SPECTRALINK CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q


x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003


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

For the transition period from _______ to ______

Commission file number 0-28180

SPECTRALINK CORPORATION

(Exact name of registrant as specified in charter)


Delaware		84-1141188
(State or other jurisdiction of incorporation or organization)		(IRS Employer
		Identification Number)

5755 Central Avenue, Boulder, Colorado		80301-2848
(Address of principal executive office)		(Zip code)

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 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 October 31, 2003, there were 18,790,155 shares outstanding of SpectraLink Corporation’s Common Stock - par value $0.01.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
	ITEM 4. Controls and Procedures
Part II Other Information
	Item 1 Legal Proceedings
	Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-31.1 Certification by John H. Elms
EX-31.2 Certification by Nancy K. Hamilton
EX-32.1 Certification by John H. Elms
EX-32.2 Certification by Nancy K. Hamilton

SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX


		Page
Part I	Financial Information
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 (Unaudited)		3
	Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited)		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4	Controls and Procedures		22
Part II	Other Information
Item 1	Legal Proceedings		23
Item 6	Exhibits and Reports on Form 8-K
	(a) Exhibits		24
	(b) Form 8-K		24
Signatures			25
Certifications			27

PART I - FINANCIAL INFORMATION

ITEM 1

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


			September 30,			December 31,

			2003			2002

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	50,002		$	44,211
	Trade accounts receivable, net of allowance of $341 and $311, respectively			13,234			11,143
	Income taxes receivable			1,192			105
	Inventory, net of allowance of $627 and $651, respectively			7,473			7,449
	Other			1,941			1,773

		Total current assets		73,842			64,681
PROPERTY AND EQUIPMENT, at cost:
	Furniture and fixtures			2,288			1,632
	Equipment			8,862			7,240
	Leasehold improvements			977			865

				12,127			9,737
	Less – accumulated depreciation			(8,086	)		(7,224	)

		Net property and equipment		4,041			2,513
OTHER				502			397

		TOTAL ASSETS	$	78,385		$	67,591

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	1,487		$	1,023
	Accrued payroll, commissions and employee benefits			2,617			2,069
	Accrued sales, use and property taxes			640			512
	Accrued warranty expenses			411			274
	Other accrued expenses and liabilities			2,265			1,564
	Deferred revenue			6,258			5,281

		Total current liabilities		13,678			10,723
LONG-TERM LIABILITIES				266			178

		TOTAL LIABILITIES		13,944			10,901

STOCKHOLDERS’ EQUITY:
	Preferred stock, 5,000 shares authorized, none issued and outstanding			—			—
	Common stock, $0.01 par value, 50,000 shares authorized, 22,697 and 22,130 shares issued, respectively, and 18,768 and 18,648 shares outstanding, respectively			226			221
	Additional paid-in capital			69,564			63,763
	Retained earnings			24,045			18,412
	Treasury stock, 3,929 shares and 3,482 shares, respectively, at cost			(29,394	)		(25,706	)

		TOTAL STOCKHOLDERS’ EQUITY		64,441			56,690

		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	78,385		$	67,591

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

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


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2003			2002			2003			2002

SALES:
	Product Sales, net			$	14,500		$	11,958		$	40,672		$	35,349
	Service Sales				3,843			3,359			10,875			9,066

		Net Sales			18,343			15,317			51,547			44,415
COST OF SALES:
	Cost of Product Sales				4,164			3,491			11,644			10,836
	Cost of Service Sales				1,883			1,875			5,193			4,780

		Total Cost of Sales			6,047			5,366			16,837			15,616

			Gross Profit		12,296			9,951			34,710			28,799
OPERATING EXPENSES:
	Research and Development				1,908			1,622			5,912			4,764
	Marketing and Selling				5,775			5,098			16,879			15,586
	General and Administrative				1,009			917			3,066			2,874

		Total Operating Expenses			8,692			7,637			25,857			23,224

INCOME FROM OPERATIONS					3,604			2,314			8,853			5,575

INVESTMENT INCOME AND OTHER:
	Interest Income				96			167			334			484
	Other Income (Expense), net				(29	)		(24	)		(102	)		(46	)

		Total Investment Income and Other			67			143			232			438

INCOME BEFORE INCOME TAXES					3,671			2,457			9,085			6,013
INCOME TAX EXPENSE					1,395			934			3,452			2,285

NET INCOME				$	2,276		$	1,523		$	5,633		$	3,728

BASIC EARNINGS PER SHARE (Note 4)				$	0.12		$	0.08		$	0.30		$	0.20

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING					18,530			18,910			18,490			19,050

DILUTED EARNINGS PER SHARE (Note 4)				$	0.12		$	0.08		$	0.30		$	0.19

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING					19,500			19,110			19,020			19,340

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

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


			Nine Months Ended
			September 30,

			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income		$	5,633		$	3,728
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		862			826
		Income tax benefit from the exercise of stock options		1,374			184
		Provision for bad debts		34			209
		Provision for excess and obsolete inventory		474			163
		Amortization of premium on investments in marketable securities		—			4
	Changes in assets and liabilities -
		(Increase) decrease in trade accounts receivable		(2,125	)		1,952
		Increase in inventory		(498	)		(208	)
		(Increase) decrease in other assets and income taxes receivable		(1,360	)		1,755
		Increase in accounts payable		464			11
		Increase in accrued liabilities, income taxes payable and deferred revenue		2,462			1,363

		Net cash provided by operating activities		7,320			9,987

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment			(2,262	)		(673	)
	Maturity of investments in marketable securities			—			1,000

