UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10 - Q

Commission file number 0-28180

SPECTRALINK CORPORATION

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

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

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

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

Applicable only to corporate issuers:
As of April 30, 2004, there were 19,041,349 shares outstanding of SpectraLink Corporation’s Common Stock - par value per share $0.01.

SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX

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PART I - ITEM 1

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

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SPECTRALINK CORPORATION AND SUBSIDIARY

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

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SPECTRALINK CORPORATION AND SUBSIDIARY

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

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SPECTRALINK CORPORATION AND SUBSIDIARY

1. Basis of Presentation

     The accompanying condensed consolidated financial statements as of March 31, 2004 and December 31, 2003, and for the three months ended March 31, 2004 and 2003, have been prepared from the books and records of SpectraLink Corporation and its wholly owned subsidiary, SpectraLink International Corporation (together “SpectraLink” or “the Company”) and are unaudited. In management’s opinion, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly present SpectraLink’s financial position, results of operations and cash flows for the periods presented. The results of operations for the period ended March 31, 2004, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2004.

     The financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2003, which are included in SpectraLink’s Annual Report on Form 10-K. The accounting policies utilized in the preparation of the financial statements herein presented are the same as set forth in SpectraLink’s annual financial statements.

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. Inventories

     Inventories include the cost of raw materials, direct labor and manufacturing overhead, and is stated at the lower of cost (first-in, first-out) or market. Inventories as of March 31, 2004 and December 31, 2003, consisted of the following:

The reserve for potential excess and/or obsolete inventories was $697,000 and $591,000 as of March 31, 2004 and December 31, 2003, respectively.

4. Earnings Per Share

     Basic earnings per share is computed by dividing the net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is determined by dividing the net income by the sum of the weighted average number of common shares outstanding, and if not anti-dilutive, the effect of outstanding stock options and/or other common stock equivalents as determined utilizing the treasury stock method. Potentially dilutive common stock options excluded from the calculation of dilutive income per share because they were anti-dilutive, totaled 151,161 and 2,030,485 for the three months ended March 31, 2004 and 2003, respectively. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:

5. Product Warranties and Service

     The Company provides warranties against defects in materials and workmanship for SpectraLink’s products generally ranging from 90 days to 15 months, but in limited cases up to 24 months. At the time the product is shipped, the Company establishes a provision for estimated expenses of providing service under these warranties based on historical warranty experience. A summary of activity for accrued product warranty and service is as follows:

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6. Advertising Costs

     The Company expenses all advertising costs as they are incurred. Advertising expense for the three months ended March 31, 2004 and 2003, were approximately $168,000 and $133,000, respectively.

7. Stockholders’ Equity

     In the first quarter of 2004, SpectraLink did not repurchase any outstanding common stock. During the first quarter of 2003, 226,500 shares of outstanding common stock (classified as treasury stock) were repurchased at a cost of $1,789,000.

8. Reclassifications

     Certain reclassifications have been made to the prior year financial statements to conform to current year presentation.

9. Legal Proceedings

     On January 14, 2002, SpectraLink issued a press release announcing preliminary financial results for the fourth quarter of 2001 and revising downward its estimates for year 2002 results of operations. Shortly after the press release, the Company’s stock price declined and the Company and certain of its officers and directors were named as defendants in four lawsuits filed between February 7, 2002 and March 6, 2002, three of which were filed in the United States District Court for the District of Colorado and one of which was filed in the Colorado District Court for the City and County of Denver. In each of the lawsuits, plaintiffs, who purport to be purchasers or holders of SpectraLink common stock, initially sought to assert claims either on behalf of a class of persons who purchased securities in SpectraLink between July 19, 2001 and January 11, 2002, or in the case of two of the lawsuits (one filed in the United States District Court and one in the Colorado District Court), derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United States District contained essentially identical claims alleging that SpectraLink and certain of its officers and directors violated Sections 10(b) and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as a result of alleged public misstatements and omissions, accompanied by insider stock sales made in the months prior to the decline in the price of SpectraLink’s stock after the January 14, 2002 press release. In the cases brought as derivative actions, the plaintiffs allege that the officers and directors of SpectraLink violated fiduciary duties owed to SpectraLink and its stockholders under state laws by allowing and/or facilitating the issuance of these same alleged public misstatements and omissions, misappropriating nonpublic information for their own benefit, making insider stock sales, wasting corporate assets, abusing their positions of control, and mismanaging the corporation. The plaintiffs in these derivative cases allege that SpectraLink has and will continue to suffer injury as a result of these alleged violations of duty for which the officers and directors should be liable.

