##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM
10 - Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from _________ to _________
 Commission
file number 0-28180
 SPECTRALINK CORPORATION
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    84-1141188
(I.R.S. Employer Identification Number)
 5755 Central Avenue, Boulder, Colorado
(Address of principal executive office)
    
    80301-2848
(Zip code)
    þ o
 þ o
 o þ




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SPECTRALINK CORPORATION AND SUBSIDIARY
 INDEX
 PagePart I Financial InformationItem 1 Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at
September 30, 2005 and December 31, 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4 Controls and Procedures
    
    
    31Part II Other InformationItem 6 Exhibits
    
    
    31Signature
    
    
    32Certification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Principal Executive Officer Pursuant to Section 906Certification of Principal Financial Officer Pursuant to Section 906
  2




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##### Table of Contents



PART
I  ITEM 1
 
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts)
 (Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,842
    
    
    $
    14,625Investment in marketable securities  current
    
    
    12,458
    
    
    
    11,984Trade accounts receivable, net of allowance of $362 and $374, respectively
    
    
    17,188
    
    
    
    21,252Inventory, net of reserves of $477 and $720, respectively
    
    
    11,545
    
    
    
    8,076Deferred income taxes
    
    
    1,382
    
    
    
    1,473Prepaids and other
    
    
    1,673
    
    
    
    1,088Total current assets
    
    
    52,088
    
    
    
    58,498INVESTMENT IN MARKETABLE SECURITIES, net of current portion
    
    
    33,605
    
    
    
    27,781PROPERTY AND EQUIPMENT, at cost:Furniture and fixtures
    
    
    2,753
    
    
    
    2,481Equipment
    
    
    13,464
    
    
    
    10,503Leasehold improvements
    
    
    1,204
    
    
    
    1,03617,421
    
    
    
    14,020Less  accumulated depreciation
    
    
    (10,629
    )
    
    
    (9,436
    )Net property and equipment
    
    
    6,792
    
    
    
    4,584DEFERRED INCOME TAXES
    
    
    152
    
    
    
    103OTHER
    
    
    495
    
    
    
    460TOTAL ASSETS
    
    $
    93,132
    
    
    $
    91,426LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,325
    
    
    $
    1,132Income taxes payable
    
    
    1,243
    
    
    
    1,038Accrued payroll, commissions and employee benefits
    
    
    2,890
    
    
    
    3,727Accrued sales, use and property taxes
    
    
    756
    
    
    
    732Accrued warranty expenses
    
    
    742
    
    
    
    901Other accrued expenses and liabilities
    
    
    4,208
    
    
    
    3,315Deferred revenue
    
    
    8,160
    
    
    
    7,144Total current liabilities
    
    
    19,324
    
    
    
    17,989LONG-TERM LIABILITIES
    
    
    130
    
    
    
    214TOTAL LIABILITIES
    
    
    19,454
    
    
    
    18,203STOCKHOLDERS EQUITY:Preferred stock, 5,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 50,000 shares authorized, 23,689 and 23,407
shares
issued, respectively, and 18,956 and 19,138 shares outstanding, respectively
    
    
    237
    
    
    
    234Additional paid-in capital
    
    
    80,140
    
    
    
    77,356Retained earnings
    
    
    30,693
    
    
    
    28,030Treasury stock, 4,732 and 4,270 shares, respectively, at cost
    
    
    (37,392
    )
    
    
    (32,397
    )TOTAL STOCKHOLDERS EQUITY
    
    
    73,678
    
    
    
    73,223TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    93,132
    
    
    $
    91,426
  3




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SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004SALES:Product sales
    
    $
    18,954
    
    
    $
    18,093
    
    
    $
    51,024
    
    
    $
    48,963Service sales
    
    
    5,808
    
    
    
    4,875
    
    
    
    16,437
    
    
    
    13,443Net sales
    
    
    24,762
    
    
    
    22,968
    
    
    
    67,461
    
    
    
    62,406COST OF SALES:Cost of product sales
    
    
    5,417
    
    
    
    5,501
    
    
    
    14,635
    
    
    
    14,757Cost of services sales
    
    
    3,010
    
    
    
    2,654
    
    
    
    8,723
    
    
    
    7,613Total cost of sales
    
    
    8,427
    
    
    
    8,155
    
    
    
    23,358
    
    
    
    22,370Gross profit
    
    
    16,335
    
    
    
    14,813
    
    
    
    44,103
    
    
    
    40,036OPERATING EXPENSES:Research and development
    
    
    2,702
    
    
    
    2,268
    
    
    
    7,648
    
    
    
    6,636Marketing and selling
    
    
    6,674
    
    
    
    6,193
    
    
    
    19,237
    
    
    
    17,853General and administrative
    
    
    1,708
    
    
    
    1,660
    
    
    
    4,837
    
    
    
    4,470Total operating expenses
    
    
    11,084
    
    
    
    10,121
    
    
    
    31,722
    
    
    
    28,959INCOME FROM OPERATIONS
    
    
    5,251
    
    
    
    4,692
    
    
    
    12,381
    
    
    
    11,077INVESTMENT INCOME AND OTHER:Interest income, net
    
    
    387
    
    
    
    159
    
    
    
    1,131
    
    
    
    388Other income (expense), net
    
    
    (38
    )
    
    
    (38
    )
    
    
    (143
    )
    
    
    (4
    )Total investment income and other
    
    
    349
    
    
    
    121
    
    
    
    988
    
    
    
    384INCOME BEFORE INCOME TAXES
    
    
    5,600
    
    
    
    4,813
    
    
    
    13,369
    
    
    
    11,461INCOME TAX EXPENSE
    
    
    1,994
    
    
    
    1,886
    
    
    
    4,946
    
    
    
    4,412NET INCOME
    
    $
    3,606
    
    
    $
    2,927
    
    
    $
    8,423
    
    
    $
    7,049BASIC EARNINGS PER SHARE
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.44
    
    
    $
    0.37BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING
    
    
    18,940
    
    
    
    19,110
    
    
    
    19,070
    
    
    
    19,050DILUTED EARNINGS PER SHARE
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.36DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING
    
    
    19,190
    
    
    
    19,260
    
    
    
    19,380
    
    
    
    19,590
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SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    8,423
    
