SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED

March 31, 2005

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO

Commission file number 0-19711

The Spectranetics Corporation

96 Talamine Court
Colorado Springs, Colorado 80907
(719) 633-8333
(Address of principal executive offices and telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 þ No ¨

Indicate by check mark whether the Registrant is an accelerated filer. Yes þ No ¨

As of May 5, 2005 there were 25,778,542 outstanding shares of Common Stock.

Page 1

Table of Contents

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements

THE SPECTRANETICS CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)

See accompanying unaudited notes to condensed consolidated financial statements.

Page 2

THE SPECTRANETICS CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In Thousands, Except Percentages, Share and Per Share Amounts)
(Unaudited)

See accompanying unaudited notes to condensed consolidated financial statements.

Page 3

THE SPECTRANETICS CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (In Thousands)
(Unaudited)

See accompanying unaudited notes to condensed consolidated financial statements.

Page 4

Item 1. Unaudited Notes to Condensed Consolidated Financial Statements

(1) General

     We design, manufacture, market and distribute single-use medical devices used in minimally invasive surgical procedures within the vascular system in conjunction with our proprietary excimer laser system. Excimer laser technology delivers comparatively cool ultraviolet light in short, controlled energy pulses to ablate or remove blockages. Our excimer laser system includes the CVX-300® laser unit and various fiber-optic delivery devices, including disposable catheters and sheaths. Our excimer laser system is the only excimer laser system approved in the United States and Europe for use in multiple, minimally invasive cardiovascular applications. Our excimer laser system is used in complex atherectomy procedures to open clogged or obstructed arteries in the coronary and peripheral vascular system. It is also used to remove lead wires from patients with implanted pacemakers or cardioverter defibrillators, which are electronic devices that regulate the heartbeat. In April 2004, we received 510(k) clearance from the Food and Drug Administration (“FDA”) for our CliRpath® laser catheters which are indicated for use in the endovascular treatment of symptomatic infrainguinal lower extremity vascular disease where total obstructions are not crossable with a guidewire.

     The accompanying condensed consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly-owned subsidiary, Spectranetics International, B.V. (collectively, the Company). All intercompany balances and transactions have been eliminated in consolidation.

     We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets, valuation allowances for receivables, inventories and deferred income tax assets, and accrued warranty and royalty expenses. Actual results could differ from those estimates.

     The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

(2) Stock-Based Compensation

     The Company accounts for its stock-based compensation plans for employees in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. No compensation cost has been recognized for stock option grants to employees in the accompanying financial statements as all options granted had an exercise price equal to or above the market value of the underlying common stock on the date of grant. Under FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of SFAS No. 123 (SFAS No. 148), entities are permitted to recognize as expense the fair value of all stock-based awards on the date of grant over the vesting period. Alternatively, SFAS No. 123, as amended, also allows entities to continue to apply the provisions of APB 25 and provide pro forma earnings

Page 5

(loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123, as amended, had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS No. 123, as amended.

     The Company accounts for nonemployee stock-based awards in accordance with SFAS No. 123 and related interpretations.

     The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended March 31, 2005 and 2004 (in thousands, except per share amounts):

     The per share weighted-average fair value of stock options granted during the first quarter of 2005 and 2004 was $5.29 and $4.05, respectively, on the date of grant using the Black-Scholes option pricing model. The Company used the following weighted-average assumptions in determining the fair value of options granted during the three months ended March 31, 2005 and 2004:

(3) Net Income Per Share

     The Company calculates net income per share under the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Under SFAS 128, basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted earnings per share are computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares outstanding during the period using the treasury stock method.

     For the three months ended March 31, 2005 and 2004, 637,292 and 1,038,392 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive

Page 6

effect. A summary of the net income per share calculation is shown below (in thousands, except per share amounts):

(4) Inventories

     Inventories consist of the following (in thousands):

(5) Property, Plant and Equipment

     Property, plant and equipment consist of the following (in thousands):

     On March 29, 2005, the Company acquired the building and land which houses its manufacturing facilities for $1,350,000 in cash. The purchase price was allocated between land and building based on the relative fair value of the assets acquired.

Page 7

     Property and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred. Equipment acquired under capital leases is recorded at the present value of minimum lease payments at the inception of the lease.

     Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of three to five years for manufacturing equipment, computers, and furniture and fixtures. Equipment held for rental or loan is depreciated using the straight-line method over three to five years. Equipment acquired under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. The building is depreciated using the straight-line method over its remaining estimated useful life of 20 years.

(6) Deferred Revenue

     Deferred revenue was $1,827,000 and $2,023,000 at March 31, 2005 and December 31, 2004, respectively. These amounts primarily relate to payments in advance for various product maintenance contracts in which revenue is initially deferred and recognized over the life of the contract, which is generally one year, and to deferred revenue associated with service provided to our customers during the warranty period after the sale of equipment. Additional information relating to the deferral of revenue associated with the warranty provided upon sale of equipment is included in Footnote 9, “Revenue Recognition”.

