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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-28180

SPECTRALINK CORPORATION

5755 Central Avenue
Boulder, Colorado 80301
(303) 440-5330
(Address and telephone number of principal executive offices)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.01 par value per share
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last day of the registrant’s most recently completed second fiscal quarter, or June 30, 2003, was approximately: $93,101,882.

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: 18,933,071 shares of common stock, $.01 par value per share, were outstanding as of January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from the issuer’s definitive proxy statement or in an amendment to this report on Form 10K/A to be filed with the Securities and Exchange Commission no later than 120 days after the end of the issuer’s fiscal year.

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Special Note Regarding Forward-Looking Statements

     Certain statements in this Form 10-K, as well as statements made by SpectraLink in periodic press releases, oral statements made by SpectraLink’s officials to analysts and stockholders in the course of presentations about SpectraLink, and conference calls following earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Words such as believes, anticipates, expects, intends, could, might, and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These projections and forward-looking statements are based on assumptions, which are believed reasonable but are, by their nature, inherently uncertain. In all cases, results could differ materially from those projected. Accordingly, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date of the making of such statements. Some of the important factors that could cause actual results to differ from any of these projections or other forward-looking statements are detailed below, and in other reports filed by SpectraLink under the Securities Exchange Act of 1934. Certain risks and uncertainties relating to forward-looking statements are set forth below in “Management’s Discussion and Analysis of Financial Condition” and in Item 7A under the caption “Forward-Looking Statement Factors”. SpectraLink undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report, except as may be required under law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K.

PART I

Item 1. Business.

Overview

     SpectraLink Corporation (“SpectraLink” or the “Company”) was incorporated in Colorado in April 1990, and reincorporated in Delaware in March 1996. Effective December 23, 1999, SpectraLink incorporated SpectraLink International Corporation in Delaware as a wholly owned subsidiary of SpectraLink. SpectraLink designs, manufactures and sells 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. The Wireless Telephone System uses a micro-cellular design and interfaces directly with a telephone system, such as a PBX, Centrex, or key/hybrid system. Because all calls are routed through the corporate phone system, there are no airtime charges incurred for SpectraLink’s customers on their wireless telephone system.

     SpectraLink’s product portfolio consists of two product categories differentiated by the wireless technology implemented: The Link Wireless Telephone System™ (Link WTS) and NetLink Wireless Telephones. Link WTS uses a proprietary radio infrastructure in the 902-928 MHz radio band, and targets organizations that require a dedicated wireless voice solution for their on-premises mobile workforce. The NetLink products operate over IEEE 802.11-compliant wireless local area networks (LANs) in the 2400-2483 MHz frequency band using Internet Protocol (IP) technology. NetLink products target organizations that want both a wireless voice and wireless data solution on a single network. SpectraLink also offers Open Application Interface (OAI) which enables standard-based, third-party software applications to be integrated with SpectraLink Wireless Handsets. Examples of such applications are nurse-call systems in hospital wards, inventory system look-ups in retail and warehousing sites and control systems interactions in industrial and manufacturing facilities.

Market Background

     A growing number of business environments require some employees to have a high degree of mobility yet remain readily accessible by telephone to customers or co-workers. Retailers seek competitive advantage by quickly responding to customers’ requests for information and service from employees dispersed throughout the store. Healthcare workers in clinical settings benefit from real-time communications with mobile healthcare professionals to deliver quality healthcare efficiently. Manufacturers and distributors seek more efficient operations by enabling workers in the factory or distribution center to solve problems or answer questions more rapidly. Service organizations seek shorter customer hold or response time by allowing immediate communications with the person who can solve a problem or answer a question. Management information systems, maintenance and other corporate office support personnel are more productive if they remain mobile in the workplace without losing communications contact with other office workers who need their services. Teachers and school administrators provide students a safer and more effective learning environment with telephone access throughout the campus.

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     Traditionally, businesses have attempted to maintain communications with mobile, on-premises employees by using overhead paging systems and electronic pagers. These indirect types of communication create delays because access to a wired phone is still needed. Delays are exacerbated in high mobility environments, such as hospitals, manufacturing facilities and distribution centers, where both parties may be mobile and repeated pages are required. Additionally, overhead paging is often difficult to understand and may create disruptive and stressful ambient noise.

     Alternatives to paging include the use of two-way radios, cordless phones and traditional cellular phones, all of which have various shortcomings. Two-way radios do not provide an adequate link to the wireline telephone system. Cordless phones are typically single-cell systems and have a limited calling range. Only a limited number of cordless phones can be deployed in a given area without interfering with each other. Traditional cellular phones often provide inconsistent indoor reception, and unless specifically designed for on-premises use, cannot be directly interfaced with a company’s PBX system. Therefore, traditional cellular phones cannot offer the wireless telephone system’s functions. In addition, monthly usage fees and airtime charges may make cellular phones prohibitively expensive in many applications.

     Products dedicated to unlicensed, on-premises voice applications first appeared in the 1990s in the 902-928 MHz band in North America. These adjunct products attach directly to business telephone systems and provide wireless phone extensions for use on the premises. Because these systems are unlicensed, they can be installed or relocated without prior approval from the Federal Communications Commission (FCC). The 902-928 MHz band in North America is set aside for unlicensed products which employ either narrow-band or spread spectrum technology. Because narrow-band technology systems in the 902-928 MHz band must operate at lower power levels than spread spectrum systems, they generally have inferior range and are more susceptible to interference. Multi-cellular wireless business phone systems that provide hand-off and systems that restrict wireless phones to a single base station are available in the 902-928 MHz band. In 1994, the FCC allocated additional spectrum in the 1920-1930 MHz band for unlicensed on-premises wireless voice applications. The products that use this spectrum are commonly referred to as unlicensed personal communications systems (U-PCS).

     Similar products using the Digital Enhanced Cordless Telecommunications (DECT) standard are available throughout Europe and in certain countries in other regions. DECT systems operate in the 1880-1900 MHz band, which is allocated to licensed public PCS providers in North America; therefore, DECT systems cannot be sold in North America without modifications to operate in one of the available unlicensed bands. DECT technology is used for both multi-cell business systems and single-cell residential cordless telephones, which makes for a much larger market with higher production volumes and lower end-user cost.

     In 1997, the Institute of Electrical and Electronics Engineers (IEEE) approved its 802.11 standard for wireless local area network operating in the 2400-2483 MHz band. The 802.11 standard specifies the radio interface between a wireless device and a base station or access point, as well as among wireless handsets (commonly referred to as a “client”). The standard allows devices to share a single wireless LAN infrastructure, including both voice and data devices, thus enabling organizations to provide mobile employees access to both data and voice applications over a single network.