    
    $
    7,049Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,266
    
    
    
    1,262Amortization of premium on investments in marketable securities
    
    
    103
    
    
    
    Income tax benefit from the exercise of stock options
    
    
    475
    
    
    
    656Provision for bad debts
    
    
    18
    
    
    
    83Provision for excess and obsolete inventory
    
    
    485
    
    
    
    472Deferred income taxes
    
    
    92
    
    
    
    166Changes in assets and liabilities:Decrease (increase) in trade accounts receivable
    
    
    4,045
    
    
    
    (219
    )Increase in inventory
    
    
    (3,953
    )
    
    
    (3,628
    )Increase in other assets
    
    
    (621
    )
    
    
    (314
    )Increase (decrease) in accounts payable
    
    
    192
    
    
    
    (377
    )Increase in income taxes payable
    
    
    204
    
    
    
    1,160(Decrease) increase in accrued liabilities
    
    
    (136
    )
    
    
    125Increase in deferred revenue
    
    
    1,016
    
    
    
    695Net cash provided by operating activities
    
    
    11,609
    
    
    
    7,130CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (3,474
    )
    
    
    (1,223
    )Purchases of investments in marketable securities
    
    
    (6,511
    )
    
    
    Net cash used in investing activities
    
    
    (9,985
    )
    
    
    (1,223
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligation
    
    
    (25
    )
    
    
    (25
    )Proceeds from exercises of common stock options
    
    
    2,010
    
    
    
    3,780Proceeds from issuances of common stock
    
    
    363
    
    
    
    321Dividends paid
    
    
    (5,760
    )
    
    
    (5,723
    )Purchases of treasury stock
    
    
    (4,995
    )
    
    
    (3,003
    )Net cash used in financing activities
    
    
    (8,407
    )
    
    
    (4,650
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,783
    )
    
    
    1,257CASH AND CASH EQUIVALENTS, beginning of period
    
    
    14,625
    
    
    
    51,861CASH AND CASH EQUIVALENTS, end of period
    
    $
    7,842
    
    
    $
    53,118SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    4,181
    
    
    $
    2,625SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:Assets acquired under long-term obligation
    
    $
    
    
    
    $
    28
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SPECTRALINK CORPORATION AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2005
 (Unaudited)
 1. Basis of Presentation
    2. Investments in Marketable Securities
  3. Stock-Based Compensation Plans
  6




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share amounts)Net Income, as reported
    
    $
    3,606
    
    
    $
    2,927
    
    
    $
    8,423
    
    
    $
    7,049Deduct stock-based employee compensation
expense under the fair value based method,
net of related tax effect:Compensation expense for stock
options
    
    
    (350
    )
    
    
    (699
    )
    
    
    (5,957
    )*
    
    
    (2,106
    )Compensation expense for the stock
purchase plan
    
    
    (38
    )
    
    
    (41
    )
    
    
    (114
    )
    
    
    (124
    )Net Income, pro forma
    
    $
    3,218
    
    
    $
    2,187
    
    
    $
    2,352
    
    
    $
    4,819Earnings Per Share:Basic  as reported
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.44
    
    
    $
    0.37Basic  pro forma
    
    $
    0.17
    
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.25Diluted  as reported
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.36Diluted  pro forma
    
    $
    0.17
    
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.25
 
 *
    
    Includes compensation expense (net of related tax effect) resulting from the acceleration of
vesting of certain outstanding stock options at June 21, 2005, as described below.   Share-Based Payment
  7




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4. Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Raw materials
    
    $
    5,675
    
    
    $
    4,245Work in progress
    
    
    2
    
    
    
    1Finished goods
    
    
    5,868
    
    
    
    3,830$
    11,545
    
    
    $
    8,076
  5. Earnings Per Share
  Three months ended September 30,(In thousands, except per share amounts)2005
    
    
    
    
    
    
    
    
    
    
    2004Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per ShareBasic earnings per share
    
    $
    3,606
    
    
    
    18,940
    
    
    $
    0.19
    
    
    $
    2,927
    
    
    
    19,110
    
    
    $
    0.15Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    Diluted earnings per share
    
    $
    3,606
    
    
    
    19,190
    
    
    $
    0.19
    
    
    $
    2,927
    
    
    
    19,260
    
    
    $
    0.15
 8




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##### Table of Contents



Nine months ended September 30,(In thousands, except per share amounts)2005
    
    
    
    
    
    
    
    
    
    
    2004Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per ShareBasic earnings per share
    
    $
    8,423
    
    
    
    19,070
    
    
    $
    0.44
    
    
    $
    7,049
    
    
    
    19,050
    
    
    $
    0.37Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    292
    
    
    
    (0.01
    )
    
    
    
    
    
    
    528
    
    
    
    (0.01
    )Diluted earnings
    
    $
    8,423
    
    
    
    19,380
    
    
    $
    0.43
    
    
    $
    7,049
    
    
    
    19,590
    
    
    $
    0.36
 6. Product Warranties and Service
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)
    
    
    (In thousands)Beginning Balance, Accrued Product Warranty and
Service
    
    $
    800
    
    
    $
    711
    
    
    $
    901
    
    
    $
    493Additions to the accrual for product warranties
    
    
    154
    
    
    
    298
    
    
    
    559
    
    
    
    970Reductions for incurred warranty charges
    
    
    (212
    )
    
    
    (259
    )
    
    
    (718
    )
    
    
    (713
    )Ending Balance, Accrued Product Warranty and Service
    
    $
    742
    
    
    $
    750
    
    
    $
    742
    
    
    $
    750
 7. Advertising Costs
  8. Stockholders Equity
  9. Recently Issued or Proposed Accounting Pronouncements
  9




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




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11




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Results of Operations
 Net Sales
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    24,762,000
    
    
    
    7.8
    %
    
    $
    22,968,000For the nine months ended
    
    $
    67,461,000
    
    
    
    8.1
    %
    
    $
    62,406,000
 Product Sales, Net.
   Service Sales
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Customer
Mix Table (As a Percentage of Net Sales)
    
    2005
    
    2004
    
    2005
    
    2004Customer Type:Indirect Product Sales (excluding OEM)
    