		Net cash (used in) provided by investing activities		(2,262	)		327

CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal payments under long-term obligation			(11	)		—
	Proceeds from exercises of common stock options			4,135			920
	Proceeds from issuances of common stock			297			311
	Purchases of treasury stock			(3,688	)		(6,619	)

		Net cash provided by (used in) financing activities		733			(5,388	)

INCREASE IN CASH AND CASH EQUIVALENTS				5,791			4,926
CASH AND CASH EQUIVALENTS, beginning of period				44,211			37,242

CASH AND CASH EQUIVALENTS, end of period			$	50,002		$	42,168

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for income taxes		$	3,171		$	113

SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
	Assets acquired under long-term obligation		$	128		$	—

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

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

1. Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2003 and December 31, 2002, and for the three and nine months ended September 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 periods ended September 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:


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

			(in thousands, except per						(in thousands, except per
			share amounts)						share amounts)
Net Income, as reported			$	2,276		$	1,523		$	5,633		$	3,728
Deduct stock based employee compensation expense under the fair value based method, net of related tax effect:
		Compensation expense for stock options		(579	)		(741	)		(1,748	)		(2,291	)
		Compensation expense for the stock purchase plan		(41	)		(43	)		(122	)		(139	)
Net Income, pro forma			$	1,656		$	739		$	3,763		$	1,298
Earnings Per Share:
	Basic – as reported		$	0.12		$	0.08		$	0.30		$	0.20
	Basic – pro forma		$	0.09		$	0.04		$	0.20		$	0.07
	Diluted – as reported		$	0.12		$	0.08		$	0.30		$	0.19
	Diluted – pro forma		$	0.09		$	0.04		$	0.20		$	0.07

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 September 30, 2003 and December 31, 2002, consisted of the following:


	September 30,		December 31,

	2003		2002

	(In thousands)
Raw materials	$	2,890	$	2,630
Work in progress		7		—
Finished goods		4,576		4,819

	$	7,473	$	7,449

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 67,265 and 1,869,546 for the three months ended September 30, 2003 and 2002, respectively, and 277,542 and 1,358,866 for the nine months ended September 30, 2003 and 2002, respectively. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:


						Three Months Ended September 30,
						(In thousands, except per share amounts)
				2003						2002

		Income		Shares		Per Share		Income		Shares		Per Share

Basic EPS—		$	2,276		18,530	$	0.12	$	1,523		18,910	$	0.08
Effect of dilutive securities:
	Stock purchase plan		—		13		—		—		17		—
	Stock options outstanding		—		957		—		—		183		—

Diluted EPS—		$	2,276		19,500	$	0.12	$	1,523		19,110	$	0.08


						Nine Months Ended September 30,
						(In thousands, except per share amounts)
				2003						2002

		Income		Shares		Per Share		Income		Shares		Per Share

Basic EPS—		$	5,633		18,490	$	0.30	$	3,728		19,050	$	0.20
Effect of dilutive securities:
	Stock purchase plan		—		16		—		—		18		—
	Stock options outstanding		—		514		—		—		272		(0.01	)

Diluted EPS—		$	5,633		19,020	$	0.30	$	3,728		19,340	$	0.19

5. Product Warranties

The Company provides warranties against defects in materials and workmanship for products for periods 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:


		Three months ended						Nine months ended
		September 30,						September 30,

		2003			2002			2003			2002

		(In thousands)						(In thousands)
Beginning Balance Accrued Product Warranty Expenses		$	404		$	289		$	274		$	278
	Additions to the accrual for product warranties		143			120			526			562
	Payments made in cash or in kind		(136	)		(109	)		(389	)		(540	)

Ending Balance Accrued Product Warranty Expenses		$	411		$	300		$	411		$	300

6. Advertising Costs

The Company expenses all advertising costs as they are incurred. Advertising expense for the three months ended September 30, 2003 and 2002, were approximately $187,000 and $118,000, respectively, and $505,000 and $309,000 for the nine months ended September 30, 2003 and 2002, respectively.

7. Stockholders’ Equity

In the third quarter of 2003, SpectraLink did not repurchase any shares of outstanding common stock. During the third quarter of 2002, 310,300 shares were repurchased at a cost of $2,122,000. For the nine months ended September 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 nine months ended September 30, 2002, 771,300 shares were repurchased at a cost of $6,619,000.

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 projections for year 2002. 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, 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 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.

John H. Elms, Defendant(s), 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 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 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 moved to dismiss the amended and corrected Elennis complaint, which motion is currently pending.

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.

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. 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 government 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.

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

• Revenue Recognition. 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.

• Allowance for Doubtful Accounts. 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 September 30, 2003 and December 31, 2002, the allowance for uncollectible accounts was $341,000 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. If actual losses are significantly greater than the reserves that SpectraLink has established, SpectraLink’s expenses will increase and its reported income will decrease.

• Accrued Product Warranty Expenses. 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 September 30, 2003 and December 31, 2002, the accrual for warranty expenses was $411,000 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. If actual returns are significantly greater than the reserves that SpectraLink has established, the actual results will decrease SpectraLink’s future reported earnings.

• Reserve for Inventory. 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 September 30, 2003 and December 31, 2002, the reserve for inventory was $627,000 and $651,000, respectively. Additional inventory write-downs may be required if actual market conditions are less favorable than those projected by management.

• Income Taxes –Valuation Allowances. 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 September 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.