(7) Segment and Geographic Reporting

     An operating segment is a component of an enterprise whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. The primary performance measure used by management is net income or loss. The Company operates in one distinct line of business, which is the development, manufacture, marketing and distribution of a proprietary excimer laser system for the treatment of certain coronary and vascular conditions. The Company has identified two reportable geographic segments within this line of business: (1) U.S. Medical and (2) Europe Medical. U.S. Medical and Europe Medical offer the same products and services but operate in different geographic regions and have different distribution networks. Additional information regarding each reportable segment is shown below.

U. S. Medical

     Products offered by this reportable segment include an excimer laser unit (“equipment”), fiber-optic delivery devices (“disposables”), and the service of the excimer laser unit (“service”). The Company is subject to product approvals from the FDA. At March 31, 2005, FDA-approved products were used in multiple vascular procedures, including coronary and peripheral atherectomy as well as the removal of nonfunctioning leads from pacemakers and cardiac defibrillators. In April 2004, the Company received 510(k) clearance from the FDA to sell fiber-optic delivery devices for the treatment of patients suffering from total occlusions (blockages) not crossable with a guidewire in their leg arteries. This segment’s customers are primarily located in the United States; however, the geographic areas served by this segment also include Canada, Mexico, South America, the Pacific Rim and Australia.

     U.S. Medical is also corporate headquarters for the Company. Accordingly, research and development as well as corporate administrative functions are performed within this reportable segment. As of March 31, 2005 and 2004, cost allocations of these functions to Europe Medical have not been performed.

Page 8

     Manufacturing activities are performed primarily within the U.S. Medical segment. Revenue associated with intersegment transfers to Europe Medical was $507,000 and $456,000 for the three months ended March 31, 2005 and 2004, respectively. Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation.

Europe Medical

     The Europe Medical segment is a marketing and sales subsidiary located in The Netherlands that serves Europe as well as the Middle East. Products offered by this reportable segment are the same as those offered by U.S. Medical. The Company has received CE mark approval for products that relate to four applications of excimer laser technology – coronary atherectomy, in-stent restenosis, lead removal, and peripheral atherectomy to clear blockages in leg arteries.

     Summary financial information relating to reportable segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):

(8) Income Taxes

     The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the future

Page 9

tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards.

     A valuation allowance is required to the extent it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income, and tax planning strategies in making this assessment. In 2004, based upon the level of historical income and projections for future income, management determined it is more likely than not a portion of the deferred tax assets will be recoverable. As of March 31, 2005, the net deferred tax asset totaled $1,558,000.

     Income tax expense (benefit) attributable to income before income taxes consists of the following (in thousands):

(9) Revenue Recognition

     Revenue from the sale of the Company’s disposable products is recognized when products are shipped to the customer and title transfers. Revenue from the sale of excimer laser systems is recognized after completion of contractual obligations, which generally include delivery and installation of the systems and in some cases completion of physician training. The Company’s field service engineers are responsible for installation of each laser and participation in the training program at each site. The Company generally provides a one-year warranty on laser sales, which includes parts, labor and replacement gas. Upon expiration of the warranty period, the Company offers similar service to its customers under service contracts or on a fee-for-service basis. Revenue allocated to service contracts is initially recorded as deferred revenue and recognized over the related service contract period, which is

Page 10

generally one year. Revenue from fee-for-service arrangements is recognized upon completion of the related service.

     The Company adopted Emerging Issues Task Force Bulletin (EITF) 00-21, Revenue Arrangements with Multiple Deliverables, on July 1, 2003, which resulted in a modification of the Company’s revenue recognition policy for the sale of a laser. The primary impact of the adoption of EITF No. 00-21 is to treat service provided during the one-year warranty period as a separate unit of accounting. As such, the fair value of this service is deferred and recognized as revenue on a straight-line basis over the related warranty period and warranty costs are expensed in the period they are incurred. Revenue allocated to the laser element is recognized upon completion of all contractual obligations in the sales contract, which generally includes delivery and installation of the laser system and in some cases completion of physician training. Deferred revenue associated with service to be performed during the warranty period totaled $229,000 and $302,000 as of March 31, 2005 and December 31, 2004, respectively.

     The Company offers two laser system placement programs, which are described below, in addition to the sale of laser systems:

     Evergreen rental program — Rental revenue under this program varies on a sliding scale depending on the customer’s catheter purchases each month. Rental revenue is invoiced on a monthly basis and revenue is recognized upon invoicing. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within cost of sales based upon a three- to five-year expected life of the unit. As of March 31, 2005, 52 laser units were in place under the Evergreen program.

     Evaluation programs — The Company “loans” laser systems to institutions for use over a short period of time, usually three to six months. The loan of the equipment is to create awareness of the Company’s products and their capabilities, and no revenue is earned or recognized in connection with the placement of a loaned laser, although sales of disposable products result from the laser placement. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within selling, general and administrative expense based upon a three- to five-year expected life of the unit. As of March 31, 2005, 85 laser units were in place under the evaluation program.