SpectraLink Products

     The Link Wireless Telephone System™ (Link WTS) operates in the 902-928 MHz band and uses a micro-cellular design consisting of three components: a Master Control Unit (MCU), Base Stations and Wireless Telephones. The MCU is installed near the PBX or key/hybrid system, or at the Centrex demarcation location. It can either interface directly with the analog ports of the host telephone switching system, or it can connect via a digital interface to certain PBX and key/hybrid systems.

     The MCU also connects to small radio transceivers called Base Stations via twisted-pair telephone wiring. The Base Stations provide the link to a six-ounce Wireless Telephone with an alphanumeric display. The Wireless Telephone provides up to four hours of talk time or up to eighty hours of standby time between battery recharges.

     Each Base Station supports multiple users and covers a transmission area in excess of 50,000 square feet depending on transmission obstructions present in the building. A call is handed off from one Base Station to another as a user moves throughout the coverage area. High-density Base Stations are available to support applications that require a large number of users within an area such as trading floors, support centers, and emergency response centers. SpectraLink designed the Link WTS to provide seamless coverage, enabling real-time hand-off of an active telephone call as the user moves about.

     NetLink Wireless Telephones operate in the 2400-2483 MHz band and are compatible with the IEEE 802.11 standard for use on an 802.11-compliant wireless LAN. Customers can use a single network for both wireless voice and data applications by adding the NetLink Wireless Telephones to an existing 802.11-compliant network provided by a wireless LAN vendor. The NetLink product line consists of up to three component types: NetLink Wireless Telephones, a NetLink SVP Server, and an optional NetLink Telephony Gateway.

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     The NetLink Wireless Telephones share many of the same physical designs as the Link Wireless Telephones but utilize wireless LAN client and voice over IP (VoIP) technologies. NetLink Wireless Telephones support either frequency hopping or direct sequence implementations of the 802.11 standard. The direct sequence version is compatible with the 802.11b (Wi-Fi) standard. NetLink Wireless Telephones support the H.323 VoIP standard, SpectraLink’s Proprietary VoIP protocol SRP, and proprietary VoIP protocols from Avaya, Cisco Systems, Inter-Tel Integrated Systems, and Nortel Networks. Support for additional proprietary VoIP protocols are under development, allowing NetLink Wireless Telephones to operate with IP telephony platforms from additional manufacturers.

     For applications that do not use a VoIP based PBX and instead use traditional PBX or Centrex technologies, NetLink Telephony Gateways are installed near the PBX or key/hybrid system, or at the Centrex demarcation location. NetLink Telephony Gateways convert a circuit-switched telephone station interface to IP packets on a standard Ethernet interface, allowing calls to connect with NetLink Wireless Telephones over wireless 802.11 networks. NetLink Telephony Gateways can either interface directly with the analog ports of the host telephone switching system, or can connect via proprietary digital interfaces to certain PBX and key/hybrid systems.

     The NetLink SVP Server is a dedicated network appliance used in conjunction with SpectraLink Voice Priority (SVP) in the wireless LAN access points. SVP is a voice prioritization mechanism developed by SpectraLink that improves voice quality on wireless LANs by reducing packet-queuing delays. A number of wireless LAN access point providers have implemented SVP technology, including: Avaya Inc., Cisco Systems, Enterasys Networks, Intermec Technologies, Proxim Inc., and Symbol Technologies. Several additional access point manufacturers are developing support for SVP and are expected to release this capability in 2004. SpectraLink anticipates that a standard wireless LAN prioritization scheme will be ratified by the 802.11 standards committee in 2004. The 802.11 Task Group “E”, in which SpectraLink participates, is working on quality of service (QoS) enhancements to the existing standard. It is likely that implementation of the mandatory components of this standard will still require the NetLink SVP Server to improve voice quality and system performance. However, implementation of optional components of the standard or proprietary QoS enhancements may allow NetLink Wireless Telephones to operate without the NetLink SVP Server and SVP implemented in the access points.

Technology

     SpectraLink devotes significant planning and resources to development and use of advanced technology. This focus on technology is necessary to meet the requirements for delivery of portability, indoor radio and system performance, high reliability, low cost and manufacturability. All of SpectraLink’s key technologies are incorporated into its Link WTS and/or NetLink products, including:

     Spread Spectrum Technology. Spread spectrum is a radio frequency transmission technique in which the transmitted information is spread over a relatively wide bandwidth. The use of spread spectrum technology makes radio signals more immune to interference, reduces the possibility of interference with others, provides privacy against eavesdropping, and improves the quality of voice transmission. While there are many advantages to the spread spectrum technique, it is more complex to implement than the more commonly used narrow-band modulation techniques. The Link Wireless Telephone System uses a form of spread spectrum transmission called frequency hopping, a technique that combines an information signal with a radio carrier whose frequency assignment changes rapidly in a pseudo-random manner at the transmitter. The signal resulting from frequency hopping is decoded at the receiving end using the same pseudo-random frequency pattern. The NetLink Wireless Telephones use either frequency hopping or direct sequence spread spectrum technology. Direct sequence spread spectrum uses a technique whereby a signal is spread over the available band by mixing the signal data with a much higher data-rate pseudo-random data stream. As with frequency hopping spread spectrum, the resulting signal is decoded at the receiving end. The spread spectrum technologies implemented in the NetLink Wireless Telephones conform with the IEEE 802.11 (frequency hopping) and 802.11b (direct sequence) global standards.

     Radio Technology. SpectraLink has designed radio transceivers and digital circuits to implement the complex spread spectrum technique at an economical cost and in a small form factor. SpectraLink’s radio transceiver and digital circuit architectures also minimize power consumption and enhance manufacturability and reliability.

     ASIC Design. SpectraLink’s expertise in digital application specific integrated circuit (ASIC) technology allows its systems to be miniaturized, power-efficient and cost effective. SpectraLink’s Wireless Telephone, Base Station, MCU, and Telephony Gateway designs use ASICs. SpectraLink expects to develop additional ASICs and to incorporate these devices into future systems.

     Wireless Access Protocols. Combining spread spectrum with a micro-cellular design presents unique challenges compared to single-cell spread spectrum implementations, such as advanced home cordless telephones. To address this, SpectraLink applied its software design expertise to develop robust networking that allows multiple users to have simultaneous telephone

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access in a spread spectrum radio environment without interfering with each other. SpectraLink implemented a sophisticated set of software resources, including micro-coded software, digital signal processing software, network architecture software, telephone switching software and user application software to address many of the unique challenges of the in-building wireless environment. The challenges include interference, multi-path degradation, signal absorption, near/far receiver desensitizing, security, busy-hour capacity demands, and shared operation with other radio systems.

