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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10 — Q

Commission file number 0-28180

SPECTRALINK CORPORATION

303-440-5330
(Registrant’s telephone number)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes    X    No          

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    X    No          

Applicable only to corporate issuers:

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SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX

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PART I — FINANCIAL INFORMATION

SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS

The accompanying notes to condensed financial statements are an integral part of these condensed consolidated balance sheets.

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SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)

The accompanying notes to condensed financial statements are an integral part of these condensed consolidated statements.

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SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes to condensed financial statements are an integral part of these condensed consolidated statements.

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SPECTRALINK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

1. Basis of Presentation

     The accompanying condensed consolidated financial statements as of June 30, 2003 and December 31, 2002, and for the three and six months ended June 30, 2003 and 2002, have been prepared from the books and records of SpectraLink Corporation and SpectraLink International Corporation (together “SpectraLink” or “the Company”) and are unaudited. In management’s opinion, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly present SpectraLink’s financial position, results of operations and cash flows for the periods presented. The results of operations for the period ended June 30, 2003, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2003.

     The financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2002, which are included in SpectraLink’s Annual Report on Form 10-K. The accounting policies utilized in the preparation of the financial statements herein presented are the same as set forth in SpectraLink’s annual financial statements.

2. Stock-Based Compensation Plans

     The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion (APB) No. 25 (APB No. 25), “Accounting for Stock Issued to Employees”. Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” defines a fair value based method of accounting for stock options and similar equity instruments. As allowed by SFAS 123, the Company has continued to apply APB No. 25 to account for its employee stock based compensation plans and has adopted the disclosure requirements of SFAS 123 and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, an amendment of SFAS 123. Had the Company determined compensation expense for its stock-based compensation plans based on fair value at the date of grant under SFAS 123, the Company’s consolidated net income, and basic and diluted earnings per share, would have been the pro forma amounts as follows:

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3. Inventory

     Inventory includes the cost of raw materials, direct labor and manufacturing overhead, and is stated at the lower of cost (first-in, first-out) or market. Inventory as of June 30, 2003 and December 31, 2002, consisted of the following:

The reserve for inventory was $722,000 and $651,000 as of June 30, 2003 and December 31, 2002, respectively.

4. Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is determined by dividing the net income by the sum of the weighted average number of common shares outstanding, and if not anti-dilutive, the effect of outstanding stock options and/or other common stock equivalents determined utilizing the treasury stock method. Potentially dilutive common stock options excluded from the calculation of dilutive income per share because they were anti-dilutive, totaled 1,803,970 and 423,984 for the three months ended June 30, 2003 and 2002, respectively, and 1,824,627 and 419,779 for the six months ended June 30, 2003 and 2002, respectively. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:

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5. Product Warranties and Service

     The Company provides warranties against defects in materials and workmanship for periods for products ranging from 90 days to 15 months, but in limited cases up to 18 months. At the time the product is shipped, the Company establishes a provision for estimated expenses of providing service under these warranties based on historical warranty experience. A summary of activity for accrued product warranty and service is as follows:

6. Advertising Costs

     The Company expenses all advertising costs as they are incurred. Advertising expense for the three months ended June 30, 2003 and 2002, were approximately $185,000 and $83,000, respectively, and $318,000 and $191,000 for the six months ended June 30, 2003 and 2002, respectively.

7. Stockholders’ Equity

     In the second quarter of 2003, SpectraLink repurchased 220,600 shares of outstanding common stock (now classified as treasury stock) at a cost of $1,899,000, and during the second quarter of 2002, 100,000 shares were repurchased at a cost of $1,036,000. For the six months ended June 30, 2003, SpectraLink repurchased 447,100 shares of outstanding common stock (now classified as treasury stock) at a cost of $3,688,000, and during the six months ended June 30, 2002, 461,000 shares were repurchased at a cost of $4,497,000.