    
    42.1
    %
    
    
    45.5
    %
    
    
    44.8
    %
    
    
    47.2
    %OEM Product Sales
    
    
    17.9
    %
    
    
    15.6
    %
    
    
    12.9
    %
    
    
    12.2
    %Direct Product Sales
    
    
    16.5
    %
    
    
    17.7
    %
    
    
    17.9
    %
    
    
    19.1
    %Service Sales
    
    
    23.5
    %
    
    
    21.2
    %
    
    
    24.4
    %
    
    
    21.5
    %Total Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Sales to Major Customer (As a Percentage of Net Sales)
    
    2005
    
    2004
    
    2005
    
    2004Customer A:
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10.5
    %
 
 (*)
    
    represents less than 10% of our revenue 12




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##### Table of Contents



Total Cost of Sales
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    8,427,000
    
    
    
    3.3
    %
    
    $
    8,155,000For the nine months ended
    
    $
    23,358,000
    
    
    
    4.4
    %
    
    $
    22,370,000
 Cost of Product Sales.
       Cost of Service Sales.
   13




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Gross Profit
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    16,335,000
    
    
    
    10.3
    %
    
    $
    14,813,000For the nine months ended
    
    $
    44,103,000
    
    
    
    10.2
    %
    
    $
    40,036,000
  Operating Expenses
 Research and Development
 % ChangeSeptember
30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    2,702,000
    
    
    
    19.1
    %
    
    $
    2,268,000Percentage of total net sales for the three months ended
    
    
    10.9
    %
    
    
    
    
    
    
    9.9
    %For the nine months ended
    
    $
    7,648,000
    
    
    
    15.2
    %
    
    $
    6,636,000Percentage of total net sales for the nine months ended
    
    
    11.3
    %
    
    
    
    
    
    
    10.6
    %
    Marketing and Selling
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    6,674,000
    
    
    
    7.8
    %
    
    $
    6,193,000Percentage of total net
sales for the three months
ended
    
    
    27.0
    %
    
    
    
    
    
    
    27.0
    %For the nine months ended
    
    $
    19,237,000
    
    
    
    7.8
    %
    
    $
    17,853,000Percentage of total net
sales for the nine months
ended
    
    
    28.5
    %
    
    
    
    
    
    
    28.6
    %
  14




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General and Administrative
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    1,708,000
    
    
    
    2.9
    %
    
    $
    1,660,000Percentage of total net
sales for the three months
ended
    
    
    6.9
    %
    
    
    
    
    
    
    7.2
    %For the nine months ended
    
    $
    4,837,000
    
    
    
    8.2
    %
    
    $
    4,470,000Percentage of total net
sales for the nine months
ended
    
    
    7.2
    %
    
    
    
    
    
    
    7.2
    %
    Income from Operations
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    5,251,000
    
    
    
    11.9
    %
    
    $
    4,692,000Percentage of total net
sales for the three months
ended
    
    
    21.2
    %
    
    
    
    
    
    
    20.4
    %For the nine months ended
    
    $
    12,381,000
    
    
    
    11.8
    %
    
    $
    11,077,000Percentage of total net
sales for the nine months
ended
    
    
    18.4
    %
    
    
    
    
    
    
    17.7
    %
  15




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##### Table of Contents



Investment Income and Other
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    349,000
    
    
    
    188.4
    %
    
    $
    121,000Percentage of total net
sales for the three months
ended
    
    
    1.4
    %
    
    
    
    
    
    
    0.5
    %For the nine months ended
    
    $
    988,000
    
    
    
    157.3
    %
    
    $
    384,000Percentage of total net
sales for the nine months
ended
    
    
    1.5
    %
    
    
    
    
    
    
    0.6
    %
  Income Tax Expense
 % ChangeSeptember 30,
    
    2004 to
    
    September 30,2005
    
    2005
    
    2004For the three months ended
    
    $
    1,994,000
    
    
    
    5.7
    %
    
    $
    1,886,000Percentage of total net sales for the three
months ended
    
    
    8.1
    %
    
    
    
    
    
    
    8.2
    %Effective tax rate for the three months ended
    
    
    35.6
    %
    
    
    
    
    
    
    39.2
    %For the nine months ended
    
    $
    4,946,000
    
    
    
    12.1
    %
    
    $
    4,412,000Percentage of total net sales for the nine
months ended
    
    
    7.3
    %
    
    
    
    
    
    
    7.1
    %Effective tax rate for the nine months ended
    
    
    37.0
    %
    
    
    
    
    
    
    38.5
    %
  Liquidity and Capital Resources
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2004Cash from operating activities
    
    $
    11,609,000
    
    
    $
    7,130,000Cash used in investing activities
    
    $
    (9,985,000
    )
    
    $
    (1,223,000
    )Cash used in financing activities
    
    $
    (8,407,000
    )
    
    $
    (4,650,000
    )
   16




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##### Table of Contents



Aggregate Contractual Obligations and Commercial Commitments
  Lease Commitments.
 Purchase Commitments.
 Indemnifications Accounting for
Contingencies Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
 17




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##### Table of Contents



2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    338,000
    
    
    $
    997,000
    
    
    $
    344,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,679,000Purchase commitments
    
    
    288,000
    
    
    
    1,872,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,160,000Other obligations
    
    
    15,000
    
    
    
    51,000
    
    
    
    51,000
    
    
    
    18,000
    
    
    
    
    
    
    
    135,000Total contractual
obligations and
commercial
commitments
    
    $
    641,000
    
    
    $
    2,920,000
    
    
    $
    395,000
    
    
    $
    18,000
    
    
    $
    
    
    
    $
    3,974,000
  Critical Accounting Policies and Estimates
    
    
    It requires us to make assumptions about matters that were uncertain at the time of
making the estimate, and
    
    Changes in the estimate or assumptions in the estimate could have a material impact
on our financial condition or results of operations.
  18




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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsSales and deferred
revenue
    
    Collectibility is
reasonably assured,
persuasive evidence
of an arrangement
exists, delivery has
occurred or
services rendered
and sellers price
to
the buyer is fixed
or determinable
    
    We are required to
estimate the
collectibility of
invoiced amounts
based upon our
assessment of the
ability of the
customer to pay.
    
