purchase our products or services. In
fact, some of our third-party business partners also offer the
products of some of our competitors. We cannot guarantee that any of
our third-party business partners will continue to market our products
or devote significant resources to doing so. Furthermore, we will,
from time to time, terminate or adjust some of our relationships with
third-party business partners in order to address changing market
conditions, adapt such relationships to our business strategy, resolve
disputes, or for other reasons. Any such termination or adjustment
could have a negative impact on our relationships with third-party
business partners and our business, and result in decreased sales
through third-party business partners or threatened or actual
litigation. If our third-party business partners do not successfully
market and sell our products or services for these or any other
reasons, our sales could be adversely affected and our revenue could
decline. For instance, we experienced a decrease in sales by
distributors during the second quarter of 2002 when those distributors
downsized their businesses in reaction to the economic slowdown and,
as a result, had fewer sales representatives marketing our products.
In addition, our third-party business partners have confidential
information concerning our products and services, product release
schedules and sales, marketing and third party reseller operations.
Although we have nondisclosure agreements with our third-party
business partners, we cannot guarantee that any third-party business
partner would not use our confidential information to compete with us.
Furthermore, since we have experienced lower gross margins related to
sales to our OEM partners, we may experience lower gross margins in
the future if sales to our OEM partners become a larger percentage of
product sales. Our success depends in part upon our ability to
maintain and expand these relationships. The loss of any major
partner, the failure to attract new partners or inability to maintain
the current level of revenue from our existing partners could have an
adverse effect on our business, operating results and financial
condition.
    
    Our revenue and earnings are highly seasonal. Seasonality and
other factors cause significant quarterly fluctuations in our revenue
and net income.Our business is highly seasonal. This causes
significant quarterly fluctuations in our financial results.
Generally, revenue and operating results are sequentially down in the
first quarter from the fourth quarter, sequentially higher in the
second quarter, sequentially flat or slightly higher or lower in the
third quarter, and strongest in the fourth quarter.
    
    A lower than anticipated rate of acceptance of domestic and
international markets using the 802.11b standard.Our NetLink
Wireless Telephones are compatible with the IEEE 802.11b standard for
use on 802.11b compliant wireless LANs. Consequently, demand for
NetLink Wireless Telephones depends upon the acceptance of markets
utilizing 802.11b compliant networks. This depends in part upon the
initial adoption of the 802.11b standard in international markets, as
well as enhancements to that standard in the U.S. and foreign markets
where the standard has already been adopted. Additionally, the
acceptance of 802.11b compliant networks may move more slowly, if at
all, if competing wireless networks are established and utilized.
Additionally, the deployment of wireless voice and data systems has
been inhibited by security concerns including the potential of
unauthorized access to data and communications transmitted over or
accessible through a wireless system. Potential customers may 24




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choose not to purchase our products until wireless systems are developed
which provide for greater security. Further, our products may not be
compatible with secure wireless systems that may be developed in the
future. If markets utilizing 802.11b compliant networks do not grow as
we anticipate, our growth would be impeded and it would not be able to
factor the related revenues into our growth in the future.
    
    The market for on-premises wireless telephone systems may fail to
grow or to grow as quickly as we anticipate.We derive our revenue
principally from the sale of wireless, on-premises telephone systems
and related installation and other services relating to those systems.
Therefore, our future operating results depend on the demand for
those types of services. If this market does not grow or grow
quickly, our future results of operations would be significantly
harmed.
    
    Our reliance on a limited number of significant customers.A
portion of our revenue has been derived from a limited number of
customers. Sales to one customer represented approximately 15.2% of
our revenue during the three months ended June 30, 2004. We also have
experienced quarter-to-quarter variability in sales to each of our
major customers and expect this pattern to continue in the future.
    
