UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10 - Q

or

For the transition period from                      to                     

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 þ No o

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

Applicable only to corporate issuers:
As of April 30, 2005, there were 19,151,028 shares outstanding of SpectraLink Corporation’s Common Stock — par value per share $0.01.

SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX

2

PART I — ITEM 1
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)

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

3

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

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

4

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

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

5

SPECTRALINK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

1. Basis of Presentation

      The accompanying condensed consolidated financial statements as of March 31, 2005 and December 31, 2004, 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, 2005, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2005.

      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, 2004, 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. Since its inception, the Company has conducted its operations in one operating segment.

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

2. Stock-Based Compensation Plans

      The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion 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:

      For SFAS 123 purposes, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: risk-free interest rates of 3.80% and 1.56% for the three months ended March 31, 2005 and 2004, respectively; expected lives (net of forfeitures) of 3.35 years and 4.06 years for the three months ended March 31, 2005 and 2004, respectively;

6

a $0.10 per share quarterly dividend for the three months ended March 31, 2005 and 2004, respectively; and expected volatility of 74% and 79%, for the three months ended March 31, 2005 and 2004, respectively. The fair value of each purchase right under the employee stock purchase plan is estimated, for disclosure purposes, on the date of grant using the Black-Scholes model with the following assumptions: a $0.10 per share quarterly dividend for the three months ended March 31, 2005 and 2004, respectively, an expected life of six months; expected volatility of 47% and 77% for the three months ended March 31, 2005 and 2004, respectively; and a risk-free interest rate of 3.80% and 1.56% for the three months ended March 31, 2005 and 2004, respectively.

3. Inventories

      Inventories include the cost of raw materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out) or market. Inventories, net, as of March 31, 2005 and December 31, 2004, consisted of the following:

      The reserve for potential excess and/or obsolete inventories was $570,000 and $720,000 as of March 31, 2005 and December 31, 2004, 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 are excluded from the calculation of dilutive income per share because they were anti-dilutive totaled 1,048,270 and 151,161 for the three months ended March 31, 2005 and 2004, respectively. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:

7

5. Product Warranties and Service

      The Company provides warranties against defects in materials and workmanship for its products generally ranging from 90 days to 15 months, and, 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 March 31, 2005 and 2004, were approximately $70,000 and $168,000, respectively.

7. Stockholders’ Equity

      During the first fiscal quarters of 2005 and 2004, the Company paid a quarterly cash dividend of $0.10 per share totaling $1,931,000 and $1,900,000, respectively, to holders of common stock. The Company did not repurchase any shares of outstanding common stock during the first fiscal quarters of 2005 or 2004.

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 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 were 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

8

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 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 appealed that decision to the district court.

      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 Court granted a final hearing for approval of the settlement on October 7, 2004, ending the litigation. The $1.5 million negotiated settlement was funded by the Company’s directors and officers insurance carrier.

      The two derivative actions were stayed pending resolution of the motion to dismiss in the consolidated class action securities litigation, 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 defendants in the derivative actions engaged in settlement discussions with the derivative plaintiffs in light of the settlement of the Consolidated Actions and the parties reached an agreement in settling both derivative cases on March 23, 2005. An Order and Final Judgment was entered on March 25, 2005, ending the litigation. The settlement was paid by SpectraLink’s directors and officers insurance carrier.

      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 has been funded by insurance proceeds.

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

9. Recently Issued or Proposed Accounting Pronouncements

      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,” (“SFAS123”) 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. The pro forma disclosures previously permitted under SFAS123 no longer will be an alternative to financial statement recognition. 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, the Company is not required to adopt SFAS 123R until January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model and related assumptions to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recognized over their vesting period for all unvested stock options at January 1, 2006, while the retroactive method would record compensation expense for all unvested stock options beginning with the first period restated. The Company is evaluating the requirements of SFAS123R and expects that the adoption of SFAS 123R will have a material impact on its consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS123R, and the Company has

9

not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect, if any, that the adoption of SFAS 151 will have on its consolidated results of operations.

10

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

      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 we achieve 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 us in periodic press releases, oral statements made by our officials to analysts and stockholders in the course of presentations about us, 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 us 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 “Risk Factors”. We undertake 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

      We commenced operations in April 1990 to design, manufacture and sell unlicensed wireless telephone communication systems for businesses. Our product portfolio consists of two types of product categories differentiated by the wireless technologies implemented into the product: The LinkÔ wireless telephone system (Link WTS) and NetLinkÔ wireless telephones. Link WTS uses a proprietary radio infrastructure in the 902-928 MHz radio band targeted to organizations that desire a dedicated wireless voice solution for their on-premises mobile workforce. The NetLink wireless telephone products operate over IEEE 802.11-compliant wireless local area networks (WLANs) in the 2400-2483 MHz frequency band using standards-based Internet Protocol (IP) technology. NetLink products are targeted at organizations that want both a wireless voice and wireless data solution on a single network. We also offer an Open Application Interface (OAI), which enables third-party messaging applications to be integrated with our wireless telephones. Because of the recent advances in wireless local area network (WLAN) technology, a significant portion of our development efforts will focus on our existing NetLink products as well as new products that operate on a WLAN.