Results of Operations

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Product Sales, net			79.0	%		78.0	%		78.9	%		79.6	%
Service Sales			21.0	%		22.0	%		21.1	%		20.4	%
	Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Product Sales			22.7	%		22.8	%		22.6	%		24.4	%
Cost of Service Sales			10.3	%		12.2	%		10.1	%		10.8	%
	Total Cost of Sales		33.0	%		35.0	%		32.7	%		35.2	%
Gross Profit			67.0	%		65.0	%		67.3	%		64.8	%
Operating Expenses:
	Research and Development		10.4	%		10.6	%		11.5	%		10.7	%
	Marketing and Selling		31.5	%		33.3	%		32.7	%		35.1	%
	General and Administrative		5.5	%		6.1	%		5.9	%		6.5	%
Total Operating Expenses			47.4	%		50.0	%		50.1	%		52.3	%
Income from Operations			19.6	%		15.0	%		17.2	%		12.5	%
Investment Income and Other, net			0.4	%		1.0	%		0.4	%		1.0	%
Income Before Income Taxes			20.0	%		16.0	%		17.6	%		13.5	%
Income Tax Expense			7.6	%		6.1	%		6.7	%		5.1	%
Net Income			12.4	%		9.9	%		10.9	%		8.4	%

SPECTRALINK CORPORATION AND SUBSIDIARY
Three and Nine Months Ended September 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 September 30, 2003, increased by 21.3% to $14,500,000 from $11,958,000 for the same period last year. Product sales for the nine months ended September 30, 2003, increased by 15.1% to $40,672,000 from $35,349,000 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 September 30, 2003, increased by 14.4% to $3,843,000 from $3,359,000 for the same period last year. Service sales for the nine months ended September 30, 2003, increased by 20.0% to $10,875,000 from $9,066,000 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 nine months ended September 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:


	Customer Mix Table
	(As a Percentage of Net Sales)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Customer Type:
Indirect Sales		55.6	%		45.9	%		54.6	%		46.3	%
Direct Sales		23.4	%		32.1	%		24.3	%		33.3	%
Service Sales		21.0	%		22.0	%		21.1	%		20.4	%

Total Net Sales		100.0	%		100.0	%		100.0	%		100.0	%

The Company had sales to major customers which individually comprised more than 10% of total net sales for either the three or nine months ended September 30, 2003. The following table summarizes sales to major customers:


	Sales to Major Customers
	(As a Percentage of Net Sales)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Customer Name:
Customer A:		10.0	%		11.4	%		9.3	%		9.2	%

Gross Profit. SpectraLink’s cost of sales consists primarily of direct material, direct labor, service expenses, and manufacturing overhead. Gross profit increased by 23.6% to $12,296,000 for the three months ended September 30, 2003, from $9,951,000 for the same period last year. Gross profit increased by 20.5% to $34,710,000 for the nine months ended September 30, 2003, from $28,799,000 for the same period last year. For the three months and nine

months ended September 30, 2003, gross profit margin (gross profit as a percentage of net sales) increased to 67.0% from 65.0% and to 67.3% 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 17.6% to $1,908,000 for the three months ended September 30, 2003, from $1,622,000 for the same period last year, representing 10.4% and 10.6%, respectively, of net sales. Research and development expenses increased by 24.1% to $5,912,000 for the nine months ended September 30, 2003, from $4,764,000 for the same period last year, representing 11.5% and 10.7%, 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 merit and the rising cost of employee benefits, 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 13.3% to $5,775,000 for the three months ended September 30, 2003, from $5,098,000 for the same period last year, representing 31.5% and 33.3%, respectively, of net sales. Sales and marketing expenses increased by 8.3% to $16,879,000 for the nine months ended September 30, 2003, from $15,586,000 for the same period last year, representing 32.7% and 35.1%, respectively, of net sales. The increase in dollars spent for the three months ended September 30, 2003 was primarily due to an increase in salaries, as well as increases in marketing and promotion costs (including costs associated with launching SpectraLink’s new products), commissions, travel costs and sales meetings. The increase in dollars spent for the nine months ended September 30, 2003 was primarily due to an increase in salaries and employee benefits to hire and retain personnel, marketing and promotion costs, and professional fees. These increases were partially offset by decreases in travel and sales meetings. The decrease in percent of sales for the three months and nine months ending September 30, 2003 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 10.0% to $1,009,000 for the three months ended September 30, 2003, from $917,000 for the same period last year, representing 5.5% and 6.1%, respectively, of net sales. General and administrative expenses increased by 6.7% to $3,066,000 for the nine months ended September 30, 2003, from $2,874,000 for the same period last year, representing 5.9% and 6.5%, 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 related to Sarbanes-Oxley legislation. The increase was partially offset by a decrease in legal fees related to legal proceedings as SpectraLink met its insurance deductible and a decrease in bad debt expense. 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 53.1% to $67,000 for the three months ended September 30, 2003, from $143,000 for the same period last year, representing 0.4% and 1.0%, respectively, of net sales. Investment income and other decreased by 47.0% to $232,000 for the nine months ended September 30, 2003, from $438,000 for the same period last year, representing 0.4% 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 $1,395,000 for the three months ended September 30, 2003, compared to $934,000 for the same period last year, and $3,452,000 for the nine months ended September 30, 2003 compared to $2,285,000 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.

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 September 30, 2003, SpectraLink had $50,002,000 of cash and cash equivalents.

For the nine months ended September 30, 2003, SpectraLink generated cash from operations of $7,320,000, consisting principally of net income of $5,633,000, and increases in income tax benefit from exercises of stock options, increases in accounts payable, accrued liabilities, and deferred revenue and was offset by increases in trade accounts receivable, inventory, other assets and income tax receivable. Investing activities used cash of $2,262,000 for purchases of property and equipment. SpectraLink generated $733,000 of cash in financing activities during the nine months ended September 30, 2003, which was a direct result of proceeds of $4,432,000 received from stock option exercises and issuances of common stock. This cash inflow was offset by the cash used to purchase 447,100 shares of its outstanding common stock (now classified as treasury stock) at a cost of $3,688,000.