    We determine whether
collectibility is reasonably
assured based on the
customers current financial
condition and on possible
credit deterioration, the
indirect and OEM channels
ability to sell through the
products purchased and the
relationship we have with
our customers.
Our revenue recognition
policy is based on complex
and dynamic rules
established by the
Securities
and Exchange Commission
and other governing bodies.
These rules require us to
make judgments with regard
to post delivery
obligations.
When significant post
delivery obligations exist,
revenue is deferred until
such obligations are
fulfilled
or until we have established
sufficient history to
estimate
the cost of our obligation.
    
     Customer
ability to pay
 Customer
ability to sell to
end-user
 19




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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsAccounts receivable
    
    Collectibility of
invoiced amounts
    
    Estimating the
collectibility of
accounts receivable
requires us to make
judgments about the
credit quality and
economic viability
of
customers based on
information
available
to us.
    
    We use information
available at the time of
credit issuance, such as
Dunn & Bradstreet credit
report, payment history, or
financial information
provided by the customer.
For ongoing customers and
past due balances, we have
discussions with our
customers to determine if
economic conditions have
deteriorated, resulting in an
impairment of their ability
to make payments.
We maintain a provision for
estimated credit losses based
upon our historical
experience and any specific
customer collection issues
that we have identified.
    
     Historical
experience
regarding
payment history
 Customer
creditworthiness
 Monitoring
collections and
payments from
customers

Deterioration of
customers
economic
condition after
date of invoice
 Changes in
credit loss rates
from historical
rates used
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsCost
of goods sold and    inventories
    
    Obsolete,
unmarketable or
excess inventory
    
    Estimating obsolete,
unmarketable or
excess inventory
requires us to
forecast
future demand and
market conditions.
Changes in our
product strategy can
result in obsolete
inventory.
    
    We base our estimate on the
difference between the cost
of held inventory and the
expected market value of
the
inventory.
    
     Product
lifecycle
 Evaluation
of
customer demand
for various
product types
 Analysis of
inventory on hand
with no estimated
future demand
from customer
base
 
 20




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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsDeferred income taxes
    
    Recoverability of
deferred tax assets
    
    We are required to
estimate whether
recoverability of
deferred tax assets is
more likely than not
based on forecasts of
taxable earnings in
the related tax
jurisdictions.
    
    We use historical and
projected future operating
results, including a review
of the eligible carryforward
period, tax planning
opportunities and other
relevant considerations.
    
     Tax law
changes
 Variances
in
future projected
profitability,
including by
taxing entity
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsWarranty
    
    Warranty
obligations
    
    Estimating warranty
liability requires
us to
forecast, using
historical data,
combined with
relevant information
regarding current
conditions, as a
basis,
future product
failure
rates, material usage
and service delivery
costs.
    
    We base our estimate on
historical and current
trends
of product failure rates,
repair cost per unit and
service delivery costs.
We have contractual
commitments to various
customers that require us to
incur costs to repair an
epidemic defect.
Historically, we have not
experienced significant
costs related to epidemic
failure. Costs would be
accrued for an epidemic
defect when an epidemic
defect is identified and the
costs of repair can be
reasonably estimated.
    
     Monitoring
and
evaluating the
quality of
component
suppliers
 Actual
historical return
rates at the time of
sale and updating
estimates
throughout the
warranty period
 Monitoring
our
customer base for
possible epidemic
defects
 Estimated
failure rates;
repair costs per
unit; and service
delivery costs
  Recently Issued Accounting Pronouncements
  21




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  Interest Rate Risk
  RISK FACTORS
 The factors discussed below are cautionary statements that identify important factors that
could cause actual results to differ materially from those anticipated by the forward-looking
statements contained in this report. For more information regarding the forward-looking statements
contained in this report, see the introductory paragraph to Part I, Item 2 of this report. You
should carefully consider the risks and uncertainties described below together with all of the
other information included in this report, in considering our business and prospects. The risks and
uncertainties described below are not the only ones facing SpectraLink. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations. The occurrence of any of the following risks could affect our business,
financial condition or results of operations.
 
    
    If we are unable to fulfill quarter end customer orders, then we could lose revenue
and customers.The volume of customer orders for our products typically increases
significantly at the end of each quarter. Generally, sales in a given quarter are
distributed approximately as follows: 15% in the first month, 25% in the second month,
and 60% in the third month. We face significant challenges in meeting this demand. It
is difficult to ensure that we have the resources available to meet any such increase in
order volume since it is very difficult to predict what the level of demand will be. We
may
not have the personnel and/or systems necessary to fulfill the large order volume or the
ability to upgrade and develop our systems and infrastructure to meet an increased order
volume. If we are unable to meet demand from our customers for our products in a cost
effective manner, then we might lose revenue and customers, or incur increased operating
costs, either of which would harm our business.
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##### Table of Contents




    
    Many of the orders for our products are realized at the end of the quarter, which
makes it difficult to forecast or adjust our operating activities quickly in response to
an unexpected increase or decrease in customer demand.Due to the timing of orders from
customers, we have often recognized a substantial portion of our revenue in the last
month of a quarter. As a result, minor fluctuations in the timing of orders and the
shipment of products may, in the future, cause operating results to vary significantly
from quarter to quarter. The demand for our products depends upon many factors and is
difficult to forecast. Significant unanticipated fluctuations in demand could cause
problems in our operations. The lead-time required to assemble our systems is often
longer than the lead-time our customers provide to us for delivery of their product
requirements. Therefore, we often must place orders in advance of expected purchase
orders from our customers. As a result, we have only a limited ability to react to
fluctuations in demand for our products, which could cause us to have either too much or
too little inventory of a particular product. Further, the business relationship which
we have with Offshore Group to use a Mexico facility to assemble our products may not be
able to provide product in a timely manner. Additionally, once we receive an order, it
requires sufficient time to complete the configuration of our product to our customers
individual phone systems.Our inability to satisfy customer demand in a timely manner would lead to lost sales and
impede our ability to increase our revenue. Conversely, a large portion of our expenses,
including rent and salaries, is fixed and difficult to reduce. Our expenses are based in
part on expectations for our revenue. If our revenue does not meet our expectations, the
adverse effect of the revenue shortfall upon our operating results may be acute in light
of the fixed nature of our expenses.
    
