##### Table of Contents



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, 2005
 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 EmployerIdentification Number)5755 Central Avenue, Boulder, Colorado
    
    80301-2848(Address of principal executive office)
    
    (Zip code)
 
  þ o
 þ o




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SPECTRALINK CORPORATION AND SUBSIDIARY
 INDEX
 PagePart I
    
    Financial InformationItem 1
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2005 and 2004 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4
    
    Controls and Procedures
    
    
    31Part II
    
    Other InformationItem 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 6
    
    Exhibits
    
    
    32Signature
    
    
    
    
    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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##### Table of Contents



PART I   ITEM 1
 
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 June 30,
    
    December 31,2005
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    8,864
    
    
    $
    14,625Investment in marketable securities  current
    
    
    12,493
    
    
    
    11,984Trade accounts receivable, net of allowance of $338 and $374, respectively
    
    
    14,250
    
    
    
    21,252Inventory, net of allowance of $543 and $720, respectively
    
    
    11,587
    
    
    
    8,076Deferred income taxes
    
    
    1,445
    
    
    
    1,473Prepaids and other
    
    
    1,614
    
    
    
    1,088Total current assets
    
    
    50,253
    
    
    
    58,498INVESTMENT IN MARKETABLE SECURITIES, net of current portion
    
    

    33,436
    
    
    
    27,781PROPERTY AND EQUIPMENT, at cost:Furniture and fixtures
    
    
    2,692
    
    
    
    2,481Equipment
    
    
    11,663
    
    
    
    10,503Leasehold improvements
    
    
    1,162
    
    
    
    1,03615,517
    
    
    
    14,020Less  accumulated depreciation
    
    
    (10,255
    )
    
    
    (9,436
    )Net property and equipment
    
    
    5,262
    
    
    
    4,584DEFERRED INCOME TAXES
    
    
    145
    
    
    
    103OTHER
    
    
    504
    
    
    
    460TOTAL ASSETS
    
    $
    89,600
    
    
    $
    91,426LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,325
    
    
    $
    1,132Income taxes payable
    
    
    999
    
    
    
    1,038Accrued payroll, commissions and employee benefits
    
    
    2,356
    
    
    
    3,727Accrued sales, use and property taxes
    
    
    685
    
    
    
    732Accrued warranty expenses
    
    
    800
    
    
    
    901Other accrued expenses and liabilities
    
    
    2,874
    
    
    
    3,315Deferred revenue
    
    
    7,564
    
    
    
    7,144Total current liabilities
    
    
    17,603
    
    
    
    17,989LONG-TERM LIABILITIES
    
    
    187
    
    
    
    214TOTAL LIABILITIES
    
    
    17,790
    
    
    
    18,203STOCKHOLDERS EQUITY:Preferred stock, 5,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 50,000 shares authorized, 23,659 and 23,407 shares
issued, respectively, and 18,927 and 19,138 shares outstanding, respectively
    
    
    237
    
    
    
    234Additional paid-in capital
    
    
    79,983
    
    
    
    77,356Retained earnings
    
    
    28,982
    
    
    
    28,030Treasury stock, 4,732 and 4,270 shares, respectively, at cost
    
    
    (37,392
    )
    
    
    (32,397
    )TOTAL STOCKHOLDERS EQUITY
    
    
    71,810
    
    
    
    73,223TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    89,600
    
    
    $
    91,426
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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 30,2005
    
    2004
    
    2005
    
    2004SALES:Product sales
    
    $
    16,614
    
    
    $
    15,664
    
    
    $
    32,070
    
    
    $
    30,870Service sales
    
    
    5,497
    
    
    
    4,461
    
    
    
    10,629
    
    
    
    8,568Net sales
    
    
    22,111
    
    
    
    20,125
    
    
    
    42,699
    
    
    
    39,438COST OF SALES:Cost of product sales
    
    
    4,669
    
    
    
    4,849
    
    
    
    9,218
    
    
    
    9,256Cost of services sales
    
    
    2,959
    
    
    
    2,518
    
    
    
    5,713
    
    
    
    4,959Total cost of sales
    
    
    7,628
    
    
    
    7,367
    
    
    
    14,931
    
    
    
    14,215Gross profit
    
    
    14,483
    
    
    
    12,758
    
    
    
    27,768
    
    
    
    25,223OPERATING EXPENSES:Research and development
    
    
    2,489
    
    
    
    2,303
    
    
    