(10) Commitments and Contingencies

     In August 2004, one of the Company’s licensors filed a lawsuit against the Company alleging that the Company underpaid royalties since January 2001 under a license agreement with the licensor. The licensor claimed that the Company took improper deductions from royalty-bearing revenue, resulting in an underpayment of the license fee. In February 2005, the Company settled its dispute with the licensor and executed an amendment to the license agreement that incorporated such settlement. Under the terms of the amendment, which has a noncancelable term of four years, the Company agreed to pay the licensor $275,000 in back royalties. Such amount was included in accrued liabilities at December 31, 2004 and paid in February 2005. Additionally, the license was converted to non-exclusive and the royalty rate for products sold using the associated technology was reduced effective October 1, 2004. The Company also agreed to increase its minimum quarterly royalty payment to $50,000 from $25,000 beginning July 1, 2005.

     The Company has a disagreement with another licensor regarding the level of past royalty payments since inception of a license agreement that was executed in October 2000. The disagreement over past royalty payments centers on the treatment of certain service-based revenue, including repair and maintenance, and physician and clinical training services. Management believes that these are beyond the scope of the license agreement. In August 2004, the licensor commenced arbitration proceedings as provided for under the license agreement, and a resolution to the matter is anticipated in mid to late 2005. The Company has accrued costs of approximately $1,826,000 associated with the resolution of this matter as of March 31, 2005, which represents management’s best estimate of costs to resolve the matter. Management intends to vigorously defend its position in such arbitration proceedings.

Page 11

     On June 24, 2004, the Court of Appeal of Amsterdam rejected an appeal made by the Company on a judgment awarded to an Italian distributor (the Distributor) by the District Court of Amsterdam. The Distributor originally filed suit in July 1999, and the lower court’s judgment was rendered in April 2002. The Court of Appeal of Amsterdam affirmed the lower court’s opinion than an exclusive distributor agreement for the Italian market was entered between the parties for the three-year period ending December 31, 2001, and that the Distributor may exercise its right to compensation from the Company for its loss of profits during such three-year period. The appellate court awarded the Distributor the costs of the appeal and has referred the case back to the lower court for determination of the loss of profits. The Distributor asserts lost profits of approximately $1,500,000, which is based on their estimate of potential profits during the three-year period. The Company estimates that the lost profits to the Distributor for the period, plus estimated interest and awarded court costs, totaled approximately $260,000. Such amount was included in accrued liabilities at March 31, 2005. The Company intends to vigorously defend the calculation of lost profits.

     The Company is involved in various other claims and legal actions arising in the ordinary course of business, which, in the opinion of management, the ultimate disposition of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

(11) Related Party Transaction

     In February 2005, the Company entered into an agreement with a director of the Company whereby the director agreed to provide training services to outside physicians on behalf of the Company. The total to be paid under the agreement, which expires on December 31, 2005, is $75,000. During the first quarter of 2005, the total amount incurred for training services provided by the director totaled $18,750.

(12) Reclassifications

     Certain amounts from prior condensed financial statements have been reclassified to conform with the March 31, 2005 presentation.

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Forward-Looking Statements

     This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. For a description of such risks and uncertainties, which could cause the actual results, performance or achievements of the Company to be materially different from any anticipated results, performance or achievements, please see the risk factors below. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of certain risks and factors that may affect our business. This analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K, filed on March 31, 2005. Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.

Page 12

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

Corporate Overview

     We develop, manufacture, market and distribute single-use medical devices used in minimally invasive surgical procedures within the vascular system in conjunction with our proprietary excimer laser system. Excimer laser technology delivers comparatively cool ultraviolet energy in short, controlled energy pulses to ablate or remove tissue. Our excimer laser system includes the CVX-300® laser unit and various fiber-optic delivery devices, including disposable catheters and sheaths. Our excimer laser system is the only excimer laser system approved in the United States and Europe for use in multiple, minimally invasive cardiovascular applications. Our excimer laser system is used in complex atherectomy procedures to open clogged or obstructed arteries in the coronary and peripheral vascular system. It is also used to remove lead wires from patients with implanted pacemakers or cardioverter defibrillators, which are electronic devices that regulate the heartbeat. Our laser system is typically used adjunctively with balloon catheters and cardiovascular stents. We compete with alternative technologies including mechanical atherectomy and thrombectomy devices. In April 2004, we obtained 510(k) marketing clearance from the Food and Drug Administration (FDA) for a laser-based treatment of total occlusions (blockages) in the legs not crossable with a guidewire. Some of the patients with total occlusions in the leg suffer from critical limb ischemia (CLI), a debilitating condition that begins with resting leg pain and often leads to tissue loss or amputation as a result of a lack of blood flow to the legs.

     Although 88% of our revenue was derived in the United States for the three months ended March 31, 2005, we also have regulatory approval to market our products in two key international markets. In Europe, we have the required approvals to market our products for the same indications that are approved in the United States. We have also received approval to market certain coronary atherectomy products in Japan, and are seeking additional approvals there for our newer coronary, peripheral and lead removal products. In 2003, we appointed a new distributor, DVx Japan, who is assisting us in pursuing reimbursement approval. We currently expect reimbursement approval in 2006, although there are no assurances that reimbursement will be received then, if at all. We do not expect significant revenue increases in Japan until reimbursement is received.