As of September 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 September 30, 2003, was $64,441,000, which represented 82.2% of total assets.

As of September 30, 2003, SpectraLink had working capital of $60,164,000 compared to $53,958,000 at December 31, 2002. The increase in working capital occurred primarily due to an increase in cash and cash equivalents, along with trade accounts receivable, income taxes receivable and is offset by increases in accrued payroll, commissions and employee benefits, other accrued expenses and deferred revenue. As of September 30, 2003, SpectraLink’s current ratio (ratio of current assets to current liabilities) was 5.40:1, 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

SpectraLink was required to adopt EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” for the quarter ending September 30, 2003. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The adoption of this EITF did not have an effect on the consolidated results of operations or financial position of SpectraLink.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

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 September 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 September 30, 2003, SpectraLink had cash and cash equivalents of $50,002,000 mainly in the form of bank demand deposits and money market accounts. SpectraLink has completed a market risk sensitivity analysis of these cash and cash equivalents based on an assumed 1% point increase

in interest rates. If market interest rates had increased or decreased 1% point during the nine months ended September 30, 2003, SpectraLink’s interest income would have increased or decreased by approximately $353,000. This is only an estimate. Any actual loss due to an increase or decrease in interest rates could differ from this estimate.

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.


•		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 market conditions prevail or are perceived to

prevail either generally or with respect to SpectraLink’s business, the price of SpectraLink’s common stock would likely decline further.


•		The ability of SpectraLink and its current and new distributors and resellers to develop and execute effective marketing and sales strategies. SpectraLink offers its products directly and indirectly through a variety of third-party business partners, including distributors and resellers. Changes in the financial or business condition of these distributors and resellers, in addition to the ability to develop and execute effective marketing and sales strategies, could subject SpectraLink to lost sales and affect its ability to bring its products to market. For instance, SpectraLink experienced a decrease in sales by distributors during the second quarter of 2002 when those distributors downsized their businesses in reaction to the economic slowdown and, as a result, had fewer sales representatives marketing SpectraLink products.

•		The continuing economic slowdown in some sectors of our target customer market, adversely impacts their information technology spending and SpectraLink’s business. SpectraLink’s business has been adversely impacted by the continuing general economic slowdown in some sectors of our target customer market within the United States and worldwide, because the slowdown has resulted in a decline in their information technology spending. Consumers of information technology in some of these sectors continue to defer, and in some cases cancel, their purchase decisions. SpectraLink’s operating results have been adversely affected as a result. SpectraLink expects the economic slowdown to continue to adversely impact its business and operating results for at least the next few quarters and perhaps significantly longer. The adverse impacts from the slowdown include longer sales cycles, lower average selling prices, fewer large orders from a single customer and reduced revenues.

•		Because many of SpectraLink’s current and planned products are or will be highly complex, they may contain defects or errors that are detectable only after deployment in complex networks and which, if detected, could have a negative effect on SpectraLink’s business, operating results or financial condition. Many of SpectraLink’s complex products can only be fully tested when deployed in commercial networks. As a result, end-users may discover defects or errors or experience breakdowns in their networks after the products have been deployed. If any of these products contains defects, or has reliability, quality or compatibility problems, SpectraLink’s reputation might be damaged significantly and customers might be reluctant to buy SpectraLink products. These defects could interrupt or delay sales. SpectraLink may have to invest significant capital and other resources to correct these problems. If SpectraLink fails to provide solutions to the problems, it will also incur product recall, repair, warranty or replacement costs. These problems might also result in claims against SpectraLink by its customer or others. In addition, the occurrence of any defects or errors in these products, could result in: failure to achieve market acceptance and loss of market share; cancellation of orders; difficulty in collecting accounts receivable; increased service and warranty costs in excess of SpectraLink’s estimates; diversion of resources, and; increased insurance costs and other losses to SpectraLink’s business or to end-users.

•		SpectraLink’s reliance on a limited number of significant customers. A portion of SpectraLink’s revenue has been derived from a limited number of customers. Sales to one customer represented approximately 10% of SpectraLink’s revenue during the three months ended September 30, 2003. SpectraLink also has experienced quarter-to-quarter variability in sales to each of its major customers and expects this pattern to continue in the future.

•		SpectraLink’s reliance on sole or limited sources of supply for many components and equipment used in its manufacturing process. SpectraLink relies on sole or limited sources of supply for many components and equipment used in its manufacturing process. The delay, inability, or refusal of any of these suppliers to ship these components or equipment could interrupt SpectraLink’s manufacturing process and ability to manufacture products in a timely manner to meet customer demand. The limited number of sources for many of these components may also prevent SpectraLink from decreasing its reliance on certain suppliers and finding other sources at competitive prices. Unforeseen price increases by any of the sole or limited source suppliers could negatively impact product margins and the financial performance of SpectraLink.