    We might not be able to execute on our business plan if we lose
key management or technical personnel, on whose knowledge, leadership
and technical expertise we rely, or if new members of our management
team fail to work effectively together.Our success depends heavily
upon the contributions of our key management and technical personnel,
whose knowledge, leadership and technical expertise would be difficult
to replace. Many of these individuals have been with us for several
years and have developed specialized knowledge and skills relating to
our technology and business. Others have been promoted within, or have
newly joined, senior management roles only recently. For example, in
September 2003, John Elms, our Vice President of Operations, was
promoted to President and Chief Executive Officer, while Bruce
Holland, the former President and Chief Executive Officer, continued
with us as Chairman of the Board until he resigned from the Board in
March 2004. Additionally, in October 2003, we hired John Kelley as
Vice President of Operations. In February 2004, Michael Cronin, our
Vice President of Sales and Marketing decided to resign his positions
of Vice President of Sales and Marketing and Corporate Officer
effective April 1, 2004, although he agreed to remain an employee to
assist us with the transition through June 30, 2004. In April 2004,
Nancy Hamilton, our Vice President of Finance and Administration and
Chief Financial Officer, decided to resign her positions as Vice
President of Finance and Administration and Chief Financial Officer
and Corporate Officer effective April 20, 2004, although she remained
an employee to assist us with the transition through July 20, 2004.
Additionally, in April 2004, we hired David Rosenthal as Vice
President of Finance and Administration, Chief Financial Officer, and
Corporate Secretary and we hired Jill Kenney as the position of Vice
President of Sales and Marketing effective May 17, 2004. Our success
depends in part upon the ability of new executives to work effectively
together and with the rest of our employees to continue to develop our
technology and manage the operation and growth of our business. All of
our executive officers and key personnel are employees at will. We
have no employment contracts for our Chief Executive Officer, Chief
Financial Officer, Vice President of Sales and Marketing, Vice
President of Engineering and Vice President of Operations, and do not
maintain key person insurance on any of our executives. We might not
be able to execute on our business plan if we were to lose the
services of any of our key personnel. If any of these individuals were
to leave us unexpectedly, we could face substantial difficulty in
hiring qualified successors and could experience a loss in
productivity while any such successor develops the necessary training
and experience.
    
    Our reliance on our 802.11b technology partners to continue to
provide the wireless local area network for our NetLink product, and
to provide access points which support our Voice Priority.In the
absences of a wireless voice prioritization standard, we rely on
802.11b technology partners, such as Proxim, Symbol Technologies, and
Cisco Systems to continue to provide wireless local area network
support for our NetLink product and to provide access points that
support our Voice Priority. If any of our technology partners fails
to provide voice prioritization support for our products, the market
opportunity for NetLink products would be reduced and our future
results of operations would be materially harmed until we find new
802.11b technology partners or voice prioritization standards are
adopted.
    
    Our ability to develop and introduce new products and transition
existing products.Our development efforts may not lead to the
successful introduction of new or improved products. We may encounter
delays in deploying new or improved products. For instance, our new
products may not properly function with our customers existing
telephone systems or our new products may contain defects or bugs.
These 25




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incompatibilities, defects or bugs may not be detected until our
customers begin to install the products or thereafter. We may need to
modify the design of our new or improved products if they have
incompatibilities, defects or bugs, which could result in significant
expenditures by us as it seeks to remedy the problems, delays in the
purchase of the products or cancelled orders. We may also encounter
delays in the manufacturing and production of the new products.
Additionally, the new products may not be commercially successful.
Demand for existing products may decrease upon the announcement of new
or improved products. Further, since products under development are
often announced before introduction, these announcements may cause
customers to delay purchases of any products, even if newly introduced,
until the new or improved versions of those products are available. If
customer orders decrease or are delayed during the product transition,
we may experience a decline in revenue and have excess inventory on hand
which could decrease gross profit margins. Our gross margins might
decrease if customers, who may otherwise choose to purchase existing
products, instead choose to purchase lower priced models of new
products. Delays or deficiencies in the development, manufacturing, and
delivery of, or demand for, new or improved products could have a
negative effect on our business, operating results or financial
condition.
    