     Our strategy is to develop additional applications for our excimer laser system, gather and develop clinical data for publication in peer-reviewed journals, increase utilization of our FDA-approved products, and expand our installed base of laser systems. We plan to remain focused on profitability, however there are no assurances that we will continue to be profitable in the future.

     In 1993, the FDA approved for commercialization our CVX-300 laser system and the first generation of our fiber optic coronary atherectomy catheters. Several improvements and additions to our coronary atherectomy product line have been made since 1993 and have been approved for commercialization by the FDA. In 1997, we secured FDA approval to use our excimer laser system for removal of pacemaker and defibrillator leads, and we secured FDA approval in 2001 to market certain products for use in restenosed (clogged) stents (thin steel mesh tubes used to support the walls of coronary arteries) as a pretreatment prior to brachytherapy (radiation therapy).

     In April 2004, we received 510(k) marketing clearance from the FDA for our CliRpath excimer laser catheters which are indicated for use in the endovascular treatment of symptomatic infrainguinal lower extremity vascular disease when total obstructions are not crossable with a guidewire. The data submitted to the FDA showed that the limb salvage rate (no major amputations) among the 47 patients treated was 95% for those patients surviving six months following the procedure. There was no difference in serious adverse events as compared with the entire set of patients treated in the LACI (Laser Angioplasty for Critical Limb Ischemia) trial.

     We are currently exploring the use of our technology to treat blockages caused by the formation of thrombus (blood clots) and are gathering clinical data for laser-based treatment of saphenous vein grafts (heart bypass grafts that develop blockages) and acute myocardial infarction (AMI, or heart attack). The CORAL trial, which is being conducted in the U.S., is a study of the use of laser atherectomy to treat

Page 13

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

blockages within sapheneous vein grafts. We enrolled almost 100 patients in 18 hospitals, with 2/3 of the patients having lesions where distal protection could not be used due to lesion location or inability to place the filter. The primary endpoint for the CORAL trial is a measurement of the complication rates, known as major adverse cardiac events (MACE). The MACE rates from the CORAL trial will be compared to MACE rates associated with the SAFER trial sponsored by Medtronic, which measured MACE rates using distal protection devices. The goal of this trial is to demonstrate the safety and efficacy of the laser in relation to distal protection devices, which are widely used and were proven to reduce MACE rates in the SAFER clinical trial. We had hoped to match the previously published complication rates of 10% with distal protection versus the complication rates of 17% using balloon and stents alone. Based on our analysis of the data which is not yet complete, it appears that we didn’t meet our endpoint in this pilot study as our complication rates were similar to balloon and stents and higher than distal protection. We believe that our patients may have had more difficult lesions, which could influence the final clinical outcomes. We are currently working with the core lab to finalize the statistical analysis and determine our next steps. Our investigators remain convinced that using the laser in the treatment of saphenous vein grafts, either alone when distal protection cannot be deployed or in combination when it can, will reduce complication rates.

     The Extended FAMILI trial is a feasibility trial that will benchmark quantitative endpoints common in other AMI trials, such as myocardial blush scores and the reduction in infarct size for the subset of patients. Enrollment in the trial has been slow but is expected to be completed by the end of the second quarter. We expect to have the 30-day follow-up and analysis complete in the third quarter. After completion of the data analysis, a decision will be made whether to pursue a pivotal, randomized trial that, if commenced, may take two to three years to complete.

     We are also considering the initiation of additional clinical research during 2005 focused on the treatment of peripheral vascular disease and chronic total occlusions in the coronary vascular system.

Page 14

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

Results of Operations

The following table summarizes key supplemental financial information for the last 5 quarters.

Page 15

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

Three Months Ended March 31, 2005, Compared with Three Months Ended March 31, 2004

     Revenue for the first quarter of 2005 was $9,053,000, up 16 percent as compared with $7,787,000 in the first quarter of 2004. The increase is due to a 19 percent increase in disposable product revenue, a three percent increase in equipment revenue, and a 12 percent increase in service and other revenue.

     The increase in disposable product revenue was almost entirely due to unit volume increases; however, a small price increase initiated in April 2004 across most of our disposable products contributed to a portion of the revenue growth in the first quarter of 2005 compared to the first quarter of 2004.