•		The risk of business interruption arising from SpectraLink’s dependence on its manufacturing facility located in Boulder, Colorado, and the business relationship SpectraLink has with Offshore Group to use a facility in Empalme, Sonora, Mexico which provides assembly services. SpectraLink is highly dependent on its Boulder, Colorado manufacturing facility, which is home to the majority of SpectraLink’s manufacturing operations. SpectraLink is also highly dependent upon its business relationship with Offshore Group to provide management services and a facility located in Empalme, Sonora, Mexico which

assembles SpectraLink’s products. Any event that may disrupt or indefinitely discontinue either of the facilities’ capacity to manufacture, assemble and repair SpectraLink’s products could greatly impair SpectraLink’s ability to generate revenues, fulfill orders and attain financial goals. For instance, SpectraLink may experience delays in the receipt of assembled product from the facility in Mexico should the border between the U.S. and Mexico close.


•		SpectraLink’s ability to respond to rapid technological changes within the on-premises wireless telephone industry. The wireless communications industry is characterized by rapid technological change, short product life cycles, and evolving industry standards. To remain competitive, SpectraLink must:


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

		•		develop new products for existing and emerging wireless communications markets, and introduce such products in a timely manner;

		•		implement emerging wireless standards quickly enough to satisfy market demands and without significant product redesign;

		•		develop or obtain access to advanced wireless networking capabilities as they become available; and

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

Due to the competitive nature of SpectraLink’s business, any failure by SpectraLink to meet these challenges could materially and adversely affect SpectraLink’s business, reputation, and operating results


•		SpectraLink’s ability to attract and retain personnel, including key technical and management personnel. Much of the future success of SpectraLink depends on the continued service and availability of skilled personnel, including technical, marketing and staff positions. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense. There can be no assurance that SpectraLink will be able to successfully retain and attract the key personnel it needs. Many of SpectraLink’s key personnel receive a total compensation package that includes stock options and other equity awards. New regulations, volatility in the stock market and other factors could diminish the value of SpectraLink’s equity awards, putting SpectraLink at a competitive disadvantage or forcing SpectraLink to use more cash compensation.

•		SpectraLink might not be able to execute on its business plan if it loses key management or technical personnel, on whose knowledge, leadership and technical expertise it relies, or if new members of SpectraLink’s management team fail to work effectively together. SpectraLink’s success depends heavily upon the contributions of its key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Many of these individuals have been with SpectraLink for several years and have developed specialized knowledge and skills relating to its technology and business. Others have been promoted within, or have newly joined, senior management roles only recently. For example, in September 2003, John Elms, SpectraLink’s Vice President of Operations, was promoted to President and Chief Executive Officer, while Bruce Holland, the former President and Chief Executive Officer, has continued with SpectraLink as Chairman of the Board. Additionally, in October 2003, SpectraLink hired John Kelley as Vice President of Operations. SpectraLink’s success depends in part upon the ability of new executives to work effectively together and with the rest of SpectraLink’s employees to continue to develop its technology and manage the operation and growth of SpectraLink’s business. All of SpectraLink’s executive officers and key personnel are employees at will. SpectraLink has no employment contracts and does not maintain key person insurance on any of its personnel. SpectraLink might not be able to execute on its business plan if it were to lose the services of any of its key personnel. If any of these individuals were to leave SpectraLink unexpectedly, SpectraLink could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor develops the necessary training and experience.

•		SpectraLink’s reliance on its 802.11b technology partners to continue to provide the wireless local area network for SpectraLink’s NetLink product, and to provide access points which support SpectraLink Voice Priority. In the absences of a wireless voice prioritization standard, SpectraLink relies on 802.11b technology partners, such as Proxim, Symbol Technologies, and Cisco Systems to continue to provide wireless local area network support for SpectraLink’s NetLink product and to provide access points that support SpectraLink Voice Priority. If any of SpectraLink’s technology partners fails to provide voice prioritization support for SpectraLink’s products, the market opportunity for NetLink products would be reduced and SpectraLink’s future results of operations would be materially harmed until SpectraLink finds

new 802.11b technology partners or voice prioritization standards are adopted.


•		Potential fluctuations in SpectraLink’s future revenues, gross margins and operating results. SpectraLink has experienced, and may in the future continue to experience, significant quarterly fluctuations in revenue, gross margins and operating results due to numerous factors, some of which are outside SpectraLink’s control. Among other things, these factors include:


•		changes in customer, geographic or product mix, including mix of configurations within each product group;

•		fluctuating market demand for, and declines in the average selling prices of, SpectraLink’s products;

•		the timing of and delay of significant orders from customers;

•		seasonality in demand within SpectraLink’s various sectors;

•		increases in material or labor costs;

•		excess inventory;

•		obsolescence charges;

•		changes in shipment volume;

•		loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;

•		increases in price competition;

•		changes in distribution channels;

•		increases in warranty costs; and

•		introducing of new products and costs of entering new markets.

For example, historically SpectraLink has not operated with a significant order backlog and a substantial portion of SpectraLink’s revenue in any quarter has been derived from orders booked and shipped in that quarter. Accordingly, SpectraLink’s revenue expectations are based almost entirely on its internal estimates of future demand and not on firm customer orders. Planned expense levels are relatively fixed in the short-term and are based in large part on these estimates, and if orders and revenue do not meet expectations, SpectraLink’s revenues, gross margins and operating results could be materially adversely affected.


•		SpectraLink’s revenue and earnings are highly seasonal. Seasonality and other factors cause significant quarterly fluctuations in SpectraLink’s revenue and net income. SpectraLink’s business is highly seasonal. This causes significant quarterly fluctuations in SpectraLink’s financial results. Revenue and operating results are usually strongest during the second and fourth fiscal quarters.