     Call Hand-off. Critical to the acceptance of on-premises wireless systems by users accustomed to high-quality telephone performance is a hand-off from cell to cell with virtually no disruptive effect on the call in progress. SpectraLink developed proprietary software to address the frequent and unpredictable nature of on-premises inter-cell hand-offs due to interference, multi-path degradation and interior obstructions. Software in the SpectraLink Wireless Telephones automatically selects the best cell among available Base Stations or access points, and performs the necessary timing and control to provide generally unnoticeable, seamless hand-off.

     Telephone System Integration. When a SpectraLink system connects to the phone system using analog ports, the SpectraLink Wireless Telephone will provide many calling features of a desk phone, including transfer, conference calling and hold. When the system digitally interfaces to the phone system, the Wireless Telephone will also support the advanced features of the host phone system such as calling party identification or calling party name display. Currently, SpectraLink supports digital interfaces to the following manufacturers’ telephone systems: Avaya, Comdial Corporation, Fujitsu Business Communication Systems, Inc., Inter-Tel Integrated Systems, Mitel Corporation, NEC America, Inc., Nortel Networks Corporation, Siemens AG and Toshiba America Information Systems, Inc. NetLink Wireless Telephones can also integrate with voice over IP (VoIP) based telephone systems using standard or proprietary protocols. VoIP integration provides similar advanced features as traditional digital integration, but with a packet-based network interface. Currently, SpectraLink supports proprietary VoIP protocols from Avaya, Cisco Systems, Inter-Tel Integrated Systems, and Nortel Networks.

     Application Interface. The SpectraLink Open Application Interface (OAI) enables SpectraLink Wireless Telephones to be used in conjunction with text messaging applications. The OAI allows third-party applications to write to the Wireless Telephone’s alphanumeric display, set up calls, and receive user input from the keypad. SpectraLink has worked with third parties to develop applications for interfacing with email, in-house paging systems, nurse-call systems, and industrial alarm and control systems.

Sales, Marketing and Customer Support

Sales and Marketing

     SpectraLink sells and supports its systems through direct, distributor and original equipment manufacturers (OEMs) sales forces. This strategy is intended to reduce SpectraLink’s dependence on a single sales channel and to permit broad marketing of SpectraLink systems.

     Sales. As of January 31, 2004, SpectraLink had 131 employees in its sales organization. SpectraLink’s indirect sales channels sell a majority of its products and services through resellers, distributors and OEMs. SpectraLink’s direct sales sell its products and services to end-user customers and supports the indirect channel. SpectraLink has North American sales offices in the metropolitan areas of Atlanta, Austin, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Indianapolis, Los Angeles, Minneapolis, Nashville, New York, Philadelphia, Portland, Sacramento, San Diego, San Francisco, St. Louis, Tampa, Washington, D.C., and West Palm Beach, and international offices in Canada, Australia and the United Kingdom.

     Resellers. SpectraLink products are sold through a number of telecommunications equipment providers and distributors in the United States and Canada. The resellers include Alltel Communications, Inc., Alphanet Solutions, Inc., Anixter, Inc., BellSouth Communication Systems, Dukane Corporation, Expanets, Inc., Executone Information Systems, Inc., Indyme, Inc., Inter-Tel Integrated Systems, LXE, Norstan, Inc., Panasonic Telecommunications Systems Company, Perot Systems Corporation, SBC Communications, Inc., Scan Source, Inc., dba Catalyst Telecom, Siemens Information and Communications Networks, Inc., Sprint/United Management Company, Syntegra, Tel-e Connect Systems (TCS), Tessco Technologies, Inc., Verizon Communications, WAV Inc., and Westcon Group, Inc. The NetLink products are also sold through international distributors, including Anixter Europe Holdings BV, ACAL Nederland bv, Compushack, Comstor UK Limited, Express Data, Dimension Data, Itegra AS, and Telindus. Each of these companies has a non-exclusive reseller relationship with SpectraLink. SpectraLink has not restricted its resellers from selling in the same geographical areas.

     OEMs and Private Labels. SpectraLink has established OEM agreements with Avaya, Alcatel Business Systems, NEC America, Nortel Networks Limited, and a private label agreement with Inter-Tel Integrated Systems. Through these agreements SpectraLink manufactures products that are branded and sold exclusively through the OEM partner and its channels.

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SpectraLink also develops support for the OEM partners’ proprietary telephone switch protocols. SpectraLink does not restrict markets for OEM partners.

     Other Partners. SpectraLink developed an 802.11-compatible voice prioritization mechanism for the NetLink Wireless Telephones that can be implemented in 802.11 access points to improve voice quality by reducing packet-queuing delays. A number of wireless local area network vendors agreed to implement SpectraLink Voice Priority (SVP) technology, including: Alvarion Ltd., Avaya, Cisco Systems, Enterasys Networks, Intermec Technologies Corp., Proxim Inc., and Symbol Technologies. Other wireless LAN vendors are currently developing SVP support with availability expected in 2004.

     Prior to 2000, SpectraLink sold its Link WTS and NetLink products primarily in the United States, Canada and Mexico. In 2000, SpectraLink began selling its NetLink products in Europe. In 2001, SpectraLink also sold NetLink products in Asia-Pacific. In the future, SpectraLink may consider selling NetLink in other areas of the world that permit 802.11 networks in the 2400-2483 MHz band.

Customer Support and Warranty Coverage

     SpectraLink operates a customer support department dedicated to planning, installing and maintaining SpectraLink systems. Customer support personnel are located in Boulder, Colorado; Atlanta, Georgia; Bentonville, Arkansas; Charlotte, North Carolina; Chicago, Illinois; Houston, Texas; Los Angeles, California; London, England; and Paris, France. Customer support involvement occurs with customers during early customer contact, the system configuration and installation phases, and the on-going warranty periods as well as any contracted maintenance periods.

     SpectraLink warrants that all products are free of defects upon delivery. SpectraLink provides standard warranty coverage at no cost for a limited period of time. After the warranty period, the customer support department provides various levels of support, based on the maintenance level selected by the customer.

Customer Dependence, Geographical and Segment Information

     While SpectraLink has a diverse customer base, it considers its operations to be conducted in one operating segment. SpectraLink derives its revenue principally from the sale, installation, and service of wireless on-premises telephone systems. The following table summarizes the sales to different customer types as a percentage of total net sales:

     SpectraLink’s sales to major customers, which individually comprised more than 10% of total net sales for the years ended December 31, 2003, 2002 and 2001, are summarized in Note 7 in SpectraLink’s accompanying Notes to the Consolidated Financial Statements.