    Our ability to manage potential expansion of operations in the
U.S. and internationally.We intend to expand our existing domestic
and international operations and to enter new markets. This expansion
will require significant management attention and financial resources.
We currently have limited experience in marketing and distributing
our products internationally and in developing versions of products
that comply with local standards. We may also not be able to maintain
or increase international market demand for our products.
International operations are subject to other inherent risks,
including foreign government regulation of technology or unexpected
changes in regulatory and customs requirements, difficulty and delays
in accounts receivable collection, difficulties and costs of staffing
and managing foreign operations, reduced protection for intellectual
property rights, foreign currency exchange rate fluctuations, and
taxation consequences.
    
    We face increasing competition in the on-premises wireless
telephone system market.The on-premises wireless telephone system
industry is competitive and influenced by the introduction of new
products and new entrants into the industry. The competitive factors
affecting the market for our systems include product functions and
features, frequency band of operation, ease-of-use, quality of
support, product quality and performance, price, network and
application integration capabilities, distribution channels, and the
effectiveness of marketing and sales efforts. Most of our competitors
have significantly greater financial, technical, research and
development, and marketing resources than us. As a result, our
competitors may respond more quickly to new or emerging technologies
and changes in customer requirements, or may devote greater resources
to the development, promotion, sale and support of their products than
us. Enterprise adoption of standards for wireless LAN and voice over
IP may lead to the commoditization of wireless telephone technology
and the availability of low-cost alternative products. In addition,
some purchasers may prefer to buy their wireless telephone systems
from a single source provider of telephone systems, such as Alcatel or
Cisco Systems, both of which manufacture and sell enterprise telephone
systems. Other purchasers may prefer to buy their 802.11 wireless
telephone systems from a single source provider of wireless local area
networks, or LANs, such as Cisco Systems or Symbol Technologies, both
of which provide 802.11 wireless infrastructure and wireless
telephones. Because we focus on wireless on-premises telephone
communications, we cannot serve as the sole source for a complete
telephone or data communications system. There is no assurance that we
will be able to compete successfully in the future. Further, if a
potential customer is already using a competing product or system,
that potential customer may not be willing or able to make the
investment necessary to replace such a system with our wireless
telephone system. In addition, there may be potential customers who
choose another technology because of cost or their belief that their
needs do not require the full function provided by our wireless
telephone system.
    
    The certification and approval process for our NetLink product
for use in countries that support the 802.11b standard.Foreign
countries, which support the 802.11b standard, could provide future
markets for the NetLink products. However, countries certification
and approval processes for 802.11b compatible products, such as ours,
are typically time consuming and costly. If we have difficulty
obtaining certification and approval by foreign countries for our
NetLink product, then we may not be able to gain access to the markets
in these countries in a timely fashion, if at all, which would limit
international growth of our business.
    
    Our ability to protect our intellectual property rights.Our
future success depends, in part, upon our proprietary technology. We
rely on a combination of patent, copyright, trade secret and trademark
laws, 26




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confidentiality procedures, and nondisclosure and other contractual
provisions to protect our proprietary rights. These legal protections
provide only limited protection and may be time consuming and expensive
to obtain and enforce. There can be no assurance that our issued patents
will not be challenged or circumvented by competitors or provide
meaningful protection against competition. If challenged, our patents
might not be upheld or their claims could be narrowed. If we fail to
protect our proprietary rights adequately, our competitors might gain
access to our technology. As a result, our competitors might offer
similar products and we might not be able to compete successfully in our
market. Moreover, despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain and use
information that we regard as proprietary. Also, our competitors may
independently develop similar, but not infringing, technology, duplicate
our products, or design around our patents or our other intellectual
property. In addition, other parties may breach confidentiality
agreements or other protective contracts with us, and we may not be able
to enforce our rights in the event of these breaches. Furthermore, we
expect that it will increase our international operations in the future,
and the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. We
may be required to spend significant resources to monitor and protect
our intellectual property rights. Any litigation surrounding our rights
could force us to divert important financial and other resources from
our business operations.
    