    4,946
    
    
    
    4,368Marketing and selling
    
    
    6,508
    
    
    
    5,709
    
    
    
    12,563
    
    
    
    11,660General and administrative
    
    
    1,547
    
    
    
    1,593
    
    
    
    3,129
    
    
    
    2,810Total operating expenses
    
    
    10,544
    
    
    
    9,605
    
    
    
    20,638
    
    
    
    18,838INCOME FROM OPERATIONS
    
    
    3,939
    
    
    
    3,153
    
    
    
    7,130
    
    
    
    6,385INVESTMENT INCOME AND OTHER:Interest income, net
    
    
    393
    
    
    
    117
    
    
    
    744
    
    
    
    233Other income (expense), net
    
    
    (53
    )
    
    
    (11
    )
    
    
    (105
    )
    
    
    30Total investment income and other
    
    
    340
    
    
    
    106
    
    
    
    639
    
    
    
    263INCOME BEFORE INCOME TAXES
    
    
    4,279
    
    
    
    3,259
    
    
    
    7,769
    
    
    
    6,648INCOME TAX EXPENSE
    
    
    1,626
    
    
    
    1,238
    
    
    
    2,952
    
    
    
    2,526NET INCOME
    
    $
    2,653
    
    
    $
    2,021
    
    
    $
    4,817
    
    
    $
    4,122BASIC EARNINGS PER SHARE
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.25
    
    
    $
    0.22BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING
    
    
    19,040
    
    
    
    19,090
    
    
    
    19,130
    
    
    
    19,010DILUTED EARNINGS PER SHARE
    
    $
    0.14
    
    
    $
    0.10
    
    
    $
    0.25
    
    
    $
    0.21DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING
    
    
    19,230
    
    
    
    19,650
    
    
    
    19,480
    
    
    
    19,720
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SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,817
    
    
    $
    4,122Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    819
    
    
    
    771Amortization of premium on investments in marketable securities
    
    
    68
    
    
    
    Income tax benefit from the exercise of stock options
    
    
    475
    
    
    
    588Provision for (recovery of) bad debts
    
    
    (6
    )
    
    
    55Provision for excess and obsolete inventory
    
    
    327
    
    
    
    220Deferred income taxes
    
    
    28
    
    
    
    (228
    )Changes in assets and liabilities:Decrease (increase) in trade accounts receivable
    
    
    7,008
    
    
    
    (471
    )Increase in inventory
    
    
    (3,838
    )
    
    
    (2,889
    )Increase in other assets
    
    
    (570
    )
    
    
    (459
    )Increase (decrease) in accounts payable
    
    
    1,193
    
    
    
    (19
    )Decrease in income taxes payable
    
    
    (39
    )
    
    
    Decrease in accrued liabilities
    
    
    (1,971
    )
    
    
    (484
    )Increase in deferred revenue
    
    
    420
    
    
    
    1,173Net cash provided by operating activities
    
    
    8,731
    
    
    
    2,379CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,497
    )
    
    
    (1,019
    )Purchases of investments in marketable securities
    
    
    (6,323
    )
    
    
    Net cash used in investing activities
    
    
    (7,820
    )
    
    
    (1,019
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligation
    
    
    (16
    )
    
    
    (17
    )Proceeds from exercises of common stock options
    
    
    1,841
    
    
    
    3,276Proceeds from issuances of common stock
    
    
    363
    
    
    
    321Dividends paid
    
    
    (3,865
    )
    
    
    (3,825
    )Purchases of treasury stock
    
    
    (4,995
    )
    
    
    Net cash used in financing activities
    
    
    (6,672
    )
    
    
    (245
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (5,761
    )
    
    
    1,115CASH AND CASH EQUIVALENTS, beginning of period
    
    
    14,625
    
    
    
    51,861CASH AND CASH EQUIVALENTS, end of period
    
    $
    8,864
    
    
    $
    52,976SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    2,495
    
    
    $
    2,291SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:Assets acquired under long-term obligation
    
    $
    
    
    
    $
    21
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SPECTRALINK CORPORATION AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
 1. Basis of Presentation
    2. Investments in Marketable Securities
  3. Stock-Based Compensation Plans
  6




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Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share amounts)Net Income, as reported
    
    $
    2,653
    
    
    $
    2,021
    
    
    $
    4,817
    
    
    $
    4,122Deduct stock based employee compensation
expense under the fair value based method,
net of related tax effect:Compensation expense for stock options
    