     We separate our disposable products revenue into two separate categories – atherectomy and lead removal. For the three months ended March 31, 2005, our atherectomy revenue totaled $3,373,000 (50% of our disposable product revenue) and our lead removal revenue totaled $3,433,000 (50% of our disposable product revenue). For the three months ended March 31, 2004, our atherectomy revenue totaled $3,075,000 (54% of our disposable product revenue) and our lead removal revenue totaled $2,638,000 (46% of our disposable product revenue). Atherectomy revenue, which includes products used in both the coronary and peripheral vascular system, grew 10% in the first quarter of 2005 as compared with the first quarter of 2004. Atherectomy revenue growth was primarily due to the launch of our CliRpath product line in May 2004, following the April 2004 FDA clearance to market these products to treat total occlusions in the legs that are not crossable with a guidewire. The FDA clearance covered catheter sizes ranging from .9 millimeters in diameter to 2.5 millimeters in diameter. Most of these catheters were marketed for coronary use prior to the FDA clearance; however, the catheters with a diameter from 2.0 to 2.5 millimeters were new products not previously marketed. These new catheters accounted for $987,000 of revenue for the first quarter of 2005 which accounted for the revenue growth within the atherectomy product line. Atherectomy revenue growth from current levels will depend on our ability to increase market acceptance of our CliRpath product line, and future success of our ongoing clinical research and product development within the coronary and peripheral atherectomy markets.

     Lead removal revenue grew 30% for the three month period ended March 31, 2005 as compared with the same three month period in 2004. We continue to believe our lead removal revenue is increasing primarily as a result of the increase in the use of implantable cardioverter defibrillators (ICD), devices that regulate heart rhythm. When an ICD is implanted, it often replaces a pacemaker. In these cases, the old pacemaker leads are likely to be removed to avoid potential electrical interference with the new ICD leads. Recent clinical studies (MADIT and ScD-Heft) have expanded the patient population that may benefit from defibrillator implants. The results of the MADIT clinical trial became available in 2003 and ScD-Heft clinical trials were made public in February 2004. Growth in the implantable defibrillator market may accelerate, depending on the establishment of referral patients to electrophysiologists for this expanded patient pool and the additional reimbursement recently established for the hospitals and electrophysiologists who treat these patients. Generally, growth in the implantable defibrillator market contributes to growth in our lead removal business. Although we expect our lead removal business to continue to grow, there can be no assurances to that effect. The current standard of care in this market is to cap leads and leave them in the body rather than lead removal. We have initiated programs to examine the costs and frequency of complication associated with abandoned leads, but there are no assurances that these programs will be successful or will change the current standard of care.

Page 16

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

     Laser equipment revenue was $783,000 and $761,000 for the three months ended March 31, 2005 and 2004, respectively. We sold 3 laser units (either an outright sale from inventory or a sale conversion from evaluation or rental programs) during each three month period, which accounts for the comparable laser sales revenue of $416,000 in the first quarter of 2005 and $438,000 in the first quarter of 2004. Rental revenue increased 14% during the three month period ended March 31, 2005, from $323,000 in the first quarter of 2004 to $367,000 in the first quarter of 2005. This increase is consistent with the increase in our installed rental base of laser systems.

     Service revenue and other revenue in the first quarter of 2005 was $1,464,000 compared with $1,313,000 during the same quarter last year. The change is attributable to an increased installed base of excimer laser systems.

     Gross margin increased to 76 percent during the three months ended March 31, 2005 from 73 percent for the first quarter of 2004. This increase was due primarily to manufacturing efficiencies realized as a result of the higher volume of catheters produced and sold during the current year quarter. Increased selling prices of disposable products, as discussed previously, also contributed to the improved gross margin.

     Operating expenses rose 24 percent to $6,849,000 in the three months ended March 31, 2005 from $5,529,000 in the same period of 2004. This increase is mainly due to a 22 percent increase in selling, general and administrative expenses and a 31 percent increase in research development and other technology expenses relative to the prior year period.

     Selling, general and administrative expenses were $5,384,000 for the three months ended March 31, 2005, as compared to the prior year period expenses of $4,410,000. The increase is primarily due to:

•

Marketing and selling expenses increased $600,000 in the quarter compared with last year’s quarter primarily as a result of the following:

	•	Increased personnel-related costs of approximately $83,000 associated with the staffing of 9 additional employees within our clinical sales and training organization in the first quarter of 2005 as compared to the first quarter of 2004. These costs include salaries and related taxes, recruiting, and travel costs.
	•	Increased commissions of approximately $224,000, which is mainly due to the increase in revenue and additional employees.
	•	Increased marketing communication costs of approximately $57,000 which is mainly due to increased marketing literature for the promotion of the CliRpath product line.
	•	Increased convention, meeting and education costs of approximately $124,000, primarily the result of attendance at an increasing number of tradeshows and conventions, combined with additional physician training costs incurred primarily in peer-to-peer clinical training sessions, including a pilot training program focused on peripheral interventions, attended by approximately 40 physicians during the quarter.
	•	Increased depreciation costs of $48,000 associated with a higher number of evaluation systems in place at March 31, 2005 compared with 2004. Refer to the “Liquidity and Capital Resources” section of this report for a further discussion of these programs.
	•	Increased costs of approximately $59,000 associated with the operations of Spectranetics International B.V., our wholly-owned subsidiary located in The Netherlands that serves the European market. Approximately $41,000 is associated with the strengthening euro in relation to the U.S. dollar. The remaining increase is due to increased personnel-related costs.

