** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10 - Q**

 

ý**QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2006**

 

o**TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from             to             **

 

**Commissionfile number 000-28180**

 

**SPECTRALINK CORPORATION**

(Exact name of registrant asspecified in charter)

 

| **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 offices)                       |       | (Zip code)              |

 

**303-440-5330**

(Registrant’s telephone number)

 

 

 (Former name, former address and former fiscalyear, if changed from last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

| Large  accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|----------------------------|--------|--------------------------|--------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12-b-2 of the Exchange Act).

Yes o  No ý

 

Applicable only to corporate issuers:

As of April 30, 2006, there were 19,331,442 shares outstanding ofSpectraLink Corporation’s Common Stock - par value per share $0.01.

 

 

----

 

**SPECTRALINKCORPORATION AND SUBSIDIARIES**

 

**INDEX**

 
| Part I  |       | Financial Information                                                                                           |   |
|---------|------------|-----------------------------------------------------------------------------------------------------------------|--------|
|    |       |                                                                                                            |   |
|    | Item 1     | Condensed Consolidated  Financial Statements                                                                    |   |
|    |       |                                                                                                            |   |
|    |       | Condensed Consolidated Balance Sheets at March 31, 2006 and December  31, 2005 (Unaudited)                      |   |
|    |       |                                                                                                            |   |
|    |       | Condensed Consolidated Statements of Operations for the Three Months  Ended March 31, 2006 and 2005 (Unaudited) |   |
|    |       |                                                                                                            |   |
|    |       | Condensed Consolidated Statements of Cash Flows for the Three Months  Ended March 31, 2006 and 2005 (Unaudited) |   |
|    |       |                                                                                                            |   |
|    |       | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                |   |
|    |       |                                                                                                            |   |
|    | Item 2     | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                     |   |
|    |       |                                                                                                            |   |
|    | Item 3     | Quantitative  and Qualitative Disclosures about Market Risk                                                     |   |
|    |       |                                                                                                            |   |
|    | Item 4     | Controls and  Procedures                                                                                        |   |
|    |       |                                                                                                            |   |
| Part II |       |                                                                                                            |   |
|    |       |                                                                                                            |   |
|    | Item 1A    | Risk Factors                                                                                                    |   |
|    |       |                                                                                                            |   |
|    | Item 6     | Exhibits                                                                                                        |   |
|    |       | (a) Exhibits                                                                                                    |   |
|    |       |                                                                                                            |   |
|    | Signatures |                                                                                                            |   |

 

2

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**Part I – Financial Information**

**Item 1. Condensed Consolidated FinancialStatements**

 

**SpectraLinkCorporation and Subsidiaries**

**CondensedConsolidated Balance Sheets**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **As of:**          | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                                    | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Assets**                                                                                    |       |                     |       |   |   |
|                                                                                          |       |                     |       |   |   |
| Current Assets:                                                                               |       |                     |       |   |   |
| Cash and cash equivalents                                                                     |       | $                        | 8,426      |   | $ | 16,703 |   |
| Cash held in escrow for acquisition (Note  2)                                                 |       | —                   |       | 55,148 |   |
| Investments in marketable securities –  current                                          |       | 13,535                   |       | 14,088 |   |
| Trade accounts receivable, net of allowance  of $342 and $343, respectively                   |       | 25,415                   |       | 22,574 |   |
| Inventories:                                                                                  |       |                     |       |   |   |
| Raw materials                                                                                 |       | 9,301                    |       | 4,783 |   |
| Work in progress                                                                              |       | 402                      |       | 5 |   |
| Finished goods                                                                                |       | 7,045                    |       | 4,727 |   |
| Less - allowance for obsolete inventory                                                       |       | (893                     | )          | (575 | ) |
| Total inventories                                                                             |       | 15,855                   |       | 8,940 |   |
| Current deferred income tax asset                                                             |       | 1,877                    |       | 1,626 |   |
| Prepaids and other                                                                            |       | 1,513                    |       | 1,201 |   |
| Total current assets                                                                          |       | 66,621                   |       | 120,280 |   |
|                                                                                          |       |                     |       |   |   |
| Property and equipment, net of accumulated  depreciation of $11,852 and $11,110, respectively |       | 12,534                   |       | 8,422 |   |
| Intangible assets, net of accumulated amortization  of $1,397 and $272, respectively          |       | 33,043                   |       | 318 |   |
| Goodwill                                                                                      |       | 24,314                   |       | — |   |
| Other non-current assets                                                                      |       | 737                      |       | 1,772 |   |
| Total assets                                                                                  |       | $                        | 137,249    |   | $ | 130,792 |   |

 

**The accompanying notes are an integral partof these condensed consolidated financial statements**.

 

3

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**SpectraLinkCorporation and Subsidiaries**

**CondensedConsolidated Balance Sheets**

**(In thousands, except**

**per share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                       | ** ** | **As of:**              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| ** **                                                                                                                                                       | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                    |       |                         |       |   |   |
|                                                                                                                                                             |       |                         |       |   |   |
| Current liabilities:                                                                                                                                             |       |                         |       |   |   |
| Accounts payable                                                                                                                                                 |       | $                            | 8,214      |   | $ | 1,478 |   |
| Accrued payroll, commissions and employee  benefits                                                                                                              |       | 5,704                        |       | 4,500 |   |
| Other accrued expenses and liabilities                                                                                                                           |       | 7,880                        |       | 6,380 |   |
| Deferred revenue                                                                                                                                                 |       | 9,545                        |       | 7,503 |   |
| Current portion long-term debt                                                                                                                                   |       | 6,000                        |       | 15,000 |   |
| Total current liabilities                                                                                                                                        |       | 37,343                       |       | 34,861 |   |
|                                                                                                                                                             |       |                         |       |   |   |
| Long-term debt                                                                                                                                                   |       | 12,050                       |       | 18,050 |   |
| Long-term deferred tax liabilities                                                                                                                               |       | 9,232                        |       | — |   |
| Other long-term liabilities                                                                                                                                      |       | 887                          |       | 900 |   |
| Total liabilities                                                                                                                                                |       | 59,512                       |       | 53,811 |   |
| Commitments and contingencies                                                                                                                                    |       |                         |       |   |   |
| Stockholders’ equity:                                                                                                                                       |       |                         |       |   |   |
| Preferred stock, 5,000 shares authorized,  none issued and outstanding                                                                                           |       | —                       |       | — |   |
| Common stock, $0.01 par value, 50,000  shares authorized, 24,058 and 23,838 shares issued, respectively, and 19,326  and 19,106 shares outstanding, respectively |       | 241                          |       | 238 |   |
| Additional paid-in capital                                                                                                                                       |       | 84,802                       |       | 81,751 |   |
| Retained earnings                                                                                                                                                |       | 29,941                       |       | 32,383 |   |
| Treasury stock, 4,732 shares, at cost                                                                                                                            |       | (37,391                      | )          | (37,391 | ) |
| Other comprehensive income                                                                                                                                       |       | 144                          |       | — |   |
| Total stockholders’ equity                                                                                                                                  |       | 77,737                       |       | 76,981 |   |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $                            | 137,249    |   | $ | 130,792 |   |

 

**The accompanying notes are an integral partof these condensed consolidated financial statements**.

 

4

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**SpectraLinkCorporation and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Sales                                                    |       |                                                 |       |   |   |
| Product sales                                            |       | $                                                    | 27,068     |   | $ | 15,456 |   |
| Service sales                                            |       | 6,901                                                |       | 5,132 |   |
| Net sales                                                |       | 33,969                                               |       | 20,588 |   |
|                                                     |       |                                                 |       |   |   |
| Cost of Sales                                            |       |                                                 |       |   |   |
| Cost of product sales                                    |       | 11,029                                               |       | 4,549 |   |
| Cost of service sales                                    |       | 3,519                                                |       | 2,754 |   |
| Total cost of sales                                      |       | 14,548                                               |       | 7,303 |   |
|                                                     |       |                                                 |       |   |   |
| Gross profit                                             |       | 19,421                                               |       | 13,285 |   |
|                                                     |       |                                                 |       |   |   |
| Operating Expenses                                       |       |                                                 |       |   |   |
| Research and development                                 |       | 5,806                                                |       | 2,457 |   |
| Marketing and selling                                    |       | 8,643                                                |       | 6,033 |   |
| General and administrative                               |       | 4,008                                                |       | 1,582 |   |
| Acquired in-process research and  development            |       | 2,021                                                |       | — |   |
| Amortization of intangible assets                        |       | 1,125                                                |       | 22 |   |
| Total operating expenses                                 |       | 21,603                                               |       | 10,094 |   |
|                                                     |       |                                                 |       |   |   |
| (Loss) income from operations                            |       | (2,182                                               | )          | 3,191 |   |
| Other (expense) income, net                              |       |                                                 |       |   |   |
| Interest (expense) income, net                           |       | (795                                                 | )          | 351 |   |
| Other income (expense), net                              |       | 242                                                  |       | (52 | ) |
| Total other (expense) income, net                        |       | (553                                                 | )          | 299 |   |
|                                                     |       |                                                 |       |   |   |
| (Loss) income before income taxes                        |       | (2,735                                               | )          | 3,490 |   |
|                                                     |       |                                                 |       |   |   |
| Income tax benefit (expense)                             |       | 293                                                  |       | (1,326 | ) |
|                                                     |       |                                                 |       |   |   |
| Net (loss) income                                        |       | $                                                    | (2,442     | ) | $ | 2,164 |   |
|                                                     |       |                                                 |       |   |   |
| Other comprehensive income, net of tax                   |       |                                                 |       |   |   |
| Foreign currency translation adjustments                 |       | 214                                                  |       | — |   |
| Unrealized (loss) gain on available for  sale securities |       | (75                                                  | )          | — |   |
| Comprehensive income (loss)                              |       | $                                                    | (2,303     | ) | $ | 2,164 |   |
|                                                     |       |                                                 |       |   |   |
| Basic (loss) earnings per share                          |       | $                                                    | (0.13      | ) | $ | 0.11 |   |
|                                                     |       |                                                 |       |   |   |
| Basic weighted average shares outstanding                |       | 19,220                                               |       | 19,230 |   |
|                                                     |       |                                                 |       |   |   |
| Diluted (loss) earnings per share                        |       | $                                                    | (0.13      | ) | $ | 0.11 |   |
|                                                     |       |                                                 |       |   |   |
| Diluted weighted average shares outstanding              |       | 19,220                                               |       | 19,710 |   |

 

**The accompanying notes are an integral partof these condensed consolidated financial statements.**

 

5

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**SpectraLink Corporation and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Cash Flows from Operating Activities                                                             |       |                                                 |       |   |   |
| Net (loss) income                                                                                |       | $                                                    | (2,442     | ) | $ | 2,164 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities         |       |                                                 |       |   |   |
| Depreciation and amortization                                                                    |       | 1,898                                                |       | 395 |   |
| Acquired in-process research and  development                                                    |       | 2,021                                                |       | — |   |
| Income tax benefit from the exercise of  stock options                                           |       | —                                               |       | 438 |   |
| Deferred income taxes                                                                            |       | (686                                                 | )          | 15 |   |
| Stock-based compensation                                                                         |       | 767                                                  |       | — |   |
| Changes in assets and liabilities, net of  effects of acquiring subsidiary                       |       | 6,053                                                |       | 4,125 |   |
| Net cash provided by operating activities                                                        |       | 7,611                                                |       | 7,137 |   |
|                                                                                             |       |                                                 |       |   |   |
| Cash Flows From Investing Activities                                                             |       |                                                 |       |   |   |
| Cash expended to acquire business, net of  cash acquired and escrow released to sellers (Note 2) |       | (3,662                                               | )          | — |   |
| Acquisition costs (Note 2)                                                                       |       | (1,349                                               | )          | — |   |
| Purchases of property and equipment                                                              |       | (2,946                                               | )          | (517 | ) |
| Proceeds from sales (purchases) of  investments in marketable securities                         |       | 4,752                                                |       | (6,139 | ) |
| Other                                                                                            |       | 45                                                   |       |   |   |
| Net cash used in investing activities                                                            |       | (3,160                                               | )          | (6,656 | ) |
|                                                                                             |       |                                                 |       |   |   |
| Cash Flows From Financing Activities                                                             |       |                                                 |       |   |   |
| Principal payments under long-term  borrowings                                                   |       | (15,000                                              | )          | (8 | ) |
| Proceeds from issuance of stock under stock  plans                                               |       | 1,994                                                |       | 1,646 |   |
| Income tax benefit from the exercise of  stock options                                           |       | 231                                                  |       | — |   |
| Dividends paid                                                                                   |       | —                                               |       | (1,931 | ) |
| Net cash used in financing activities                                                            |       | (12,775                                              | )          | (293 | ) |
|                                                                                             |       |                                                 |       |   |   |
| (Decrease) increase in cash and cash  equivalents                                                |       | (8,324                                               | )          | 188 |   |
| Cash and cash equivalents, beginning of  period                                                  |       | 16,703                                               |       | 14,625 |   |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | 47                                                   |       | — |   |
| Cash and cash equivalents, end of period                                                         |       | $                                                    | 8,426      |   | $ | 14,813 |   |

 

**The accompanying notes are an integral partof these condensed consolidated financial statements.**

 

6

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**SpectraLink Corporation and Subsidiaries**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

 

**1.****             Basisof Presentation**

 

The accompanying unaudited, condensedconsolidated financial statements have been prepared from the books and recordsof SpectraLink Corporation and its wholly owned subsidiaries: SpectraLinkInternational Corporation, SpectraLink Denmark ApS, and KIRK telecom A/S(“KIRK”) (together “SpectraLink” or “the Company”). SpectraLink designs,manufactures and sells on-premise wireless telephone systems to customersworldwide that complement existing telephone systems by providing mobilecommunications in a building or campus environment. SpectraLink wirelesstelephone systems increase the efficiency of employees by enabling them toremain in telephone contact while moving throughout the workplace.

 

In management’s opinion, these financialstatements include all adjustments, consisting only of normal recurringadjustments necessary to fairly present SpectraLink’s financial position,results of operations and cash flows for the periods presented. The results ofoperations for the period ended March 31, 2006, are not necessarily indicativeof the results to be expected for any subsequent quarter or for the entirefiscal year ending December 31, 2006. The financial statements should be readin conjunction with the audited financial statements and notes thereto as of,and for the year ended, December 31, 2005, which are included in SpectraLink’sAnnual Report on Form 10-K. Except as discussed in Note 3, the accountingpolicies utilized in the preparation of the financial statements hereinpresented are the same as set forth in SpectraLink’s annual financialstatements.

 

The December 31, 2005, condensed balancesheet data was derived from audited financial statements.

 

***Principles of Consolidation***

 

Theconsolidated financial statements include the accounts of the Company and itssubsidiaries, all of which are wholly owned. All significant intercompanytransactions and balances have been eliminated.

 

***Foreign Currency Translation***

 

The Company’s foreignoperating subsidiaries use as their functional currency the local currency ofthe countries in which they operate. Their assets and liabilities aretranslated into U.S. dollars at the exchange rates in effect at the balancesheet date. Revenue, expenses, and cash flows are translated at the averagerates of exchange prevailing during the period. Translation gains and lossesare included in comprehensive income (loss) within stockholders’ equity.Realized and unrealized transaction gains and losses resulting from theremeasurement of non-functional currency financial instruments are included inthe determination of net income (loss). Transaction gains for the three monthsended March 31, 2006 and 2005, were insignificant.

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities, as well as disclosure of contingent assets andliabilities, at the date of the financial statements, and the reported amountsof revenue and expenses during the reporting period. Actual results coulddiffer from those estimates. Significant estimates used in the accompanyingfinancial statements include: allowance for doubtful accounts, reserve forobsolete or otherwise unrealizable inventory, estimated warranty costs, andvaluations of tangible and intangible assets acquired and liabilities assumed.

 

***Reclassifications***

 

Certainreclassifications have been made to the prior year financial statements toconform to the current year presentation.

 

7

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***Revenue Recognition and Deferred Revenue***

 

We derive ourrevenue principally from the sale of products and/or services for wirelesstelephone systems. For multiple element arrangements, we establish the fairvalue of these products and services based primarily on sales prices when theproducts and services are sold separately. We recognize revenue on each elementof an arrangement when there is persuasive evidence of an arrangement, deliveryhas occurred, collection is probable, and the fee is fixed or determinable.Revenue from product sales is recorded upon transfer of title, which isgenerally upon shipment of product. Revenue is deferred if there aresignificant post delivery obligations, if collection is not reasonably assuredat the time of sale, or if the fee is not fixed or determinable. Whensignificant post delivery obligations exist, revenue is deferred until suchobligations are fulfilled. We offer products and services such as installation,support, education and training, and extended warranty coverage. Revenue frominstallation and training services are deferred and recognized when theservices are performed. Revenue from maintenance services is deferred andrecognized over the term of the maintenance agreement. We recognize amountsbilled to customers for shipping and handling costs as revenue when the relatedproducts are shipped. Costs of shipping and handling are included in cost ofsales.