     SpectraLink had revenue from international operations of approximately 1% for each of the years ending December 31, 2003, 2002 and 2001, respectively.

Backlog

     SpectraLink generally ships its systems promptly upon the receipt of an order. SpectraLink’s backlog of orders is generally less than 30 days at any given time. Some of SpectraLink’s distributors and larger customers place orders for systems in advance of the scheduled delivery date; however, these orders are subject to rescheduling or cancellation. As a result, SpectraLink currently does not consider backlog to be a meaningful indicator of future sales.

Competition

     The on-premises wireless telephone system industry is competitive and influenced by the introduction of new products. The competitive factors affecting the market for SpectraLink’s systems include product features and functions, frequency band of operation, ease-of-use, quality of support, product quality and performance, price, and the effectiveness of marketing and sales efforts. Most of SpectraLink’s competitors have significantly greater financial, technical, research and development, and

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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. Other purchasers may prefer to buy their 802.11 wireless telephone systems from a single source provider of wireless LANs, such as Cisco Systems, which provides 802.11 wireless infrastructure and enterprise telephone systems as well as 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.

     SpectraLink’s product competition falls into four general categories: multi-user cordless telephone products, unlicensed multi-cell systems, cellular-based systems, and wireless LAN-based systems. Single-user cordless telephones are not considered competing products because of their low user capacity, limited range, and consumer-grade handset design. SpectraLink also does not regard public cellular or PCS services as competitors because of their lack of integration with enterprise telephone systems, inadequate indoor coverage, and usage-based cost structure.

	•		Multi-user cordless telephone systems allow multiple handsets to operate in the same area without interference on shared or unique base stations. Some of these systems offer limited hand-off capability to a secondary base station for additional coverage. An example of such a product is the Siemens Gigaset.
	•		Unlicensed multi-cell systems are products that offer similar capacity and functions to SpectraLink’s Link WTS. They operate on unlicensed radio spectrum with no airtime charges or licensing requirements. Some of these products are integrated into the host PBX system, allowing the wireless system to share some of the PBX common equipment and administration. Unlicensed multi-cell systems are available in North America from Alcatel, Ascom, and NEC America. Similar systems using DECT technology are sold throughout Europe and in several Asian countries. DECT technology is used for both multi-cell business systems and single-cell residential cordless products. DECT systems are available from Alcatel, Ascom, Avaya, Ericsson, Kirk Telecom, Nortel Networks, Philips, Siemens, and several other manufacturers.
	•		Cellular-based systems operate on licensed cellular or PCS frequencies, allowing handsets to be used on both the in-building wireless system and the public cellular or PCS network. These systems utilize a network of active or passive antennas installed throughout a building to provide radio coverage for cellular telephone users. Integration with the enterprise telephone system is addressed by forwarding calls to the cellular network through the telephone system or through an adjunct device.
	•		Wireless LAN-based systems use voice over IP technology to carry packetized voice information over a standards-based wireless LAN. Along with SpectraLink’s NetLink Wireless Telephones, Cisco Systems, and Symbol Technologies also offer wireless LAN-based telephone products. In addition, Vocera Communications offers a wireless LAN-based communication system that utilizes voice recognition technology. Motorola has announced a wireless handset that will support both unlicensed wireless LAN and licensed public cellular technologies for availability in 2004. Other wireless-LAN based telephone products have been previewed by various component and handset manufacturers.

     SpectraLink also considers the existing technologies of overhead and electronic paging, two-way radios and cordless telephones to be competitive with SpectraLink’s products. To the extent such a system is already in use, a 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 one of these other technologies because of cost or their belief that their needs do not require the full functions provided by a SpectraLink Wireless Telephone System.

Proprietary 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. As part of these confidentiality procedures, SpectraLink enters into confidentiality and non-disclosure agreements with its employees, and limits access to, and distribution of, its proprietary information. SpectraLink has been awarded ten United States patents in the areas of radio frequency and spread spectrum digital communication, and wireless telephony with various expiration dates between 2011 and 2019. However, there is no assurance that SpectraLink’s patents will not be challenged or circumvented by competitors, or that they will provide meaningful protection against competition. SpectraLink may in the future be notified that it is infringing 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 intellectual property rights of others, there is no assurance that litigation or infringement claims

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will not occur in the future.

Manufacturing

     SpectraLink’s manufacturing operations consist primarily of the fabrication and assembly of components and subassemblies, which are individually tested and integrated into full systems, or shipped as individual items for expansion orders. In order to facilitate initial start-up and manufacturing process improvements, SpectraLink conducts in-house prototype development and has established pilot line capabilities. SpectraLink maintains complete in-house materials procurement, assembly, testing and quality control functions. In August 2001, SpectraLink entered into an agreement with OFFSHORE INTERNATIONAL, INC. (OFFSHORE), as OFFSHORE has an existing contractual relationship with Maquilas Teta Kawi S.A. de C.V., for the furnishing of manufacturing space, labor (primarily for component assembly) and services in Guaymas/Empalme, Sonora, Mexico. SpectraLink utilizes a minimal number of subcontract manufacturers to assemble its components.

     The principal components of SpectraLink’s systems are unpopulated printed circuit boards, electronic components, including microprocessors and ASICs, and metal or plastic housings, all of which are purchased from outside vendors. Although alternate suppliers are available for most of the components, qualifying replacement suppliers and receiving components could take several months. Many components are available only from sole source suppliers and embody such parties’ proprietary technologies. There is no assurance that any sole source supplier will continue to provide the required components in sufficient quantities with adequate quality and at acceptable prices. SpectraLink would be adversely affected if a redesign of SpectraLink’s subassemblies is necessary to develop alternative suppliers. In certain circumstances, a part will be placed on allocation due to competition for parts commonly used by the telecommunications and computer industries. Consequently, SpectraLink could see a material adverse effect on its operations if demand for product considerably exceeds what is anticipated by SpectraLink. SpectraLink maintains, or requires suppliers to at certain times maintain, inventory to allow it to fill customer orders without significant interruption during the period that SpectraLink believes would be required to obtain alternate supplies of many replacement components. However, there is no assurance that SpectraLink will have sufficient inventory supply to meet every possible contingency. Any shortage or discontinuation of, or manufacturing defect in, these components would have a material adverse effect on SpectraLink’s operations.