      For the three months ended March 31, 2005, we generated $20.6 million in revenue, resulting in net income of $2.2 million and $0.11 earnings per fully diluted share. This represents year-over-year growth in revenue of 7% and net income of 3%. In comparison, for the first quarter of 2004, net income was $2.1 million, or $0.11 earnings per fully diluted share, on revenue of $19.3 million.

      Our traditional distribution channels were responsible for about 59% of first quarter product sales, original equipment manufacturer (OEM) partners contributed approximately 16% of first quarter product sales, and the balance of 25% was met through our direct sales team. International product sales were approximately $1 million in the first quarter equaling 6.3% of total product sales.

      Sales from our Link Wireless Telephone Systems exceeded sales from our NetLink Wireless Telephone Systems in the first quarter. Link accounted for 56% of product sales, delivering $8.7 million in revenue. NetLink sales accounted for 44% of total product sales, or $6.8 million, which is down on a percentage basis from a record high of 53% in the fourth quarter of 2004. As OEM sales fluctuate, we experience correlating fluctuations for the NetLink product line.

      Overall gross margin was 64.5% in the first quarter, which is at the high end of our guidance range of 60-65% for the year. We attribute this to above average direct sales as a percentage of revenue as well as the shift in product mix favoring the Link products. Our Link product line gross margin is approximately 10% higher than the aggregate gross margin from the sale of the NetLink products because of the added infrastructure associated with Link sales.

11

However, we expect that we will sell more NetLink products; as a percentage of our total revenue, over time, so we expect that our overall gross margin will decrease in the future.

      Our operating margin of 15.5% in the first quarter is below our annual guidance of 18 to 20%, and is a direct result of lower than expected revenue for the first quarter and an increase in sales and marketing expenses from hiring additional direct sales personnel, which we had anticipated. However, our net income for the twenty-seventh consecutive quarter led to another quarter of positive cash from operations. The $2.2 million in net income for the first quarter, along with strong cash collections, resulted in the achievement by us of our twenty-fifth consecutive quarter of positive cash from operations, with cash from operations totaling over $7 million.

      The total of cash, cash equivalents and investments on our balance sheet at March 31, 2005, rose by more than 10% to $60.6 million from $54.4 million at December 31, 2004. We continue to invest in low-risk instruments including government securities and tax-free investments.

      During the first quarter, we paid a cash dividend of $1.9 million for the sixth straight quarter. We did not repurchase company stock in the first quarter. We have repurchased approximately 4.3 million shares through our repurchase program leaving a remaining balance of about 1.7 million shares still authorized for repurchase.

      In the first quarter, we launched enhanced features and capabilities for our NetLink Wireless Telephones. These enhancements include support for the latest security standards, improved performance and management for SpectraLink’s exclusive Wi-Fi push-to-talk feature and new user-interface attributes to improve usability in a wide variety of enterprise applications and environments. We also announced our new NetLink h340 Wireless Telephone in the first quarter. Designed for the demanding needs of the healthcare industry, the Wi-Fi handsets provide immediate communication for nurses, doctors and hospital staff with the privacy, security, voice quality and other business quality call features they require.

      We continue to monitor several emerging competitive threats. One such threat comes from overseas manufacturers attempting to bring products to the U.S. market that operate on the 1900 MHz DECT standard. We note that products from manufacturers in the Far East are not yet competitive with our products, since they remain entirely based on off-the-shelf silicon and standards based audio technology that provide none of the “standards-plus” features and quality that our customers have come to expect in a business quality wireless telephone. In addition, several manufacturers have announced wireless telephony products targeted at the enterprise with availability planned for later in 2005.

      Taking into account our first quarter results, and the near-term outlook for continuing softness in the OEM channel, we now expect our 2005 revenue to be just above $100 million, plus or minus 5%, with upside and downside potential roughly equal.

12

Results of Operations

     Net Sales

      Product Sales, Net. We derive our product revenue principally from the sale of wireless, on-premises telephone systems.

      Product sales for the three months ended March 31, 2005 remained relatively constant with an increase of 1.7% to $15,456,000 from $15,206,000 for the same period last year.

      Service Sales. We derive our service revenue principally from the installation and service of wireless, on-premises telephone systems.

      Service sales for the three months ended March 31, 2005 increased 25.0% to $5,132,000 from $4,107,000 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 our products and purchase maintenance contracts. Service sales also increased due to additional installations and time and material service repairs.

      The following table details the sales to different customer types as a percentage of total net sales.