 

**2.****             Acquisitionof KIRK Telecom A/S**

 

On January 3, 2006, pursuant to a stockpurchase agreement dated December 12, 2005, SpectraLink acquired KIRK from thestockholders of KIRK by purchasing 100% of its outstanding common stock. KIRKis a manufacturer of on-site wireless communications products based in Denmark.The purchase price for the transaction was approximately 389 million Danish Kroneror approximately U.S. $62 million, which was paid in cash, and approximately $2million of acquisition costs.  We fundedthe acquisition price with approximately $31 million of our own cash and fundsprovided by a credit facility (Note 9). We escrowed $55.1 million in December2005, which was released to the selling shareholders on January 3, 2006,along with an additional $6.9 million to acquire KIRK.

 

***Reasons for the Acquisition***

 

With theaddition of KIRK’s DECT-based products, we now offer a complete productportfolio that incorporates all major enterprise wireless voice technologies:Wi-Fi, DECT and proprietary systems. The acquisition of KIRK telecom alsosignificantly increases our international reach and augments our distributionchannels and geographical market penetration, further extending our leadershipin workplace wireless telephony. Furthermore, the acquisition enables us tocompete in new small to medium business markets in North America with KIRK’sDECT products.

 

***Pro Forma Results***

 

The results ofKIRK have been included in the consolidated financial statements since January3, 2006.

 

The followingpro forma information shows the results of our operations for the three monthsended March 31, 2005, as if the acquisition had occurred at the beginning of thatperiod:

 
| ** **                          | ** ** | **Three months ended March 31,**                  | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Actual)**                                                          | ** ** | **(Pro forma)** | ** ** |
| ** **                          | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net sales                           |       | $                                                                     | 33,969     |   | $ | 29,764 |   |
| Pretax (loss) income                |       | (2,735                                                                | )          | (31 | ) |
| Net (loss) income                   |       | (2,442                                                                | )          | (827 | ) |
| Net (loss) income per common share: |       |                                                                  |       |   |   |
| Basic                               |       | $                                                                     | (0.13      | ) | $ | (0.04 | ) |
| Diluted                             |       | $                                                                     | (0.13      | ) | $ | (0.04 | ) |

 

We reported inour Form 8-K/A filed on March 17, 2006 that the functional currency for our Danishholding company would be Danish Krone based upon the expectations we had at thattime of the future activities of the holding company. Upon further review, wehave concluded that the holding company will be used solely for the purpose of holdingour investment in KIRK telecom, and the functional currency for the holdingcompany will be U.S. dollars. 

 

8

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***Preliminary Purchase Accounting***

 

Using the mostcurrently available information and subject to finalization, the followingrepresents the preliminary allocation of the aggregate purchase price to theacquired net assets of KIRK as of January 3, 2006, (in thousands).

 
| Total current assets                                                     |   | $      | 17,194 |   |
|--------------------------------------------------------------------------|--------|--------|--------|--------|
| Property and equipment                                                   |   | 1,949  |   |
| Amortizable intangible assets                                            |   | 33,992 |   |
| In-process research and development                                      |   | 2,021  |   |
| Goodwill                                                                 |   | 24,314 |   |
| Other assets                                                             |   | 160    |   |
| Total assets acquired                                                    |   | 79,630 |   |
| Total liabilities assumed                                                |   | (6,170 | )      |
| Deferred taxes                                                           |   | (9,742 | )      |
| Net assets acquired                                                      |   | 63,718 |   |
| Less: Acquisition costs paid or accrued                                  |   | (1,885 | )      |
| Amount paid in cash, including the release  of $55,148 of escrowed funds |   | $      | 61,833 |   |

 

Identifiableintangible assets as of January 3, 2006, represent technology owned by KIRKplus other identifiable intangible assets such as acquired contractualrelationships which are subject to amortization over various periods of time,using methods which approximate the periodic decreases in value, with theweighted average amortization period being 8 years. Since these assets aredeductible for financial reporting purposes but not tax purposes, a deferredtax liability was recorded as of the acquisition date. Future estimated amortizationexpense is shown in Note 7. The following table summarizes the identifiableintangible assets:

 
| ** **             | ** ** | **Estimated  Fair Value** | ** **   | **Useful  Life** | ** ** |
|------------------------|------------|--------------------------------|--------------|------------------|------------|
| ** **             | ** ** | **(In thousands)**        | ** **   | **(Years)**      | ** ** |
| Existing technology    |       | $                              | 17,139       |             | 5-8        |   |
| Core technology        |       | 6,939                          |         | 8                |       |
| Customer relationships |       | 7,686                          |         | 7-11             |       |
| FCC licenses           |       | 334                            |         | 8                |       |
| Trade name             |       | 1,703                          |         | 11               |       |
| Order backlog          |       | 191                            |         | —           |       |
|                   |       | $                              |  33,992 |             |       |   |
|                        |            |                                |              |                  |            |  |  |

 

In addition,we acquired approximately $2.0 million of in-process research and developmentfrom KIRK. In-process purchased research and development (IPRD) representsresearch and development regarding internet protocol technology developmenteffort which had not reached technological feasibility and have no alternativefuture use as of the acquisition date. IPRD was expensed in accordance withFinancial Accounting Standards Board Interpretation No. 4, Applicability ofFASB Statement No. 2 to Business Combinations Accounted for by the PurchaseMethod.

 

Goodwill wascompletely allocated to our KIRK segment (see Note 5) at March 31, 2006 andwill not be tax deductible. Management is currently evaluating potential integrationactivities that could impact our future financial reporting. Significantoutstanding items include: evaluation of our organization structure, decisionson transfer pricing and allocation of goodwill among our segments.

 

The valuationof intangible assets was determined using the excess earnings method,replacement cost approach, or relief-from-royalty approach, depending upon thetype of asset. KIRK’s net tangible assets were generally valued at theirrespective carrying amounts, as management believes that these amountsapproximate their fair value.

 

**3.****             Adoptionof New Accounting Pronouncements**

 

The adoption of the following accountingpronouncements in the first quarter of 2006 did not have a material impact onour results of operations, financial condition, or cash flows:

 

•      Statement ofFinancial Accounting Standards (“SFAS”) 151, “Inventory Costs – An Amendment ofARB No. 43, Chapter 4”;

•      SFAS 153,“Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 20”;

•      SFAS 154,“Accounting Changes and Error Corrections, which replaces APB Opinion 20,“Accounting Changes” and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements – An Amendment of APB Opinion No. 28”;

•      Emerging IssuesTask Force (“EITF”) Issue 05-06, “Determining the Amortization Period forLeasehold Improvements”; and

•      FASB StaffPositions 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments.”

 

9

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***Stock-Based Compensation***

 

In December2004, the FASB issued Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requiresmeasurement of all employee stock-based compensation awards using a fair-valuemethod and the recording of such expense in the consolidated financialstatements. In addition, the adoption of SFAS 123R requires additionalaccounting related to the income tax effects and disclosure regarding the cashflow effects resulting from share-based payment arrangements. In March 2005,the SEC issued Staff Accounting Bulletin No. 107, which provides supplementalguidance for the implementation of SFAS 123R. On January 1, 2006 (the first dayof our 2006 fiscal year), we adopted SFAS 123R using the modified prospectivemethod as permitted under SFAS 123R. Under this transition method, compensation cost recognized in the firstquarter of 2006 includes: (a) compensation cost for all share-based paymentsgranted prior to but not yet vested as of December 31, 2005, based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123,and (b) compensation cost for all share-based payments granted subsequent toDecember 31, 2005, based on the grant-date fair value estimated in accordancewith the provisions of SFAS 123R.  Inaccordance with the modified prospective method of adoption, our results ofoperations and financial position for prior periods have not been restated.

 

We used thegraded attribution method to recognize expense for all options granted prior tothe adoption of SFAS 123R.  Upon adoptionof SFAS 123R on January 1, 2006, we adopted the straight-line attributionmethod to recognize expense for options granted after December 31, 2005.  The expense associated with the unvestedportion of the pre-adoption grants will continue to be expensed using thegraded attribution method.

 

The amount ofstock-based compensation recognized during a period is based on the value ofthe portion of the awards that are ultimately expected to vest. SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.  The term “forfeitures” isdistinct from “cancellations” or “expirations” and represents only the unvestedportion of the surrendered option. Based on an analysis of historicalforfeitures, we have applied an annual forfeiture rate of 9% to all unvestedoptions as of March 31, 2006. This analysis will be re-evaluated quarterly andthe forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognizedover the vesting period will only be for those shares that vest. Forfeited orotherwise cancelled options are returned to the pool of options authorized forissuance under our stock-based compensation plans. It is our policy to issuenew shares, as opposed to treasury shares upon exercise or purchase under ourstock-based compensation plans. See Note 12.

 

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**4.****             RecentlyIssued Accounting Pronouncements**

 

***SFAS No. 155 (SFAS 155),“Accounting for Certain Hybrid Financial Instruments, an Amendment of FASBStatements No. 133 and 140”***

 

SFAS 155 was issued in February 2006 and willbe effective for us in the first quarter of our 2007 fiscal year. Among otherthings, SFAS 155 permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation. We do not believe that the adoption of SFAS 155 will have amaterial impact on our financial statements.

 

***SFAS No. 156 (SFAS 156),“Accounting for Servicing of Financial Assets, an amendment to SFAS No. 140”***

 

SFAS 156 was issued in March 2006 and will beeffective for us in the first quarter of our 2007 fiscal year. SFAS 156simplifies certain aspects of accounting for separately recognized servicingassets and liabilities and clarifies when to separately recognize servicingobligations. We do not believe that the adoption of SFAS 156 will have animpact on our financial statements.

 

**5.****             SegmentInformation**

 

In accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” we define operatingsegments as components of an enterprise for which separate financialinformation is available. This information is reviewed regularly by our chiefoperating decision-maker, to evaluate performance and to make operatingdecisions. We have identified our Chief Executive Officer as our chiefoperating decision-maker. The chief operating decision maker reviews revenueand overall results of operations by segment.

 

During the first quarter of 2006, we operatedour business across two operating segments, based on the legal structures ofSpectraLink and KIRK. Prior to the first quarter of 2006, and the acquisitionof KIRK, we operated as one segment. As discussed in Note 2, management isreviewing the structure of the Company and may modify our segment structure inthe ensuing quarters.

 

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The SpectraLink segment primarily consists ofour Americas operations and corporate activities, including global corporatesupport functions, such as executive offices, legal, finance and treasury. TheSpectraLink segment also includes branch sales and support personnel located inthe United Kingdom and Australia.

 

The KIRK segment is comprised of theoperations and corporate activities of KIRK acquired on January 3, 2006 (SeeNote 2). KIRK designs, manufactures and sells wireless on-site adjunctcommunication solutions. KIRK also includes two subsidiaries: KIRK telecom,Inc, a distribution sales and support subsidiary in the United States; and KIRKscantel A/S, which designs, contract manufactures and sells wired and wirelesstelephones under the KIRK brand name to the residential market, primarily inthe Scandinavian countries.

 

We began selling products between oursegments subsequent to March 31, 2006, and had no inter-segment operatingactivity during the first quarter. We had one customer in the first quarter of2006 for which revenue exceeded 10% of our consolidated net revenue.

 

The following summarizes our results andtotal assets by segment (in thousands):

 
| **Three months ended:** | ** ** | **SpectraLink** | ** ** | **KIRK** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------|------------|----------|------------|-----------|------------|
| March 31, 2006                    |       |            |       |     |       |      |       |
| Revenue                           |       | $               | 26,319     |     | $          | 7,650     |       | $ | 33,969 |   |
| Income (loss) from operations     |       | 1,456           |       | (3,638   | )          | (2,182    | )          |
| March 31, 2005                    |       |            |       |     |       |      |       |
| Revenue                           |       | $               | 20,588     |     | $          | —    |       | $ | 20,588 |   |
| Income from operations            |       | 3,191           |       | —   |       | 3,191     |       |
|                              |       |            |       |     |       |      |       |
| Assets as of March 31, 2006:      |       | $               | 66,492     |     | $          | 70,757    |       | $ | 137,249 |   |
| Assets as of December 31, 2005:   |       | 130,792         |       | —   |       | 130,792   |       |

 

**6.****             EarningsPer Share**

 

A reconciliation of the numerators anddenominators used in computing earnings (loss) per share is as follows:

 
| ** **                        | ** ** | **Three months ended March 31,**                  | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                        | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                        | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **Net loss**                                                     | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **Net  income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
| Basic (loss) earnings per share   |       | $                                                                     | (2,442     | ) | 19,220 |   | $ | (0.13 | ) | $ | 2,164 |   | 19,230 |   | $ | 0.11 |   |
| Effect of dilutive securities:    |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Stock purchase plan               |       | —                                                                |       | — |   | — |   | — |   | 9 |   | — |   |
| Stock options outstanding         |       | —                                                                |       | — |   | — |   | — |   | 471 |   | — |   |
| Diluted (loss) earnings per share |       | $                                                                     | (2,442     | ) | 19,220 |   | $ | (0.13 | ) | $ | 2,164 |   | 19,710 |   | $ | 0.11 |   |
| Dividends declared per share      |       |                                                                  |       |   |   | $ | — |   |   |   |   |   | $ | 0.10 |   |

 

Basic earnings per share is computed bydividing net income by the weighted average number of shares of common stockoutstanding for the period. Diluted earnings per share is determined bydividing net income by the sum of the weighted average number of common sharesoutstanding, and if not anti-dilutive, the effect of outstanding stock optionsand/or other common stock equivalents as determined utilizing the treasurystock method. Potentially dilutive common stock options that were excluded fromthe calculation of dilutive income per share because they were anti-dilutivetotaled 2.4 million shares and 1.0 million shares for the three months endedMarch 31, 2006 and 2005, respectively. Weighted average options and rights topurchase 0.2 million shares of common stock were excluded from the dilutedstock calculation for the three months ended March 31, 2006, as their effectwould have been anti-dilutive as a result of the net loss for the period. Inaccordance with debt covenants, we have not declared dividends in the firstquarter of 2006. See Note 9.

 

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**7.****             Goodwilland Other Intangibles**

 

The following table presents details of ourintangible assets, other than goodwill, as of March 31, 2006:

 
| ** **                          | ** ** | **Useful Life** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net**    | ** ** |
|-------------------------------------|------------|----------------------|------------|-------------------|------------|-------------------------------|------------|------------|------------|
| ** **                          | ** ** | **(Years)**          | ** ** | ** **        | ** ** | **(In thousands)**       | ** ** | ** ** | ** ** |
| International and domestic licenses |       | 1-5                  |       | $                 | 974        |                          | $          | 310        |       | $ | 664 |   |
| Patents and technology              |       | 5-8                  |       | 24,077            |       | 884                           |       | 23,193     |       |
| Customer relationships              |       | 7-11                 |       | 7,685             |       | 166                           |       | 7,519      |       |
| Other                               |       | 11                   |       | 1,704             |       | 37                            |       | 1,667      |       |
| Total                               |       |                 |       | $                 | 34,440     |                          | $          | 1,397      |       | $ | 33,043 |   |

 

The following table presents details of ourintangible assets, as of December 31, 2005:

 
| ** **             | ** ** | **Useful Life** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net**    | ** ** |
|------------------------|------------|----------------------|------------|-----------------------|------------|-------------------------------|------------|------------|------------|
| ** **             | ** ** | **(Years)**          | ** ** | ** **            | ** ** | **(In thousands)**       | ** ** | ** ** | ** ** |
| International licenses |       | 1-5                  |       | $                     | 589        |                          | $          | 272        |       | $ | 317 |   |
| Other                  |       | Indefinite           |       | 1                     |       | —                        |       | 1          |       |
| Total                  |       |                 |       | $                     | 590        |                          | $          | 272        |       | $ | 318 |   |

 

The estimated future amortization expense ofintangible assets is as follows:

 
| **Fiscal Year** | ** ** | **Amount**              | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(In thousands)** | ** ** |
| 2006 (remaining)     |       | $                       | 3,300      |   |
| 2007                 |       | 4,700                   |       |
| 2008                 |       | 4,600                   |       |
| 2009                 |       | 4,400                   |       |
| 2010                 |       | 4,100                   |       |
| Thereafter           |       | 11,900                  |       |
|                 |       | $                       | 33,000     |   |
|                      |            |                         |            |  |  |

 

Amortization expense of intangible assets was$1.1 million for the quarter ended March 31, 2006, and insignificant for thequarter ended March 31, 2005.

 

As discussed in Note 2, we preliminarilyallocated $24.3 million to goodwill as a result of the acquisition of KIRK.Goodwill was completely allocated to our KIRK segment at March 31, 2006. As weare finalizing the valuation of certain assets and liabilities acquired withKIRK, goodwill and other intangible asset allocations are subject to change.See Note 2 for the detailed listing of values assigned to KIRK intangibles andgoodwill.