     Since May 1997, SpectraLink has maintained a portion of its manufacturing operation and corporate headquarters in a 37,050 square foot leased facility in Boulder, Colorado. SpectraLink leased two additional facilities in Boulder, Colorado, a 15,083 square foot facility in March 2001 and a 7,483 square foot facility in September 2001, which was expanded to include an additional 7,483 square feet in October 2003. SpectraLink also leased 4,609 square feet in August 2001, which was expanded to include an additional 4,519 square feet in August 2003, in Guaymas/Empalme, Sonora, Mexico. Since SpectraLink relies on these manufacturing facilities, a major catastrophe affecting any of these locations could result in a prolonged interruption of SpectraLink’s business, with adverse impact on SpectraLink.

Research and Product Development

     The wireless telecommunications industry is subject to rapid technological changes, frequent new product introductions and enhancements, product obsolescence and changes in end-user requirements. SpectraLink believes its future success and ability to compete in the on-premises wireless telephone market are largely dependent upon its ability to augment current product lines and develop, introduce and sell new features and products while maintaining technological competitiveness through the advancement of its core technologies.

     As of January 31, 2004, SpectraLink employed 55 people in support of its research and development activities. SpectraLink expended in research and development approximately $7,759,000, $6,501,000 and $5,510,000 in 2003, 2002 and 2001, respectively. SpectraLink expects that research and development expenses will be approximately 10% to 12% of net sales for fiscal 2004. The inability of SpectraLink to introduce in a timely manner new products or enhancements to existing products that contribute to sales could have a material adverse effect on SpectraLink’s business and financial condition.

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Product Warranties and Service

     SpectraLink 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, SpectraLink establishes a provision for estimated expenses of providing service under these warranties based on historical warranty experience. As of December 31, 2003 and 2002, accrued warranty expenses were $493,000 and $274,000, respectively. Product failure rates, materials 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.

Government Regulation

     The wireless communications industry, which is regulated by the FCC in the United States and similar regulatory 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.

     The 902-928 MHz Band. In 1985, the FCC permitted the use of spread spectrum technology under its Part 15 Rules in the 902-928 MHz band. Part 15 Rules refer to the section of the FCC regulations that permit the use of radio-based systems without requiring the user to obtain an operating license from the FCC. For this reason, Part 15 Rules permit devices to be deployed expediently without the inherent delays associated with the traditional radio equipment licensing procedure. A significant industry developed around the Part 15 Rules for commercial products. The FCC has certified all of SpectraLink’s Link Wireless Telephone Systems for unlicensed operation under Part 15 Rules in this band.

     In the federal regulatory framework, Part 15 spread spectrum systems accorded secondary status in the 902-928 MHz band, which means that their operators must accept interference received, and correct any interference caused to other systems, even if it requires the operator to cease operating in the band. The FCC, in Docket 93-61, modified this status somewhat, establishing a presumption of non-interference in favor of Part 15 devices that meet specific requirements. SpectraLink believes its Link Wireless Telephone System satisfies these requirements. In addition, the Part 15 Rules provide SpectraLink with additional flexibility to resolve interference under certain circumstances.

     The 1920-1930 MHz Band. In 1994, the FCC designated a 10 MHz segment from 1920-1930 MHz for isochronous wireless systems such as voice communications. Wireless telephone equipment operating in this range falls under Subpart D of the Part 15 Rules. SpectraLink does not offer a product that uses this band, although several competing products operate in the band.

     The 2400-2483 MHz Band. The FCC permits the use of spread spectrum technology under the Part 15 Rules in the 2400-2483 MHz band. The FCC has certified SpectraLink’s NetLink Wireless Telephones for unlicensed operation under Part 15 Rules in this band.

     In 1997, the IEEE approved an 802.11 specification for a wireless LAN standard operating in the 2400-2483 MHz band. The 802.11 standard specified an “over the air” interface between a wireless client and a base station or access point, as well as among wireless clients. The standard provides interoperability among devices sharing a single wireless LAN infrastructure, including both voice and data devices, thus enabling organizations to provide mobile employees access to both data and voice applications over a single network. Subsequently, a significant industry developed around wireless local area networks in this band. The 802.11 specification is a global standard. Each country that supports the standard also has specific certification processes that must be undergone before a product can operate in that country. SpectraLink is involved in a number of international certification processes.

Employees

     As of January 31, 2004, SpectraLink employed 325 persons, 314 of whom were full-time employees.

Available Information

     SpectraLink makes available free of charge on or through its Internet address located at www.spectralink.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after SpectraLink electronically files that material with, or furnishes it to, the Securities and Exchange Commission. The information on SpectraLink’s website is not incorporated by reference into this annual report.

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     SpectraLink has adopted a written code of ethics that applies to all directors, officers and employees of SpectraLink, including our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder. The code of ethics will be available on SpectraLink’s website at www.spectralink.com/company/governance.html. SpectraLink intends to make all required disclosures concerning any amendments to, or waivers from, SpectraLink’s code of ethics on its website.

Item 2. Description of Property.

     SpectraLink’s corporate headquarters, manufacturing, and research and development activities are located in Boulder, Colorado, in one 37,050 square foot leased building at 5755 Central Avenue, 15,083 square feet of office space at 5744 Central Avenue and 14,966 square feet of distribution and office space at 5766 Central Avenue. In addition, SpectraLink leases 9,128 square feet of manufacturing space primarily for component assembly in Guaymas/Empalme, Sonora, Mexico. The length of these leases is as follows: (i) the lease for the 5755 Central Avenue facility runs through April 2007, (ii) the lease for 5744 Central Avenue runs through April 2007, (iii) the lease for 7,483 square feet of 5766 Central Avenue runs through April 2007 and 7,483 square feet of 5766 Central Avenue runs through June 2007, and (iv) the lease for Guaymas/Empalme, Sonora, Mexico runs through August 2004. SpectraLink enters into short-term leases for its domestic and international sales offices. SpectraLink believes that the combination of its existing facilities together with the availability of additional space for lease in Boulder and other real estate markets will be adequate to meet its current and foreseeable facilities needs.

Item 3. 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, Defendants), and SpectraLink Corporation, Nominal Defendant (United States District Court Civil Action Number 02-D-0345); and Roger Humphreys, Derivatively on Behalf of Nominal Defendant SpectraLink Corporation, Plaintiff, v. Carl D. Carman, Anthony V. Carollo, Jr., Bruce M. Holland, Burton J. McMurtry, Gary L. Bliss, Michael P. Cronin, John H. Elms, and Nancy K. Hamilton, Defendants (Colorado District Court Case. No. 02CV1687).