8. Legal Proceedings

     On January 14, 2002, SpectraLink issued a press release announcing preliminary financial results for the fourth quarter of 2001 and revising downward its estimates for year 2002 results of operations. Shortly after the press release, the Company’s stock price declined and the Company and certain of its officers and directors were named as defendants in four lawsuits served between February 20, 2002 and March 20, 2002, three of which were filed in the United States District Court for the District of Colorado and one of which was filed in the Colorado District Court for the City and County of Denver. In each of the lawsuits, plaintiffs, who purport to be purchasers or holders of SpectraLink common stock, seek to assert claims either on behalf of a class of persons who purchased securities in SpectraLink between July 19, 2001 and January 11, 2002, or in the case of two of the lawsuits (one filed in the United States District Court and one in the Colorado District Court), derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United States District contained essentially identical claims alleging that SpectraLink and certain of its officers and directors violated Sections 10(b) and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as a result of alleged public misstatements and omissions, accompanied by insider stock sales made prior to the decline in the price of SpectraLink’s stock after the January 14, 2002 press release. In the cases brought as derivative actions, the plaintiffs allege that the officers and directors of SpectraLink violated fiduciary duties owed to SpectraLink and its stockholders under state laws by allowing and/or facilitating the issuance of these same alleged public misstatements and omissions, misappropriating nonpublic information for their own benefit, making insider stock sales, wasting corporate assets, abusing their positions of control, and mismanaging the corporation. The plaintiffs in these derivative cases allege that SpectraLink has and will continue to suffer injury as a result of these alleged violations of duty for which the officers and directors should be liable.

     The cases are designated as follows: Wilmer Kerns, Individually And On Behalf of All Others Similarly Situated, Plaintiff, vs. SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States District Court Civil Action Number 02-D-0263); Danilo Martin Molieri, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States District Court Civil Action Number 02-D-0315); Evie Elennis, derivatively on behalf of SpectraLink Corporation, Plaintiff(s), v. Bruce M. Holland, Anthony V. Carollo, Jr., Gary L. Bliss, Michael P. Cronin, Nancy K. Hamilton and John H. Elms, Defendant(s), and SpectraLink Corporation, Nominal Defendant (United States District Court Civil

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Action Number 02-D-0345); and Roger Humphreys, Derivatively on Behalf of Nominal Defendant SpectraLink Corporation, Plaintiff, v. Carl D. Carman, Anthony V. Carollo, Jr., Bruce M. Holland, Burton J. McMurtry, Gary L. Bliss, Michael P. Cronin, John H. Elms, and Nancy K. Hamilton, Defendants (Colorado District Court Case. No. 02CV1687).

     The Kerns and Molieri purported class actions were consolidated, and the plaintiffs filed a Consolidated Amended Complaint. In January of 2003, the Court denied a motion to dismiss that amended pleading, and discovery has recently commenced. The Court has now certified a class of all purchasers of publicly traded common stock of SpectraLink from April 19, 2001 through January 11, 2002, inclusive.

     The two derivative actions were stayed pending resolution of the motion to dismiss in the consolidated class action, and plaintiff’s counsel in the Elennis derivative action recently filed an unopposed motion for relief from the stay and filed an amended complaint and then a corrected amended complaint. Prior to the entry of the stays in each of the derivative cases, the defendants had filed motions to dismiss. Defendants intend to move to dismiss the amended and corrected Elennis complaint.

     SpectraLink believes that the lawsuits are without merit and it intends to vigorously defend itself and its officers and directors. SpectraLink does not believe that its interests and that of the named officers and directors are adverse to each other as of this time. However, no assurance can be given that SpectraLink will be successful in defending the claims being asserted in these suits, or that the interests of the various parties will remain aligned. If SpectraLink is not successful in its defense of these suits, it could be required to make significant payments to its stockholders and their lawyers, which could have a material adverse effect on SpectraLink’s business, financial condition and results of operations. In addition, the litigation could result in substantial costs, divert management’s attention and resources, or ultimately result in the interests of SpectraLink becoming adverse to those of certain of its officers and directors. In either case, SpectraLink’s business could be adversely affected, even if the plaintiffs are not successful in their claims against SpectraLink and/or its officers and directors.