 

**8.****             DerivativeFinancial Instruments**

 

We do not hold or issue derivative financialinstruments for speculative trading purposes. We account for derivativefinancial instruments in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended by SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS 133”). SFAS 133 requires that all derivative instruments be recorded onthe consolidated balance sheet at fair value. The accounting for changes in thefair value (i.e., gains or losses) of a derivative instrument is dependent uponwhether the derivative has been designated and qualifies as part of a hedgingrelationship and further, on the type of hedging relationship. For derivativeinstruments that are designated and qualify as a

 

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fair value hedge, the gain orloss on the derivative instrument as well as the offsetting gain or loss on thehedged item attributable to the hedged risk are recognized in the results ofoperations. For derivative instruments that are designated and qualify as acash flow hedge, the effective portion of the gain or loss on the derivativeinstrument is reported as a component of other comprehensive income (loss) andreclassified into earnings in the same period or periods during which thehedged transaction affects earnings. Any ineffective portion of the gain orloss on the derivative instrument is recorded in the results of operationsimmediately. For derivative instruments not designated as hedging instruments,the gain or loss is recognized in our results of operations immediately.

 

We are exposed to foreign currency exchangerisk in the normal operation of our business. Our primary currency risks resultfrom our investment in KIRK, which is a Danish Krone functional currencybusiness, and through KIRK purchases denominated in U.S. dollars and Euros. Tomitigate this risk, we purchase forward currency contracts. Forward currencycontract activity was insignificant in the first quarter of 2006.

 

**9.****             Debt**

 

Debt consisted of thefollowing:

 
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **As of:**              | ** **       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------------|
| ** **                                                                                                                                                                                                                                                                                     | ** ** | **March 31, 2006** | ** **       | **December 31, 2005** | ** ** |
| Term loan payable to bank, quarterly  principal installments of $1,250,000 beginning on March 31, 2006, with final  maturity in December 2008; variable quarterly interest payments, (interest at  8.25 % as of December 31, 2005), collateralized by substantially all assets  of the Company |       | $                            | —           |   | $ |  15,000,000 |   |
|                                                                                                                                                                                                                                                                                           |       |                         |             |   |   |
| Revolving line of credit, principal due and  payable in December 2008, variable quarterly interest payments at 6.875% and  8.25% as of March 31, 2006, and December 31, 2005, respectively, collateralized  by substantially all assets of the Company                                         |       | 18,050,000                   |             | 18,050,000 |   |
|                                                                                                                                                                                                                                                                                           |       |                         |             |   |   |
| Total Long-Term Debt                                                                                                                                                                                                                                                                           |       | $                            |  18,050,000 |   | $ |  33,050,000 |   |
| Less: Current Portion of Long-Term Debt                                                                                                                                                                                                                                                        |       | (6,000,000                   | )                | (15,000,000 | ) |
| Total Long-Term Debt                                                                                                                                                                                                                                                                           |       | $                            |  12,050,000 |   | $ |  18,050,000 |   |

 

On December 9, 2005, we entered into a creditfacility (the “Credit Facility”) with a group of banks, led by JP Morgan, toprovide funds for the acquisition of KIRK in 2006 (Note 2). The Credit Facilityconsists of a three-year term loan of $15.0 million and a revolving line ofcredit for borrowings up to $25.0 million (of which $5.0 million becomesavailable as of July 1, 2006) that also matures in three years. On March 28,2006, we repaid the term loan in its entirety, and $0.3 million of related debtissuance costs were expensed immediately. We can borrow under the remainingrevolving line of credit at either the JP Morgan Prime rate plus 1% or at aLIBO rate plus 2%. At March 31, 2006, the Company’s interest rate was basedupon LIBO plus 2% (6.875%). At December 31, 2005, our interest was based uponthe JP Morgan prime plus 1% (8.25%). The amount available for borrowings underthe revolving line of credit are determined based on the borrowing basecalculation as defined in the Credit Facility beginning with the month endedMay 2006. As of March 31, 2006, approximately $2.0 million was available foradditional borrowings under the line of credit. We are obligated to pay annualcommitment fees of up to a maximum of 0.5% of the unused amount of therevolving credit line. Amounts due under the Credit Facility are secured by afirst security interest in substantially all of the Company’s assets.

 

The revolving line of credit may be prepaidat any time without penalty. It is management’s intention to repay $6.0 millionof the outstanding line of credit using current assets over the next twelvemonths. Therefore, $6.0 million of the outstanding line of credit has beenclassified as current as of March 31, 2006.

 

Under the Credit Facility, we are required tocomply with certain financial and non-financial covenants. Among the financialcovenants are requirements related to consolidated net worth, a quarterlyleverage ratio and a quarterly fixed charge ratio. The Credit Facility alsolimits our ability to: enter into secured and unsecured borrowing arrangements,issue dividends to stockholders (the Company was permitted to pay a dividend inDecember 2005), repurchase our stock, acquire and dispose of businesses, andissue additional

 

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shares of our stock, amongother requirements, as defined in the Credit Facility. We were in compliancewith all covenants related to the Credit Facility at March 31, 2006, and as ofthe date of this report.

 

Future maturities of long-termdebt (reflecting contractual maturities and management’s intent) are as followsas of March 31, 2006:

 

| 2006 (remaining) |   | $         | 4,500,000  |   |
|------------------|--------|-----------|------------|--------|
| 2007             |   | 6,000,000 |       |
| 2008             |   | 7,550,000 |       |
|             |   | $         | 18,050,000 |   |

 

**10.****          IncomeTaxes**

 

Our first quarter 2006 results include a nondeductible in-processresearch and development write-off which is considered a discrete item forpurposes of calculating our effective tax rate, and which caused our effectivetax rate to drop to 11%, compared to 38% in the first quarter of 2005. Withoutregard to the discrete item, our effective tax rate would be comparable to lastyear’s rate. We have estimated an effective tax rate for the year between 35%and 39%.

 

We account for income taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*” (SFASNo. 109). Judgment is required in determining our worldwide provision forincome taxes. In the ordinary course of our business, there are manytransactions for which the ultimate tax outcome is uncertain. Additionally, ourincome tax provision is based on calculations and assumptions that are subjectto examination by many different tax authorities. We adjust our income taxprovision in the period it is probable that actual results will differ from ourestimates. Tax law and rate changes are reflected in the income tax provisionin the period in which such changes are enacted.

 

As discussed in Note 2, we formed a Danish holding company in Decemberof 2005, for the purposes of acquiring KIRK. Under the accounting guidance ofAPB 23 and SFAS 109, we have elected to treat the holding company’searnings as permanently reinvested. Our intention is to reinvest the earningspermanently or to repatriate the earnings when it is tax effective to do so. Itis not practicable to determine the amount of incremental taxes that mightarise were these earnings to be remitted. However, we believe that U.S. foreigntax credits would largely eliminate any U.S. taxes and offset any foreignwithholding taxes due on remittance.

 

**11.****          Commitmentsand Contingencies**

 

***Product Warranties and Service***

 

We providewarranties against defects in materials and workmanship for our products,generally ranging from 90 days to 24 months. At the time the product is eithermanufactured or shipped, we establish a provision for estimated expenses ofproviding service under these warranties based on historical warrantyexperience. We believe our reserves are adequate as recorded. A summary ofactivity for accrued product warranty and service is as follows:

 
| ** **                                                 | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                          | ** ** |
|                                                       |       |                                             |       |   |   |
| Beginning Balance, Accrued Product Warranty  and Service   |       | $                                                | 947        |   | $ | 901 |   |
| Warranty reserves assumed in acquisition of  KIRK (Note 2) |       |                                             | 551        |   |   | — |   |
| Additions to the accrual for product  warranties           |       | 665                                              |       | 254 |   |
| Reductions for incurred warranty charges                   |       | (299                                             | )          | (247 | ) |
| Ending Balance, Accrued Product Warranty  and Service      |       | $                                                | 1,864      |   | $ | 908 |   |

 

***Indemnifications***

 

We provide indemnifications of varying scope and size to certaincustomers against claims of intellectual property infringement made by thirdparties arising from the use of our products. We evaluate estimated losses forsuch indemnifications under SFAS 5, *Accounting forContingencies*, as interpreted by FASB Interpretation 45, *Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others*. We considersuch factors as the degree of probability of an unfavorable outcome and theability to make a reasonable estimate of the amount of loss. To date, we havenot encountered material costs as a result of such obligations and have notaccrued any liabilities related to such indemnifications in our financialstatements.

 

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***Legal Proceedings***

 

We are not presently a party to any material pending legal proceedingsof which we are aware.

 

***12.          Stock Based Compensation***

 

We have twoshare-based arrangements for which we recognize expense under SFAS 123R:   the 2000 Stock Option Plan (the “OptionPlan”) and the Employee Stock Purchase Plan (the “ESPP”).

 

The OptionPlan provides selected employees, officers, directors, agents, consultants andindependent contractors of the Company options to purchase shares of theCompany’s stock. Under the terms of the Option Plan, the Board of Directors maygrant either non-qualified or incentive stock options, as defined by theInternal Revenue Service. The purchase price per share of a non-qualified stockoption will not be less than par value per share of the Company’s common stockat the time of grant. The purchase price per share of an incentive stock optionwill not be less than 100% of the market value per share of the Company’scommon stock at the time of grant. If the grantee of an incentive stock optionowns more than 10% of the total combined voting power of all classes of stockon the date of grant, the purchase price will be at least 110% of the marketvalue of a share of the Company’s common stock at the date of grant. Optionsgranted under the Option Plan expire after 10 years. Options vest at a rate of25% after 12 months from the date of grant, and ratably per month thereafter,conditioned upon continued employment.  Fullvesting occurs after 48 months from the date of grant.

 

Stock optionsoutstanding at March 31, 2006, changes during the first of 2006, and sharesavailable for grant under all of the Company’s plans are presented below:

 
| ** **                          | ** ** | **Shares  available for  grant** | ** ** | **Outstanding  options** | ** ** | **Weighted-  average  exercise  price, per  common share** | ** ** | **Remaining  contractual  life, in years** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **(in thousands)**               | ** ** | **(in thousands)**  | ** ** | ** **                                                           | ** ** | ** **                                           | ** ** | ** **                      | ** ** |
| Outstanding as of December 31, 2005 |       | 2,872                                 |       | 3,116                    |       | $                                                                    | 13.64      |                                                 |       |                            |       |   |
| Authorized                          |       | —                                |       | —                   |       | —                                                               |       |                                                 |       |                            |       |
| Granted                             |       | (633                                  | )          | 633                      |       | $                                                                    | 12.50      |                                                 |       |                            |       |   |
| Exercised                           |       | —                                |       | (162                     | )          | $                                                                    | 9.18       |                                                 |       |                            |       |   |
| Forfeited/expired                   |       | 38                                    |       | (38                      | )          | $                                                                    | 12.87      |                                                 |       |                            |       |   |
|                                |       |                                  |       |                     |       |                                                                 |       |                                                 |       |                            |       |
| Outstanding as of March 31, 2006    |       | 2,277                                 |       | 3,549                    |       | $                                                                    | 13.65      |                                                 | 8.11       |                            | $          | 2,926,539 |   |
|                                |       |                                  |       |                     |       |                                                                 |       |                                                 |       |                            |       |
| Exercisable at March 31, 2006       |       |                                  |       | 2,207                    |       | $                                                                    | 14.39      |                                                 | 7.37       |                            | $          | 1,920,366 |   |
|                                     |            |                                       |            |                          |            |                                                                      |            |                                                      |            |                                 |            |  |  |  |

 

Theweighted-average grant date fair value of options granted during the first quarterof 2006 was $7.82. The total intrinsic value of options exercised during thefirst quarter of 2006 was $0.3 million.

 

As of March31, 2006, there was $6.2 million of total unrecognized compensation cost fromshare-based compensation granted under the Option Plan, related to unvestedshares. This compensation is expected to be recognized over a weighted-averageperiod of approximately 1.6 years.

 

We selectedthe Black-Scholes option-pricing model as the most appropriate valuation methodfor our awards.  The fair value of eachoption grant is estimated as of the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions used forgrants. Note that for 2006 grants, we have separated the optionees into threegroups:  Non-employee directors,Executives, and Management/Staff. We have determined that the exercise behaviorof the three groups is distinct and, therefore, the assumptions are differentfor purposes of valuing their options using the Black-Scholes model. The expectedlives (net of forfeitures) for the non-employee director, executive andmanagement/staff group are estimated to be 5.28 years, 5.27 years, and 4.39years, respectively. Volatility for the three groups is estimated to range from67% to 72%. The risk-free interest rate is 4.82% for all groups and thedividend yield is 0%.

 

Subject tocertain maximum stock ownership restrictions, employees are eligible toparticipate in the ESPP if employed by the Company at the beginning of eachoffering period, on a full-time or part-time basis, and regularly scheduled towork more than 20 hours per week. Participating employees may have up to 10% oftheir base pay in effect at the commencement of each offering period withheldpursuant to the ESPP. Common stock purchased under the ESPP is equal to 85% ofthe lower of the market value on the commencement date or termination date ofeach offering period (usually six months).

 

We do notseparate our employees into groups for purposes of valuing the ESPP awards. Theassumptions we used in 2006 to value these awards were as follows:  Interest rate – 4.3%; Dividend yield – 0%;Expected term – 6 months; Volatility – 41%. At March 31, 2006, there was $0.1million of total unrecognized compensation cost related to our ESPP, which willbe recognized over the remaining offer period, through August 15, 2006.

 

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The followingtable sets forth the total stock-based compensation expense resulting fromstock-based compensation included in our Condensed Consolidated Statements ofOperations (in thousands):

 
| ** **                                                   | ** ** | **Three months ended March 31, 2006** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                   | ** ** | **Option Plan**                                      | ** ** | **ESPP** | ** ** |
| Cost of product and service revenue |       | $                                                         | 52         |   | $ | 14 |   |
| Research and development                                     |       | 186                                                       |       | 27 |   |
| Selling and marketing                                        |       | 85                                                        |       | 29 |   |
| General and administrative                                   |       | 369                                                       |       | 5 |   |
| Stock-based compensation expense before  income taxes        |       | 692                                                       |       | 75 |   |
| Income tax  benefit                                          |       | (277                                                      | )          | (30 | ) |
| Total stock-based compensation expense  after income taxes   |       | $                                                         |  415  |   | $ |  45 |   |
| Basic and diluted cost per share                             |       | $                                                         | 0.02       |   | $ | — |   |

 

                        Priorto adoption of SFAS 123R, we applied SFAS 123, amended by SFAS 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure” (SFAS 148),which allowed companies to apply the existing accounting rules under APB 25,“Accounting for Stock Issued to Employees,” and related interpretations. Ingeneral, no compensation expense was recognized in periods prior to theadoption of SFAS 123R for our plans; however, as required by SFAS 148 prior tothe adoption of SFAS 123R, we provided pro forma net income (loss) and proforma net income (loss) per common share disclosures for stock-based awards, asif the fair-value-based method defined in SFAS 123 had been applied.

 

The followingtable illustrates the effect on net income (loss) after tax and net income(loss) per common share as if we had applied the fair value recognitionprovisions of SFAS 123 to stock-based compensation during the three monthsended March 31, 2005, (in thousands, except per share amounts):

 
| ** **                                                                                                      | ** ** | **Three months ended  March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net income, as reported                                                                                         |       | $                                                          | 2,164      |   |
| Deduct stock based employee compensation  expense under the fair value based method, net of related tax effect: |       |                                                       |       |
| Compensation expense for stock options                                                                          |       | (858                                                       | )          |
| Compensation expense for the stock purchase  plan                                                               |       | (37                                                        | )          |
| Net income, pro forma                                                                                           |       | $                                                          | 1,269      |   |
| Earnings per share:                                                                                             |       |                                                       |       |
| Basic – as reported                                                                                        |       | $                                                          | 0.11       |   |
| Basic – pro forma                                                                                          |       | $                                                          | 0.07       |   |
| Diluted – as reported                                                                                      |       | $                                                          | 0.11       |   |
| Diluted – pro forma                                                                                        |       | $                                                          | 0.07       |   |

 

Ourassumptions in the first quarter of 2005 were not dependent upon an optioneegrouping, and included an interest rate of 3.80%, and expected life (net offorfeitures) of 3.35 years, a per share quarterly dividend of $0.10, andexpected volatility of 74%.

 

Net cashproceeds from the exercise of stock options were $1.5 million and $1.6 millionfor the three months ended March 31, 2006, and 2005, respectively. Net cashproceeds from employee stock  purchaseswere $0.5 million for the three months ended March 31, 2006. In accordance withSFAS 123R, we present excess tax benefits from the exercise of stock options,if any, as financing cash flows in 2006 rather than operating cash flows, aspresented previously.