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

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     The parties to the consolidated class actions have agreed to engage in mediation on April 16, 2004, and the Court has granted a stipulated motion which extends various discovery and other deadlines. There can be no assurance that the mediation will be successful.

     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.

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

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

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

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Item 4. Submission of Matters to a Vote of Security Holders.

     No matters were submitted to a vote of SpectraLink’s stockholders during the fourth quarter of 2003.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

     SpectraLink’s common stock is traded on the Nasdaq National Market under the symbol “SLNK”. The following table sets forth for the quarterly periods indicated, the high and low bid prices for SpectraLink’s common stock as reported by Nasdaq. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

Dividend Policy

     On November 19, 2003, SpectraLink’s Board of Directors initiated a dividend policy and declared SpectraLink’s initial quarterly cash dividend of $0.10 per share of SpectraLink common stock. SpectraLink’s first cash dividend was paid on December 23, 2003, to stockholders of record at the close of business on December 15, 2003.

Equity Compensation Plan Information

Stock Option Plan

     On May 24, 2000, the Company’s stockholders approved the 2000 Stock Option Plan (the 2000 Option Plan), which is a successor to the Company’s original option plan that became effective June 7, 1990. Collectively, these two option plans are referred to as the (Plans). The 2000 Option Plan provides selected employees, officers, directors, agents, consultants and independent contractors of the Company options to purchase up to 2,000,000 shares of the Company’s common stock. The 2000 Option Plan also provides for automatic annual increases in the number of shares available for issuance under the 2000 Option Plan by an amount equal to five percent of the total number of shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year, or such lesser number of shares ratified by the Company’s Board of Directors, not to exceed 1,300,000 shares. In 2003, 2002 and 2001, the Board of Directors restricted the increase in the number of shares available for issuance under the 2000 Option Plan to 950,000, 950,000 and 900,000 shares, respectively.

     On January 31, 2004, SpectraLink had approximately 120 stockholders of record.

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Item 6. Selected Financial Data.

     The selected, consolidated financial information presented below for each of the five years in the period ended December 31, 2003 is derived from our consolidated financial statements. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in this report. Historical results may not be indicative of future results.

Consolidated Statement of Operations Data:
(In thousands, except per share amounts)

Consolidated Balance Sheet Data:
(In thousands)

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Quarterly Financial Data:
(In thousands, except per share amounts)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

     The following discussion and analysis should be read in conjunction with “Selected Financial Data” and SpectraLink’s Consolidated Financial Statements and Notes thereto included elsewhere in this report. As referenced in the first paragraph of Part I, this report contains forward-looking statements that involve risks and uncertainties. SpectraLink’s actual results may differ materially from the results discussed in such forward-looking statements. For a more complete understanding of our financial condition and results of operations, and some of the risks and trends that could affect future results, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources” in this report’s Item 7.

Business Description and Overview

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

     For fiscal year 2003, SpectraLink’s earnings per diluted share were $0.42 on net income of $8.2 million and revenue of $71.4 million. This represents 51% growth in annual net income, and over 17% growth in annual revenue, compared to fiscal year 2002. The primary driver of revenue growth in 2003 was the increased sales of NetLink Wireless Telephones. Sales of this product line grew more than $9,000,000 from 2002 to 2003, which was a 125% increase over 2002 NetLink sales.

     SpectraLink introduced new NetLink products in 2003. All of these products are based on the global 802.11standard and are expected by SpectraLink to be a foundation for targeted future growth. SpectraLink expects that sales of NetLink Wireless Telephones will constitute a majority of its product sales in 2004.

     In fiscal year 2003, sales through SpectraLink’s distributors accounted for 70% of total product sales. The vast majority of sales in fiscal year 2003 occurred in North America. International sales are expected to grow as a percentage of total revenue with the introduction of SpectraLink products that utilize VoIP that are offered at a much-reduced price to the customer as compared to its past products.

     The i640 NetLink handset, which is targeted at vertical markets that need extensive features and durability, was enhanced with a push-to-talk feature allowing broadcast messaging where needed. The new e340 NetLink handset, which is a smaller, lighter option than previously offered products, was designed to expand SpectraLink’s presence into the small- to medium-enterprise markets, as well as international markets. With its dramatically reduced price, this handset is intended to capitalize on the price elasticity of demand and drive overall product volume. The other main product announced in 2003 was the wireless deskset. This product will appeal to the growing interest in totally wireless office facilities.

     In 2003, SpectraLink used $5,570,000 of its cash to repurchase outstanding common stock and to pay a cash dividend to its stockholders.

     SpectraLink’s ongoing success is dependent upon its ability to build solid partnerships and relationships. To that end, an Original Equipment Manufacturer Program Management Office was created in 2003. During the year, SpectraLink announced agreements with NEC, Inter-Tel and SBC. These relationships complement the arrangement with Avaya that was initiated in 2002. The OEM Program Office will continue to seek relationships that will not only distribute SpectraLink products but also

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co-brand and private label these products. The goal of this strategy is to provide greater exposure to SpectraLink’s products through the reach these partners have with their customers. These relationships also help to establish an international presence for SpectraLink products.

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

Results of Operations

Net Sales

     Product Sales, Net. SpectraLink derives its product revenue principally from the sale of wireless, on-premises telephone systems.

     In 2003, product sales increased 15.8% to $56,469,000 from $48,771,000 in 2002. The increase in product sales was mainly due to SpectraLink’s increased product sales through distributors and increased penetration in the commercial and retail markets, as well as an increase in the overall marketplace’s acceptance of 802.11 technology.

     In 2002, product sales decreased 3.8% to $48,771,000 from $50,683,000 in 2001. The decrease in sales was mainly due to SpectraLink’s decreasing orders from customers as a result of the weak economy.

     Service Sales. SpectraLink derives its service revenue principally from the installation and service of wireless, on-premises telephone systems.

     In 2003, service sales increased 23.3% to $14,959,000 from $12,130,000 in 2002. The increase in service sales was mainly due to increased revenue from maintenance contracts relating to products previously sold to a larger installed base of customers, which continue to use our products and purchase our maintenance contracts. Service sales also increased due to additional time and material service repairs.

     In 2002, service sales increased 20.5% to $12,130,000 from $10,068,000 in 2001. The increase in service sales was mainly due to increased revenue from maintenance contracts and installations.

     During fiscal 2003 and fiscal 2001, one customer comprised more than 10% of total net sales. In 2003, this customer represented 11.3% of total net sales, while representing 11.7% of net sales in 2001. During 2002, no one customer comprised more than 10% of total sales. Also, for the fourth quarter 2003, this one customer comprised 15.4% of net sales.