Page 17

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

•

General and administrative expenses increased approximately $385,000 in the quarter compared with last year, primarily the result of the following:

	•	Increased legal fees of $160,000, primarily due to the legal proceedings associated with the Rentrop lawsuit. Legal matters are discussed within Part II, Item 1 — Legal Proceedings within this report.
	•	Increased audit and other fees totaling $225,000 due to the compliance requirements of the Sarbanes-Oxley legislation, specifically related to testing of our internal control system over financial reporting.

     Research, development and other technology expenses increased 31 percent to $1,465,000 for the first quarter of 2005 from $1,119,000 in the first quarter of 2004. Costs included within research, development and other technology expenses are research and development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. The increase is primarily due to:

	•	Increased royalty expenses of $16,000 as a result of higher revenues offset by a slight reduction of the royalty rate due to the expiration of certain patents underlying the licensed technology.
	•	Increased personnel-related costs of approximately $90,000 due to the hiring of additional engineering staff for the development of new catheter products.
	•	Increased product development costs of $208,000, related primarily to peripheral products.
	•	Increased clinical data costs of $75,000 primarily related to the advancement of clinical research focused on laser-based treatment of heart attacks, complications associated with capped pacemaker or defibrillator leads, and saphenous vein grafts.

     Interest income increased to $99,000 in the first quarter of 2005 as compared to $27,000 in 2004 due to higher yields on an increased balance of interest-bearing securities, which consist primarily of cash equivalents, and U.S. Treasury and agency notes. The higher yields are consistent with the overall change in the interest rate environment between the first quarter of 2004 and the first quarter of 2005.

     Net income for the three months ended March 31, 2005 was $75,000, compared with net income of $135,000 in the same quarter last year.

     The functional currency of Spectranetics International B.V. is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of operations using weighted average exchange rates during the period. Fluctuation in euro currency rates during the three months ended March 31, 2005, as compared with the three months ended March 31, 2004, caused an increase of less than one percent in consolidated revenue and operating expenses.

Income Taxes

     The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method

Page 18

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards.

     A valuation allowance is required to the extent it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income, and tax planning strategies in making this assessment. In 2004, based upon the level of historical income and projections for future income, management determined it is more likely than not a portion of the deferred tax assets will be recoverable. As of March 31, 2005, the net deferred tax asset totaled $1,558,000.

Liquidity and Capital Resources

     Cash, cash equivalents, and current and long-term investments in marketable securities as of March 31, 2005 were $15,941,000, a decrease of $1,469,000 from $17,410,000 at December 31, 2004. The primary reason for the decrease is due to the purchase of the building and land in March 2005 that houses our manufacturing facilities for $1,350,000. In addition, $275,000 was paid to a licensor in February 2005 for back royalties associated with an amendment to the license agreement with the licensor. The payment of the back royalties is discussed in Part II, Item 1 — Legal Proceedings within this report.

     Cash used by operating activities of $1,011,000 for the three months ended March 31, 2005 consisted primarily of the following:

	•	Increased inventories of $859,000, primarily the result of higher stocking levels to meet the anticipated increase in laser demand.
	•	Increase in equipment held for rental or loan of $349,000 as a result of expanding placement activity of our laser systems through evaluation or rental programs.
	•	Accounts payable and accrued liabilities decreased $321,000, primarily due to a decrease in royalty accruals of $161,000, a decrease in employee related accruals of $810,000, and a $58,000 decrease in other accruals, partially offset by an increase in accounts payable of $708,000.

     The above uses of cash by operating activities was offset by the following sources for the three months ended March 31, 2005:

Page 19

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

	•	Net income of $75,000 for the three months ended March 31, 2005, plus non-cash expenses of $458,000, which consist of depreciation and amortization of $398,000, the fair value of options granted for consulting services of $3,000, and the recognition of deferred taxes of $57,000.
	•	A decrease in accounts receivable of $118,000, mainly due to a collection of a large past-due receivable by our foreign subsidiary.

     The table below presents the change in receivables and inventory in relative terms, through the presentation of financial ratios. Days sales outstanding are calculated by dividing the ending accounts receivable balance, net of reserves for sales returns and doubtful accounts, by the average daily sales for the first quarter. Inventory turns are calculated by dividing annualized cost of sales for the first quarter by ending inventory.

     The reduction in inventory turns is primarily due to the increase in inventory as of March 31, 2005 that was necessitated in order to meet the increased demand for our laser systems.

     For the three months ended March 31, 2005, cash used by investing activities was $1,421,000, primarily due to the purchase of the building and land that houses our manufacturing facilities for $1,350,000 and other capital expenditures of $71,000.

     Cash provided by financing activities for the three month period ended March 31, 2005 was $1,048,000, comprised entirely of proceeds from the sale of common stock to employees and former employees as a result of exercises of stock options and stock issuances under our employee stock purchase plan. At March 31, 2005, there was no debt or capital lease obligations.

     At March 31, 2005, and December 31, 2004, we had placed a number of laser systems on rental and loan programs. A total of $7,258,000 and $7,064,000 was recorded as equipment held for rental or loan at March 31, 2005 and December 31, 2004, respectively, and is being depreciated over three to five years, depending on whether the laser system is new or manufactured. The net book value of this equipment was $3,712,000 and $3,681,000 at March 31, 2005 and December 31, 2004, respectively.