     The Company has incurred a loss related to the directors and officers insurance deductible of which the majority of the expense was reflected in 2002. Based on current facts and circumstances, the Company is unable to estimate future losses, if any, it may incur after considering the amounts that will be covered by insurance.

     SpectraLink is not presently a party to any other material pending legal proceedings of which it is aware.

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     This Form 10-Q contains forward-looking statements within the context of Section 21E of the Securities Exchange Act of 1934, as amended. Each and every forward-looking statement involves a number of risks and uncertainties which are described in this report. The actual results that SpectraLink achieves may differ materially from those described in any forward-looking statement due to such risks and uncertainties. SpectraLink has identified by * bold face * various sentences within this Form 10-Q which are believed to contain forward-looking statements. Additionally, words such as “believes”, “anticipates”, “expects”, “intends”, “could”, “might”, and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. SpectraLink undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Business Description

     SpectraLink commenced operations in April 1990 to design, manufacture and sell workplace wireless telephone systems which complement existing telephone systems by providing mobile communications in a building or campus environment. SpectraLink Wireless Telephone Systems increase the efficiency of employees by enabling them to remain in telephone contact while moving throughout the workplace. SpectraLink’s primary sales efforts are currently focused on home improvement, grocery stores and other retail store chains, hospitals, nursing homes, distribution centers, manufacturing and service facilities, corporate offices and education facilities. SpectraLink sells its systems in the United States, Canada, Europe and Asia/Pacific through its direct sales force, telecommunications equipment distributors, and certain specialty dealers. Effective December 23, 1999, SpectraLink incorporated SpectraLink International Corporation in Delaware, as a wholly owned subsidiary of SpectraLink.

     Since inception, SpectraLink has expended considerable effort and resources developing its wireless telephone systems, building its direct and indirect channels of distribution, and managing the effects of rapid growth. This rapid growth has required SpectraLink to significantly increase the scale of its operations, including the hiring of additional personnel in all functional areas, and has resulted in significantly higher operating expenses. SpectraLink anticipates that its operating expenses will continue to increase. Expansion of SpectraLink’s operations may cause a significant strain on SpectraLink’s management, financial and other resources. The inability of SpectraLink to manage additional growth, should it occur, could have a material adverse effect on SpectraLink’s business, financial condition and results of operations.

Critical Accounting Policies and Estimates

     SpectraLink has identified the most critical accounting principles upon which its financial status depends in response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”. SpectraLink determined the critical accounting principles by considering accounting policies that involve the most complex or subjective decisions or assessments. Below is a summary of SpectraLink’s most critical accounting policies. This discussion and analysis should be read in conjunction with SpectraLink’s consolidated financial statements and related notes included in SpectraLink’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which was filed with the U.S. Securities and Exchange Commission on March 28, 2003 (“2002 Form 10-K”).

     SpectraLink’s discussion and analysis of its financial condition and results of operations are based upon SpectraLink’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires SpectraLink to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. SpectraLink evaluates its estimates, on an on-going basis, including those related to revenue recognition, receivables, product warranty obligations, inventories and income taxes. SpectraLink bases estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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     SpectraLink believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