 

**13.****          SubsequentEvents**

 

Effective April 10, 2006, David Rosenthalresigned as the Company’s executive vice president of finance andadministration, chief financial officer, corporate secretary and treasurer, andassumed, at his then current salary, the role of non-executive assistant toJohn Elms, the Company’s president and CEO, to assist with the transition.

 

During the transition, Carolyn Smyth assumedthe role of interim chief financial officer and principal accounting officer.Ms. Smyth has been with the Company since November 1999, first as corporatecontroller, and since November 2005, as revenue controller.

 

On April 17, 2006, the Company announcedthe appointment of Ernest Sampias as the Company’s CFO, executive vicepresident of finance and administration, secretary and treasurer, effectiveMay 15, 2006. At that time, he will replace Carolyn Smyth, the Company’sinterim CFO and chief accounting officer. Ms. Smyth will resume her priorduties as controller of revenue for the Company.

 

Pursuant to the terms of Mr. Sampias’offer letter, Mr. Sampias is entitled to receive an annual base salary of$300,000 and will be eligible to participate in the Company’s discretionarycash bonus plan of up to 35% of his annual cash salary based on business andfinancial targets. Mr. Sampias will receive, upon commencement of hisemployment, a stock option grant of 100,000 shares of SpectraLink common stockwhich will vest over four years, with one-fourth of the shares vesting one yearafter the commencement of his employment and one-forty eighth of the sharesvesting each month afterward. These options will be issued at the fair maketvalue on the date of grant. Effective upon his first day of employment, if achange of control in the Company occurs, then by the terms of the 2000 StockOption Plan, 50% of the shares subject to his option will automatically vest.

 

In addition, as approved by the Company’sCompensation Committee, the Company entered into a change of control andseverance agreement (“Agreement”) with Mr. Sampias and members of theCompany’s executive team consisting of John Elms (president, chief executiveofficer and a director), Masood Garahi (executive vice president of engineeringand chief technology officer), John Kelley (executive vice president ofoperations), Jill Kenney (executive vice president of Americas sales, andmarketing), Leah Maher (vice president and general counsel) and Gary Mead (vicepresident of market development) effective April 17, 2006. The Companypreviously agreed to a change of control provision with Ole Lysgaard Madsen(executive vice president of international, and president and managing directorof KIRK telecom A/S) upon the Company’s acquisition of KIRK telecom A/S onJanuary 3, 2006, under different terms. According to the terms of theAgreement, if within twelve months following the occurence of a change ofcontrol of the Company an executive is either terminated without cause, isconstructively terminated or quits for “good reason,” then the Company must payto that executive an amount equal to one hundred percent of the executive’sannual base salary plus the executive’s target annual incentive compensation,and all of the executive’s outstanding options and restricted stock willimmediately vest. Additionally, in the preceding circumstance, that executivewill receive benefits as defined until the earlier of one year followingtermination or the date that executive receives comparable benefits as defined fromanother employer.

 

 

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**Item 2.****    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*Certain statements about future events andexpectations in this Form 10-Q, as well as statements made by us in periodicpress releases, oral statements made by our officials to analysts andstockholders in the course of presentations about SpectraLink, and conferencecalls following earnings releases, constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Examples of forward-looking statements include statements we make regardingfuture prospects for growth in the on-premise wireless telephone system andphone market, our ability to maintain or increase our market share, our abilityto introduce new products successfully, success in integrating the KIRKacquisition and our future operating results. In addition, words such as“believes”, “anticipates”, “expects”, “plans”, “estimates”, “intends”, “could”,“might”, and similar expressions are intended to identify forward-lookingstatements. These forward-looking statements are based on assumptions, whichare believed reasonable but, by their nature, are all inherently uncertain andinvolve risk. In all cases, results could differ materially from thoseprojected.  Certain risks and uncertainties relating to forward-lookingstatements are set forth below in “Management’s Discussion and Analysis ofFinancial Condition” and in Item 1A of this Form 10-Q under the caption“Risk Factors”. New risks and uncertainties come up from time to time and it isimpossible for us to predict these events or how they may affect us. We undertakeno obligation to revise any forward-looking statements in order to reflectevents or circumstances that may arise after the date of this report.*

 

**Business Description and Overview**

 

SpectraLinkcommenced operations in April 1990 to design, manufacture and sell unlicensedwireless telephone communication systems for businesses.  Our product portfolio consists of three types of product categoriesdifferentiated by the wireless technologies implemented into the product: The LinkTM wireless telephone system and NetLinkTM wireless telephones and theDECT telephone system. Link uses a proprietary radio infrastructure in the902-928 MHz radio band targeted to organizations that desire a dedicatedwireless voice solution for their on-premises mobile workforce. The NetLink wireless telephone products operate over IEEE802.11-compliant wireless local area networks (WLANs) in the 2400-2483 MHzfrequency band using standards-based Internet Protocol (IP) technology. NetLink products are targeted to organizations that want both a wireless voiceand wireless data solution on a single network.  SpectraLink also offersan Open Application Interface (OAI), which enables third-party messagingapplications to be integrated with our wireless telephones. Becauseof the recent advances in wireless local area network (WLAN) technology, asignificant portion of our development efforts will focus on our existingNetLink products as well as new products that operate on a WLAN. We beganoffering the DECT technology as a result of acquiring KIRK telecom A/S.

 

*Acquisition ofKIRK*

 

On January 3, 2006,SpectraLink Corporation through its wholly-owned subsidiaries acquired all ofthe stock of KIRK telecom A/S and its subsidiaries for 389 million DanishKroner or approximately $62.0 million, which was paid in cash, andapproximately $2 million of acquisition-related costs.  As a result of theacquisition, KIRK telecom became a wholly owned subsidiary. We funded theacquisition price with approximately $31 million of our own cash plus fundsprovided by a Credit Facility.  KIRK telecom is based in Horsens, Denmarkand designs, manufactures and sells unlicensed wireless telephone systems usingthe DECT standard.  In addition, KIRKtelecom offers the KIRK Serial In Out (SIO) to enablethird-party messaging applications to interface with its telephone systems.KIRK has two wholly-owned subsidiaries, scantel A/S and KIRK telecom, Inc.

 

With the addition ofKIRK telecom’s DECT-based products, we now offer a complete product portfoliothat incorporates all major enterprise wireless voice technologies: Wi-Fi, DECTand proprietary systems.  Our acquisition of KIRK telecom alsosignificantly increases our international reach and augments our distributionchannels and geographical market penetration, further extending our leadershipin workplace wireless telephony.  Furthermore, the acquisition enables usto compete in new small to medium business markets in North America with KIRKtelecom’s DECT products.  As we continue to integrate KIRK telecom’soperations, our results of operations will continue to be significantlyimpacted to increase our sales, cost of sales, and operating expenses abovehistorical levels.

 

Factorsthat impact gross margin are sales through our OEM partners and productmix.  We realize lower margins on products sold through OEM relationshipsbecause of the pricing arrangements inherent in these relationships.  OurLink product line gross margin is approximately 10% higher than the aggregategross margin from the sale of the NetLink products because of the addedinfrastructure associated with Link sales.  DECT products also have alower margin than our Link products and are approximately 45%.

 

We are continuing our transition from a NorthAmerican-oriented niche market provider to a global supplier of workplacewireless systems with our recent acquisition of KIRK telecom as well as ourpartnerships with some of the largest telecommunications manufacturersworldwide including Nortel, Alcatel, Avaya, Inter-Tel, and NEC America. Becauseour OEM partners primarily sell NetLink wireless telephones, if OEM salesincrease, we would expect NetLink revenue to also increase.  If we sell proportionately more NetLink and DECT than Link, we willcontinue to see pressure on our overall gross margins.

 

*Consolidated Results of Operations*

 

Forthe three months ended March 31, 2006, we generated $34.0 million in revenue.We incurred a net loss of $2.4 million or $0.13 loss per diluted share. For thethree months ended March 31, 2006, we incurred $2.0 million related to acquiredin-process research and development expense, and we incurred $1.1 million of 

 

18

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amortization expense for the intangible assets relatedto our acquisition of KIRK. We also incurred approximately $0.8 million relatedto the expensing of stock based compensation in accordance with SFAS 123R. Incomparison, for the first quarter of 2005, net income was $2.2 million, or$0.11 earnings per fully diluted share, on revenue of $20.6 million.

 

Consolidated product revenue for the three months ended March 31, 2006,increased 75.1% to $27.1 million from $15.5 million for the same period lastyear. The increase in product revenue was primarily due to the acquisition ofKIRK and an increase in the SpectraLink Americas unit due to an increase in itsOEM and retail segments of our business.

 

Ourtraditional distribution channels were responsible for approximately 44.4% offirst quarter product sales, original equipment manufacturer (OEM) partnerscontributed approximately 37.7 % of first quarter product sales, and thebalance of 17.9 % was met through the SpectraLink direct sales team. Sales of ourNetLink wireless telephone systems exceeded sales of our Link wirelesstelephones in the first quarter. Link accounted for 35.3 % of product sales,delivering $9.5 million in revenue. NetLink sales accounted for 37.3% of totalproduct sales, or $10.1 million, and DECT product sales were 27.4% of totalproduct sales or $7.4 million. During the first quarter of 2006, we had onecustomer that accounted for over 10% of our consolidated net sales.

 

Consolidatedservice revenue for the three months ended March 31, 2006, increased 34.5% to$6.9 million compared to $5.1 million for the same period last year. Theincrease in service sales was primarily related to an increase in maintenancecontracts relating to products previously sold to a larger installed base ofour customers. The increase also related to an increase in installation and timeand materials services.

 

Overallconsolidated gross margin for the three months ended March 31, 2006, was 57.2%or $19.4 million compared to 64.5% or $13.3 million for the same period lastyear. We attribute the dilution of our gross margin to the addition of DECTproducts to our product offerings. DECT products carry a lower gross marginthan either Link or NetLink. In addition, for the three months ended March 31,2006, we incurred approximately $0.3 million of increased warranty costs forfield replacements related to an issue with a specific product, which has beensubsequently corrected.

 

Consolidatedresearch and development expense excluding acquired in-process research anddevelopment expense and amortization of intangible assets for the three monthsended March 31, 2006 increased 136.3% to $5.8 million from $2.5 million for thesame period last year. The increase was primarily due to the acquisition ofKIRK and as a result of increases in salaries, and employee benefits primarilyrelated to increases in headcount and contractors to support SpectraLink’saccelerated new product rollout schedule and compensation expense associatedwith the fair value of share-based payments to employees related to theadoption of SFAS 123R in the first quarter of 2006.

 

Consolidatedmarketing and selling for the three months ended March 31, 2006 increased 43.3%to $8.6 million from $6.0 million for the same period last year. The increasewas primarily due to the acquisition of KIRK.

 

Consolidatedgeneral and administrative expenses for the three months ended March 31, 2006increased 153.4% to $4.0 million from $1.6 million for the same period lastyear. The increase was primarily due to the acquisition of KIRK and it alsorelated to compensation expense associated with the fair value of share-basedpayments to employees related to the adoption of SFAS 123R in the first quarterof 2006, and was also due to increased professional service fees for theimplementation of new accounting standards, including option expensing.

 

Consolidatedother (expense), income net was a net other expense of $0.6 million for thethree months ended March 31, 2006 compared to a net other income of $0.3million for same period in the prior year. For the three months ended March 31,we incurred interest expense related to our Credit Facility of approximately$0.6 million and amortization of debt issuance costs of approximately $0.3million related to the repayment of the term loan in the Credit Facility. Therewas nominal-interest expense for the same period last year. Interest expensewas offset by interest income on investments and a realized gain on forwardcontracts. For the three months ended March 31, 2005, other income, net included investment income as a result of ourinvestments in money market, investment grade securities, government securitiesand corporate bonds.

 

Consolidatedincome tax benefit (expense) was $0.3 million benefit for the three monthsended March 31, 2006, compared to income tax expense of $1.3 million for thesame period last year. Our first quarter 2006 results include a nondeductiblein-process research and development write-off which is considered a discreteitem for purposes of calculating our effective tax rate, and which caused oureffective tax rate to drop to 11% compared to the 38% in the first quarter of2005. Without regard to the discrete item, our effective tax rate would becomparable to last year's rate. We have estimated an effective tax rate for theyear between 35% and 39%.

 

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**Segment Results of Operations**

 

*SpectraLink Segment*

 

TheSpectraLink segment primarily consists of our Americas operations and corporateactivities, including global corporate support functions, such as executiveoffices, legal, finance and treasury. The SpectraLink segment also includesbranch sales and support personnel located internationally.

 
| ** **                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| **(Dollars in thousands)**   | ** ** | **2006**                                             | ** ** | **% change** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(actual)**                                         | ** ** | ** ** | ** ** | **(actual)** | ** ** |
| Net product and service sales     |       | $                                                    | 26,319     |   | 27.8 | % | $ | 20,588 |   |
| Cost of product and service sales |       | 9,906                                                |       | 35.6 | % | 7,303 |   |
| Gross profit                      |       | 16,413                                               |       | 23.5 | % | 13,285 |   |
| Research and development          |       | 4,448                                                |       | 81.0 | % | 2,457 |   |
| Marketing and selling             |       | 7,592                                                |       | 25.8 | % | 6,033 |   |
| General and administrative        |       | 2,890                                                |       | 82.7 | % | 1,582 |   |
| Amortization of intangible assets |       | 27                                                   |       | 22.7 |   | 22 |   |
| Income from operations            |       | $                                                    | 1,456      |   | (54.4 | )% | $ | 3,191 |   |
|                                   |            |                                                      |            |  |  |  |  |  |  |  |  |

 

*                NetProduct Sales and Service Revenue.*We derive our product revenueprincipally from the sale of wireless, on-premises telephone systems. We deriveour service revenue principally from the installation and maintenance serviceof wireless, on-premises telephone systems. Net product and service salesincreased 27.8% in the three months ended March 31, 2006, compared to the sameperiod last year. Product sales increased 27.1% to $19.7 million for the threemonths ended March 31, 2006, from $15.5 million for the same period last year.The increase in product sales was primarily related to an increase in ourNetLink product sales, which was largely attributable to an increase in OEMsales. Service sales increased 29.9% to $6.7 million for the three months endedMarch 31, 2006, from $5.1 million for the same period last year. The increasein service sales was primarily related to an increase in maintenance contractsrelating to products previously sold to a larger installed base of ourcustomers. The increase also related to an increase in installation and timeand materials services.

 

*Cost of Product Sales and Service Revenue.*Ourcost of product sales consists primarily of direct material, direct labor*,* product packaging, third-party royalties, andmanufacturing overhead. Our cost of service sales consists primarily ofemployee-related costs and the associated costs incurred to provide installation,maintenance, training, and product repair and support.

 

*Cost of Product*. Forthe three months ended March 31, 2006, cost of product sales increased by 41.2%to $6.4 million from $4.5 million for the same period last year. Cost ofproduct sales as a percentage of product sales, net was 32.7% for the threemonths ended March 31, 2006 compared to 29.4% for the same period last year.Gross profit from product sales, net increased by 21.3% to $13.2 million forthe three months ended March 31, 2006, from $10.9 million for the same periodlast year. This increase in gross profit from product sales was due toincreased sales. Gross profit percentage from product sales, net (gross profitfrom product sales, net as a percentage of net product sales) for the threemonths ended March 31, 2006, decreased to 67.3% from 70.6% for the same periodlast year. The decrease in gross profit percentage from net product sales wasdue to additional warranty costs we incurred of approximately $0.3 million forfield replacements related to an issue with a specific product, and additionalmaterial costs related to a change in product mix.

 

*Cost of Service Sales.*Forthe three months ended March 31, 2006, cost of service sales increased by 26.5%to $3.5 million from $2.8 million for the same period last year. Cost ofservice sales as a percentage of service sales was 52.2% for the three monthsended March 31, 2006, compared to 53.7% for the same period last year. Grossprofit from service sales increased by 33.9% to $3.2 million for the threemonths ended March 31, 2006, from $2.4 million for the same period last year.Gross profit percentage from service sales (gross profit from service sales asa percentage of service sales) for the three months ended March 31, 2006,increased to 47.8% from 46.3% for the same period last year. The increase ingross profit from service sales was due to increased service sales, while costsremain relatively flat.

 

*Gross Profit.*Forthe three months ended March 31, 2006, the SpectraLink segment’s gross profitpercentage (gross profit as a percentage of net sales) decreased to 62.4% from64.5% for the same period last year. The decrease in gross profit was due tostronger NetLink product sales, which carry lower margins, and increased salesthrough the SpectraLink segment’s OEM partners which typically carry higherdiscounts as well as an increase in warranty costs.

 

*Research and Development.*Researchand development expenses consist primarily of employee costs, professionalservices, and supplies necessary to develop new products, enhance existingproducts and reduce the cost of our systems. Research and development expensesas a percentage of net sales were 16.9% for the three months ended March 31,2006, compared to 11.9% for the three months ended March 31, 2005. The increasein research and development dollars spent and the increase as a percentage ofnet sales, were each due to increases in salaries, and employee benefitsprimarily related to increases in headcount to support SpectraLink’s acceleratednew product rollout schedule and compensation expense associated with the fairvalue of share-based payments to employees related to the adoption of SFAS 123Rin the first quarter of 2006. Other factors contributing to this increaseincluded consulting fees and miscellaneous parts and supplies for thedevelopment of new products and enhancements to existing products.