     The cases are designated as follows: Wilmer Kerns, Individually And On Behalf of All Others Similarly Situated, Plaintiff, vs. SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States District Court Civil Action Number 02-D-0263); Danilo Martin Molieri, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. SpectraLink Corporation, Bruce Holland and Nancy K. Hamilton, Defendants (United States District Court Civil Action Number 02-D-0315); Evie Elennis, derivatively on behalf of SpectraLink Corporation, Plaintiff(s), v. Bruce M. Holland, Anthony V. Carollo, Jr., Gary L. Bliss, Michael P. Cronin, Nancy K. Hamilton and John H. Elms, Defendants), and SpectraLink Corporation, Nominal Defendant (United States District Court Civil Action Number 02-D-0345); and Roger Humphreys, Derivatively on Behalf of Nominal Defendant SpectraLink Corporation, Plaintiff, v. Carl D. Carman, Anthony V. Carollo, Jr., Bruce M. Holland, Burton J. McMurtry, Gary L. Bliss, Michael P. Cronin, John H. Elms, and Nancy K. Hamilton, Defendants (Colorado District Court Case. No. 02CV1687).

     The Kerns and Molieri purported class actions were consolidated, and the plaintiffs filed a Consolidated Amended Complaint in these Consolidated Actions. In January of 2003, the Court denied a motion to dismiss that amended pleading, and discovery commenced. The Court has certified a class of all purchasers of publicly traded common stock of SpectraLink from April 19, 2001 through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs in these Consolidated Actions moved the court for permission to file a second consolidated amended class action, which would have deleted certain of the original claims, would have extended the class period so that it would commence on February 1, 2001 instead of April 19, 2001, and would have added more detail on claims relating to alleged improper revenue recognition. The Company filed an opposition to that motion. On March 5, 2004, the Magistrate Judge entered his Order denying plaintiffs’ motions, and plaintiffs have appealed that decision to the district court.

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     On April 16, 2004, the parties to these Consolidated Actions held a mediation in San Francisco. The parties entered into a Memorandum of Understanding settling the case for $1.5 million, subject to certain terms and conditions, including approval by the court. The settlement will be paid from insurance proceeds.

     The two derivative actions were stayed pending resolution of the motion to dismiss in the consolidated class action, and plaintiff’s counsel in the Elennis derivative action filed an unopposed motion for relief from the stay and filed an amended complaint and then a corrected amended complaint. Prior to the entry of the stays in each of the derivative cases, the defendants had filed motions to dismiss. In August of 2003, Defendants moved to dismiss the amended and corrected Elennis complaint. The Court denied that motion on March 22, 2004. No discovery has been conducted in either of the derivative actions. The Company expects to engage in settlement discussions with the derivative plaintiffs in light of the settlement of the Consolidated Actions.

     SpectraLink believes that the lawsuits are without merit and it intends to vigorously defend itself and its officers and directors if the two derivative cases are not settled in light of the settlement of the Consolidated Actions, and/or if the settlement of the Consolidated Actions is not approved by the court. SpectraLink does not believe that its interests and that of the named officers and directors are adverse to each other as of this time. However, no assurance can be given that SpectraLink will be successful in defending the claims being asserted in these suits, or that the interests of the various parties will remain aligned. If 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. As noted, the settlement of the Consolidated Actions will be funded by insurance proceeds. Based on current facts and circumstances, the Company is unable to estimate future losses, if any, it may incur if the cases are not settled, after considering the amounts that will be covered by insurance.