	•		Most of SpectraLink’s sales are generated from contractual arrangements, which require SpectraLink’s revenue recognition policy to follow very specific and detailed guidelines in measuring revenue and determining the periods that the related revenue should be recorded, however, certain judgments affect the application of SpectraLink’s revenue policy, particularly in the area of collectibility. The assessment of collectibility is particularly critical in determining whether revenues should be recognized in the current market environment. As part of the revenue recognition policy, SpectraLink determines whether collectibility on its customers is reasonably assured based on various factors, including whether there has been deterioration in the credit quality of its customers that could result in SpectraLink being unable to collect. SpectraLink will defer revenue and related costs if SpectraLink is uncertain as to whether collectibility is reasonably assured. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause SpectraLink’s operating results to vary significantly from quarter to quarter and could result in operating losses.
	•		SpectraLink is required to estimate the collectibility of its trade accounts receivable. A considerable amount of judgment is required in assessing the realization of these receivables, including current creditworthiness of each customer and related aging of past due balances. SpectraLink maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. At June 30, 2003 and December 31, 2002, the allowance for uncollectible accounts was $335,000 and $311,000, respectively. Additional allowances may be required if the financial condition of SpectraLink’s customers were to deteriorate, resulting in an impairment of their ability to make payments.
	•		SpectraLink provides for the estimated cost of product warranties at the time revenue is recognized. SpectraLink engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers. At June 30, 2003 and December 31, 2002, the accrual for warranty expenses was $404,000 and $274,000, respectively. Product failure rates, material usage and service delivery costs incurred in correcting a product failure affect SpectraLink’s warranty obligation. Revisions to the estimated warranty liability would be required should actual product failure rates, material usage or service delivery costs differ from SpectraLink’s estimates.
	•		SpectraLink writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. At June 30, 2003 and December 31, 2002, the reserve for inventory was $722,000 and $651,000, respectively. Additional inventory write-downs may be required if actual market conditions are less favorable than those projected by management.
	•		SpectraLink may record a valuation allowance to reduce its deferred tax assets to an amount that is estimated to be more likely than not that such amounts will not be realized. As of June 30, 2003 and December 31, 2002, there was no valuation allowance for deferred tax assets as it was more likely than not that such amounts would be realized. SpectraLink considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.

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Results of Operations

     The following table sets forth unaudited results of operations for the three-month and six-month periods ended June 30, 2003 and 2002, as a percentage of net sales in each of these periods. This data has been derived from unaudited consolidated financial statements.

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SPECTRALINK CORPORATION AND SUBSIDIARY
Three and Six Months Ended June 30, 2003 and 2002

Product Sales, net. SpectraLink derives its product revenue principally from the sale of wireless, on-premises telephone systems. Product sales for the three months ended June 30, 2003, increased by 22.8% to $14,895,000 from $12,128,000 for the same period last year. Product sales for the six months ended June 30, 2003, increased by 11.9% to $26,172,000 from $23,391,000 for the same period last year. The increase in product sales was mainly due to SpectraLink’s increased product sales through distributors and dealers, and increased penetration in the commercial markets.

Service Sales. SpectraLink derives its service revenue principally from the installation and service of wireless, on-premises telephone systems. Service sales for the three months ended June 30, 2003, increased by 20.3% to $3,740,000 from $3,109,000 for the same period last year. Service sales for the six months ended June 30, 2003, increased by 23.2% to $7,032,000 from $5,707,000 for the same period last year. The increase in service sales was mainly due to increased revenue from maintenance contracts relating to products previously sold to a larger install base of customers which continue to use our products. Service sales also increased due to additional time and material service repairs.

The customer mix shows a relatively equal decrease in the percentage of direct sales compared to the increase in the percentage of indirect sales for the three months and six months ended June 30, 2003 and 2002 for many reasons one of which is because SpectraLink has continued to enter into agreements with additional distributors. The following table details the sales to different customer types as a percentage of total net sales:

The following table summarizes sales to major customers:

Gross Profit. SpectraLink’s cost of sales consists primarily of direct material, direct labor, service expenses, and manufacturing overhead. Gross profit increased by 30.1% to $12,764,000 for the three months ended June 30, 2003, from $9,809,000 for the same period last year. Gross profit increased by 18.9% to $22,414,000 for the six months

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ended June 30, 2003, from $18,848,000 for the same period last year. For the three months and six months ended June 30, 2003, gross profit margin (gross profit as a percentage of net sales) increased to 68.5% from 64.4% and to 67.5% from 64.8%, respectively. The increase in gross profit margin as a percentage of net sales was mainly due to an increase in product sales compared to a proportionate decrease in service sales and lower material costs.