    Our reliance on sole or limited sources of supply for many components and equipment
used in our manufacturing process.We rely on sole or limited sources of supply for many
components and equipment used in our manufacturing process. The delay, inability, or
refusal of any of these suppliers to ship these components or equipment could interrupt
our manufacturing process and ability to manufacture products in a timely manner to meet
customer demand. The limited number of sources for many of these components may also
prevent us from decreasing our reliance on certain suppliers and finding other sources at
competitive prices. Unforeseen price increases by any of the sole or limited source
suppliers could negatively impact product margins and the financial performance of our
company.
    
    Because many of our current and planned products are or will be highly complex, they
may contain defects or errors that are detectable only after deployment in complex
networks and which, if detected, could have a negative effect on our business, operating
results or financial condition.Many of our complex products can only be fully tested
when deployed in live existing wireless networks. As a result, end-users may only
discover defects or errors or experience breakdowns in their networks after the products
have been deployed. If any of these products contain defects, or have reliability,
quality or compatibility problems, our reputation might be damaged significantly and
customers might be reluctant to buy our products. These defects could interrupt or delay
sales. We may have to invest significant capital and other resources to correct these
problems. If we fail to provide solutions to the problems, we will also incur product
recall, repair, warranty or replacement costs. These problems might also result in
claims against us by our customer or others. In addition, the occurrence of any defects
or errors in these products, could result in: failure to achieve market acceptance and
loss of market share; cancellation of orders; difficulty in collecting accounts
receivable; increased service and warranty costs in excess of our estimates; diversion of
resources, and; increased insurance costs and other losses to our business or to
end-users.
    
    If we experience product failure that indicates either manufacturing or design
deficiencies, we may be required to recall units in the field and/or stop producing and
shipping such products until the deficiency is identified and corrected.In the event of
such product failures, our business could be adversely affected resulting in reduced
revenue, increased costs and decreased customer satisfaction. End-users have discovered
errors in our products in the past and may discover errors in our products in
the future. In addition, if our costs of remediating problems experienced by our
customers exceed the expectations used in developing our warranty reserves, these costs
may adversely affect our operating results. Consequently, our product failure could have a
material adverse impact on our operations and financial results.
    
    Our ability to attract and retain personnel, including key technical and management
personnel.Much of the future success of our company depends on the continued service and
availability of skilled personnel, including technical, marketing and staff positions.
Experienced personnel in the wireless
 23




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##### Table of Contents




    
    The risk of business interruption arising from our dependence on our manufacturing
facility located in Boulder, Colorado, and the business relationship we have with
Offshore Group to use a facility in Empalme, Sonora, Mexico which provides assembly
services.We are highly dependent on our Boulder, Colorado manufacturing facility, which
is home to the majority of our manufacturing and repair operations. We are also highly
dependent upon our business relationship with Offshore Group to provide management
services and an assembly facility located in Empalme, Sonora, Mexico. Our agreement with
Offshore Group expires in August 2006. We cannot assure you that we will be able to
successfully re-negotiate a new agreement with terms favorable to us, or at all. If we
are unable to enter a new agreement with Offshore Group, or should any other event occur
that disrupts or indefinitely discontinues either of the facilities capacity to
manufacture, assemble and repair our products, our ability to generate revenue, fulfill
orders and attain financial goals would be greatly impaired. For instance, we may
experience delays in the receipt of assembled product from the facility in Mexico should
the border between the U.S. and Mexico close.
    
    Our ability to respond to rapid technological changes within the on-premises wireless
telephone industry.The wireless communications industry is characterized by rapid
technological change, short product life cycles, and evolving industry standards. To
remain competitive, we must:
 
    
    develop or gain access to new technologies in order to increase product
performance and function, reduce product size, and maintain cost-effectiveness;
    
    develop new products for existing and emerging wireless communications markets,
and introduce such products in a timely manner;
    
    implement an emerging wireless standard or multiple emerging wireless standards
quickly enough to satisfy market demands and without significant product redesign
or the need to allocate additional resources to comply with multiple standards;
    
    develop or obtain access to advanced wireless capabilities as they become available; and
    
    design, develop and introduce competitive new products on a timely basis.
  
    
    Potential fluctuations in our future revenues, gross margins and operating results.
We have experienced, and may in the future continue to experience, significant quarterly
fluctuations in revenue, gross margins and operating results due to numerous factors,
some of which are outside our control.
Among other things, these factors include:
 
    
    changes in customer, geographic or product mix, including mix of configurations
within each product group;
    
    fluctuating market demand for, and declines in the average selling prices of, our products;
    
    the timing of, and delay of, significant orders from customers;
    
    seasonality in demand within our various sectors;
    
    increases in material or labor costs;
    
    excess inventory;
 24




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##### Table of Contents




    
    obsolescence charges;
    
    changes in shipment volume;
    
    loss of cost savings due to changes in component pricing or charges incurred due
to inventory holding periods if parts ordering does not correctly anticipate
product demand;
    
    increases in price competition;
    
    changes in the mix of our distribution channels including our OEM partners;
    
    government regulation of frequency spectrum;
    
    increases in warranty costs; and
    
    introduction of new products and costs of entering new markets.
  
    
    The uncertainty about economic prospects in some sectors of our target customer market
adversely impacts their information technology spending and our business.Our business
has from time to time been adversely impacted by the uncertainty about general economic
prospects in some sectors of our target customer market within the United States and
worldwide, because this uncertainty has resulted in a decline in, or a failure to
increase, their information technology spending. Consumers of information technology in
some of these sectors may defer, and in some cases cancel, their purchase decisions. Our
operating results may be adversely affected as a result. We expect the economic
uncertainty to continue to adversely impact our business and operating results for at
least the next few quarters and perhaps significantly longer. The adverse impacts from
economic uncertainty include longer sales cycles, lower average selling prices, fewer
large orders from a single customer and reduced revenue.
    