    
    (4,767
    )*
    
    
    (952
    )
    
    
    (5,607
    )*
    
    
    (1,407
    )Compensation expense for the stock
purchase plan
    
    
    (38
    )
    
    
    (38
    )
    
    
    (76
    )
    
    
    (83
    )Net Income (Loss), pro forma
    
    $
    (2,152
    )
    
    $
    1,031
    
    
    $
    (866
    )
    
    $
    2,632Earnings Per Share:Basic  as reported
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.25
    
    
    $
    0.22Basic  pro forma
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    0.14Diluted  as reported
    
    $
    0.14
    
    
    $
    0.10
    
    
    $
    0.25
    
    
    $
    0.21Diluted  pro forma
    
    $
    (0.11
    )
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    0.13
 
 *
    
    Includes compensation expense (net of related tax effect) resulting from the acceleration of
vesting of certain outstanding stock options, as described below.   Share-Based Payment
  7




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4. Inventories
  June 30,
    
    December 31,2005
    
    2004(In thousands)Raw materials
    
    $
    5,445
    
    
    $
    4,245Work in progress
    
    
    1
    
    
    
    1Finished goods
    
    
    6,141
    
    
    
    3,830$
    11,587
    
    
    $
    8,076
  5. Earnings Per Share
  Three months ended June 30,(In thousands, except per share amounts)2005
    
    2004Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per ShareBasic EPS
    
    $
    2,653
    
    
    
    19,040
    
    
    $
    0.14
    
    
    $
    2,021
    
    
    
    19,090
    
    
    $
    0.11Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    Stock options outstanding
    
    
    
    

    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    (0.01
    )Diluted EPS
    
    $
    2,653
    
    
    
    19,230
    
    
    $
    0.14
    
    
    $
    2,021
    
    
    
    19,650
    
    
    $
    0.10
 Six months ended June 30,(In thousands, except per share amounts)2005
    
    2004Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per ShareBasic EPS
    
    $
    4,817
    
    
    
    19,130
    
    
    $
    0.25
    
    
    $
    4,122
    
    
    
    19,010
    
    
    $
    0.22Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    697
    
    
    
    (0.01
    )Diluted EPS
    
    $
    4,817
    
    
    
    19,480
    
    
    $
    0.25
    
    
    $
    4,122
    
    
    
    19,720
    
    
    $
    0.21
 6. Product Warranties and Service
  8




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##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands)
    
    (In thousands)Beginning Balance, Accrued Product Warranty and
Service
    
    $
    908
    
    
    $
    594
    
    
    $
    901
    
    
    $
    493Additions to the accrual for product warranties
    
    
    151
    
    
    
    358
    
    
    
    405
    
    
    
    672Reductions for incurred warranty charges
    
    
    (259
    )
    
    
    (241
    )
    
    
    (506
    )
    
    
    (454
    )Ending Balance, Accrued Product Warranty and Service
    
    $
    800
    
    
    $
    711
    
    
    $
    800
    
    
    $
    711
 7. Advertising Costs
  8. Stockholders Equity
  9. Recently Issued or Proposed Accounting Pronouncements
   9




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##### Table of Contents



PART I   ITEM 2
 
 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business Description and Overview
 Ô Ô
     10




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##### Table of Contents



Results of Operations
 Net Sales
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    22,111,000
    
    
    
    9.9
    %
    
    $
    20,125,000For the six months ended
    
    $
    42,699,000
    
    
    
    8.3
    %
    
    $
    39,438,000
 11




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##### Table of Contents



Product Sales, Net.
   Service Sales
   Three Months Ended
    
    Six Months EndedCustomer Mix Table (As a Percentage of Net Sales)
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Customer Type:Indirect Product Sales (excluding OEM)
    
    
    48.2
    %
    
    
    47.1
    %
    
    
    46.4
    %
    
    
    48.3
    %OEM Product Sales
    
    
    8.1
    %
    
    
    14.4
    %
    
    
    10.0
    %
    
    
    10.1
    %Direct Product Sales
    
    
    18.8
    %
    
    
    16.3
    %
    
    
    18.7
    %
    
    
    19.9
    %Service Sales
    
    
    24.9
    %
    
    
    22.2
    %
    
    
    24.9
    %
    
    
    21.7
    %Total Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three Months Ended
    
    Six Months EndedSales to Major Customer (As a Percentage of Net Sales)
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Customer A:
    