    The assertion of intellectual property infringement claims
against us.Our industry is characterized by the existence of a large
number of patents and frequent claims and related litigation regarding
patent and other intellectual property rights. We cannot be certain
that our products do not and will not infringe upon issued patents,
patents to be issued in the future, or other intellectual property
rights of others. We may in the future be notified that we are
infringing upon certain patent and/or other intellectual property
rights of others. Although there are no such pending lawsuits against
us that we are infringing upon intellectual property rights of others,
there can be no assurance that infringement claims will not occur in
the future. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related methods that are important to us. Litigation
may be necessary in the future to defend against claims of
infringement or invalidity, to determine the validity and scope of the
proprietary rights of others, to enforce our intellectual property
rights, or to protect our trade secrets. We may also be subject to
claims from customers for indemnification. Any resulting litigation,
regardless of our resolution, could result in substantial costs and
diversion of resources. If it were determined that our products
infringe upon the intellectual property rights of others, we would
need to obtain licenses from these parties or reengineer our products
in order to avoid infringement. We might not be able to obtain the
necessary licenses on acceptable terms or at all, or to reengineer our
products successfully. Moreover, if we are sued for infringement and
lose the suit, we could be required to pay substantial damages or be
enjoined from licensing or using the infringing products or
technology. Any of the foregoing could cause us to incur significant
costs and prevent us from selling our products.
    
    Enacted and proposed changes in securities laws and regulations
are likely to increase our costs.The Sarbanes-Oxley Act of 2002 that
became law in July 2002, as well as new rules subsequently implemented
by the SEC, requires changes in some of our corporate governance,
public disclosure and compliance practices. The Act also requires the
SEC to implement additional new rules on a variety of subjects. In
addition to final rules and rule proposals already made by the SEC,
the Nasdaq National Market has adopted revisions to its requirements
for companies, such as us, that are Nasdaq-listed. These developments
have increased our legal and financial compliance costs, and make some
activities, like SEC reporting obligations, more difficult. In
addition, we expect these developments to make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These developments
could make it more difficult for us to attract and retain qualified
members of our board of directors, particularly to serve on our audit
committee, and qualified executive officers. We are presently
evaluating and monitoring regulatory developments and are continuing
to estimate the timing and magnitude of additional costs we may incur
as a result.
    
    Our reported financial results may be adversely affected by
changes in accounting principles generally accepted in the United
States.Generally accepted accounting principles in the United States
are subject to issuance and interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified Public
Accountants, the Securities and Exchange Commission, (SEC), and
various bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or
interpretations could have a significant effect on our reported
financial results, and could affect the reporting of transactions
completed before the announcement of a change. For example, we
currently are not required to record stock-based compensation charges
if the employees stock option 27




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exercise price is equal to or exceeds the deemed fair value of our
common stock at the date of grant. However, several companies have
recently elected to change their accounting policies and begun to record
the fair value of stock options as an expense. Although the standards
have not been finalized and the timing of a final statement has not been
established, FASB published in March 2004 an exposure draft that would
require us to record expense for the fair value of stock options
granted. Our reported earnings would be harmed if we were required to
change our accounting policy in accordance with the fair-value based
concepts of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensationand SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure.
    