    Changes in rules and regulations of the FCC and other regulatory agencies.The
wireless communications industry, regulated by the Federal Communications Commission
(FCC) in the United States and similar government agencies in other countries, is subject
to changing political, economic, and regulatory influences. Internationally, products
that we develop will be required to comply with standards established by authorities in
various countries. Regulatory changes, including changes in the allocation of available
frequency spectrum, or changing free un-licensed to free based spectrum licensing could
significantly impact our operations in the United States and internationally. For
example, recently the FCC revised regulations related to the 1920-1930 MHz Unlicensed PCS
band that previously had deterred DECT-standard products from being introduced into the
U.S. market and, in the last several years, the European Union (EU) has adopted a number
of initiatives (WEEE, RoHS, etc.) related to equipment emissions, electronic waste,
privacy of information and expanded consumer warranties. Failure to comply with existing
or evolving industry standards or to obtain timely domestic or foreign regulatory
approvals or certificates could seriously harm our business.
    
    We are dependent on indirect sales channels for most of our revenue.A significant
portion of our revenues is derived from a variety of third-party business partners,
including OEMs, distributors and resellers. During the three months ended September 30,
2005, sales of our products through our indirect distributors accounted for 78.4% of our
product revenue, of which 23.4% of product revenue was contributed by our OEM partners.
Our contracts with third-party business partners do not require those partners to
purchase minimum quantities of our products or services. In fact, some of our third-party
business partners also offer the products of some of our competitors. In addition, our
OEM
agreements do not restrict an OEM from acquiring products from a third-party or
independently developing products and services that would directly compete with us. We
cannot guarantee that any of our third-party business partners will continue to market our
products or devote significant resources to doing so. Furthermore, we will, from time to
time, terminate or adjust some of our relationships with third-party business partners in
order to address changing market conditions, adapt such relationships to our business
strategy, resolve disputes, or for other reasons. Any such termination or adjustment
could have a negative impact on our relationships with third-party business partners and
our business, and result in decreased sales through third-party business partners or
threatened or actual litigation. If our third-party business partners do not successfully
market and sell our products or services for these or any other reasons, our sales could
be adversely affected and our revenue could decline. In addition, our third-party
business partners have confidential information concerning our products and services,
product release schedules
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##### Table of Contents




    
    Our revenue and earnings are seasonal.Seasonality and other factors may cause
significant quarterly fluctuations in our revenue and net income.Our business is
seasonal based on budget cycles in various vertical markets such as healthcare and
retail. This causes significant quarterly fluctuations in our financial results.
Generally, revenue and operating results are sequentially down in the first quarter from
the fourth quarter, sequentially higher in the second quarter, sequentially flat or
slightly higher or lower in the third quarter, and strongest in the fourth quarter.
Actual results from operations may or may not follow these normal seasonal patterns in a
given year leading to performance that is not in alignment with expectations.
    
    A lower than anticipated rate of acceptance of domestic and international markets
using the 802.11b standard.Our NetLink wireless telephones are compatible with the IEEE
802.11b standard for use on 802.11b compliant WLAN. Consequently, demand for NetLink
wireless telephones depends upon the acceptance of markets utilizing 802.11b compliant
networks. This depends in part upon the initial adoption of the 802.11b standard in
international markets, as well as enhancements to that standard in the U.S. and foreign
markets where the standard has already been adopted. Additionally, the acceptance of
802.11b compliant networks may move more slowly, if at all, if competing wireless
networks are established and utilized. Additionally, the deployment of wireless voice
and data systems has been inhibited by security concerns including the potential of
unauthorized access to data and communications transmitted over or accessible through a
wireless system. Potential customers may choose not to purchase our products until
wireless systems are developed which provide for greater security. Further, our products
may not be compatible with secure wireless systems that may be developed in the future.
If markets utilizing 802.11b compliant networks do not grow as we anticipate, our growth
would be impeded and we would not be able to factor the related revenue into our growth
in the future. If the 802.11b standard does not emerge as the dominant wireless standard
in our markets, or multiple standards are adopted that require different technologies we
may need to spend time and resources to add functionality to meet the additional
standards and many of our strategic initiatives and investments may be of no or limited
value. Further, to the extent that additional standards are adopted, our product
differentiation could be minimized and our implementation may not be interoperable with
the standard, necessitating additional product development to meet the standard which may
cause product delays.
    
    The market for on-premises wireless telephone systems may fail to grow or to grow as
quickly as we anticipate.We derive our revenue principally from the sale of wireless,
on-premises telephone systems and related installation and other services relating to
those systems. Therefore, our future operating results depend on the demand for those
types of services. If this market does not grow or grow quickly, our future results of
operations would be significantly harmed. In particular, increased demand for our
NetLink product depends on the growth of the voice over Wi-Fi-related market. Although
NetLink sales have grown significantly in recent periods, the market for deployment of
converged voice and data wireless networks in the general enterprise continues to be
immature. We expect that this will remain the case unless that market moves through its
acceptance of IP wireless applications, standards adoption increases to reduce complexity,
and customers deploy wireless IP access points more fully throughout their enterprise
networks in densities required to support wireless voice traffic.
    
    Our reliance on a limited number of significant customers.A portion of our revenue in
the past has been derived from a limited number of customers. We also have experienced
quarter-to-quarter variability in sales to each of our major customers and expect this
pattern to continue in the future.
    
    We might not be able to execute on our business plan if we lose key management or
technical personnel, on whose knowledge, leadership and technical expertise we rely, or
if new members of our management team fail to work effectively together.Our success
depends heavily upon the contributions of our key management and technical personnel,
whose knowledge, leadership and technical expertise would be difficult to replace. Many
of these individuals have been with us for several years and
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##### Table of Contents




    
    Our reliance on our 802.11b technology partners to continue to provide the wireless
local area network for our NetLink product, and to provide access points which support
SpectraLinks Voice Priority Technology.In the absence of a wireless voice
prioritization standard to ensure quality of service, we rely on 802.11b technology
partners, such as Symbol Technologies, Cisco Systems, Trapeze Networks Inc. and Aruba
Wireless Networks to continue to provide wireless local area network support for our
NetLink product, and to provide access points that support SVP capability. If any of our
technology partners fail to provide voice prioritization support for our products, the
market opportunity for NetLink products would be reduced and our future results of
operations would be materially harmed until we find new 802.11b technology partners or
voice prioritization standards are adopted.
    