     We currently offer two laser system placement programs in addition to the sale of laser systems:

	(1)	Evergreen rental program – Rental revenue under this program varies on a sliding scale depending on the customer’s catheter purchases each month. Rental revenue is invoiced on a monthly basis and revenue is recognized upon invoicing. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within cost of sales based upon a three- to five-year expected life of the unit. We also offer a straight monthly rental program and there are a small number of hospitals that pay $3000-$5000 per month under this program. As of March 31, 2005, 52 laser units were in place under the rental programs.
	(2)	Evaluation programs – We “loan” laser systems to institutions for use over a short period of time, usually three to six months. The loan of the equipment is to create awareness of our products and their capabilities, and no revenue is earned or recognized in connection

Page 20

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

with the placement of a loaned laser, although sales of disposable products result from the laser placement. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within selling, general and administrative expense based on a three- to five-year expected life of the unit. As of March 31, 2005, 85 laser units were in place under the evaluation program. These laser systems contribute to revenue immediately through the sales of disposable products to customers that have acquired a laser system under an evaluation program. During the three months ended March 31, 2005 and 2004, one customer and two customers, respectively, elected to purchase their evaluation laser systems, which accounted for a total of $119,000 and $267,000 of equipment revenue, respectively.

     We believe our liquidity and capital resources as of March 31, 2005 are sufficient to meet our operating and capital requirements through at least the next twelve months. In the event we need additional financing for the operation of our business, we will consider additional public or private financing. Factors influencing the availability of additional financing include our progress in our current clinical trials, investor perception of our prospects and the general condition of the financial markets. We cannot assure you that our existing cash and cash equivalents will be adequate or that additional financing will be available when needed or that, if available, this financing will be obtained on terms favorable to our shareholders or us.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to estimates and assumptions include the carrying amount of property and equipment, intangible assets, valuation allowances for receivables, inventories, and deferred income tax assets; and accrued warranty and royalty expenses. Actual results could differ from those estimates.

     Our critical accounting policies and estimates are included in our Form 10-K, filed with the SEC on March 31, 2005.

New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (“Statement 123R”). Statement 123R, which is a revision of Statement 123 and supersedes APB Opinion No. 25, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on transactions in which an entity obtains employee services. Statement 123R also requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and to recognize that cost over the period during which the employee is required to provide service (usually the vesting period of the award). Statement 123R also requires companies to measure the cost of employee services received in exchange for an award of liability instruments (such as stock appreciation rights) based on the current fair value of the award, and to remeasure the fair value of the award at each reporting date.

Page 21

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

     Public companies are required to adopt Statement 123R as of the beginning of the first interim period that begins after December 15, 2005 (extended from the previous date of June 15, 2005). The provisions of Statement 123R will affect our accounting for all awards granted, modified, repurchased or cancelled after January 1, 2006. Our accounting for awards granted, but not vested, prior to January 1, 2006 will also be impacted. The provisions of Statement 123R allow companies to adopt the standard on a prospective basis or to restate all periods for which Statement 123 was effective. We expect to adopt Statement 123R on a prospective basis, and our financial statements for periods that begin after December 15, 2005 will include pro forma information as though the standard had been adopted for all periods presented.

     While we have not yet fully quantified the impact of adopting Statement 123R, we believe that such adoption could have a significant impact on our operating income and net earnings in the future. For the three months ended March 31, 2005 and 2004, pro forma compensation expense, net of tax, related to equity instruments was $160,000 and $120,000, respectively. These amounts were disclosed, but not recorded, in the financial statements for the three months ended March 31, 2005 and 2004.

RISK FACTORS

     We Have a History of Losses and May Not Be Able to Maintain Profitability. We incurred losses from operations since our inception in June 1984 until the second quarter of 2001, and we incurred net losses in the first and second quarters of 2002. At March 31, 2005, we had accumulated $73.3 million in net losses since inception. We expect that our research, development and clinical trial activities and regulatory approvals, together with future selling, general and administrative activities and the costs associated with launching our products for additional indications will result in significant expenses for the foreseeable future. In addition, we expect the adoption of Statement 123R for periods that begin after December 15, 2005 will result in significant compensation expense in future periods. Although we have demonstrated profitability for eleven consecutive quarters, no assurance can be given that we will be able to maintain profitability in the future.

     Increases in our Stock Price are Largely Dependent on our Ability to Grow Revenues. Revenue growth from current levels depends largely on our ability to successfully penetrate the peripheral atherectomy market with our recently introduced CliRpath product line targeted at total occlusions (blockages) in the legs. The success of this launch will require increased re-order rates from existing customers and adoption by new customers. Beyond the initial CliRpath product line launch, new products will need to be developed and FDA-approved to sustain revenue growth within the peripheral market. Additional clinical data and new products to treat coronary artery disease will likely be necessary to grow revenue within the coronary market.