    The historic volatility of our stock price, which may make it
more difficult to resell shares at prices attractive to sellers.The
market price of our common stock has been volatile and is likely to
remain subject to wide fluctuations in the future. For example, during
the 12-month period ended June 30, 2004, the closing price of our
common stock has ranged from a high of $24.80 per share to a low of
$9.42 per share. Many factors could cause the market price of our
common stock to fluctuate, including:  
    
    variations in our actual or anticipated quarterly or annual results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introduction of new products or product enhancements or
new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant orders;
    
    changes in the market valuations of other telecommunications companies;
    
    the amount of liquid financial resources available to us;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance
or changes in recommendations by securities analysts. In addition, the stock market in general, and the market for
technology-related stocks in particular, could decline, which could cause
the market price of our common stock to fall for reasons not necessarily
related to our business, results of operations or financial condition. The
market price of our stock also might decline in reaction to events that
affect other companies in our industry even if these events do not directly
affect us. Accordingly, you may not be able to resell your shares of
common stock at or above the price you paid. Securities class action
litigation is often brought against a company following a period of
volatility in the market price of its securities, and we have previously
been sued in several purported securities class action lawsuits. Further,
certain of our management and directors were also sued in purported
shareholder derivative actions. Although we believe that the lawsuits lack
merit, due to inherent uncertainties in litigation, we cannot accurately
predict the outcome of this litigation. An adverse determination could
have a significant effect upon our business and materially affect the price
of its stock. Moreover, regardless of the ultimate result, it is likely
that the lawsuits will require us to incur expenses and divert managements
attention and resources from other matters, which could also adversely
affect our business and the price of our stock. 
 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures.Regulations under the
Securities Exchange Act of 1934 require public companies to maintain
disclosure controls and procedures, which are defined to mean a companys
controls and other procedures that are designed to ensure that information
required to be disclosed by the company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in the Commissions rules and
forms. Our Chief Executive Officer and Chief Financial Officer, based on their
evaluation of our disclosure controls and procedures as of the end of the
period covered by this report (the Evaluation Date), concluded that our
disclosure controls and procedures were effective as of the Evaluation Date for
this purpose. Changes in Internal Controls over Financial Reporting.Regulations under
the Securities Exchange Act of 1934 require public companies to evaluate any
change in our internal control over financial reporting, which is defined as
a process to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States. In connection with their evaluation of our disclosure controls
and procedures as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer did not identify any change in 28