    Our ability to generate continued market growth rates may require us to participate in
industry consolidation. As part of our business strategy to continue our market growth
for IP telephony, we may engage in acquisitions or mergers with other companies, or
individual product lines, technologies and/or personnel or become the target for a merger
or acquisition. Acquisitions or mergers involve numerous risks, including the following:
 
    
    Difficulties in integrating the operations, technologies, products, and
personnel of the acquired companies;
    
    Diversion of managements attention from normal daily operations of the
business;
    
    Potential difficulties in completing projects associated with in-process
research and development;
    
    Difficulties in entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market positions;
    
    Initial dependence on unfamiliar supply chains or relatively small supply partners;
    
    Be disruptive to our sales efforts, channel partners or customer relationships;
    
    Insufficient revenues to offset increased expenses associated with acquisitions; and
    
    The potential loss of key employees of the acquired companies.
  
    
    Issue common stock that would dilute our current stockholders percentage ownership;
    
    Assume liabilities;
    
    Record goodwill and nonamortizable intangible assets that will be subject to
impairment testing
on a regular basis and potential periodic impairment charges;
    
    Experience possible delays in financial reporting and additional resources
required to integrate ERP systems;
    
    Incur additional financial costs and personnel resources which may be required
to timely comply on a consolidated basis with Section 404, Managements Internal
Controls and Procedures for Financial Reporting of the Sarbanes-Oxley Act of 2002;
    
    Incur amortization expenses related to certain intangible assets;
    
    Incur large and immediate write-offs and restructuring and other related expenses; and
    
    Become subject to intellectual property or other litigation.
  If we are unable to develop and introduce new products and
transition existing products and respond to emerging technological trends, changing
environmental regulations and customers changing needs, our operating results and market
share may suffer
 27




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##### Table of Contents




    
    If we are unable to develop and introduce new products and transition existing
products and respond to emerging technological trends, changing environmental regulations
and customers changing needs, our operating results and market share may suffer.The
process of developing new technology is complex and uncertain, and if we fail to
accurately predict customers changing needs and emerging technological trends, our
business could be harmed. We must commit significant resources to developing new products
before knowing whether our investments will result in products the market will accept. We
may encounter delays in deploying new or improved products. For instance, our new
products may not properly function with our customers existing telephone systems, or our
new products may contain defects or bugs. These incompatibilities, defects or bugs may
not be detected until our customers begin to install the products or thereafter. We may
need to modify the design of our new or improved products if they have incompatibilities,
defects or bugs, which could result in significant expenditures as we seek to remedy the
problems, delays in the purchase of the products or cancelled orders. We may also
encounter delays in the manufacturing and production of the new products. Additionally,
the new products may not be commercially successful. Demand for existing products may
decrease upon the announcement of new or improved products. Further, since products
under development are often announced before introduction, these announcements may cause
customers to delay purchases of any products, even if newly introduced, until the new or
improved versions of those products are available. If customer orders decrease or are
delayed during the product transition, we may experience a decline in revenue and have
excess inventory on hand which could decrease gross profit margins. Our gross margins
might decrease if customers, who may otherwise choose to purchase existing products,
instead choose to purchase lower priced models of new products. Delays or deficiencies
in the development, manufacturing, and delivery of, or demand for, new or improved
products could have a negative effect on our business, operating results or financial
condition.
    
    Our ability to manage potential expansion of operations in the U.S. and
internationally.We intend to expand our existing domestic and international operations,
and to enter new markets. This expansion will require significant management attention
and financial resources. We currently have limited experience in marketing and
distributing our products internationally and in developing versions of products that
comply with local standards. We may also not be able to maintain or increase
international market demand for our products. International operations are subject to
other inherent risks, including foreign government regulation of technology or unexpected
changes in regulatory and customs requirements, difficulty and delays in accounts
receivable collection, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights, foreign currency
exchange rate fluctuations, and taxation consequences.
    
    We face increasing competition in the on-premises wireless telephone system market.
The on-premises wireless telephone system industry is competitive and influenced by the
introduction of new products and new entrants into the industry. The competitive factors
affecting the market for our systems include product functions and features, frequency
band of operation, ease-of-use, quality of support, product quality and performance,
price, network and application integration capabilities,
distribution channels, and the effectiveness of marketing and sales efforts. Most of our
competitors have significantly greater financial, technical, research and development, and
marketing resources than us. As a result, our competitors may respond more quickly to new
or emerging technologies and changes in customer requirements, or may devote greater
resources to the development, promotion, sale and support of their products than us. In
addition, mature DECT-standard based products previously marketed by large telecom
companies in markets outside the U.S. are being introduced in the U.S. which is our
largest market and may be lower-priced than our offerings. Enterprise adoption of
standards for wireless LAN and VoIP may lead to the commoditization of wireless telephone
technology and the availability of low-cost alternative products. Other purchasers may
prefer to buy their 802.11b wireless telephone systems from a single source provider of
wireless local area networks, or LANs, such as Cisco Systems, which provides 802.11b
wireless infrastructure and wireless telephones. Because we focus on wireless on-premises
telephone communications, we cannot serve as the sole source for a complete telephone or
data communications system. There is no assurance that we will be able to compete
successfully in the future. Further, if a potential customer is already using a competing
product or system, that potential customer may not be willing or able to make the
investment necessary to replace such a system with our wireless telephone system. In
addition, there may be potential customers who choose another technology because
of cost or their belief that their needs do not require the full function provided by our
wireless telephone systems.
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
    
    The certification and approval process for our NetLink product for use in countries
that support the 802.11b standard.Foreign countries, which support the 802.11b
standard, could provide future markets for our NetLink products. However, countries
certification and approval processes for 802.11b compatible products, such as ours, are
typically time consuming and costly. If we have difficulty obtaining certification and
approval by foreign countries for our NetLink wireless telephone product, then we and/or
our distributor channels may not be able to gain access to the markets in these countries
in a timely fashion, if at all, which would limit international growth of our business.
    