Research and Development. Research and development expenses consist primarily of employee costs, professional services and supplies necessary to develop, enhance and reduce the cost of SpectraLink’s systems. Research and development expenses increased by 29.7% to $2,101,000 for the three months ended June 30, 2003, from $1,620,000 for the same period last year, representing 11.3% and 10.6%, respectively, of net sales. Research and development expenses increased by 27.4% to $4,004,000 for the six months ended June 30, 2003, from $3,142,000 for the same period last year, representing 12.1% and 10.8%, respectively, of net sales. SPECTRALINK EXPECTS THAT RESEARCH AND DEVELOPMENT EXPENSES WILL BE APPROXIMATELY 10% TO 12% OF NET SALES FOR FISCAL 2003. In both periods, SpectraLink incurred research and development expenses for new product development, improvements to existing products, and manufacturing process improvements. The increase in research and development expenses in dollars spent and as a percentage of net sales was due to an increase in headcount, which resulted from hiring additional personnel, increases in salaries and employee benefits to retain personnel, as well as increased consulting fees, product design fees, tooling costs and miscellaneous parts and supplies associated with new products and enhancements to existing products.

Marketing and Selling. Marketing and selling expenses consist primarily of salaries and other expenses for personnel, commissions, travel, advertising, trade shows, sales meetings and market research. Sales and marketing expenses increased by 13.8% to $5,960,000 for the three months ended June 30, 2003, from $5,237,000 for the same period last year, representing 32.0% and 34.4%, respectively, of net sales. Sales and marketing expenses increased by 5.9% to $11,104,000 for the six months ended June 30, 2003, from $10,488,000 for the same period last year, representing 33.4% and 36.1%, respectively, of net sales. The increase in dollars spent was primarily due to an increase in salaries and employee benefits to retain personnel, increased marketing and promotion costs (including costs associated with launching SpectraLink’s new products) and commissions. The increase in dollars spent was partially offset by a decrease in sales meetings and travel costs. The decrease in percent of sales was due to economies of scale resulting from increased sales.

General and Administrative. General and administrative expenses consist primarily of salaries and other expenses for management, finance, accounting, contract administration, order processing, investor relations, and human resources, as well as legal and other professional services. General and administrative expenses increased by 3.6% to $1,062,000 for the three months ended June 30, 2003, from $1,025,000 for the same period last year, representing 5.7% and 6.7%, respectively, of net sales. General and administrative expenses increased by 5.1% to $2,057,000 for the six months ended June 30, 2003, from $1,958,000 for the same period last year, representing 6.2% and 6.7%, respectively, of net sales. The increase in dollars spent was primarily due to increasing SpectraLink’s infrastructure to support future growth, which resulted in increased salaries and employee benefits to hire and retain personnel, as well as professional fees, insurance and amounts spent on other corporate matters. The increase was partially offset by a decrease in legal fees related to legal proceedings as SpectraLink met its insurance deductible. The decrease as a percentage of sales was due to economies of scale resulting from increased sales.

Investment Income and Other (Net). Investment income is the result of SpectraLink’s investments in money market, investment-grade debt securities, government securities, and corporate bonds. Investment income and other decreased by 54.6% to $69,000 for the three months ended June 30, 2003, from $152,000 for the same period last year, representing 0.4% and 1.0%, respectively, of net sales. Investment income and other decreased by 44.4% to $164,000 for the six months ended June 30, 2003, from $295,000 for the same period last year, representing 0.5% and 1.0%, respectively, of net sales. The decrease in investment income and other was primarily due to a decrease in interest rates in 2003.

Income Tax. SpectraLink’s income tax expense was $1,410,000 for the three months ended June 30, 2003, compared to $790,000 for the same period last year, and $2,057,000 for the six months ended June 30, 2003 compared to $1,351,000 for the same period last year. The increase was primarily related to increased sales and income from the operations of SpectraLink.