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our internal control over financial reporting during the three-month period
ended June 30, 2004 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 
 Part II     Other Information 
 Item 1 Legal Proceedings On January 14, 2002, we issued a press release announcing preliminary
financial results for the fourth quarter of 2001 and revising downward its
estimates for year 2002 results of operations. Shortly after the press
release, our stock price declined and we and certain of our officers and
directors were named as defendants in four lawsuits filed between February 7,
2002 and March 6, 2002, three of which were filed in the United States District
Court for the District of Colorado and one of which was filed in the Colorado
District Court for the City and County of Denver. In each of the lawsuits,
plaintiffs, who purport to be purchasers or holders of our common stock,
initially sought to assert claims either on behalf of a class of persons who
purchased our securities between July 19, 2001 and January 11, 2002, or in the
case of two of the lawsuits (one filed in the United States District Court and
one in the Colorado District Court), derivatively on our behalf. Two of the
lawsuits filed in the United States District contained essentially identical
claims alleging that we and certain of our officers and directors violated
Sections 10(b) and 20(a) and Rule 10b-5 under the Securities Exchange Act of
1934, as a result of alleged public misstatements and omissions, accompanied by
insider stock sales made in the months prior to the decline in the price of our
stock after the January 14, 2002 press release. In the cases brought as
derivative actions, the plaintiffs allege that our officers and directors
violated fiduciary duties owed to us and our stockholders under state laws by
allowing and/or facilitating the issuance of these same alleged public
misstatements and omissions, misappropriating nonpublic information for their
own benefit, making insider stock sales, wasting corporate assets, abusing
their positions of control, and mismanaging the corporation. The plaintiffs in
these derivative cases allege that we have and will continue to suffer injury
as a result of these alleged violations of duty for which the officers and
directors should be liable. The cases are designated as follows: Wilmer Kerns, Individually And On
Behalf of All Others Similarly Situated, Plaintiff, vs. SpectraLink
Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States
District Court Civil Action Number 02-D-0263); Danilo Martin Molieri,
Individually and On Behalf of All Others Similarly Situated, Plaintiff, v.
SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants
(United States District Court Civil Action Number 02-D-0315); Evie Elennis,
derivatively on behalf of SpectraLink Corporation, Plaintiff(s), v. Bruce M.
Holland, Anthony V. Carollo, Jr., Gary L. Bliss, Michael P. Cronin, Nancy K.
Hamilton and John H. Elms, Defendants), and SpectraLink Corporation, Nominal
Defendant (United States District Court Civil Action Number 02-D-0345); and
Roger Humphreys, Derivatively on Behalf of Nominal Defendant SpectraLink
Corporation, Plaintiff, v. Carl D. Carman, Anthony V. Carollo, Jr., Bruce M.
Holland, Burton J. McMurtry, Gary L. Bliss, Michael P. Cronin, John H. Elms,
and Nancy K. Hamilton, Defendants (Colorado District Court Case. No. 02CV1687). The Kerns and Molieri purported class actions were consolidated, and the
plaintiffs filed a Consolidated Amended Complaint in these Consolidated
Actions. In January of 2003, the Court denied a motion to dismiss that amended
pleading, and discovery commenced. The Court certified a class of all
purchasers of publicly traded common stock of SpectraLink from April 19, 2001
through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs
in these Consolidated Actions moved the court for permission to file a second
consolidated amended class action, which would have deleted certain of the
original claims, would have extended the class period so that it would commence
on February 1, 2001 instead of April 19, 2001, and would have added more detail
on claims relating to alleged improper revenue recognition. We filed an
opposition to that motion. On March 5, 2004, the Magistrate Judge entered his
Order denying plaintiffs motions, and plaintiffs appealed that decision to the
district court. On April 16, 2004, the parties to these Consolidated Actions held a
mediation in San Francisco. The parties entered into a Memorandum of
Understanding settling the case for $1.5 million, subject to certain terms and
conditions, including approval by the Court. The Court granted preliminary
approval to the settlement, and a final hearing for approval of the settlement
has been scheduled for October 7, 2004. The settlement will be paid for
through insurance proceeds. The Consolidated Actions have been stayed in
light of the settlement. The two derivative actions were stayed pending resolution of the motion to
dismiss in the consolidated class action, and plaintiffs counsel in the
Elennis derivative action filed an unopposed motion for relief from the stay
and filed an amended complaint and then a corrected amended complaint. Prior
to the entry of the stays in each of the derivative cases, the defendants had
filed motions to dismiss. In August of 2003, Defendants moved to dismiss the 29




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amended and corrected Elennis complaint. The Court denied that motion on March
22, 2004. No discovery has been conducted in either of the derivative actions.
We are currently engaged in settlement discussions with the derivative
plaintiffs in light of the settlement of the Consolidated Actions. We believe the lawsuits are without merit and we intend to vigorously
defend ourself and our officers and directors if the two derivative cases are
not settled in light of the settlement of the Consolidated Actions, and/or if
the settlement of the Consolidated Actions is not given final approval by the
Court. We do not believe that our interests and that of the named officers and
directors are adverse to each other as of this time. However, no assurance can
be given that we will be successful in defending the claims being asserted in
these suits, or that the interests of the various parties will remain aligned.
If the settlement of the Consolidated Actions is not approved and the
derivative cases are not settled, and we were then unsuccessful in its defense
of these suits, we could be required to make significant payments to our
stockholders and their lawyers, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
litigation could result in substantial costs, divert managements attention and
resources, or ultimately result in the interests of us becoming adverse to
those of certain of our officers and directors. In either case, our business
could be adversely affected, even if the plaintiffs are not successful in their
claims against us and/or our officers and directors. We have incurred a loss related to the directors and officers insurance
deductible of which the majority of the expense was reflected in 2002. As
noted, the settlement of the Consolidated Actions will be funded by insurance
proceeds. Based on current facts and circumstances, we are unable to estimate
future losses, if any, we may incur if the cases are not settled, after
considering the amounts that will be covered by insurance. We are not presently a party to any other material pending legal
proceedings of which we aware. 
 Item 4 Submission of Matters to a Vote of Security Holders At SpectraLinks Annual Meeting of Stockholders held June 21, 2004,
the following proposals were adopted by the margins indicated.  1.
    