 

*Marketingand Selling.*Marketing and selling expenses consist primarilyof salaries and other expenses for personnel, commissions, travel, advertising,tradeshows, sales meetings and market research. Marketing and selling expensesas a percentage of net sales were 28.8% for the three months ended March 31,2006, compared to 29.3% for the three months ended March 31, 2005. The increasein sales and marketing dollars spent was due to increases in salaries andemployee benefits primarily related to increases in headcount and compensationexpense associated with the fair value of share-based payments to employeesrelated to the adoption of SFAS 123R in the first quarter of 2006. Otherfactors contributing to the increase included commissions and bonuses relatedto an increase in sales. The percentage of net sales decreased from the prioryear due to an increase in sales.

 

*Generaland Administrative.*General and administrative expensesconsist primarily of salaries and other expenses for management, finance,legal, investor relations, and human resources. The increase in general andadministrative dollars spent and the increase as a percentage of net sales,were each due to increases in salaries and employee benefits primarily relatedto increases in headcount and merit raises as well as compensation expenseassociated with the fair value of share-based payments to employees related tothe adoption of SFAS 123R in the first quarter of 2006. Other factorscontributing to this increase included audit, legal and outside consulting feesrelated to the acquisition of KIRK that were not capitalizable as a componentof the purchase price, and due to increased professional service fees for theimplementation of new accounting standards, including option expensing.

 

For the three months ended March31, 2006, SpectraLink also incurred interest expense related to its CreditFacility of approximately $0.6 million and amortization of debt issuance costsof approximately $0.3 million related to the repayment of the term loan on theCredit Facility. There was nominal interest expense for the same period lastyear. Interest expense was offset by interest income on investments and arealized gain on forward currency contracts.

 

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*KIRKSegment*

 

TheKIRK segment is comprised of the operations of KIRK telecom A/S acquired onJanuary 3, 2006 (“KIRK telecom”) and the corporate activities of ourwholly-owned subsidiary SpectraLink Denmark ApS, which exists to hold theinvestment in KIRK telecom A/S. KIRK telecom A/S designs, manufactures andsells wireless on-site adjunct communication solutions. Based on thelong-established DECT technology standard, KIRK telecom offers wirelesshandsets as well as the underlying radio infrastructure for professional use.KIRK telecom products are targeted at specific vertical markets and are offeredin most major markets around the world. Products are sold under the KIRK brandas well as incorporated into OEM solutions. KIRK telecom also includes KIRKtelecom, Inc., a distribution sales subsidiary in the United States and KIRKscantel A/S, which designs, contract manufactures and sells wired and wirelesstelephones under the KIRK brand name to the residential market, primarily inthe Scandinavian countries.

 

Thefollowing represents the KIRK segment’s actual results for 2006 and pro formaresults, as if the acquisition had occurred on January 1, 2005, for comparativepurposes. The Danish Krone is KIRK telecom’s functional currency, therefore,results are impacted by fluctuations in the currency exchange between theDanish Krone and the U.S. Dollar.

 
| ** **                                             | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                             | ** ** | **% change** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(actual)**                                         | ** ** | ** ** | ** ** | **(pro-forma)** | ** ** |
| Net product sales and service sales                    |       | $                                                    | 7,650      |   | (16.6 | )% | $ | 9,176 |   |
| Cost of sales                                          |       | 4,642                                                |       | (8.8 | ) | 5,090 |   |
| Gross profit                                           |       | 3,008                                                |       | (26.4 | ) | 4,086 |   |
| Research and development                               |       | 1,358                                                |       | 12.5 |   | 1,207 |   |
| Marketing and selling                                  |       | 1,051                                                |       | (14.8 | ) | 1,234 |   |
| General and administrative                             |       | 1,118                                                |       | 11.1 |   | 1,006 |   |
| Acquired in process research and  development expenses |       | 2,021                                                |       | — |   | 2,021 |   |
| Amortization of intangible assets                      |       | 1,098                                                |       | — |   | 1,098 |   |
| Loss from operations                                   |       | $                                                    | (3,638     | ) | 46.7 | % | $ | (2,480 | ) |
|                                                        |            |                                                      |            |  |  |  |  |  |  |  |  |

 

*                NetProduct Sales and Service Sales.*KIRK derives its product revenueprincipally from the sale of wireless, on-premises telephone systems. KIRK derivesits service revenue principally from the service of wireless, on-premisestelephone systems. On a local currency basis, excluding purchase accounting adjustmentsmade for the acquisition of KIRK, there was a slight decrease in revenue of 3.6%for the three months ended March 31, 2006, compared to the same period lastyear, and the remainder of the change of 13.4% is due to fluctuation ofcurrency against the dollar. Product sales decreased 17.0% to $7.4 million forthe three months ended March 31, 2006, from $8.9 million for the same periodlast year. The decrease in product sales was primarily due to the fluctuationin currency rates. Service sales remained relatively constant between years at$0.2 million for the three months ended March 31, 2006 compared to $0.2 millionfor the same period last year.

 

*Cost of Product Sales and Service Sales.*Ourcost of product sales consists primarily of direct material, direct labor*,* product packaging, third-party royalties, andmanufacturing overhead. Our cost of service sales consists primarily ofemployee-related costs and the associated costs incurred for product repair.

 

*Cost of Product*. Ona local currency basis, excluding purchase accounting adjustments made for theacquisition of KIRK, there was a slight decrease in cost of product sales of 6.1%for the three months ended March 31, 2006, compared to the same period lastyear, and the remainder of the change of 2.9% is due to fluctuations ofcurrency against the dollar. For the three months ended March 31, 2006, cost ofproduct sales decreased by 9.0% to $4.6 million from $5.1 million for the sameperiod last year. Cost of product sales as a percentage of product sales, netwas 62.1% for the three months ended March 31, 2006 compared to 56.7% for thesame period last year. Gross profit from product sales, net decreased by 27.5%to $2.8 million for the three months ended March 31, 2006, from $3.9 millionfor the same period last year. This decrease in gross profit from product saleswas due to decreased sales. Gross profit percentage from net product sales(gross profit from product sales, net as a percentage of net product sales) forthe three months ended March 31, 2006, decreased to 37.9% from 43.3% for thesame period last year.

 

*Cost of Service Sales*.Cost of service sales remained relatively constant between periods.

 

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*Gross Profit.*Forthe three months ended March 31, 2006, our gross profit percentage (grossprofit as a percentage of net sales) decreased to 39.3% from 44.5% for the sameperiod last year.

 

*Researchand Development.*Research and development expensesconsist primarily of employee costs, professional services, and suppliesnecessary to develop new products and enhance our existing products. Researchand development expenses as a percentage of net sales were 17.8% for the threemonths ended March 31, 2006, compared to 13.2% for the three months ended March31, 2005. On a local currency basis excluding purchase accounting adjustmentsmade for the acquisition of KIRK, there was an increase in research anddevelopment expenses of 23.9% for the three months ended March 31, 2006,compared to the same period last year that was offset by a benefit of 11.4%related to fluctuations of currency against the dollar. The increase inresearch and development dollars spent and the increase as a percentage of netsales, were each due to increases in salaries, and employee benefits primarilyrelated to increases in headcount to support the development of new productsand enhancements to existing products.

 

*Marketingand Selling.*Marketing and selling expenses consistprimarily of salaries and other expenses for personnel travel, and marketingand promotion costs. Marketing and selling expenses as a percentage of netsales were 13.7% for the three months ended March 31, 2006, compared to 13.4%for the three months ended March 31, 2005. On a local currency basis excludingpurchase accounting adjustments made for the acquisition of KIRK, there was aslight decrease in marketing and selling of 5.2% for the three months endedMarch 31, 2006 compared to the same period last year and the remainder of thechange of 9.6% is due to fluctuations of currency against the dollar.

 

*General andAdministrative.*General and administrative expensesconsist primarily of salaries and other expenses for management, finance, legal,and human resources. This increase included audit, legal and outside consultingfees incurred due to the integration of KIRK with SpectraLink during the firstquarter 2006.

 

**Liquidity and Capital Resources**

 

The following summarizes our key liquidityand capital resources metrics for the periods presented:

 
| ** **                                       | ** ** | **Three months ended  (In thousands)** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                       | ** ** | **March 31, 2006**                          | ** ** | **March 31, 2005** | ** ** |
| **Cash Flows**                                   |       |                                                  |       |   |   |
| Cash provided by operating activities            |       | $                                                     | 7,611      |   | $ | 7,137 |   |
| Cash used in investing activities                |       | (3,160                                                | )          | (6,656 | ) |
| Cash provided by (used in) financing  activities |       | (12,775                                               | )          | (293 | ) |
|                                                  |            |                                                       |            |  |  |  |  |

 
| ** **                | ** ** | **As of  March 31, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|---------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|
| **Capital Resources**     |       |                                     |       |                                        |       |
| Cash and cash equivalents |       | $                                        | 8,426      |                                        | $          | 16,703 |   |
| Investments               |       | 13,535                                   |       | 14,088                                      |       |
| Cash held in escrow       |       | —                                   |       | 55,148                                      |       |
| Working capital           |       | 29,278                                   |       | 85,419                                      |       |
| Short-term debt           |       | 6,000                                    |       | 15,000                                      |       |
| Long-term debt            |       | 12,050                                   |       | 18,050                                      |       |
| Available credit          |       | 1,950                                    |       | 1,950                                       |       |
|                           |            |                                          |            |                                             |            |  |  |

 

Our cash andcash equivalents and short-term investments declined $8.8 million sinceDecember 31, 2005. Our cash held in escrow was released in the first quarter topurchase KIRK, which served to further reduce our working capital position atMarch 31, 2006. We have met our cash needs since inception with cash providedby operations, supplemented by equity financing and leases on capitalequipment. Our acquisition of KIRK was partially financed by our cash andshort-term investments, supplemented by borrowings totaling $33 million.

 

During the first quarter of 2006, wegenerated cash from operations of $7.6 million which was $0.5 million higher thanthe $7.1 million generated in the first quarter of 2005. The increase is drivenby an increase in accounts payable at the end of March.

 

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We expended $3.2 million of cash for investingactivities during the first quarter of 2006, primarily to purchase KIRK. Cashprovided by the sales of marketable securities was used to pay acquisitioncosts and interest due on our borrowings in the first quarter of 2006. In thefirst quarter of 2005, cash was used primarily to invest in marketablesecurities.

 

We expended $12.8 million of cash forfinancing activities during the first quarter of 2006, compared to a small netuse of cash in financing activities in the first quarter of 2005. Since 2003, wehave paid a quarterly dividend, but will no longer declare dividends inaccordance with our Credit Facility covenants in 2006. Cash used in financingactivities in 2006 reflects the debt pay down of $15 million in the quarter. AtMarch 31, 2006, we have reflected $6 million of our debt balance as a currentliability. It is management’s intent to repay quarterly principal on ourremaining debt of $1.5 million, essentially replacing our previous dividendpayments until the debt balance is entirely repaid.

 

We believe that our current cash, cashequivalents, marketable securities, including those acquired from KIRK telecomand cash generated from operations will be sufficient, based on our presentlyanticipated needs, to fund necessary capital expenditures, to provide adequateworking capital, to repay debt when it is due, and to finance our expansion forthe foreseeable future (next 12 months). There can be no assurance, however,that we will not require additional financing. There can be no assurance thatany additional financing will be available to us on acceptable terms, or atall, when required by us. If additional funds were to be raised through thesale of equity securities, additional dilution to the existing stockholderswould be likely to result.

 

**AggregateContractual Obligations and Commercial Commitments**

 

As of March 31, 2006, expected future cash paymentsrelated to contractual obligations and commercial commitments weresignificantly impacted by the addition of KIRK:

 
| **Contractual Obligations** | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|----------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| Debt (1)                         |       | $                               | 6,000      |               | 12,050     |               | —     |                             | —     |      | $          | 18,050 |   |
| Interest (1)                     |       | 1,086                           |       | 908                |       | —             |       | —                           |       | 1,994     |       |
| Operating Leases (2)             |       | 1,509                           |       | 3,267              |       | 2,654              |       | 1,370                            |       | 8,800     |       |
| Other Purchase Commitments (3)   |       | 1,815                           |       | —             |       | —             |       | —                           |       | 1,815     |       |
| Total                            |       | $                               | 10,410     |               | $          | 16,225             |       | $                                | 2,654      |      | $          | 1,370 |   | $ | 30,659 |   |
|                                  |            |                                 |            |                    |            |                    |            |                                  |            |           |            |  |  |  |  |  |

 

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(1)   Refer to Note 9 toour Condensed Consolidated Financial Statements on page 14.

 

(2)   We lease ourfacilities under non-cancelable operating lease arrangements that expire atvarious dates through 2012. We have other obligations for office equipment thatexpire at various dates through 2006.

 

(3)   We have purchaseobligations with various vendors and suppliers for the purchase of inventory,as well as goods and services, in the normal course of business. Theseobligations are generally evidenced by purchase orders with delivery dates fromsix to twelve months from the purchase date, and in certain cases, purchaseorders that contain non-cancelable/non-returnable terms and conditionsassociated with these purchase arrangements. We are committed to acceptdelivery of such materials pursuant to such purchase orders subject to variouscontract provisions, which allow us to delay receipt of such orders. Suchorders may or may not include cancellation costs payable by us. In the past, wehave been required to take delivery of materials from our suppliers that werein excess of demand requirements, and we have previously recognized charges andexpenses related to such excess material, resulting primarily from engineeringchanges. If we are not able to adequately manage our supply chain and adjustsuch commitments for changes in demand, we may incur additional inventoryexpenses related to excess and obsolete inventory. Such expenses could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

We believe our existing cash balances and fundsexpected to be generated from future operations will be sufficient to satisfythese contractual obligations and commercial commitments, and that the ultimate

 

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payments associated with these commitments will not have a materialadverse effect on our liquidity position.

 

**Off-BalanceSheet Arrangements**

 

Asapproved by the Company’s Compensation Committee, the Company entered into achange of control and severance agreement (“Agreement”) with Ernest Sampiaswho will become the Company's executive vice president of finance, chieffinancial officer, secretary and treasurer effective May 15, 2006 andmembers of the Company’s executive team consisting of John Elms (president,chief executive officer and a director), Masood Garahi (executive vicepresident of engineering and chief technology officer), John Kelley (executivevice president of operations), Jill Kenney (executive vice president ofAmericas sales, and marketing), Leah Maher (vice president and general counsel)and Gary Mead (vice president of market development) effective April 17,2006, all in the same form. The Company previously agreed to a change ofcontrol provision with Ole Lysgaard Madsen (executive vice president ofinternational, and president and managing director of KIRK telecom A/S) uponthe Company’s acquisition of KIRK telecom A/S on January 3, 2006, underdifferent terms. According to the terms of the Agreement, in the event a changeof control of the Company occurs and an executive’s employment is terminated orconstructively terminated, within twelve months following the change ofcontrol, the affected executive’s outstanding options will fully vest and theaffected executive will be entitled to twelve months of the affected executive’sannual salary plus the affected executive’s target bonus plan (which assumes100% of the target bonus plan is met for the year). Additionally, in thepreceding circumstance, that executive will receive benefits until the earlierof one year following termination or the date that executive receivescomparable benefits from another employer. On April 10, 2006, DavidRosenthal resigned his position as executive vice president, chief financialofficer, secretary and treasurer of the Company, and remains as specialassistance to the chief executive officer until September 10, 2006 at hiscurrent salary.

 

**CriticalAccounting Policies and Estimates**

 

We have identified the most critical accountingprinciples upon which our reported financial position and results of operationsdepend. We determined the critical accounting principles by consideringaccounting policies that involve the most complex or subjective decisions orassessments. Below is a summary of our most critical accounting policies. Thisdiscussion and analysis should be read in conjunction with our condensedconsolidated financial statements and related notes beginning on page 3 ofthis report and in conjunction with our consolidated financial statements andrelated notes included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2005, which was filedwith the Securities and Exchange Commission on March 16, 2006.

 

Our discussion and analysis of our financial conditionand results of operations is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses, and related disclosure of contingentassets and liabilities. We evaluate our estimates, on an on-going basis,including those related to revenue recognition, receivables, product warrantyobligations, inventories and income taxes. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We consider an accounting estimate to be critical if:

 

•                  It requires us to make assumptionsabout matters that were uncertain at the time of making the estimate, and

•                  Changes in the estimate orassumptions in the estimate could have a material impact on our financialcondition or results of operations.