    
    *
    
    
    
    15.2
    %
    
    
    *
    
    
    
    13.1
    %
 
 (*)   represents less than 10% of our revenue   12




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##### Table of Contents



Total Cost of Sales
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    7,628,000
    
    
    
    3.5
    %
    
    $
    7,367,000For the six months ended
    
    $
    14,931,000
    
    
    
    5.0
    %
    
    $
    14,215,000
 Cost of Product Sales.
       Cost of Service Sales.
   13




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##### Table of Contents



Gross Profit
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    14,483,000
    
    
    
    13.5
    %
    
    $
    12,758,000For the six months ended
    
    $
    27,768,000
    
    
    
    10.1
    %
    
    $
    25,223,000
  Operating Expenses
 Research and Development
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    2,489,000
    
    
    
    8.1
    %
    
    $
    2,303,000Percentage of total net sales for the three months ended
    
    
    11.3
    %
    
    
    
    
    
    
    11.4
    %For the six months ended
    
    $
    4,946,000
    
    
    
    13.2
    %
    
    $
    4,368,000Percentage of total net sales for the six months ended
    
    
    11.6
    %
    
    
    
    
    
    
    11.1
    %
    Marketing and Selling
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    6,508,000
    
    
    
    14.0
    %
    
    $
    5,709,000Percentage of total net sales for the three months ended
    
    
    29.4
    %
    
    
    
    
    
    
    28.4
    %For the six months ended
    
    $
    12,563,000
    
    
    
    7.7
    %
    
    $
    11,660,000Percentage of total net sales for the six months ended
    
    
    29.4
    %
    
    
    
    
    
    
    29.6
    %
    14




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##### Table of Contents



General and Administrative
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    1,547,000
    
    
    
    (2.9
    )%
    
    $
    1,593,000Percentage of total net sales for the three months ended
    
    
    7.0
    %
    
    
    
    
    
    
    7.9
    %For the six months ended
    
    $
    3,129,000
    
    
    
    11.4
    %
    
    $
    2,810,000Percentage of total net sales for the six months ended
    
    
    7.3
    %
    
    
    
    
    
    
    7.1
    %
    Income from Operations
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    3,939,000
    
    
    
    24.9
    %
    
    $
    3,153,000Percentage of total net sales for the three months ended
    
    
    17.8
    %
    
    
    
    
    
    
    15.7
    %For the six months ended
    
    $
    7,130,000
    
    
    
    11.7
    %
    
    $
    6,385,000Percentage of total net sales for the six months ended
    
    
    16.7
    %
    
    
    
    
    
    
    16.2
    %
  Investment Income and Other
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    340,000
    
    
    
    220.8
    %
    
    $
    106,000Percentage of total net sales for the three months ended
    
    
    1.5
    %
    
    
    
    
    
    
    0.5
    %For the six months ended
    
    $
    639,000
    
    
    
    143.0
    %
    
    $
    263,000Percentage of total net sales for the six months ended
    
    
    1.5
    %
    
    
    
    
    
    
    0.7
    %
  15




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Income Tax Expense
 % ChangeJune 30, 2005
    
    2004 to 2005
    
    June 30, 2004For the three months ended
    
    $
    1,626,000
    
    
    
    31.3
    %
    
    $
    1,238,000Percentage of total net sales for the three months ended
    
    
    7.4
    %
    
    
    
    
    
    
    6.2
    %Effective tax rate for the three months ended
    
    
    38.0
    %
    
    
    
    
    
    
    38.0
    %For the six months ended
    
    $
    2,952,000
    
    
    
    16.9
    %
    
    $
    2,526,000Percentage of total net sales for the six months ended
    
    
    6.9
    %
    
    
    
    
    
    
    6.4
    %Effective tax rate for the six months ended
    
    
    38.0
    %
    
    
    
    
    
    
    38.0
    %
  Liquidity and Capital Resources
 Six Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004Cash from operating activities
    
    $
    8,731,000
    
    
    $
    2,379,000Cash used in investing activities
    
    $
    (7,820,000
    )
    
    $
    (1,019,000
    )Cash used in financing activities
    
    $
    (6,672,000
    )
    
    $
    (245,000
    )
      16




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##### Table of Contents



Aggregate Contractual Obligations and Commercial Commitments
  Lease Commitments.
 Purchase Commitments.
 Indemnifications Accounting for
Contingencies Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
  2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalOperating leases
    