•		Recently enacted and proposed changes in securities laws and regulations are likely to increase SpectraLink’s costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules subsequently implemented by the SEC, requires changes in some of SpectraLink’s corporate governance, public disclosure and compliance practices. The Act also requires the SEC to promulgate additional new rules on a variety of subjects. In addition to final rules and rule proposals already made by the SEC, the Nasdaq National Market has proposed revisions to its requirements for companies, such as SpectraLink, that are Nasdaq-listed. SpectraLink expects these developments to increase SpectraLink’s legal and financial compliance costs, and to make some activities like SEC reporting obligations, more difficult. In addition, SpectraLink expects these developments to make it more difficult and more expensive for SpectraLink to obtain director and officer liability insurance, and SpectraLink may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for SpectraLink to attract and retain qualified members of SpectraLink’s board of directors, particularly to serve on SpectraLink’s audit committee, and qualified executive officers. SpectraLink is presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs SpectraLink may incur as a result.

•		A lower than anticipated rate of acceptance of domestic and international markets using the 802.11b standard. SpectraLink’s NetLink Wireless Telephones are compatible with the IEEE 802.11b standard for use on 802.11b compliant wireless LANs. Consequently, demand for NetLink Wireless Telephones depends upon the acceptance of markets utilizing 802.11b compliant networks. This depends in part upon the initial adoption of the 802.11b standard in international markets, as well as enhancements to that standard in the U.S. and foreign markets where the standard has already been adopted. Additionally, the acceptance of 802.11b compliant networks may move more slowly, if at all, if competing wireless networks are established and utilized. Additionally, the deployment of wireless voice and data systems has been inhibited by concerns about the potential of unauthorized access to data and communications transmitted

over or accessible through a wireless system. Potential customers may choose not to purchase SpectraLink products until wireless systems are developed which provide for greater security. Further, SpectraLink’s products may not be compatible with secure wireless systems that may be developed in the future. If markets utilizing 802.11b compliant networks do not grow as SpectraLink anticipates, SpectraLink’s growth would be impeded and it would not be able to factor the related revenues into its growth in the future.


•		The market for on-premises wireless telephone systems may fail to grow or to grow as quickly as SpectraLink anticipates. SpectraLink derives its revenue principally from the sale of wireless, on-premises telephone systems and related installation and other services relating to those systems. Therefore, SpectraLink’s future operating results depend on the demand for those types of services. If this market does not grow or grow quickly, SpectraLink’s future results of operations would be significantly harmed.

•		The ability of SpectraLink to develop and introduce new products and transition existing products. SpectraLink’s development efforts may not lead to the successful introduction of new or improved products. SpectraLink may encounter delays in deploying new or improved products. For instance, SpectraLink’s new products may not properly function with its customers’ existing telephone systems or SpectraLink’s new products may contain defects or bugs. These incompatibilities, defects or bugs may not be detected until SpectraLink’s customers begin to install the products or thereafter. SpectraLink may need to modify the design of its new or improved products if they have incompatibilities, defects or bugs, which could result in significant expenditures by SpectraLink as it seeks to remedy the problems, delays in the purchase of the products or cancelled orders. SpectraLink may also encounter delays in the manufacturing and production of the new products. Additionally, the new products may not be commercially successful. Demand for existing products may decrease upon the announcement of new or improved products. Further, since products under development are often announced before introduction, these announcements may cause customers to delay purchases of any products, even if newly introduced, until the new or improved versions of those products are available. If customer orders decrease or are delayed during the product transition, SpectraLink may experience a decline in revenue and have excess inventory on hand which could decrease gross profit margins. SpectraLink’s gross margins might decrease if customers, who may otherwise choose to purchase existing products, instead choose to purchase lower priced models of new products. Delays or deficiencies in the development, manufacturing, and delivery of, or demand for, new or improved products could have a negative effect on SpectraLink’s business, operating results or financial condition.

•		SpectraLink’s ability to manage potential expansion of operations in the U.S. and internationally. SpectraLink intends to expand its existing domestic and international operations and to enter new markets. This expansion will require significant management attention and financial resources. SpectraLink currently has limited experience in marketing and distributing its products internationally and in developing versions of products that comply with local standards. SpectraLink may also not be able to maintain or increase international market demand for its products. International operations are subject to other inherent risks, including foreign government regulation of technology or unexpected changes in regulatory and customs requirements, difficulty and delays in accounts receivable collection, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights, foreign currency exchange rate fluctuations, and taxation consequences.

•		If SpectraLink experiences warranty failure that indicates either manufacturing or design deficiencies, SpectraLink may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such warranty failures, SpectraLink’s business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. End-users have discovered errors in SpectraLink’s products in the past and may discover errors in SpectraLink’s products in the future. In addition, if SpectraLink’s costs of remediating problems experienced by SpectraLink’s customers exceed SpectraLink’s warranty reserves, these costs may adversely affect SpectraLink’s operating results. Consequently, SpectraLink’s warranty failure could have a material adverse impact on SpectraLink’s operations and financial results.