Total Cost of Sales

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

     In 2003, cost of product sales increased by 10.8% to $16,329,000 from $14,732,000 in 2002. Cost of product sales as a percentage of product sales, net was 28.9% for the year ended December 31, 2003 compared to 30.2% for the year ended December 31, 2002. Gross profit from product sales, net increased by 17.9% to $40,140,000 in 2003 from $34,039,000 in 2002. For the years ended December 31, 2003 and 2002, respectively gross profit from product sales, net (gross profit from product sales, net as a percentage of product sales, net) increased to 71.1% from 69.8%. The increase in gross profit from product sales, net was due to lower material costs and manufacturing expenses for labor and overhead as a percentage of

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product sales, net, which was a result of an overall increase in product sales, net, offset by a change in product mix.

     In 2002, cost of product sales decreased by 3.1% to $14,732,000 from $15,206,000 in 2001. Cost of product sales as a percentage of product sales, net was 30.2% for the year ended December 31, 2002 compared to 30.0% for the year ended December 31, 2001. Gross profit from product sales, net decreased by 4.1% to $34,039,000 in 2002 from $35,477,000 in 2001. For the years ended December 31, 2002 and 2001, respectively gross profit from product sales, net (gross profit from product sales, net as a percentage of product sales, net) decreased to 69.8% from 70.0%. The decrease in gross profit from product sales, net was due to a change in product mix within product sales and a decrease in product sales due to the weak economy.

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

     In 2003, cost of service sales increased by 14.5% to $7,220,000 from $6,303,000 in 2002. Cost of service sales as a percentage of service sales was 48.3% for the year ended December 31, 2003 compared to 52.0% for the year ended December 31, 2002. Gross profit from service sales increased by 32.8% to $7,739,000 in 2003 from $5,827,000 in 2002. For the years ended December 31, 2003 and 2002, respectively, gross profit from service sales (gross profit from service sales as a percentage of service sales) increased to 51.7% from 48.0%. The increase in gross profit from service sales was due to economies of scale resulting from increased service sales.

     In 2002, cost of service sales increased by 18.7% to $6,303,000 from $5,311,000 in 2001. Cost of service sales as a percentage of service sales was 52.0% for the year ended December 31, 2002 compared to 52.8% for the year ended December 31, 2001. Gross profit from service sales increased by 22.5% to $5,827,000 in 2002 from $4,757,000 in 2001. For the years ended December 31, 2002 and 2001, respectively gross profit from service sales (gross profit from service sales as a percentage of service sales) increased to 48.0% from 47.2%. The increase in gross profit from service sales was due to economies of scale resulting from increased service sales.

Gross Profit

     In 2003, SpectraLink’s gross profit margin (gross profit as a percentage of net sales) increased to 67.0% from 65.5% in 2002. The increase in gross profit margin was mainly due to an increase in total product sales dollars compared to a proportionate decrease in total service sales dollars, lower material costs and a change in product mix.

     In 2002, SpectraLink’s gross profit margin (gross profit as a percentage of net sales) decreased to 65.5% from 66.2% in 2001. The decrease in gross profit margin was mainly due to an increase in service sales which have a lower gross margin compared to product sales, net. Additionally, gross margin decreased due to a change in product mix within product sales and a decrease in product sales due to the weak economy.

Operating Expenses

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. SpectraLink expects that research and development expenses will be approximately 10% to 12% of net sales for fiscal 2004.

     In 2003 compared to 2002, the increase in dollars spent and as a percentage of net sales, was due to increases in headcount, merit raises and the rising cost of employee benefits. Additionally, consulting fees, product design fees, tooling costs and miscellaneous parts and supplies increased with the development of a new family of products and performance enhancements to existing products.

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     In 2002 compared to 2001, the increase in dollars spent and as a percentage of net sales was due to an increase in headcount, which resulted from hiring additional personnel and the corresponding recruiting cost to hire these personnel, as well as costs associated with new products and performance 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.

     In 2003 compared to 2002, the increase in dollars spent for both domestic and international sales, was primarily due to an increase in salaries and employee benefits to hire and retain personnel, commissions, marketing and promotional costs and legal fees. These increases were offset by decreases in travel, sales meetings and other professional fees. The decrease in percent of sales was due to economies of scale resulting from increased sales.

     In 2002 compared to 2001, marketing and selling total dollars spent and as a percentage of net sales remained relatively consistent.

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.

     In 2003 compared to 2002, 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 an increase in professional fees, insurance and amounts for corporate governance and disclosure requirements 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.

     In 2002 compared to 2001, the increase in dollars spent and as a percentage of net sales was primarily a result of increasing SpectraLink’s infrastructure to support a higher volume of sales and future growth, for domestic and international business matters, as well as increased legal, insurance, bad debt expense and other corporate matters.

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Other Non-Operating Expenses

Investment Income and Other, Net

     Investment income is the result of SpectraLink’s investment in money market, investment-grade debt securities, government securities, and corporate bonds.

     In 2003 compared to 2002, the decrease was primarily due to a decrease in interest rates in 2003.

     In 2002 compared to 2001, the decrease was primarily due to a decrease in interest rates in 2002.

Income Tax

     In 2003 compared to 2002, the decrease in the effective tax rate was due to an increase in tax credits in 2003. The increase in income tax expense was primarily related to an increase in operating income.

     In 2002 compared to 2001, the decrease in income tax expense was primarily related to a decrease in operating income.

Liquidity and Capital Resources

     SpectraLink has funded its operations since inception with cash provided by operations, supplemented by equity financing and leases on capital equipment. As of December 31, 2003, SpectraLink had $51,861,000 of cash and cash equivalents. During the fourth quarter of 2003, SpectraLink paid its first quarterly cash dividend to holders of common stock and intends to use some of its cash provided by operations to pay future quarterly dividends during a yet to be determined period of time as determined by the Board of Directors.

     During 2003, SpectraLink generated cash from operations of $10,727,000 consisting principally of net income of $8,176,000, adjustments for depreciation and amortization, income tax benefit from exercises of stock options, and provision for excess and obsolete inventory that reconcile net income to cash, as well as increases in accounts payable, accrued liabilities, and deferred revenue and was offset by increases in trade accounts receivable, inventory, income taxes receivable, and other assets.

     In 2003, investing activities used cash of $2,681,000 for purchases of property and equipment primarily related to the implementation of an ERP system and purchases of manufacturing tooling and molds.