    $
    564,000
    
    
    $
    912,000
    
    
    $
    344,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,820,000Purchase commitments
    
    
    1,208,000
    
    
    
    1,654,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,862,000Other obligations
    
    
    28,000
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    18,000
    
    
    
    
    
    
    
    146,000Total contractual
obligations and
commercial
commitments
    
    $
    1,800,000
    
    
    $
    2,616,000
    
    
    $
    394,000
    
    
    $
    18,000
    
    
    $
    
    
    
    $
    4,828,000
  17




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##### Table of Contents



Critical Accounting Policies and Estimates
    
    
    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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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    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 the
customers current
financial condition
and on possible
credit deterioration,
the indirect and OEM
channels ability to
sell through the
products purchased
and the relationship
we have with our
customers.
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
significant 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-user
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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    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 information
available at the time of
credit issuance, such as
Dunn & Bradstreet credit
report, payment history, or
financial information
provided by the customer.
For ongoing customers and
past due balances, we have
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
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    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.
Changes in our
product strategy can
result in obsolete
inventory.
    
    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
base
 20




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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    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 entity
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsWarranty
    
    Warranty
obligations
    
    Estimating warranty
liability requires
us to forecast,
using
historical data as a
basis, 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
an 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
  Recently Issued Accounting Pronouncements
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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  Interest Rate Risk
  RISK FACTORS
 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. For more information regarding the forward-looking statements
contained in this report, see the introductory paragraph to Part I of this report. You should
carefully consider the risks and uncertainties described below together with all of the other
information included in this report, in considering our business and prospects. The risks and
uncertainties described below are not the only ones facing SpectraLink. Additional risks and
uncertainties not presently known to us also may impair our business operations. The occurrence of
any of the following risks could affect our business, financial condition or results of operations.
 
    
    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
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##### Table of Contents



to forecast 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 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 us 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 our customers
individual phone systems.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.
    
    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 live existing wireless networks. As a result, end-users may only
discover defects or errors or experience breakdowns in their networks after the products
have been deployed. If any of these products contain defects, or have 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 product 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 product 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 wireless
communications 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
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##### Table of Contents




    
    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 and repair operations. We are also highly
dependent upon our business relationship with Offshore Group to provide management
services and an assembly facility located in Empalme, Sonora, Mexico. Our agreement with
Offshore Group expires in August 2006. We cannot assure you that we will be able to
successfully re-negotiate a new agreement with terms favorable to us, or at all. If we
are unable to enter a new agreement with Offshore Group, or should any other event occur
that disrupts or indefinitely discontinues either of the facilities capacity to
manufacture, assemble and repair our products, our ability to generate revenue, fulfill
orders and attain financial goals would be greatly impaired. 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 an emerging wireless standard or multiple emerging wireless standards
quickly enough to satisfy market demands and without significant product redesign
or the need to allocate additional resources to comply with multiple standards;
    
    develop or obtain access to advanced wireless capabilities as they become available; and
    
    design, develop and introduce competitive new products on a timely basis.
  
    
    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;
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
    
    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 the mix of our distribution channels including our OEM partners;
    
    government regulation of frequency spectrum;
    
    increases in warranty costs; and
    
    introduction 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.
    
    The uncertainty about economic prospects in some sectors of our target customer market
adversely impacts their information technology spending and our business.Our business
has from time to time been adversely impacted by the 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 may defer, and in some cases cancel, their purchase decisions. Our
operating results may be 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 revenue.
    
    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. Internationally, products
that we develop will be required to comply with standards established by authorities in
various countries. Regulatory changes, including changes in the allocation of available
frequency spectrum, or changing free un-licensed to free based spectrum licensing could
significantly impact our operations in the United States and internationally. For
example, in the last several years, the European Union (EU) has adopted a number of
initiatives (WEEE, RoHS, etc.) related to equipment emissions, electronic waste, privacy
of information and expanded consumer warranties. Failure to comply with existing or
evolving industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could seriously harm our business.
    