•		SpectraLink faces increasing competition in the on-premises wireless telephone system market. The on-premises wireless telephone system industry is competitive and influenced by the introduction of new products and new entrants into the industry. The competitive factors affecting the market for SpectraLink’s systems include product functionality and features, frequency band of operation, ease-of-use, quality of support, product quality and performance, price, distribution channels, and the effectiveness of marketing and sales efforts. Most of SpectraLink’s competitors have significantly greater financial, technical, research and development, and marketing resources than SpectraLink. As a result, SpectraLink’s competitors may respond more quickly to new or emerging technologies and changes in customer requirements, or may

devote greater resources to the development, promotion, sale and support of their products than SpectraLink. In addition, some purchasers may prefer to buy their wireless telephone systems from a single source provider of telephone systems, such as Alcatel or Cisco Systems, all of which manufacture and sell enterprise telephone systems. Other purchasers may prefer to buy their 802.11 wireless telephone systems from a single source provider of wireless local area networks, or LANs, such as Cisco Systems or Symbol Technologies, all of which provide 802.11 wireless infrastructure and wireless telephones. Because SpectraLink focuses on wireless on-premises telephone communications, it cannot serve as the sole source for a complete telephone or data communications system. There is no assurance that SpectraLink will be able to compete successfully in the future. Further, if a potential customer is already using a competing product or system, that potential customer may not be willing or able to make the investment necessary to replace such a system with a SpectraLink Wireless Telephone System. In addition, there may be potential customers who choose another technology because of cost or their belief that their needs do not require the full functionality provided by a SpectraLink Wireless Telephone System.


•		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.

•		Changes in rules and regulations of the FCC and other wireless regulatory agencies. The wireless communications industry, regulated by the Federal Communications Commission (FCC) in the United States and similar government agencies in other countries, is subject to changing political, economic, and regulatory influences. Regulatory changes, including changes in the allocation of available frequency spectrum, could significantly impact SpectraLink’s operations in the United States and internationally.

•		SpectraLink’s ability to protect its intellectual property rights. SpectraLink’s future success depends, in part, upon its proprietary technology. SpectraLink relies on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures, and nondisclosure and other contractual provisions to protect its proprietary rights. These legal protections provide only limited protection and may be time consuming and expensive to obtain and enforce. There can be no assurance that SpectraLink’s pending patent applications will be allowed or that the issued or pending patents will not be challenged or circumvented by competitors or provide meaningful protection against competition. If challenged, SpectraLink’s patents might not be upheld or their claims could be narrowed. If SpectraLink fails to protect its proprietary rights adequately, SpectraLink’s competitors might gain access to SpectraLink’s technology. As a result, SpectraLink’s competitors might offer similar products and SpectraLink might not be able to compete successfully in its market. Moreover, despite SpectraLink’s efforts to protect its proprietary rights, unauthorized parties may copy aspects of SpectraLink’s products and obtain and use information that SpectraLink regards as proprietary. Also, SpectraLink’s competitors may independently develop similar, but not infringing, technology, duplicate SpectraLink’s products, or design around SpectraLink’s patents or its other intellectual property. In addition, other parties may breach confidentiality agreements or other protective contracts with SpectraLink, and SpectraLink may not be able to enforce its rights in the event of these breaches. Furthermore, SpectraLink expects that it will increase its international operations in the future, and the laws of many foreign countries do not protect SpectraLink’s intellectual property rights to the same extent as the laws of the United States. SpectraLink may be required to spend significant resources to monitor and protect its intellectual property rights. Any litigation surrounding SpectraLink’s rights could force SpectraLink to divert important financial and other resources from its business operations.

•		The assertion of intellectual property infringement claims against SpectraLink. SpectraLink’s industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. SpectraLink cannot be certain that its products do not and will not infringe upon issued patents, patents to be issued in the future, or other intellectual property rights of others. SpectraLink may in the future be notified that it is infringing upon certain patent and/or other intellectual property rights of others. Although there are no such pending lawsuits against SpectraLink or unresolved notices that SpectraLink is infringing upon intellectual property rights of others, there can be no assurance that infringement claims will not occur in the future. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to SpectraLink. Litigation may be necessary in the future to defend against

claims of infringement or invalidity, to determine the validity and scope of the proprietary rights of others, to enforce SpectraLink’s intellectual property rights, or to protect SpectraLink’s trade secrets. SpectraLink may also be subject to claims from customers for indemnification. Any resulting litigation, regardless of its resolution, could result in substantial costs and diversion of resources. If it were determined that SpectraLink’s products infringe upon the intellectual property rights of others, SpectraLink would need to obtain licenses from these parties or reengineer its products in order to avoid infringement. SpectraLink might not be able to obtain the necessary licenses on acceptable terms or at all, or to reengineer its products successfully. Moreover, if SpectraLink is sued for infringement and loses the suit, it could be required to pay substantial damages or be enjoined from licensing or using the infringing products or technology. Any of the foregoing could cause SpectraLink to incur significant costs and prevent it from selling its products.


•		The historic volatility of SpectraLink’s stock price, which may make it more difficult to resell shares at prices attractive to sellers. The market price of SpectraLink’s common stock has been volatile and is likely to remain subject to wide fluctuations in the future. For example, during the 12-month period ended September 30, 2003, the closing price of SpectraLink’s common stock has ranged from a high of $24.70 per share to a low of $4.45 per share. Many factors could cause the market price of SpectraLink’s common stock to fluctuate, including:


		•		variations in SpectraLink’s actual or anticipated quarterly or annual results;

		•		market conditions in SpectraLink’s industry, the industries of SpectraLink’s customers and the economy as a whole;

		•		announcements of technological innovations by SpectraLink or by its competitors;

		•		introduction of new products or product enhancements or new pricing policies by SpectraLink or by its competitors;

		•		acquisitions or strategic alliances by SpectraLink or by its competitors;

		•		recruitment or departure of key personnel;

		•		the gain or loss of significant orders;

		•		changes in the market valuations of other telecommunications companies;

		•		the amount of liquid financial resources available to SpectraLink;

		•		the gain or loss of significant customers; and

		•		changes in the estimates of SpectraLink’s operating performance or changes in recommendations by securities analysts.