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

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PART I — ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECTRALINK CORPORATION AND SUBSIDIARY

     This Form 10-Q contains forward-looking statements within the context of Section 21E of the Securities Exchange Act of 1934, as amended. Each and every forward-looking statement involves a number of risks and uncertainties which are described in this report. The actual results that SpectraLink achieves may differ materially from those described in any forward-looking statement due to such risks and uncertainties. Certain statements in this Form 10-Q, as well as statements made by 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. Certain risks and uncertainties relating to forward-looking statements are set forth below in “Management’s Discussion and Analysis of Financial Condition” and in Item 3 under the caption “Forward-Looking Statement Factors”. 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, except as may be required under law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q.

Business Description and Overview

     SpectraLink commenced operations in April 1990 to design, manufacture and sell unlicensed wireless telephone communication systems for businesses. SpectraLink’s product portfolio consists of two product categories differentiated by the wireless technology implemented: Link WTS and NetLink Wireless Telephones. Link WTS targets organizations that require a dedicated wireless voice solution for their on-premises mobile workforce. NetLink Wireless Telephones target organizations that want both a wireless voice and wireless data solution on a single network. Because of the recent advances in wireless local area network (LAN) technology, SpectraLink’s future focus will be on its existing NetLink products as well as products it is currently developing that operate on a wireless LAN. SpectraLink’s primary sales efforts currently focus on home improvement, grocery and other retail store chains, hospitals, nursing homes, distribution centers, manufacturing and service facilities, corporate offices, government and education facilities.

     For the three months ended March 31, 2004, SpectraLink’s earnings per diluted share were $0.11 on net income of $2.1 million and revenue of $19.3 million. This represents 99% growth in quarterly year-over-year net income, and over 33% growth in quarterly year-over-year revenue. A driver of revenue growth for the three months ended March 31, 2004 was the increased sales of NetLink Wireless Telephones. Sales of this product line grew by approximately $1.9 million or a 67.4% increase for the three months ended March 31, 2004 compared to the same period in 2003.

     SpectraLink introduced new NetLink products in 2003. All of these products are based on the global 802.11 standard and are expected by SpectraLink to be a foundation for targeted future growth. Over time, SpectraLink expects that sales of NetLink Wireless Telephones will become a majority of its product sales.

     For the three months ended March 31, 2004, sales through SpectraLink’s distributors accounted for 69.9% of total product sales. The vast majority of sales during the three months ended March 31, 2004 occurred in North America. International sales are expected to grow as a percentage of total revenue with the introduction of SpectraLink products that utilize VoIP that are offered at a much-reduced price to the customer as compared to its past products.

     The i640 NetLink handset, which is targeted at vertical markets that need extensive features and durability, was enhanced with a push-to-talk feature allowing broadcast messaging where needed. The new e340 NetLink handset, which is a smaller, lighter option than previously offered products, was designed to expand SpectraLink’s presence into the small- to medium- sized enterprise markets, as well as international markets. With its dramatically reduced price, this handset is intended to capitalize on the price elasticity of demand and drive overall product volume. The

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other main product announced in 2003 was the wireless deskset. This product will appeal to the growing interest in totally wireless office facilities.

     On March 23, 2004, SpectraLink used $1,900,000 of its cash to pay a cash dividend to its stockholders.

     SpectraLink’s ongoing success is dependent upon its ability to build solid partnerships and relationships. SpectraLink’s commitment to this strategy resulted in two OEM relationships being finalized in the first quarter of 2004: one with Alcatel and one other with Nortel Networks. These relationships complement SpectraLink’s existing agreements with Avaya, Inter-Tel, and NEC. The Original Equipment Manufacturer Program Management Office established in 2003, will continue to seek relationships that will not only distribute SpectraLink products but also co-brand and private label these products. The goal of this strategy is to provide greater exposure to SpectraLink’s products through the reach these partners have with their customers. These relationships also help to establish an international presence for SpectraLink products. SpectraLink expects to see an increase in indirect sales related to OEM customers in the second half of 2004.