Future Operating Expenses. SpectraLink bases operating expenses in part on its expectations of future sales, and generally determines expense levels in advance of sales. SPECTRALINK CURRENTLY PLANS TO CONTINUE TO EXPAND AND INCREASE ITS OPERATING EXPENSES IN AN EFFORT TO GENERATE AND SUPPORT ADDITIONAL FUTURE REVENUE. If sales do not occur in any quarter as expected, SpectraLink’s results of operations for that quarter will be adversely affected. Net income may be disproportionately affected by a reduction because only a small portion of SpectraLink’s operating expenses varies directly with its revenue.

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Liquidity and Capital Resources

     Since its inception, SpectraLink has funded its operations with cash provided by operations, supplemented by equity financing and leases on capital equipment. As of June 30, 2003, SpectraLink had $43,665,000 of cash and cash equivalents.

     For the six months ended June 30, 2003, SpectraLink generated cash from operations of $3,886,000, consisting principally of net income of $3,356,000, and increases in accounts payable, accrued liabilities, income taxes payable and deferred revenue and was offset by increases in trade accounts receivable, inventory, other assets and income tax receivable. Investing activities used cash of $1,194,000 for purchases of property and equipment. SpectraLink used $3,238,000 of cash in financing activities during the six months ended June 30, 2003, which was a direct result of purchases of 447,100 shares of its outstanding common stock (now classified as treasury stock) at a cost of $3,688,000. The use of cash to repurchase common stock was offset by proceeds of $456,000 received from stock option exercises and issuances of common stock.

     As of June 30, 2003, SpectraLink had no debt outstanding, and there were no off-balance sheet arrangements, unconsolidated subsidiaries, commitments or guarantees, except as disclosed in the notes to the consolidated financial statements. Stockholders’ equity at June 30, 2003, was $56,870,000, which represented 81.5% of total assets.

     As of June 30, 2003, SpectraLink had working capital of $53,362,000 compared to $53,958,000 at December 31, 2002. The decrease in working capital occurred primarily due to an increase in accounts payable, accrued liabilities, deferred revenue and income taxes payable. As of June 30, 2003, SpectraLink’s current ratio (ratio of current assets to current liabilities) was 5.2:1, compared with a current ratio of 6.03:1 as of December 31, 2002.

     SPECTRALINK BELIEVES THAT ITS CURRENT CASH, CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE SECURITIES, AND CASH GENERATED FROM OPERATIONS WILL BE SUFFICIENT, BASED ON SPECTRALINK’S PRESENTLY ANTICIPATED NEEDS TO FUND NECESSARY CAPITAL EXPENDITURES, TO PROVIDE ADEQUATE WORKING CAPITAL, AND TO FINANCE SPECTRALINK’S EXPANSION FOR THE FORESEEABLE FUTURE (NEXT 12 MONTHS). THERE CAN BE NO ASSURANCE THAT ANY ADDITIONAL FINANCING WILL BE AVAILABLE TO SPECTRALINK ON ACCEPTABLE TERMS, OR AT ALL, WHEN REQUIRED BY SPECTRALINK. IF EQUITY SECURITIES ARE ISSUED TO RAISE ADDITIONAL FUNDS, FURTHER DILUTION TO THE EXISTING STOCKHOLDERS WILL RESULT.

Recently Issued Accounting Pronouncements

     The EITF reached a consensus regarding Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. The Issue also addresses how the arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. SpectraLink is required to adopt this consensus for its quarter ending September 30, 2003. The Company has not determined the impact this issue will have on its financial statements.

     Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of SpectraLink due to adverse changes in financial and commodity market prices and rates. SpectraLink is exposed to market risk in the areas of changes in United States interest rates. These exposures are directly related to its normal operating and funding activities. As of June 30, 2003, SpectraLink has not used derivative instruments or engaged in hedging activities, and is not currently impacted by fluctuations in foreign currency exchange rates.