    To elect a Board of Directors to serve until the next Annual
Meeting of Stockholders and until their successors are elected and
qualified. Number of SharesVoted For
    
    WithheldCarl D. Carman
    
    
    17,817,976
    
    
    
    300,432Anthony V. Carollo, Jr.
    
    
    17,826,379
    
    
    
    292,029John H. Elms
    
    
    18,065,912
    
    
    
    52,496Gerald J. Bud Laber
    
    
    17,893,332
    
    
    
    225,076Werner P.
Schmücking
    
    
    18,012,390
    
    
    
    106,018
  2.
    
    To ratify the selection of KPMG LLP, independent public
accountants, as auditors for SpectraLink for the fiscal year ending
December 31, 2004. Number of shares voted: For 17,827,736; Against
285,752; Abstain 4,920. 30




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Item 6 Exhibits and Reports on Form 8-K 
 (a)  Exhibits The following exhibits are filed herewith: ExhibitNumber
    
    Exhibit Title31.1 
    
    Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2 
    
    Certification by David I. Rosenthal pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1 *
    
    Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2 *
    
    Certification by David I. Rosenthal pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
   Filed herewith. *  In accordance with SEC Release No. 33-8238, these exhibits are furnished
with this quarterly report on Form 10-Q and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in
any filing of SpectraLink Corporation under the Securities Act of 1933 or
the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings. Exhibits filed with SpectraLinks 2003 Form 10-K constitute those
exhibits currently required to be on file. The reader should refer to the
2003 Form 10-K under Part III, Item 15, for a list of those exhibits. 
 (b)  Reports on Form 8-K We filed two Current Reports on Form 8-K during the fiscal quarter
ended June 30, 2004. The first Form 8-K, filed April 22, 2004, reported
information under Item 5 Other Events concerning the announcement that
Nancy Hamilton would retire and step down as chief financial officer and
vice president of finance and administration effective April 20, 2004. We
announced that David Rosenthal would replace Ms. Hamilton, and had accepted
the position of chief financial officer, vice president of finance and
administration and corporate secretary for SpectraLink, effective
immediately. We further announced that Jill Kenney had accepted the
position of vice president of sales and marketing effective May 17, 2004. The second Form 8-K, filed April 23, 2004, reported information under Items 7
Financial Statements and Exhibits, that was intended to be furnished under
Item 12. Results of Operations and Financial Condition in accordance with SEC
Release No. 33-8216. This filing included our earnings press release for the
quarter ended March 31, 2004, and the script used by our executives on the
conference call explaining the results. 31




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SPECTRALINK CORPORATION
SIGNATURES In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. SPECTRALINK CORPORATIONDate: August 9, 2004
    By:
    /s/  DAVID I. ROSENTHALDavid I. Rosenthal,Vice President of Finance and
Administration and Chief
Financial Officer
(Principal Financial and Accounting
Officer and on behalf of the Registrant) 32




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EXHIBIT INDEX ExhibitNumber
    
    Exhibit Title31.1 
    
    Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2 
    
    Certification by David I. Rosenthal pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1 *
    
    Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2 *
    
    Certification by David I. Rosenthal pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
   Filed herewith. *  In accordance with SEC Release No. 33-8238, these exhibits are furnished
with this quarterly report on Form 10-Q and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of SpectraLink Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof
and irrespective of any general incorporation language in any filings.