    We are dependent on indirect sales channels for most of our revenue.A significant
portion of our revenues is derived from a variety of third-party business partners,
including OEMs, distributors and resellers. During the three months ended June 30, 2005,
sales of our products through our indirect distributors accounted for 75.0% of our
product revenue, of which 10.7% of product revenue was contributed by our OEM partners.
Our contracts with third party business partners do not require those partners to
purchase minimum quantities of our products or services. In fact, some of our third party
business partners also offer the products of some of our competitors. In addition, our
OEM agreements do not restrict an OEM from acquiring products from a third party or
independently developing products and services that would directly compete with us. 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. 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
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##### Table of Contents



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 seasonal.Seasonality and other factors may cause
significant quarterly fluctuations in our revenue and net income.Our business is
seasonal based on budget cycles in various vertical markets such as healthcare and
retail. 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.
Actual results from operations may or may not follow these normal seasonal patterns in a
given year leading to performance that is not in alignment with expectations.
    
    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 WLAN. 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 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 we would not be able to factor the related revenue into our growth
in the future. If the 802.11b standard does not emerge as the dominant wireless standard
in our markets, or multiple standards are adopted that require different technologies we
may need to spend time and resources to add functionality to meet the additional
standards and many of our strategic initiatives and investments may be of no or limited
value. Further, to the extent that additional standards are adopted, our product
differentiation could be minimized and our implementation may not be interoperable with
the standard, necessitating additional product development to meet the standard which may
cause product delays.
    
    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. In particular, increased demand for our
NetLink product depends on the growth of the voice over Wi-Fi-related market. Although
NetLink sales have grown significantly in recent periods, the market for deployment of
converged voice and data wireless networks in the general enterprise continues to be
immature. We expect that this will remain the case unless that market moves through its
acceptance of IP wireless applications, standards adoption increases to reduce
complexity, and customers deploy wireless IP access points more fully throughout their
enterprise networks in densities required to support wireless voice traffic.
    
    Our reliance on a limited number of significant customers.A portion of our revenue in
the past has been derived from a limited number of customers. 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.
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Others have been promoted within, or have joined, senior management roles recently. For
example, effective May 31, 2005, Gary Bliss, our Executive Vice President of Engineering,
retired from his position and as of June 30, 2005, we had not hired his replacement. In
addition, during the last two years three of the five executive officers were either new
to the Company or were promoted. 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 executive officers, and do not maintain key person insurance on any of
our executive officers. 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
SpectraLinks Voice Priority Technology.In the absence of a wireless voice
prioritization standard to ensure quality of service, 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 SVP capability. If any of our technology partners fail 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 generate continued market growth rates may require us to participate in
industry consolidation. As part of our business strategy to continue our market growth
for IP telephony, we may engage in acquisitions or mergers with other companies, or
individual product lines, technologies and/or personnel or become the target for a merger
or acquisition. Acquisitions or mergers involve numerous risks, including the following:
 
    
    Difficulties in integrating the operations, technologies, products,
and personnel of the acquired companies;
    
    Diversion of managements attention from normal daily operations of
the business;
    
    Potential difficulties in completing projects associated with
in-process research and development;
    
    Difficulties in entering markets in which we have no or limited direct
prior experience and where competitors in such markets have stronger
market positions;
    
    Initial dependence on unfamiliar supply chains or relatively small supply partners;
    
    Insufficient revenues to offset increased expenses associated with acquisitions; and
    
    The potential loss of key employees of the acquired companies.
 Acquisitions may also cause us to:
 
    
    Issue common stock that would dilute our current stockholders
percentage ownership;
    
    Assume liabilities;
    
    Record goodwill and nonamortizable intangible assets that will be
subject to impairment testing on a regular basis and potential periodic
impairment charges;
    
    Experience possible delays in financial reporting and additional
resources required to integrate ERP systems;
    
    Incur additional financial costs and personnel resources which may be
required to timely comply on a consolidated basis with Section 404,
Managements Internal Controls and Procedures for Financial Reporting
of the Sarbanes-Oxley Act of 2002;
    
    Incur amortization expenses related to certain intangible assets;
    
    Incur large and immediate write-offs and restructuring and other
related expenses; and
    
    Become subject to intellectual property or other litigation.
 Mergers and acquisitions of telecommunications companies are inherently risky, and no
assurance can be given that any future acquisitions would be successful and would not
materially adversely affect our business, operating results, or financial condition.
Failure to manage and successfully integrate acquisitions could also materially harm our
business and operating results.Risks related to new product development also apply to acquisitions. Please see the risk
factor below entitled If we are unable to develop and introduce new products and
transition existing products and
respond to emerging technological trends, changing environmental regulations and
customers changing needs, our operating results and market share may suffer for
additional information.
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
    