 

 

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Thefollowing table presents information about the nature and rationale for ourcritical accounting policies and estimates used in the preparation of ourconsolidated financial statements.

 
| **Financial Statement  Caption(s)**                                                            | ** ** | **Critical Estimate Item**                                                                                                                                                                      | ** ** | **Nature of Estimates  Required**                                                                                                                                                       | ** ** | **Assumptions/  Approaches Used**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Key Factors**                                                                                                                                                                                                                                                                                      |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| A.           Sales 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                                                                                                                                                                                                                                |
|                                                                                           |       |                                                                                                                                                                                            |       |                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                                                                                                                                                                                                                                                 |
| B.             Accounts 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 |

 

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| C.             Cost 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                                                                                                                                                           |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                          |   |                                       |   |                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                       |
| D.            Deferred 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 carry forward period, tax  planning opportunities and other relevant considerations.                                                                                                                                                                                                                                                                                                             |   | Tax law changes Variances in future projected  profitability, including by taxing entity                                                                                                                                                                                                                                                   |
|                                                                                                          |   |                                       |   |                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                       |
| E.              Warranty                     |   | 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 |
|                                                                                                          |   |                                       |   |                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                                                                                                                                                                                                       |
| F.              Acquired business net assets |   | Fair values                                |   | We are required to allocate the purchase price of  acquired companies to the tangible and intangible assets acquired,  liabilities assumed, as well as in-process research and development based on  their estimated fair values. |   | The valuation of the business net assets is  determined using one or more valuation methods, including excess earnings,  discounted cash flows, replacement cost, market value from published sources,  and relief-from-royalty.                                                                                                                                                                                                                                                               |   | Projected income and cash flows; comparable market  information

 

Weighted average cost of capital

 

Useful lives remaining                                                                                                                                                                                                  |

 

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| G.             Stock-based Compensation Expense  (allocated by department, with some expense capitalized to ending inventory) |   | Value of Stock-based Compensation |   | Calculating the fair value of stock compensation expense requires the  input of multiple estimates, including forfeiture rate, volatility, and  expected term to exercise. |   | The fair value of each option award is estimated on  the grant date using the Black-Scholes model. Key assumptions input into the  model include: 

 

Expected term to exercise

 

Forfeiture rate

 

Volatility

 

Dividend yield

 

Risk-free interest rate |   | We have utilized historical volatility based on daily closing prices  of our stock over periods that correlated with the expected term of the  option. We have considered implied volatility from traded options of the  company’s stock and extraordinary events that may impact historical  volatility. The  expected term of options is based on historical and expected exercise  patterns, and on the terms and conditions of the options. We have calculated  an expected forfeiture rate based upon historical data pertinent to our  company, after due consideration for historical forfeiture experience that  may not be reflective of that to be expected in the future. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In addition, thereare other items within our financial statements that require estimation, butare not as critical as those discussed above. Revisions to any of the discussedestimates, or other non-critical items, could have a significant effect on ourconsolidated financial statements.

 

**Adoptionof New Accounting Pronouncements**

 

The adoption ofthe following accounting pronouncements in the first quarter of 2006 did nothave a material impact on our results of operations, financial condition, orcash flows:

 

•                  Statement of Financial AccountingStandards (“SFAS”) 151, “Inventory Costs – An Amendment of ARB No. 43,Chapter 4”;

•                  SFAS 153, “Exchanges of NonmonetaryAssets – An Amendment of APB Opinion No. 20”;

•                  SFAS 154, “Accounting Changes and ErrorCorrections, which replaces APB Opinion 20, “Accounting Changes” and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements – An Amendment of APB OpinionNo. 28”;

•                  Emerging Issues Task Force (“EITF”)Issue 05-06, “Determining the Amortization Period for Leasehold Improvements”;and

•                  FASB Staff Positions 115-1 and 124-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.”

 

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***Stock-Based Compensation***

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R requires measurement of all employeestock-based compensation awards using a fair-value method and the recording ofsuch expense in the consolidated financial statements.  In addition, the adoption of SFAS 123Rrequires additional accounting related to the income tax effects and disclosureregarding the cash flow effects resulting from share-based payment arrangements.In March 2005, the SEC issued Staff Accounting Bulletin No. 107,which provides supplemental implementation guidance for the implementation ofSFAS 123R. On January 1, 2006 (the first day of our 2006 fiscal year), weadopted SFAS 123R using the modified prospective method as permitted under SFAS123R.  Under this transition method, compensation cost recognized in thefirst quarter of 2006 includes: (a) compensation cost for all share-basedpayments granted prior to but not yet vested as of December 31, 2005, based onthe grant-date fair value estimated in accordance with the provisions of SFAS123, and (b) compensation cost for all share-based payments granted subsequentto December 31, 2005, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123R.  In accordance with themodified prospective method of adoption, our results of operations andfinancial position for prior periods have not been restated.

 

We used the graded attribution method to recognizeexpense for all options granted prior to the adoption of SFAS 123R.  Uponadoption of SFAS 123R on January 1, 2006, we adopted the straight-lineattribution method to recognize expense for options granted after December 31,2005.  The expense associated with the unvested portion of thepre-adoption grants will continue to be expensed using the graded attributionmethod.

 

The amount of stock-based compensation recognizedduring a period is based on the value of the portion of the awards that areultimately expected to vest. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.  The term “forfeitures” isdistinct from “cancellations” or “expirations” and represents only the unvestedportion of the surrendered option. Based on an analysis of historicalforfeitures, we have applied an annual forfeiture rate of 9% to all unvestedoptions as of March 31, 2006.  This analysis will be re-evaluatedquarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only befor those shares that vest. Forfeited or otherwise cancelled options arereturned to the pool of options authorized for issuance under our stock-basedcompensation plans. It is our policy to issue new shares, as opposed totreasury shares upon exercise or purchase under our stock-based compensationplans. 

 

See Note 12 to the accompanying condensed consolidatedfinancial statements on page 16.

 

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**RecentlyIssued Accounting Pronouncements**

 

***Statement of Financial AccountingStandards No. 155 (SFAS 155), “Accounting for Certain Hybrid FinancialInstruments, an Amendment of FASB Statements No. 133 and 140”***

 

SFAS155 was issued in February 2006 and will be effective for us in the firstquarter of our 2007 fiscal year. Among other things, SFAS 155 permits fairvalue remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation. We do not believethat the adoption of SFAS 155 will have a material impact on our financialstatements.

 

***Statement of Financial AccountingStandards No. 156 (SFAS 156), “Accounting for Servicing of Financial Assets, anamendment to SFAS No. 140”***

 

SFAS156 was issued in March 2006 and will be effective for us in the firstquarter of our 2007 fiscal year. SFAS 156 simplifies certain aspects ofaccounting for separately recognized servicing assets and liabilities and clarifieswhen to separately recognize servicing obligations. We do not believe that theadoption of SFAS 156 will have an impact on our financial statements.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

Market risk represents the risk of loss that may impactour financial position, results of operations or cash flows due to adversechanges in financial and commodity market prices and rates. We are primarilyexposed to market risk due to changes in interest rates and foreign currencyfluctuations. These exposures are directly related to our normal operating andfunding activities.

 

***CurrencyRisk***

 

As of December 31,2005, we entered into foreign currency forward contractsto reduce the foreign currency exposure related to our anticipated acquisitionof KIRK. Under the terms of the stock purchase agreement, the purchase pricewas to be payable in Danish Kroner at the closing. The forward contracts

 

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werenot designated as accounting hedges and the carrying amount of the forwardcontracts was the fair value, which was determined by obtaining quoted marketprices, and recognized as either assets or liabilities. Changes in fair valueof forward contracts are recognized in other income (loss), net at the end ofeach period. In the first quarter 2006, we recognized a net realized gain of $0.2million that was included in other income (expense) in the consolidatedstatements of operations, which was offset by the related unrealized losses recordedas of December 31, 2005, from the changes in the fair value of theseforward contracts of $0.2 million.

 

KIRK enters into foreign currency contracts fromtime-to-time to reduce its exposure to foreign currency-denominated purchases. Forthe quarter ended March 31, 2006, gains from KIRK’s foreign currencycontracts were insignificant.

 

We have not entered into any derivatives that qualifyfor hedge accounting treatment under SFAS 133.

 

***InterestRate Risk***

 

Our  primaryinterest rate risk is related to our borrowings under our Credit Facility. Wecan borrow at the JP Morgan prime rate plus 1% or at the LIBO rate plus 2%. Weborrowed $33.0 million under the Credit Facility as of December 31, 2005. Asof March 31, 2006, we had $18.0 million outstanding under the CreditFacility. On March 3, 2006, we elected to base the variable interest rateof our Credit Facility on the Eurodollar rate, which is LIBO plus 2% (6.875%). Basedupon borrowings outstanding at the end of March 2006, an increase invariable interest rates of 100 basis points would have an effect on the ourannual results of operations and cash flows of approximately $0.2 million.

 

**Item 4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures.**Regulations under theSecurities Exchange Act of 1934 require public companies to maintain “disclosurecontrols and procedures,” which, as applied to us, means our controls and otherprocedures that are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. OurChief Executive Officer and Interim Chief Financial Officer, with theassistance from other members of management, have reviewed the effectiveness ofour disclosure controls and procedures as of March 31, 2006, and based ontheir evaluation, have concluded that our disclosure controls and procedureswere effective as of such date.

 

**Changesin Internal Controls over Financial Reporting.**Regulationsunder the Securities Exchange Act of 1934 require public companies to evaluateany change in “internal control over financial reporting,” which is defined asa process to provide reasonable assurance regarding the reliability offinancial reporting and preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States. In connection with their evaluation of our disclosure controlsand procedures as of March 31, 2006, our Chief Executive Officer andInterim Chief Financial Officer identified changes in our internal control overfinancial reporting during the three-month period ended March 31, 2006,that affected, or are reasonably likely to affect, our internal control overfinancial reporting, as noted in the following paragraphs.

 

The acquisition of KIRK occurred on January 3,2006, and our KIRK business units will complete requirements under InternalControl over Financial Reporting Section 404 of the Sarbanes-Oxley Act of2002 as of fiscal year ending 2006. This effort is in its earliest stages andwe are not aware of any material weaknesses in internal control over financialreporting related to this acquired entity. We have added certain accountingprocesses and controls related to consolidation of these entities and foreigncurrency translation.

 

During the fiscal quarter ended March 31, 2006,we implemented new modules to our enterprise resource planning informationsystems. While the transition was smooth in most operational areas, weencountered general problems in the procure-to-pay process. To address theissues, we performed additional transaction review and more detailed controlactivities. The problems have since been rectified and, as indicated above, wehave concluded that our disclosure controls and procedures were effective as ofMarch 31, 2006.

 

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With the exception of the matters discussed above,there were no other changes in our internal control over financial reportingduring the three-month period ended March 31, 2006, that materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part II - Other Information**

 

**Item 1. Legal Proceedings**

 

**None**

 

**Item 1.A  RISK FACTORS**

 

*The factorsdiscussed below are cautionary statements that identify important factors thatcould cause actual results to differ materially from those anticipated by theforward-looking statements contained in this report. For more informationregarding the forward-looking statements contained in this report, see theintroductory paragraph to Part I of this report. You should carefullyconsider the risks and uncertainties described below together with all of theother information included in this report, in considering our business andprospects. The risks and uncertainties described below are not the only onesfacing the Company. Additional risks and uncertainties not presently known tous also may impair our business operations. The occurrence of any of thefollowing risks could affect our business, financial condition or results ofoperations.*

 

•                                          **We are subject to numerous risks associated with our recent acquisitionof KIRK.**On January 3, 2006, we acquired KIRK, a provider ofon-site, wireless communications products, based in Denmark. As a result of theacquisition, KIRK became a wholly owned subsidiary of SpectraLink through itsholding company SpectraLink Denmark ApS. Mergers and acquisitions oftelecommunications companies are inherently risky, and no assurance can be giventhat our acquisition of KIRK or any other future acquisitions will be successfuland will not materially adversely affect our business, operating results, orfinancial condition. Failure to manage and successfully integrate KIRK andother acquired companies could also materially harm our business and operatingresults.

 

Difficultiesin integrating the operations, technologies, products, and personnel of KIRK orany other acquired company could lead to the following:

 

•                  Diversion of management’s attentionfrom normal daily operations of the business;

•                  The potential loss of key employeesof KIRK or any other acquired company;

•                  Potential difficulties in completingprojects associated with research and development due to uncertainty ofcombined product roadmap plans;

•                  Difficulties in entering markets inwhich we have no or limited direct prior experience and where competitors insuch markets have stronger market positions;

•                  Initial dependence on unfamiliarsupply chains or relatively small supply partners;

•                  Insufficient revenue to offsetincreased acquisition expenses;

•                  Assuming liabilities;

•                  Recording goodwill and non-amortizableintangible assets that will be subject to impairment testing on a regular basisand potential  impairment charges;

•                  Experience an increase in thecomplexity of accounting issues and reporting requirements related topreviously inapplicable accounting pronouncements, such as accounting policesrelated to foreign currency transactions;

•                  Experience possible delays infinancial reporting and additional resources required to integrate ERP systems;

•                  Difficulties in managing andintegrating internal financial control systems;

•                  Risks associated with a foreigncompany privately held becoming part of a U.S. public company;

•                  Risks associated with managinginternal control systems in foreign subsidiaries;

•                  Economic risks in doing business in aforeign country;

•                  Incurring additional financial costsand personnel resources which may be required to timely comply on aconsolidated basis with Section 404, “Management’s Internal Controls andProcedures for Financial Reporting” of the Sarbanes-Oxley Act of 2002;

•                  Be subject to the impacts of currencyfluctuations;

•                  Incurring amortization expensesrelated to certain intangible assets;

•                  Incur large and immediate write-offsand restructuring and other related expenses; and

 

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•                  Becoming subject to intellectualproperty or other litigation.

 

Risks related to newproduct development also apply to acquisitions. Please see the risk factorbelow entitled “If we are unable to develop and introduce new products andtransition existing products and respond to emerging technological trends and customers’ changing needs, our operating resultsand market share may suffer” for additional information.

 

•                  **Our foreign operations aresubject to economic, political and other risks that could adversely affect our revenueor financial position.**Our business operations in Denmark, the UnitedKingdom, Australia and any other possible foreign operations in the future,could result in adverse financial consequences and operational problems notexperienced in the United States. We anticipate that our revenue from ourinternational operations may grow in the future. Accordingly, our businessis subject to risks associated with doing business internationally, including:

 

•                  changesin a specific country’s or region’s political or economic conditions;

•                  lawsand regulations that restrict repatriation of earnings or other funds; and

•                  difficultyin recruiting trained personnel; and language and cultural differences.

 

Inaddition, we face risks associated with changes in foreign currency exchangerates. Due to the acquisition of KIRK, we will increase our exposure to foreigncurrency exchange rates and the risks associated therein. We have limitedforward currency contracts but we have not historically engaged in any hedgingactivities relating to our non-U.S. dollar operations, and we may sufferfuture losses as a result of changes in currency exchange rates.

 

•                  **Our wholly-ownedsubsidiary, KIRK, has a fiscal calendar year end of April 30th,which is different than SpectraLink's fiscal year ending on December 31which makes it difficult to predict revenue and expenses as the companiesintegrate their product sales targets and the sales forces are being integratedinto new reporting structures.**At the time of the acquisition ofKIRK telecom on January 3, 2006, KIRK only reported revenue on an annualbasis. Integrating with us now requires KIRK to report and focus its results ona quarterly basis which it has never done. In addition, as part of theintegration process, certain sales and support personnel from  Kirk’s United States distribution sales andsupport subsidiary accepted employment with and direction from our Americassales organization which could cause disruption and distraction from its salesand support efforts. Our personnel based in our two branch offices in theUnited Kingdom and Australia were similarly integrated on a reporting basis toKIRK management. The combination of new financial reporting requirements andmanagement changes make it difficult to predict if revised financial targetswill be met.

 

•                  **Substantial leverage and debt service obligations may adverselyaffect us.**In anticipation of the KIRK acquisition, we took on asubstantial amount of indebtedness. As of March 31, 2006, we hadapproximately $18 million. Our substantial level of indebtedness increases thepossibility that we may be unable to generate cash sufficient to pay whendue the principal of, interest on, or other amounts due with respect to ourindebtedness. All of our outstanding indebtedness bears interest at floatingrates. As a result, our interest payment obligations on such indebtedness willincrease if interest rates increase. Subject to certain restrictions under ourexisting indebtedness, we may also obtain additional long-term debt andworking capital lines of credit to meet future financing needs. This would havethe effect of increasing our total leverage.