In addition, the stock market in general, and the market for technology-related stocks in particular, could decline, which could cause the market price of SpectraLink’s common stock to fall for reasons not necessarily related to SpectraLink’s business, results of operations or financial condition. The market price of SpectraLink’s stock also might decline in reaction to events that affect other companies in SpectraLink’s industry even if these events do not directly affect SpectraLink. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. Securities class action litigation is often brought against a company following a period of volatility in the market price of its securities, and SpectraLink has recently been sued in several purported securities class action lawsuits. Further, certain of SpectraLink’s management and directors have also been sued in purported shareholder derivative actions. Although SpectraLink believes that the lawsuits lack merit, due to inherent uncertainties in litigation, SpectraLink cannot accurately predict the outcome of this litigation. An adverse determination could have a significant effect upon SpectraLink’s business and materially affect the price of its stock. Moreover, regardless of the ultimate result, it is likely that the lawsuits will require SpectraLink to incur expenses and divert management’s attention and resources from other matters, which could also adversely affect SpectraLink’s business and the price of its stock.

ITEM 4. Controls and Procedures.

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. SpectraLink’s Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation of the effectiveness of SpectraLink’s disclosure controls and procedures by SpectraLink’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, that SpectraLink’s disclosure controls and procedures were effective for this purpose.

During the third quarter of fiscal 2003, there have been no changes in SpectraLink’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, SpectraLink’s internal control over financial reporting.

Part II Other Information

Item 1 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, 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 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, Defendant(s), 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 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. Defendants have moved to dismiss the amended and corrected Elennis complaint, which motion is currently pending.

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.

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

Item 6 Exhibits and Reports on Form 8-K


(a)		Exhibits
		The following exhibits are filed herewith:


Exhibit Number		Exhibit Title

31.1 †		Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 †		Certification by Nancy K. Hamilton pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 †*		Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 †*		Certification by Nancy K. Hamilton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Filed herewith.

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of SpectraLink Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

Exhibits filed with SpectraLink’s 2002 Form 10-K constitute those exhibits currently required to be on file. The reader should refer to the 2002 Form 10-K under Part III, Item 15, for a list of those exhibits

(b) Reports on Form 8-K

SpectraLink filed two Current Reports on Form 8-K during the quarter ending September 30, 2003. The first Form 8-K, dated July 23, 2003, reported information under Item 9 “Regulation FD Disclosure,” that was intended to be furnished under “Item 12. Results of Operations and Financial Condition” in accordance with SEC Release No. 33-8216. This filing included SpectraLink’s earnings press release for the six months ended June 30, 2003, and the script used by SpectraLink executives on the conference call explaining the quarterly results. The information furnished under that Form 8-K was intended to be furnished and not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference in any filing of SpectraLink under the Securities Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether made before or after the date of that Form 8-K and irrespective of any general incorporation language in any filings.

The second Form 8-K, dated August 21, 2003, reported information under Item 5 “Other Events” concerning the announcement that: John H. Elms, Vice President of Operations of SpectraLink for the past four years, assumed the position of President and Chief Executive Officer on September 1, 2003 and Mr. Elms also joined the Board of Directors; and Bruce Holland, President and CEO, up to September 1, 2003, and a founder of SpectraLink, would continue with SpectraLink as Chairman of the Board.

SPECTRALINK CORPORATION
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2003

By: /s/ NANCY K. HAMILTON

Nancy K. Hamilton,
Principal Financial and Accounting
Officer and on behalf of the Registrant

EXHIBIT INDEX


Exhibit Number		Exhibit Title

31.1 †		Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 †		Certification by Nancy K. Hamilton pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 †*		Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 †*		Certification by Nancy K. Hamilton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Filed herewith.

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	•		Revenue Recognition. 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.

	•		Allowance for Doubtful Accounts. 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 September 30, 2003 and December 31, 2002, the allowance for uncollectible accounts was $341,000 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. If actual losses are significantly greater than the reserves that SpectraLink has established, SpectraLink’s expenses will increase and its reported income will decrease.

	•		Accrued Product Warranty Expenses. 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 September 30, 2003 and December 31, 2002, the accrual for warranty expenses was $411,000 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. If actual returns are significantly greater than the reserves that SpectraLink has established, the actual results will decrease SpectraLink’s future reported earnings.

	•		Reserve for Inventory. 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 September 30, 2003 and December 31, 2002, the reserve for inventory was $627,000 and $651,000, respectively. Additional inventory write-downs may be required if actual market conditions are less favorable than those projected by management.

	•		Income Taxes –Valuation Allowances. 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 September 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.

	(b)		Reports on Form 8-K

			SpectraLink filed two Current Reports on Form 8-K during the quarter ending September 30, 2003. The first Form 8-K, dated July 23, 2003, reported information under Item 9 “Regulation FD Disclosure,” that was intended to be furnished under “Item 12. Results of Operations and Financial Condition” in accordance with SEC Release No. 33-8216. This filing included SpectraLink’s earnings press release for the six months ended June 30, 2003, and the script used by SpectraLink executives on the conference call explaining the quarterly results. The information furnished under that Form 8-K was intended to be furnished and not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference in any filing of SpectraLink under the Securities Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether made before or after the date of that Form 8-K and irrespective of any general incorporation language in any filings.

			The second Form 8-K, dated August 21, 2003, reported information under Item 5 “Other Events” concerning the announcement that: John H. Elms, Vice President of Operations of SpectraLink for the past four years, assumed the position of President and Chief Executive Officer on September 1, 2003 and Mr. Elms also joined the Board of Directors; and Bruce Holland, President and CEO, up to September 1, 2003, and a founder of SpectraLink, would continue with SpectraLink as Chairman of the Board.