Interest Rate Risk

     As part of SpectraLink’s cash management strategy, at June 30, 2003, SpectraLink had cash and cash equivalents of $43,665,000 mainly in the form of bank demand deposits and money markets. SpectraLink has completed a market risk sensitivity analysis of these cash and cash equivalents based on an assumed 1% increase in interest rates. If market interest rates had increased or decreased 1% during the six months ended June 30, 2003, SpectraLink’s interest income would have increased or decreased by approximately $220,000. This is only an estimate. Any actual loss due to an increase or decrease in interest rates could differ from this estimate.

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FORWARD-LOOKING STATEMENT FACTORS

     Certain statements in this Form 10-Q, as well as statements made by SpectraLink in periodic press releases, oral statements made by SpectraLink’s officials to analysts and stockholders in the course of presentations about SpectraLink, and conference calls following earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Words such as believes, anticipates, expects, intends, could, might, and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These projections and forward-looking statements are based on assumptions, which are believed reasonable but are, by their nature, inherently uncertain. In all cases, results could differ materially from those projected. Accordingly, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date of the making of such statements. Some of the important factors that could cause actual results to differ from any of these projections or other forward-looking statements are detailed below and in other reports filed by SpectraLink under the Securities Exchange Act of 1934. SpectraLink undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report.

	•		The certification and approval process for SpectraLink’s NetLink product for use in countries that support the 802.11b standard. Foreign countries which support the 802.11b standard could provide future markets for the NetLink products. However, countries’ certification and approval processes for 802.11b compatible products, such as those of SpectraLink, are typically time consuming and costly. If SpectraLink has difficulty obtaining certification and approval by foreign countries for its NetLink product, then SpectraLink 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 SpectraLink’s business.
	•		If SpectraLink is unable to fulfill quarter end customer orders, then SpectraLink could lose revenue and customers. The volume of customer orders for SpectraLink’s products typically increases significantly at the end of each quarter. SpectraLink faces significant challenges in meeting this demand. It is difficult to ensure that SpectraLink has 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. SpectraLink may not have the personnel and/or systems necessary to fulfill the large order volume or the ability to upgrade and develop its systems and infrastructure to meet an increased order volume. If SpectraLink is unable to meet demand from its customer for its products in a cost effective manner, then SpectraLink might lose revenue and customers or incur increased operating costs, either of which would harm SpectraLink’s business.
	•		Many of the orders for SpectraLink’s products are realized at the end of the quarter, which makes it difficult to estimate or adjust SpectraLink’s operating activities quickly in response to an unexpected increase or decrease in customer demand. Due to the timing of orders from customers, SpectraLink has often recognized a substantial portion of its 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 SpectraLink’s products depends upon many factors and is difficult to forecast. Significant unanticipated fluctuations in demand could cause problems in SpectraLink’s operations. The lead-time required to assemble SpectraLink’s systems is often longer than the lead-time SpectraLink’s customers provide to SpectraLink for delivery of their product requirements. Therefore, SpectraLink often must place orders in advance of expected purchase orders from SpectraLink’s customers. As a result, SpectraLink has only a limited ability to react to fluctuations in demand for its products, which could cause it to have either too much or too little inventory of a particular product. Further, the business relationship which SpectraLink has with Offshore Group to use a Mexico facility to assemble SpectraLink’s products may not be able to provide product in a timely manner. Additionally, once SpectraLink receives an order, it requires sufficient time to complete the configuration of its product to the phone systems of the customer. SpectraLink’s inability to satisfy customer demand in a timely manner would lead to lost sales and impede SpectraLink’s ability to increase its revenue. Conversely, a large portion of SpectraLink’s expenses, including rent and salaries, is fixed and difficult to reduce. SpectraLink’s expenses are based in part on expectations for its revenue. If SpectraLink’s revenue does not meet its expectations, the adverse effect of the revenue shortfall upon SpectraLink’s operating results may be acute in light of the fixed nature of its expenses. It is possible that due to fluctuations in revenue, SpectraLink’s operating results could be below the expectations of securities analysts and investors. For instance, SpectraLink’s stock price declined substantially after its preliminary announcement of its fourth quarter 2001 financial results reported in January 2002. In such an event, or in the event that adverse