    Our ability to protect or enforce our intellectual property rights.Our future
success depends, in part, upon our proprietary technology. We rely on a combination of
patent, copyright, trade secret and trademark laws, confidentiality procedures, and
nondisclosure and other contractual provisions to protect our proprietary rights. These
legal protections provide only limited protection and may be time consuming and expensive
to obtain and enforce. There can be no assurance that our issued patents will not be
challenged or circumvented by competitors or provide meaningful protection against
competition. If challenged, our patents might not be upheld or their claims could be
narrowed. If we fail to protect our proprietary rights adequately, our competitors might
gain access to our technology. As a result, our competitors might offer similar products
and we might not be able to compete successfully in our market. Moreover, despite our
efforts to protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. Also, our
competitors may independently develop similar, but not infringing, technology, duplicate
our products, or design around our patents or our other intellectual property. In
addition, other parties may breach confidentiality agreements or other protective
contracts with us, and we may not be able to enforce our rights in the event of these
breaches. Furthermore, we expect that we will increase our international operations in
the future, and the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. We may be required
to spend significant resources to monitor and protect our intellectual property rights.
Any litigation surrounding our rights could force us to divert important financial and
other resources from our business operations.
    
    The assertion of intellectual property infringement claims against us.Our industry
is characterized by the existence of a large number of patents and frequent claims and
related litigation regarding patent and other intellectual property rights. We cannot be
certain that our products do not and will not infringe upon issued patents, patents to be
issued in the future, or other intellectual property rights of others. We may in the
future be notified that we are infringing upon certain patent and/or other intellectual
property rights of others. Although there are no such pending lawsuits against us that
we are infringing upon intellectual property rights of others, there can be no assurance
that infringement claims will not occur in the future. From time to time, third parties
may assert exclusive patent, copyright, trademark and other intellectual property rights
to technologies and related methods that are
important to us. Litigation may be necessary in the future to defend against claims of
infringement or invalidity, to determine the validity and scope of the proprietary rights
of others, to enforce our intellectual property rights, or to protect our trade secrets.
We may also be subject to claims from customers for indemnification. Any resulting
litigation, regardless of our resolution, could result in substantial costs and diversion
of resources. If it were determined that our products infringe upon the intellectual
property rights of others, we would need to obtain licenses from these parties or
reengineer our products in order to avoid infringement. We might not be able to obtain
the necessary licenses on acceptable terms or at all, or to reengineer our products
successfully. Moreover, if we are sued for infringement and lose the suit, we could be
required to pay substantial damages or be enjoined from licensing or using the infringing
products or technology. Any of the foregoing could cause us to incur significant costs
and prevent us from selling our products.
    
    We rely on the availability of third-party licenses.Many of our products
are designed to include software or other intellectual property licensed from third
parties, especially through our OEM agreements. If we terminate OEM or technology
partner relationships, it may be necessary in the future to seek or renew licenses with
protocols allowing our products to interoperate with their switches. There can be no
assurance that the necessary licenses would be available on acceptable terms, if at all.
The inability to obtain certain licenses or other rights or to obtain such licenses or
rights on favorable terms, or the need to engage in litigation regarding these matters,
could harm our business, operating results, and financial condition.
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
    
    Changes in securities laws and regulations have increased our costs.The
Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules
subsequently implemented by the SEC, have required changes in some of our corporate
governance, public disclosure and compliance practices. The Act also required the SEC to
implement additional new rules on a variety of subjects. In addition to rules made by the
SEC, the Nasdaq National Market has adopted revisions to its requirements for companies,
such as us, that are Nasdaq-listed. These developments have increased our legal and
financial compliance costs, and make some activities, like SEC reporting obligations,
more expensive and difficult. For instance, in seeking to comply with Section 404
Managements Internal Controls and Procedures for Financial Reporting of the
Sarbanes-Oxley Act of 2002, we spent approximately $700,000 in outside services
associated with documenting, testing and auditor review of our internal controls during
2004. In addition, these developments may make it more difficult and more expensive for
us to obtain director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
developments could make it more difficult for us to attract and retain qualified members
of our board of directors, particularly to serve on our audit committee, and qualified
executive officers. We are presently evaluating and monitoring regulatory developments
and are continuing to estimate the timing and magnitude of additional costs we may incur
as a result.
    
    Our reported financial results may be adversely affected by changes in accounting
principles generally accepted in the United States.Generally accepted accounting
principles in the United States are subject to issuance and interpretation by the
Financial Accounting Standards Board, or FASB, the American Institute of Certified Public
Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or interpretations could have a
significant effect on our reported financial results, and could affect the reporting of
transactions completed before the announcement of a change. For example, in December
2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after June 15, 2005, with early
adoption encouraged. In April 2005, the Securities and Exchange Commission made an
amendment to Rule 401(a) regarding the compliance date for SFAS 123R. Under Rule 401(a)
as amended, we are not required to comply with SFAS 123R until January 1, 2006. Our
reported earnings will be decreased when we change our accounting policy in accordance
with the fair-value based concepts soon to be required.
    
    The historic volatility of our stock price, which may make it more difficult to resell
shares at prices attractive to sellers.The market price of our common stock has been
volatile and is likely to
remain subject to wide fluctuations in the future. For example, during the 12-month
period ended September 30, 2005, the closing price of our common stock has ranged from a
high of $17.75 per share to a low of $9.33 per share. Many factors could cause the market
price of our common stock to fluctuate, including:
 
    
    variations in our actual or anticipated quarterly or annual results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introduction of new products or product enhancements or new pricing policies by
us or by our competitors;
    
    government regulation;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant orders;
    
    changes in the market valuations of other telecommunications companies;
    
    the amount of liquid financial resources available to us;
    
    the gain or loss of significant customers including OEMs; and
    
    changes in the estimates of our operating performance or changes in
recommendations by securities analysts.
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Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls over Financial Reporting.
 
 PART II. OTHER INFORMATION
 
 Item 6. Exhibits
   Exhibit Number
    
    Exhibit Title31.1 
    
    Certification of Principal Executive Officer
pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2 
    
    Certification of Principal Financial Officer
pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1 *
    
    Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2 *
    
    Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 
 
    
    Filed or furnished herewith.*
    
    In accordance with SEC Release No. 33-8238, these exhibits are furnished with this quarterly
report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission, and
are not incorporated by reference in any filing of SpectraLink Corporation under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof
and irrespective of any general incorporation language in any filings. 31




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SPECTRALINK CORPORATION
 
 SIGNATURE
  SPECTRALINK CORPORATIONDate: November 9, 2005
    
    By:
    
    /s/ DAVID I. ROSENTHALDavid I. RosenthalChief Financial Officer, Executive Vice President of Financeand Administration, Secretary and Treasurer(Principal Financial Officer and duly authorized signatory)
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##### Table of Contents



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