 

Our substantial leveragecould have significant negative consequences on our financial condition andresults of operations, including:

 

•                  impairingour ability to meet one or more of the financial ratios contained in our creditfacility agreement or to generate cash sufficient to pay interest or principal,which events could result in an acceleration of all or some of our outstandingdebt as a result of cross-default provisions;

•                  increasing our vulnerability to generaladverse economic and industry conditions;

•                  requiring us to sell debt or equitysecurities or to sell some of our core assets, possibly on unfavorable terms,to meet payment obligations;

•                  limiting our ability to obtain additionaldebt or equity financing;

 

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•                  requiring the dedication of a substantialportion of our cash flow from operations to service our debt, thereby reducingthe amount of our cash flow available for other purposes, including capitalexpenditures;

•                  limiting our flexibility in planning for,or reacting to, changes in our business and the industries in which we compete;and

•                  placing us at a possible competitivedisadvantage with less leveraged competitors and competitors that may havebetter access to capital resources.

 

•                  **Restrictive covenants in the Credit Facility couldadversely affect our business by limiting flexibility.**The Credit Facilitycontains restrictive covenants and requirements that we comply with certainleverage and other financial tests. These limit our ability to take variousactions, including incurring additional debt, guaranteeing indebtedness,issuing preferred stock, engaging in various types of transactions, includingmergers and sales of assets, and paying dividends, repurchasing our stock, andmaking distributions or other restricted payments, including investments. Thesecovenants could have an adverse effect on our business by limiting our abilityto take advantage of financing third-party product development, merger andacquisition or other opportunities.

 

•                  **Our ability to generatecontinued market growth rates may require us to participate in industryconsolidation**. As part of our business strategy and thebusiness environment in the telecommunications equipment industry in general,we may engage in further acquisitions or mergers with other companies, orindividual product lines, technologies and/or personnel or become the targetfor a merger or acquisition. Our ability to take such actions may be constrainedby the convenants in our Credit Facility.

 

•                  **If we are unable tofulfill quarter end customer orders, then we could lose revenue and customers.**Thevolume of customer orders for our products typically increases significantly atthe end of each quarter. KIRK also has experienced uneven distribution of salesin any month, particularly in April, which is the last month of KIRK’s fiscalyear end. We face significant challenges in meeting this demand. It isdifficult to ensure that we have the resources available to meet any suchincrease in order volume since it is very difficult to predict what the levelof demand will be. We may not have the personnel and/or systems necessaryto fulfill the large order volume or the ability to upgrade and develop oursystems and infrastructure to meet an increased order volume. If we are unableto 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 ourproducts are realized at the end of the quarter, which makes it difficult toforecast or adjust our operating activities quickly in response to anunexpected increase or decrease in customer demand.**Due to thetiming of orders from customers, we have often recognized a substantial portionof our revenue in the last month of a quarter. As a result, minor fluctuationsin the timing of orders and the shipment of products may, in the future, causeoperating results to vary significantly from quarter to quarter. The demand forour products depends upon many factors and is difficult to forecast. Further,our acquisition of KIRK may make it more difficult for us to predict thedemand in the mix for our products. Significant unanticipated fluctuations indemand could cause problems in our operations. The lead-time required toassemble our systems is often longer than the lead-time our customers provideto us for delivery of their product requirements. Therefore, we often mustplace orders in advance of expected purchase orders from our customers. As aresult, we have only a limited ability to react to fluctuations in demand forour products, which could cause us to have either too much or too littleinventory of a particular product. Further, the business relationship which wehave with Offshore Group to use a Mexico facility to assemble our products may notbe able to provide product in a timely manner. The majority of the KIRKproducts are manufactured in Horsens, Denmark, and the manufacturing lines forSpectraLink product are located in Boulder, Colorado. Additionally, once wereceive an order, it requires sufficient time to complete the configuration ofour product to our customer’s individual phone systems.

 

Ourinability to satisfy customer demand in a timely manner would lead to lostsales and impede our ability to increase our revenue. Conversely, a largeportion of our expenses, including rent and salaries, is fixed and difficult toreduce. Our expenses are based in part on expectations for our revenue. Ifour

 

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revenuedoes not meet our expectations, the adverse effect of the revenue shortfallupon our operating results may be acute in light of the fixed nature ofour expenses.

 

•                  **Our revenue and earningsare seasonal.**Seasonality and other factors may cause significantquarterly fluctuations in our revenue and net income*.*Ourbusiness is seasonal based on budget cycles in various vertical markets such ashealthcare and retail. This causes significant quarterly fluctuations in ourfinancial results. Generally, revenue and operating results are sequentiallydown in the first quarter from the fourth quarter, sequentially higher in thesecond quarter, sequentially flat or slightly higher or lower in the thirdquarter, and strongest in the fourth quarter. Actual results from operations may ormay not follow these normal seasonal patterns in a given year leading toperformance that is not in alignment with expectations.

 

•                  **Our reliance on sole orlimited sources of supply for many components and equipment used in our manufacturingprocess.** We rely on sole or limited sources of supply for manycomponents and equipment used in our manufacturing process. The delay,inability, or refusal of any of these suppliers to ship these components orequipment could interrupt our manufacturing process and ability to manufactureproducts in a timely manner to meet customer demand. The limited number ofsources for many of these components may also prevent us from decreasingour reliance on certain suppliers and finding other sources at competitiveprices. Unforeseen price increases by any of the sole or limited sourcesuppliers could negatively impact product margins and our financial performance

 

•                  **Because many of ourcurrent and planned products are or will be highly complex, they may containdefects or errors that are detectable only after deployment in complex networksand which, if detected, could have a negative effect on our business, operatingresults or financial condition.** Many of our complex products canonly be fully tested when deployed in “live” existing wireless networks. As aresult, end-users may only discover defects or errors or experiencebreakdowns in their networks after the products have been deployed. If any ofthese products contain defects, or have reliability, quality or compatibilityproblems, our reputation might be damaged significantly and customers might bereluctant to buy our products. These defects could interrupt or delay sales. Wemay have to invest significant capital and other resources to correctthese problems. If we fail to provide solutions to the problems, we will alsoincur product recall, repair, warranty or replacement costs. These problemsmight 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 oforders; difficulty in collecting accounts receivable; increased service andwarranty 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 productfailure that indicates either manufacturing or design deficiencies, we may berequired to recall units in the field and/or stop producing and shipping suchproducts until the deficiency is identified and corrected.**In theevent of such product failures, our business could be adversely affectedresulting in reduced revenue, increased costs and decreased customersatisfaction. End-users have discovered errors in our products in the past and may discovererrors in our products in the future. In addition, if our costs of remediationproblems experienced by our customers exceed the expectations used indeveloping our warranty reserves, these costs may adversely affect ouroperating results. Consequently, our product failure could have a materialadverse impact on our operations and financial results.

 

•                  **Our ability to attract andretain personnel, including key technical and management personnel.**Much of the future success of our company depends on the continued service andavailability of skilled personnel, including technical, marketing and staffpositions. Experienced personnel in the wireless communications industry are inhigh demand and competition for their talents is intense. For example, we haveappointed two chief financial officers within two years. There can be noassurance that we will be able to successfully retain and attract the keypersonnel we need. Many of our key personnel receive a total compensationpackage that includes stock options. In order to comply with changes toaccounting principles generally accepted in the United States enacted by theFinancial Accounting Standards Board and other agencies starting in the firstquarter of 2006, we recorded a charge to earnings for employee stock optiongrants, employee stock purchase plans and other equity incentives. In addition,applicable stock exchange listing standards relating to obtaining stockholderapproval of equity compensation plans could make it more difficult or expensiveto grant options to employees in the future. To the extent that new regulationsmake it more difficult or expensive to grant options to employees, we may incurhigher compensation costs, change our equity compensation strategy or find itdifficult to attract, retain and motivate

 

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employees,any of which could have a material and adverse impact on our business.

 

•                  **The risk of businessinterruption arising from our dependence on our manufacturing facilitieslocated in Boulder, Colorado, and Horsens, Denmark, and the businessrelationship we have with Offshore Group to use a facility in Empalme, Sonora,Mexico which provides assembly services.**We are highly dependent onour Boulder, Colorado, and Horsens, Denmark, manufacturing facilities, which iswhere the majority of our manufacturing and repair operations occur. We arealso highly dependent upon our business relationship with Offshore Group toprovide management services and an assembly facility located in Empalme,Sonora, Mexico. Any event that may disrupt or indefinitely discontinue anyof the facilities’ capacity to manufacture, assemble and repair our productscould greatly impair our ability to generate revenue, fulfill orders and attainfinancial goals. For instance, we may experience delays in the receipt ofassembled product from the facility in Mexico should the border between theU.S. and Mexico close.

 

•                  **Our ability to respond torapid technological changes within the on-premises wireless telephone industry.**The wireless communications industry is characterized by rapid technologicalchange, short product life cycles, and evolving industry standards. To remaincompetitive, we must:

 

•                  developor gain access to new technologies in order to increase product performance andfunction, reduce product size, and maintain cost-effectiveness;

•                  developnew products for existing and emerging wireless communications markets, andintroduce such products in a timely manner;

•                  implementemerging wireless standards or multiple emerging wireless standards quicklyenough to satisfy market demands and without significant product redesign orthe need to allocate additional resources to comply with multiple standards;

•                  developor obtain access to advanced wireless capabilities as they become available;and

•                  design,develop and introduce competitive new products on a timely basis.

 

We may notsuccessfully execute on our vision of product requirements because of errors indefining product marketing requirements, planning or timing, technical hurdlesthat we fail to overcome in a timely fashion, or a lack of appropriateresources. Due to the competitive nature of our business, any failure by us tomeet any of these challenges could render our products or technologies obsoleteor noncompetitive and thereby materially and adversely affect our business,reputation, and operating results.

 

•                  **Potential fluctuations inour future revenue, gross margins and operating results.**We haveexperienced, and may in the future continue to experience, significantquarterly fluctuations in revenue, gross margins and operating results due tonumerous factors, some of which are outside our control. Among other things,these factors include:

 

•                  changesin customer, geographic or product mix, including mix of configurations withineach product group;

•                  fluctuatingmarket demand for, and declines in the average selling prices of, our products;

•                  thetiming of, and/or delay of, significant orders from customers;

•                  seasonalityin demand within our various sectors;

•                  increasesin material or labor costs;

•                  excessinventory;

•                  obsolescencecharges;

•                  changesin shipment volume;

•                  foreigncurrency fluctuations;

•                  lossof cost savings due to changes in component pricing or charges incurred due toinventory holding periods if parts ordering does not correctly anticipateproduct demand;

•                  increasesin price competition;

•                  changesin the mix of our distribution channels including our OEM partners;

•                  governmentregulation of frequency spectrum;

•                  increasesin warranty costs; and

•                  introductionof new products and costs of entering new markets.

 

For example, historically we have not operated with a significant orderbacklog, and a substantial portion of our revenue in any quarter has beenderived from orders booked and shipped in that quarter. Accordingly, ourrevenue expectations are based almost entirely on our internal estimates offuture demand and not on firm customer orders. Further, our acquisition of KIRKmay make it more difficult

 

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for us to predict demand for our products. Planned expense levels arerelatively fixed in the short-term and are based in large part on theseestimates, and if orders and revenue do not meet expectations, our revenue,gross margins and operating results could be materially adversely affected.

 

•                  **The uncertainty abouteconomic prospects in some sectors of our target customer market adverselyimpacts their information technology spending and our business.**Ourbusiness has from time to time been adversely impacted by the uncertainty aboutgeneral economic prospects in some sectors of our target customer market withinthe United States and worldwide, because this uncertainty has resulted in adecline in, or a failure to increase, their information technology spending. Consumersof information technology in some of these sectors may defer, and in somecases cancel, their purchase decisions. Our operating results may beadversely affected as a result. The adverse impacts from economic uncertaintyinclude longer sales cycles, lower average selling prices, fewer large ordersfrom a single customer and reduced revenue.

 

•                  **Changes in rules andregulations of the FCC and other regulatory agencies.** The wirelesscommunications 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. Regulatorychanges, including changes in the allocation of available frequency spectrum,or changing free un-licensed to free based spectrum licensing couldsignificantly impact our operations in the United States and internationally.

 

•                  **We are dependent on indirectsales channels for most of our revenue.**A significant portion of ourrevenue is derived from a variety of third-party business partners, includingOEMs, distributors and resellers. During the three months ended March 31,2006, sales of our products through our indirect distributors accounted for 44.4%of our product revenue and 37.7% of product revenue was contributed by our OEMpartners. Our contracts with thirdparty business partners do not require those partners to purchase minimumquantities of our products or services. In fact, some of our third partybusiness partners also offer the products of some of our competitors. Inaddition, our OEM agreements do not restrict an OEM from acquiring productsfrom a third party or independently developing products and services that woulddirectly compete with us. We cannotguarantee that any of our third party business partners will continue to marketour products or devote significant resources to doing so. Furthermore, we will,from time to time, terminate or adjust some of our relationships with thirdparty business partners in order to address changing market conditions, adaptsuch relationships to our business strategy, resolve disputes, or for otherreasons. Any such termination or adjustment could have a negative impact on ourrelationships with third party business partners and our business, and resultin decreased sales through third party business partners or threatened oractual litigation. If our third party business partners do not successfully marketand sell our products or services for these or any other reasons, our salescould be adversely affected and our revenue could decline. In addition,our third-party business partners have confidential information concerning ourproducts and services, product release schedules and sales, marketing andthird-party reseller operations. Although we have nondisclosure agreements withour third-party business partners, we cannot guarantee that any third-partybusiness partner would not use our confidential information to compete with us.Furthermore, since we have experienced lower gross margins related to sales toour OEM partners, we may experience lower gross margins in the future ifsales to our OEM partners become a larger percentage of product sales. Our successdepends in part upon our ability to maintain and expand theserelationships. The loss of any major partner, the failure to attract newpartners or inability to maintain the current level of revenue from ourexisting partners could have an adverse effect on our business, operatingresults and financial condition.

 

•                  **A lower than anticipatedrate of acceptance of domestic and international markets using the 802.11bstandard may impede our growth.**Our NetLink wireless telephonesare compatible with the IEEE 802.11b standard for use on 802.11b compliant WLANnetworks. Consequently, demand for NetLink wireless telephones depends upon theacceptance of markets utilizing 802.11b compliant networks. This depends in part uponthe initial adoption of the 802.11b standard in international markets, as wellas enhancements to that standard in the U.S. and foreign markets where thestandard has already been adopted. Additionally, the acceptance of 802.11bcompliant networks may move more slowly, if at all, if competing wirelessnetworks are established and utilized. Additionally, the deployment of wirelessvoice and data systems has been inhibited by security concerns including thepotential of unauthorized access to data and communications transmitted over oraccessible through a wireless system. Potential customers may choose notto purchase our products until wireless systems are developed which provide forgreater security. Further, our products may not be compatible with securewireless systems that may be developed in the future. If markets utilizing 802.11b compliantnetworks do not grow as we anticipate, ourgrowth would be impeded and we would not be able to factor the related revenueinto our growth in the future. If

 

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the802.11b standard does not emerge as the dominant wireless standard in ourmarkets, or multiple standards are adopted that require different technologieswe may need to spend time and resources to add functionality to meet theadditional standards and many of our strategic initiatives and investments may beof no or limited value. Further, to theextent that additional standards are adopted, our product differentiation couldbe minimized and our implementation may not be interoperable with the standard,necessitating additional product development to meet the standard which may causeproduct delays.

 

•                  **The market for DECT orSpectraLink proprietary technology may decline.**If the marketadoption of  802.11 standards are fasterthan anticipated, it may affect sales of KIRK’s DECT technology andSpectraLink’s Link wireless telephone systems. Sales of our Link product havegenerally been flat in recent years. DECT solutions could face the samecompetition and cause a downward trend in our sales growth and our overallgross margin.

 

•                  **The market for on-premiseswireless telephone systems may fail to grow or to grow as quickly as weanticipate.** We derive our revenue principally from the sale ofwireless, on-premises telephone systems and related installation and otherservices relating to those systems. Therefore, our future operating resultsdepend on the demand for those types of services. If this market does not growor grow quickly, our future results of operations would be significantly harmed.In particular, increased demand for our NetLink product depends on the growthof the voice over Wi-Fi-related market. Although NetLink sales have grownsignificantly in recent periods, the market for deployment of converged voiceand data wireless networks in the general enterprise continues to be immature.We expect that this will remain the case unless that market moves through itsacceptance of IP wireless applications, standards adoption increases to reducecomplexity, and customers deploy wireless IP access points more fullythroughout their enterprise networks in densities required to support wirelessvoice traffic.

 

•                  **Our revenue may fluctuatebecause we rely on a limited number of significant customers.** Aportion of our revenue in the past has been derived from a limited number ofcustomers. We also have experienced quarter-to-quarter variability in sales toeach of our major customers and expect this pattern to continue in the future.