    If we are unable to develop and introduce new products and transition existing
products and respond to emerging technological trends, changing environmental regulations
and customers changing needs, our operating results and market share may suffer.The
process of developing new technology is complex and uncertain, and if we fail to
accurately predict customers changing needs and emerging technological trends, our
business could be harmed. We must commit significant resources to developing new products
before knowing whether our investments will result in products the market will accept. 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 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 as we seek 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 VoIP may lead to the commoditization of wireless telephone
technology and the availability of low-cost alternative products. Other purchasers may
prefer to buy their 802.11b wireless telephone systems from a single source provider of
wireless local area networks, or LANs, such as Cisco Systems, which provides 802.11b
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 systems.
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
    
    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 our 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 wireless telephone product, then we and/or our
distributor channels 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 or enforce 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, 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 we 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.
    
    We rely on the availability of third-party licenses.Many of our products
are designed to include software or other intellectual property licensed from third
parties, especially through our OEM agreements. If we terminate OEM or technology
partner relationships, it may be necessary in the future to seek or renew licenses
relating to various aspects of these products. There can be no assurance that the
necessary licenses would be available on acceptable terms, if at all. The inability to
obtain certain licenses or other rights or to obtain such licenses or rights on favorable
terms, or the need to engage in litigation regarding these matters, could harm our
business, operating results, and financial condition.
    
    Changes in securities laws and regulations have increased our costs.The
Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules
subsequently implemented by the SEC, have required changes in some of our corporate
governance, public disclosure and compliance practices. The Act also required the SEC to
implement additional new rules on a variety of subjects. In addition to rules
made by the SEC, the Nasdaq National Market has adopted revisions to its requirements for
companies,
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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 expensive and difficult. For instance, in seeking to comply with
Section 404 Managements Internal Controls and Procedures for Financial Reporting of the
Sarbanes-Oxley Act of 2002, we spent approximately $700,000 in outside services associated
with documenting, testing and auditor review of our internal controls during 2004. In
addition, these developments may 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 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, in December
2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after June 15, 2005, with early
adoption encouraged. In April 2005, the Securities and Exchange Commission made an
amendment to Rule 401(a) regarding the compliance date for SFAS 123R. Under Rule 401(a)
as amended, we are not required to comply with SFAS 123R until January 1, 2006. Our
reported earnings will be decreased when we change our accounting policy in accordance
with the fair-value based concepts soon to be required.
    
    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, 2005, the closing price of our common
stock has ranged from a high of $17.75 per share to a low of $7.97 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;
    
    government regulation;
    
    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 including OEMs; 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 securities class action lawsuits which we
successfully settled.
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Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls over Financial Reporting.
 
 Part
II  Other Information
 
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 Period
    
    Total Number of
    
    Average Price Paid
    
    Total Number of
    
    ApproximateShares Purchased
    
    Per Share
    
    Shares Purchased
    
    Dollar Value ofas Part of Publicly
    
    Shares that MayAnnounced Plans
    
    Yet Be Purchasedor Programs
    
    under the Plans orProgramsMonth #1
(April 2005)
    
    
    189,500
    
    
    $
    10.87
    
    
    
    189,500
    
    
    $
    16,749,833Month #2
(May 2005)
    
    
    273,400
    
    
    $
    10.74
    
    
    
    273,400
    
    
    $
    13,613,197Month #3
(June 2005)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    462,900
    
    
    $
    10.79
    
    
    
    462,900
    
    
    
    
 
 Item 4. Submission of Matters to a Vote of Security Holders
  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
    
    
    18,150,495
    
    
    
    263,331Anthony V. Carollo, Jr.
    
    
    18,205,646
    
    
    
    208,180John H. Elms
    
    
    18,231,394
    
    
    
    182,432Gerald J. Bud Laber
    
    
    18,136,148
    
    
    
    277,678Werner P. Schmucking
    
    
    18,249,050
    
    
    
    164,776
 2.
    
    To ratify the selection of KPMG LLP, independent registered public accountanting
firm, as auditors for SpectraLink for the fiscal year ending December 31, 2005. Number of
shares voted: For 18,346,894; Against 60,094; Abstain 6,838.
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Item 6 Exhibits
   Exhibit Number
    
    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.
 
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SPECTRALINK CORPORATION
 
 SIGNATURE
  SPECTRALINK CORPORATIONDate: August 5, 2005By: /s/ JOHN H. ELMSJohn H. ElmsPresident and CEO
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EXHIBIT INDEX
 Exhibit Number
    
    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.
 
   34