     SpectraLink used $396,000 of cash in financing activities during 2003, which was a direct result of purchases of 447,100 shares of the outstanding common stock (now classified as treasury stock) at a cost of $3,688,000, the issuance and payment of a cash dividend of $1,882,000 and payments on an obligation of $19,000. These cash outflows were offset by proceeds of $5,193,000 received from common stock option exercises and issuances of common stock through the employee stock purchase plan.

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     As of December 31, 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 December 31, 2003 was $66,549,000, which represented 82.0% of total assets.

     As of December 31, 2003, SpectraLink had working capital of $62,178,000 compared to $53,958,000 at December 31, 2002. The increase in working capital of $8,220,000 occurred primarily from cash flows from operations and proceeds from common stock option exercises and stock issuances, offset by the purchase of capital assets, the repurchase of common stock and the cash dividend paid. As of December 31, 2003, SpectraLink’s current ratio (ratio of current assets to current liabilities) was 5.33:1, compared with a current ratio of 5.99:1 as of December 31, 2002.

     SpectraLink believes that its current cash, cash equivalents 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, pay dividends and to finance its expansion for the foreseeable future (next 12 months). There can be no assurance, however, that SpectraLink will not require additional financing. 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 additional funds were to be raised through the sale of equity securities, additional dilution to the existing stockholders would be likely to result.

Aggregate Contractual Obligations and Commercial Commitments

     SpectraLink incurs various contractual obligations and commercial commitments in its normal course of business. Such obligations and commitments consist primarily of the following:

     Lease Commitments. SpectraLink leases its facilities under noncancelable operating lease arrangements that expire at various dates through 2007. SpectraLink has other obligations for office equipment that expire at various dates through 2008.

     Purchase Commitments. SpectraLink incurs various purchase obligations with vendors and suppliers for the purchase of inventory, as well as goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from six to twelve months from the purchase date, and in certain cases, purchase orders that contain non-cancelable/non-returnable terms and conditions associated with these purchase arrangements. SpectraLink is committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which allow SpectraLink to delay receipt of such orders. Such orders may or may not include cancellation costs payable by SpectraLink. In the past, SpectraLink has been required to take delivery of materials from its suppliers that were in excess of demand requirements and SpectraLink has previously recognized charges and expenses related to such excess material, related primarily to engineering changes. If SpectraLink is not able to adequately manage its supply chain and adjust such commitments for changes in demand, SpectraLink may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on SpectraLink’s business, financial condition and results of operations.

     Indemnifications. SpectraLink provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products. SpectraLink evaluates estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). SpectraLink considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, SpectraLink has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications in SpectraLink’s financial statements.

     As of December 31, 2003, expected future cash payments related to contractual obligations and commercial commitments were as follows:

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     SpectraLink believes its existing cash balances and funds expected to be generated from future operations will be sufficient to satisfy these contractual obligations and commercial commitments and that the ultimate payments associated with these commitments will not have a material adverse effect on SpectraLink’s liquidity position.

Critical Accounting Policies and Estimates

     SpectraLink has identified the most critical accounting principles upon which its financial status depends. 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 beginning on page 29 of this report.

     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 considers an accounting estimate to be critical if:

	•		It requires SpectraLink to make assumptions about matters that were uncertain at the time of making the estimate, and
	•		Changes in the estimate or assumptions in the estimate could have a material impact on SpectraLink’s financial condition or results of operations.

     The following table presents information about the nature and rationale for SpectraLink’s critical accounting policies and estimates used in the preparation of its consolidated financial statements:

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     In addition, there are other items within SpectraLink’s financial statements that require estimation, but are not as critical as those discussed above. Revisions to any of the discussed estimates, or other non-critical items, could have a significant effect on SpectraLink’s consolidated financial statements.

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Recently Issued Accounting Pronouncements

     SpectraLink was required to adopt EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” for the quarter ended 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.

     In December 2003, the Staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element arrangements, superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SAB Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 in December 2003 did not have an effect on the consolidated results of operations or financial position of SpectraLink.

Item 7A. 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 due to changes in United States interest rates. These exposures are directly related to SpectraLink’s normal operating and funding activities. As of December 31, 2003, SpectraLink has not used derivative instruments or engaged in hedging activities, and is not currently impacted significantly by fluctuations in foreign currency exchange rates.

Interest Rate Risk

     As part of SpectraLink’s cash management strategy, at December 31, 2003, SpectraLink had cash and cash equivalents of approximately $51,861,000 mainly in the form of bank demand deposits and money markets. SpectraLink has completed a market risk sensitivity analysis of these cash and cash equivalents based on an assumed 1% point increase in interest rates. If market rates had increased or decreased 1% point during the year ended December 31, 2003, SpectraLink’s interest income would have increased or decreased by approximately $480,000.

FORWARD-LOOKING STATEMENT FACTORS

     The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part I of this report.

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	•		Develop or gain access to new technologies in order to increase product performance and function, reduce product size, and maintain cost-effectiveness;
	•		develop new products for existing and emerging wireless communications markets, and introduce such products in a timely manner;
	•		implement 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.

	•		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.

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	•		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;

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	•		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 previously been sued in several purported securities class action lawsuits. Further, certain of SpectraLink’s management and directors were also 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.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Independent Auditors’ Report

The Board of Directors and Stockholders of SpectraLink Corporation:

We have audited the accompanying consolidated balance sheets of SpectraLink Corporation (a Delaware corporation) and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of SpectraLink Corporation and subsidiary as of December 31, 2001 and for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated January 18, 2002 (except with respect to the matter discussed in note 9, as to which the date is March 20, 2002).

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpectraLink Corporation and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Denver, Colorado
January 23, 2004

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Report of Independent Public Accountants

To SpectraLink Corporation:

     We have audited the accompanying consolidated balance sheets of SpectraLink Corporation (a Delaware corporation) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SpectraLink Corporation and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ARTHUR ANDERSEN LLP Arthur Andersen LLP

Denver, Colorado,

     January 18, 2002 (except with respect to the matter discussed in Note 9, as to which the date is March 20, 2002)

The report of Arthur Andersen LLP (Andersen) is a copy of a report previously issued by Andersen on January 18, 2002 (except with respect to the matter discussed in Note 9, as to which the date is March 20, 2002). We have not been able to obtain a re-issued report from Andersen. Andersen has not consented to the inclusion of its report in this Annual Report on Form 10-K. The report of Andersen refers to consolidated balance sheets as of December 31, 2001 and 2000 and statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2000 and 1999 not included herein. Because Andersen has not consented to the inclusion of its report in this Annual Report, it may be more difficult for you to seek remedies against Andersen and your ability to seek relief against Andersen may be impaired.

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SPECTRALINK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)