     SpectraLink expects that its gross margin in 2004 will range between 60 and 65%. SpectraLink realizes relatively lower margins on products sold through OEM relationships. Therefore, if SpectraLink succeeds in expanding these relationships, it will experience downward pressure on gross margins from historical amounts ranging from 66 to 69%. Another factor that will directly affect gross margins is product mix. The NetLink e340 handset carries a much lower margin than any other SpectraLink product. As a result, if SpectraLink succeeds in penetrating new enterprise markets, and sales of the NetLink e340 handset increase as a result, gross margins will decline. These two factors may potentially push gross margins below the forecast range of 60 to 65%.

Results of Operations

     Net Sales

     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 March 31, 2004 increased 34.9% to $15,206,000 from $11,276,000 for the same period last year. The increase in product sales dollars was primarily due to SpectraLink’s increased product sales through SpectraLink’s indirect channels and increased penetration in the commercial, healthcare and retail markets, as well as an increase in the overall marketplace’s acceptance of 802.11 technology.

     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 March 31, 2004 increased 24.8% to $4,107,000 from $3,292,000 in the same period last year. The increase in service sales was primarily due to increased revenue from maintenance contracts relating to products previously sold to a larger installed base of customers, which continue to use SpectraLink’s products and purchase its maintenance contracts. Service sales also increased due to additional installations and time and material service repairs.

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     The customer mix shows a decrease in the percentage of indirect sales compared to an offsetting increase in the percentage of direct sales. The increase in direct sales was primarily due to an increase in retail sales to direct customers. 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:

     Total Cost of Sales

     Product. SpectraLink’s cost of product sales consists primarily of direct material, direct labor, product packaging, third party royalties, and manufacturing overhead.

     In the three months ended March 31, 2004, cost of product sales increased by 34.9% to $4,325,000 from $3,205,000 in the same period last year. Cost of product sales as a percentage of product sales, net was 28.4% for each of the three months ended March 31, 2004 and 2003. Gross profit from product sales, net increased by 34.8% to $10,881,000 for the three months ended March 31, 2004 from $8,071,000 in the same period last year. For each of the three months ended March 31, 2004 and 2003, gross profit from product sales, net (gross profit from product sales, net as a percentage of product sales, net) was 71.6%.

     Service. SpectraLink’s cost of service sales consists primarily of employee-related costs and the associated costs incurred to provide installation, maintenance, training, and product repair and support.

     Cost of service sales for the three months ended March 31, 2004 increased by 42.5% to $2,441,000 from $1,713,000 in the same period last year. Cost of service sales as a percentage of service sales was 59.4% for the three months ended March 31, 2004 compared to 52.0% for the same period last year. Gross profit from service sales increased by 5.5% to $1,666,000 for the three months ended March 31, 2004 from $1,579,000 for the same period last year. For the three months ended March 31, 2004 and 2003, respectively, gross profit from service sales (gross profit from service sales as a percentage of service sales) decreased to 40.6% from 48.0%. The decrease in gross profit percentage from service sales was primarily due to increasing SpectraLink’s service infrastructure to support future growth, which resulted in an increase in salaries and employee benefits due to an increase in headcount to hire and retain personnel, an increase in travel to install, train and support SpectraLink’s customer base, an increase in write-offs and reserves for obsolete inventory and an increase in costs for materials and freight.

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     Gross Profit

     For the three months ended March 31, 2004, SpectraLink’s gross profit margin (gross profit as a percentage of net sales) decreased to 65.0% from 66.2% in the same period last year. The decrease in gross profit margin was primarily due to an increase in service inventory reserves and other service related costs.

     Operating Expenses

     Research and Development