 

•                  **Wemight not be able to execute on our business plan if we lose key management ortechnical****personnel, on whoseknowledge, leadership and technical expertise we rely, or if new members of ourmanagement team fail to work effectively together.**Our successdepends heavily upon the contributions of our key management and technicalpersonnel, whose knowledge, leadership and technical expertise would bedifficult to replace. Many of these individuals have been with us for severalyears and have developed specialized knowledge and skills relating to ourtechnology and business. 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 hisposition. In October 2005, Masood Gahari was hired as our Executive VicePresident of Engineering and Chief Technology Officer. Also, effective April 10,2006, David Rosenthal, our Executive Vice President of Finance andAdministration, Chief Financial Officer, Corporate Secretary and Treasurerresigned from his position. On April 17, 2006, Ernest J. Sampias acceptedthe position of Executive Vice President of Finance and Administration, ChiefFinancial Officer, Corporate Secretary and Treasurer. In addition, during thelast two years, three of the five executive officers were either new to theCompany or were promoted. Our success depends in part upon the ability ofnew executives to work effectively together and with the rest of our employeesto continue to develop our technology and manage the operation and growth ofour business. Excepting Ole Lysgaard Madsen, President and Managing Director ofKIRK in Denmark, we have no employment contracts for our executive officers,and do not maintain key person insurance on any of our executive officers. Wemight not be able to execute on our business plan if we were to lose theservices of any of our key personnel. If any of these individuals were to leaveus unexpectedly, we could face substantial difficulty in hiring qualifiedsuccessors, and could experience a loss in productivity while any suchsuccessor develops the necessary training and experience.

 

•                  **We rely on our 802.11btechnology partners to continue to provide the wireless local area network forour NetLink product, and to provide access points which support SpectraLink’sVoice Priority Technology.**In the absence of a wireless voiceprioritization standard to ensure quality of service, we rely on 802.11btechnology partners, such as Symbol Technologies, Cisco Systems, TrapezeNetworks Inc., 3 Com, Alcatel, Nortel and Aruba Wireless Networks to continueto provide wireless local area network support for our NetLink product, and toprovide access points that support SVP capability. If any of our technologypartners fail to provide voice prioritization support for our products, themarket

 

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opportunityfor NetLink products would be reduced and our future results of operationswould be materially harmed until we find new 802.11b technology partners orvoice prioritization standards are adopted.

 

•                  **If we are unable todevelop and introduce new products and transition existing products and respondto emerging technological trendsand 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 emergingtechnological trends, our business could be harmed. We must commit significantresources to developing new products before knowing whether our investmentswill result in products the market will accept. We may encounter delays indeploying new or improved products. For instance, our new products may notproperly function with our customers’ existing telephone systems, or our new productsmay contain defects or bugs. These incompatibilities, defects or bugs may notbe detected until our customers begin to install the products or thereafter. Wemay need to modify the design of our new or improved products if they haveincompatibilities, defects or bugs, which could result in significantexpenditures as we seek to remedy the problems, delays in the purchase of theproducts or cancelled orders. We may also encounter delays in themanufacturing and production of the new products. Additionally, the newproducts may not be commercially successful. Demand for existing products may decreaseupon the announcement of new or improved products. Further, since productsunder development are often announced before introduction, these announcements may causecustomers to delay purchases of any products, even if newly introduced, untilthe new or improved versions of those products are available. If customerorders decrease or are delayed during the product transition, we may experiencea decline in revenue and have excess inventory on hand which could decreasegross profit margins. Our gross margins might decrease if customers, who may otherwisechoose to purchase existing products, instead choose to purchase lower pricedmodels of new products. Delays or deficiencies in the development,manufacturing, and delivery of, or demand for, new or improved products couldhave a negative effect on our business, operating results or financialcondition.

 

•                  **If we are unable tocross-sell the SpectraLink and KIRK products to each other’s channels, we may notrealize the value expected from the acquisition.**We acquired KIRK to extend market presence inworkplace wireless telephony by adding another technology standard offering andprovide a platform for international growth. If we do not successfully addeach other’s products to our product offerings, we will not add incrementalgrowth nor realize the effects of leveraging KIRK’s distribution channels,causing less than expected revenue growth.

 

•                  **Our ability to managepotential expansion of operations in the U.S. and internationally.**Weintend to expand our existing domestic and international operations, and toenter new markets. This expansion will require significant management attentionand financial resources. We currently have limited experience in marketing anddistributing our products internationally and in developing versions ofproducts that comply with local standards. We may also not be able tomaintain or increase international market demand for our products. Internationaloperations are subject to other inherent risks, including foreign governmentregulation of technology or unexpected changes in regulatory and customsrequirements, difficulty and delays in accounts receivable collection,difficulties and costs of staffing and managing foreign operations, reducedprotection for intellectual property rights, foreign currency exchange ratefluctuations, and taxation consequences.

 

•                  **We face increasingcompetition in the on-premises wireless telephone system market.**Theon-premises wireless telephone system industry is competitive and influenced bythe introduction of new products and new entrants into the industry. Thecompetitive factors affecting the market for our systems include productfunctions and features, frequency band of operation, ease-of-use, quality ofsupport, product quality and performance, price, network and applicationintegration capabilities, distribution channels, and the effectiveness ofmarketing and sales efforts. Most of our competitors have significantly greaterfinancial, technical, research and development, and marketing resources thanus. As a result, our competitors may respond more quickly to new oremerging technologies and changes in customer requirements, or may devotegreater resources to the development, promotion, sale and support of theirproducts than us. In addition, mature DECT-standard based products previouslymarketed by large telecom companies in markets outside the U.S. are beingintroduced in the U.S. which is our largest market and may be lower-pricedthan the Link and NetLink offerings. Enterprise adoption of standards forwireless LAN and VoIP may lead to the commoditization of wirelesstelephone technology and the availability of low-cost alternative products.Other purchasers may prefer to buy their 802.11b wireless telephonesystems from a single source provider of wireless local area networks, or LANs,such as Cisco Systems, who provides 802.11b wireless infrastructure andwireless telephones. Because we focus on

 

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wirelesson-premises telephone communications, we cannot serve as the sole source for acomplete telephone or data communications system. There is no assurance that wewill be able to compete successfully in the future. Further, if a potentialcustomer is already using a competing product or system, that potentialcustomer may not be willing or able to make the investment necessary toreplace such a system with our wireless telephone system. In addition, there may bepotential customers who choose another technology because of cost or theirbelief that their needs do not require the full function provided by ourwireless telephone systems.

 

•                  **The certification andapproval process for our NetLink product for use in countries that support the802.11b standard.**Foreign countries, which support the 802.11bstandard, 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 difficultyobtaining certification and approval by foreign countries for our NetLinkwireless telephone product, then we and/or our distributor channels may notbe 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 orenforce our intellectual property rights.**Our future successdepends, in part, upon our proprietary technology. We rely on a combination ofpatent, copyright, trade secret and trademark laws, confidentiality procedures,and nondisclosure and other contractual provisions to protect our proprietaryrights. These legal protections provideonly limited protection and may be time consuming and expensive to obtainand enforce. There can be no assurance that our issued patents will notbe challenged or circumvented by competitors or provide meaningful protectionagainst competition. If challenged,our patents might not be upheld or theirclaims could be narrowed. If we failto protect our proprietary rights adequately, our competitors might gain access to our technology. As a result, our competitors might offer similar products and wemight not be able to compete successfullyin our market. Moreover, despite our effortsto protect our proprietary rights, unauthorized parties may copy aspectsof our products and obtain and useinformation that we regard asproprietary. Also, our competitors may independentlydevelop similar, but not infringing, technology, duplicate our products, or design around our patents or our other intellectual property. Inaddition, other parties may breach confidentiality agreements or otherprotective contracts with us, and wemay not be able to enforce our rightsin 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 extentas the laws of the United States. We may berequired to spend significant resources to monitor and protect our intellectualproperty rights. Any litigation surrounding our rights could force us todivert important financial and other resources from our business operations.

 

•                  **The assertion ofintellectual property infringement claims against us.**Our industryis characterized by the existence of a large number of patents and frequentclaims and related litigation regarding patent and other intellectual propertyrights. We cannot be certain that our products do not and will not infringeupon issued patents, patents to be issued in the future, or other intellectualproperty rights of others. We may in the future be notified that we areinfringing upon certain patent and/or other intellectual property rights ofothers. Although there are no such pending lawsuits against us that we areinfringing upon intellectual property rights of others, there can be noassurance that infringement claims will not occur in the future. From time to time, third parties may assertexclusive patent, copyright, trademark and other intellectual property rightsto technologies and related methods that are important to us. Litigation may be necessary in the futureto defend against claims of infringement or invalidity, to determine thevalidity 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. Anyresulting litigation, regardless of our resolution, could result in substantialcosts and diversion of resources. If it were determined that our products infringe upon the intellectual propertyrights of others, we would need toobtain licenses from these parties or reengineer our products in order to avoidinfringement. We might not be ableto obtain the necessary licenses on acceptable terms or at all, or toreengineer our products successfully. Moreover, if we are sued for infringement and lose the suit, wecould be required to pay substantial damages or be enjoined from licensing orusing the infringing products or technology. Any of the foregoing could cause usto incur significant costs and prevent usfrom selling our products.

 

•                  **Werely on the availability of third-party licenses.**Many of ourproducts are designed to include software or other intellectual propertylicensed from third parties, especially through our OEM agreements. If weterminate OEM or technology partner relationships, it may be necessary in thefuture to seek or renew licenses relating to various aspects of these products.There can be no assurance that the necessary licenses would be available onacceptable terms, if at all. The inability to obtain certain licenses or otherrights or to

 

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obtainsuch licenses or rights on favorable terms, or the need to engage in litigationregarding these matters, could harm our business, operating results, andfinancial condition.

 

•                  **Changes in securities lawsand regulations have increased our costs.**The Sarbanes-Oxley Act of2002 that became law in July 2002, as well as new rules subsequentlyimplemented by the SEC, has required changes in some of our corporategovernance, public disclosure and compliance practices. The Act also requiredthe SEC to implement additional new rules on a variety of subjects. Inaddition to rules made by the SEC, the Nasdaq National Market has adoptedrevisions to its requirements for companies, such as us, that are Nasdaq-listed.These developments have increased our legal and financial compliance costs, andmake some activities, like SEC reporting obligations, more expensive anddifficult. In addition, these developments may make it more difficult andmore expensive for us to obtain director and officer liability insurance, andwe may be required to accept reduced coverage or incur substantiallyhigher costs to obtain coverage. These developments could make it moredifficult for us to attract and retain qualified members of our board ofdirectors, particularly to serve on our audit committee, and qualifiedexecutive officers. We are presently evaluating and monitoring regulatorydevelopments and are continuing to estimate the timing and magnitude ofadditional costs we may incur as a result. In addition, we will need todocument, test and audit KIRK’s operations prior to year-end in 2006, which may bedifficult and expensive.

 

•                  **The historic volatility ofour stock price, which may make it more difficult to resell shares atprices attractive to sellers.**Themarket price of our common stock has been volatile and is likely to remainsubject to wide fluctuations in the future. For example, during the 3-monthperiod ended March 31, 2006, the closing price of our common stock hasranged from a high of $13.83 per share to a low of $11.90 per share. Manyfactors could cause the market price of our common stock to fluctuate,including:

 

•                  variationsin our actual or anticipated quarterly or annual results;

•                  marketconditions in our industry, the industries of our customers and the economy asa whole;

•                  announcementsof technological innovations by us or by our competitors;

•                  introductionof new products or product enhancements or new pricing policies by us or by ourcompetitors;

•                  governmentregulation;

•                  acquisitionsor strategic alliances by us or by our competitors;

•                  recruitmentor departure of key personnel;

•                  thegain or loss of significant orders;

•                  changesin the market valuations of other telecommunications companies;

•                  theamount of liquid financial resources available to us;

•                  thegain or loss of significant customers including OEMs; and

•                  changesin the estimates of our operating performance or changes in recommendations bysecurities analysts.

 

In addition, the stock market in general, and themarket for technology-related stocks in particular, could decline, which couldcause the market price of our common stock to fall for reasons not necessarilyrelated to our business, results of operations or financial condition. Themarket price of our stock also might decline in reaction to events that affectother 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 ator above the price you paid. Securities class action litigation is

 

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often brought against a company following a period ofvolatility in the market price of its securities, and we have previously beensued in several purported securities class action lawsuits. Further,certain of our management and directors were also sued in purported stockholderderivative actions. The consolidated class action suit and derivativeactions have all been settled.

 

**Item 6.****          ****Exhibits**

 

**(a) Exhibits**

 

The following exhibits are filedor furnished herewith:

 
| **Exhibit Number** | ** ** | **Exhibit Title** |
|-------------------------|------------|------------------------|
| 4.1                     |       |                   | Restated Certificate of Incorporation (incorporated by reference to  Form S-8, filed April l3,  2006). |
| 10.1**                  |       |                   | Service Agreement, dated January 3, 2006, between  SpectraLink and Ole Lysgaard Madsen  (incorporated by reference to Form 8-K, filed January 4, 2006). |
| 10.2**                  |       |                   | SpectraLink 2006 Equity Incentive Plan (incorporated by reference to  the  Definitive Proxy filed on April 3,  2006). |
| 10.3**                  |       |                   | 2006 Employee Stock Purchase Plan (incorporated by reference to the  Definitive Proxy filed on April 3,  2006). |
| 10.4**                  |       |                   | 2006 International Employee Stock Purchase Plan (incorporated by  referenced to  Definitive Proxy  filed on April 3, 2006). |
| 10.5**†            |       |                   | Severance agreement between  SpectraLink  Corporation and David Rosenthal. |
| 10.6**†            |       |                   | Form of Change of control and severance agreements between  SpectraLink Corporation and John Elms, Masood  Garahi, John Kelley, Jill Kenney, Leah Maher, Gary Mead and Ernest Sampias. |
| 10.7†              |       |                   | Waiver and Second Amendment to Credit Agreement, dated March 28,  2006. |
| 31.1 †             |       |                   | 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 Carolyn Smyth 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 Carolyn Smyth 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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†Filed or furnished herewith.

 

*In accordance with SEC Release No. 33-8238,these exhibits are furnished with this quarterly report on Form 10-Q andare not deemed filed with the Securities and Exchange Commission, and are notincorporated by reference in any filing of SpectraLink Corporation under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

41

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**Indicates a management controlor compensatory plan arrangement.

 

Exhibits filed with SpectraLink’s2005 Form 10-K constitute those exhibits currently required to be on file.The reader should refer to the 2005 Form 10-K under Part IV, Item 15,for a list of those exhibits.

 

42

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**Signatures**

 

In accordance with therequirements of the Securities Exchange Act of 1934, as amended, the Registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

SPECTRALINKCORPORATION

 

 
| Date: May 15,  2006 | By:                                      | /s/ CAROLYN A.  SMYTH |   |
|--------------------------|------------------------------------------|-----------------------|--------|
|                     | Carolyn A Smyth                          |
|                     | Interim Chief  Financial Officer and     |
|                     | Principal  Accounting                    |
|                     | Officer and on  behalf of the Registrant |

 

 
| Date: May 15,  2006 | By:                                    | /s/ JOHN H. ELMS |   |
|--------------------------|----------------------------------------|------------------|--------|
|                     | John H. Elms                           |
|                     | President and  Chief Executive Officer |

 

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**Exhibit Index**

 
| **Exhibit Number** | ** ** | **Exhibit Title** |
|-------------------------|------------|------------------------|
| 4.1                     |       |                   | Restated Certificate of Incorporation (incorporated by reference to  Form S-8, filed April l3,  2006). |
| 10.1**                  |       |                   | Service Agreement, dated January 3, 2006, between  SpectraLink and Ole Lysgaard Madsen  (incorporated by reference to Form 8-K, filed January 4, 2006). |
| 10.2**                  |       |                   | SpectraLink 2006 Equity Incentive Plan (incorporated by reference to  the  Definitive Proxy filed on April 3,  2006). |
| 10.3**                  |       |                   | 2006 Employee Stock Purchase Plan (incorporated by reference to the  Definitive Proxy filed on April 3,  2006). |
| 10.4**                  |       |                   | 2006 International Employee Stock Purchase Plan (incorporated by  referenced to  Definitive Proxy  filed on April 3, 2006). |
| 10.5**†            |       |                   | Severance agreement between  SpectraLink  Corporation and David Rosenthal. |
| 10.6**†            |       |                   | Form of Change of control and severance agreements between  SpectraLink Corporation and John Elms, Masood  Garahi, John Kelley, Jill Kenney, Leah Maher, Gary Mead and Ernest Sampias. |
| 10.7†              |       |                   | Waiver and second amendment to credit agreement, dated March 28,  2006. |
| 31.1 †             |       |                   | 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 Carolyn Smyth 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 Carolyn Smyth 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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†Filed or furnished herewith.

 

*In accordance with SEC Release No. 33-8238,these exhibits are furnished with this quarterly report on Form 10-Q andare not deemed filed with the Securities and Exchange Commission, and are notincorporated by reference in any filing of SpectraLink Corporation under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

**Indicates a management controlor compensatory plan arrangement.

 

Exhibits filed with SpectraLink’s2005 Form 10-K constitute those exhibits currently required to be on file.The reader should refer to the 2005 Form 10-K under Part IV, Item 15,for a list of those exhibits.

 

44

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