     Regulatory Compliance Is Expensive and Can Often Be Denied or Significantly Delayed. The industry in which we compete is subject to extensive regulation by the FDA and comparable state and foreign agencies. Complying with these regulations is costly and time consuming. International regulatory approval processes may take longer than the FDA approval process. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspensions or revocations of approvals, seizures or recalls of products, operating restrictions, criminal prosecutions and other penalties. We may be unable to obtain future regulatory approval in a timely manner, or at all, if existing regulations are changed or new regulations are adopted. For example, the FDA approval process for the use of excimer laser technology in clearing blocked arteries in the leg took longer than we anticipated due to requests for additional clinical data and changes in regulatory requirements.

Page 22

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

     Failures in Clinical Trials May Hurt Our Business and Our Stock Price. All of Spectranetics’ potential products are subject to extensive regulation and will require approval from the FDA and other regulatory agencies prior to commercial sale. The results from pre-clinical testing and early clinical trials may not be predictive of results obtained in large clinical trials. Companies in the medical device industry have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials, after apparently promising results had been obtained in earlier trials.

     The development of safe and effective products is uncertain and subject to numerous risks. The product development process may take several years, depending on the type, complexity, novelty and intended use of the product. Larger competitors are able to offer larger financial incentives to their customers to support their clinical trials. Enrollment in our clinical trials may be adversely affected by clinical trials financed by our larger competitors. Product candidates that may appear to be promising in development may not reach the market for a number of reasons.

     Product candidates may:

	•	be found ineffective;
	•	take longer to progress through clinical trials than had been anticipated; or
	•	require additional clinical data and testing.

     Our Small Sales and Marketing Team May Be Unable To Compete With Our Larger Competitors or To Reach All Potential Customers. Many of our competitors have larger sales and marketing operations than we do. This allows those competitors to spend more time with potential customers and to focus on a larger number of potential customers, which gives them a significant advantage over our team in making sales. Additionally, our field service organization consists primarily of individuals with extensive clinical experience within hospital catheterization labs; however, their sales experience is limited. We are providing sales training and, as we add new field sales employees, will attempt to recruit candidates with more sales experience. However, there are no assurances that our sales training and recruiting will improve productivity within our field sales organization. Further, there may be more turnover within the field sales organization relative to past history as a result of our transition towards a higher level of sales skills.

     Our Products May Not Achieve Market Acceptance. Excimer laser technology is generally used adjunctively with more established therapies for restoring circulation to clogged or obstructed arteries such as balloon angioplasty and stent implantation. Market acceptance of the excimer laser system depends on our ability to provide incremental clinical and economic data that shows the clinical efficacy and cost effectiveness of, and patient benefits from, excimer laser atherectomy used with balloon angioplasty and stent implantation.

     We May Be Unable To Compete Successfully With Bigger Companies in Our Highly Competitive Industry. Our primary competitors are manufacturers of products used in competing therapies within the coronary and peripheral atherectomy markets, such as:

	•	bypass surgery (coronary and peripheral);
	•	atherectomy and thrombectomy, using mechanical methods to remove arterial blockages (coronary and peripheral);
	•	amputation (peripheral); and
	•	balloon angioplasty (peripheral).

Page 23

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

     We also compete with companies marketing lead extraction devices or removal methods, such as mechanical sheaths. In the lead removal market, we compete worldwide with lead removal devices manufactured by Cook Vascular, Inc. and we compete in Europe with devices manufactured by VascoMed. We believe we are the lead removal market leader and are focusing our efforts on growing the market for the removal of pacemaker and defibrillator leads.

     Although balloon angioplasty and stents are used extensively in the coronary vascular system, we do not compete directly with these products. Rather, our laser technology is most often used as an adjunctive treatment to balloon angioplasty and stents.

     Almost all of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. Larger competitors have a broader product line, which enables them to offer customers bundled purchase contracts and quantity discounts. We expect competition to intensify.

     We believe that the primary competitive factors in the interventional cardiovascular market are:

	•	the ability to treat a variety of lesions safely and effectively;
	•	the impact of managed care practices, related reimbursement to the health care provider, and procedure costs;
	•	ease of use;
	•	size and effectiveness of sales forces; and
	•	research and development capabilities.

     Manufacturers of atherectomy or thrombectomy devices include Boston Scientific, Guidant, Possis Medical, Inc., Fox Hollow Technologies, Lumend, and Intraluminal Therapeutics.

     Laser placement is a barrier to accessing patient cases for which our disposable products may be suited. Many competing products do not require an up-front investment in the form of a capital equipment purchase, lease, or rental.

     Failure of Third Parties To Reimburse Medical Providers for Our Products May Reduce Our Sales. We sell our CVX-300 laser unit primarily to hospitals, which then bill third-party payers such as government programs and private insurance plans, for the services the hospitals provide using the CVX-300 laser unit. Unlike balloon angioplasty or other atherectomy devices, laser atherectomy requires the acquisition of capital equipment. In some circumstances, the amount reimbursed to a hospital for procedures involving our products may not be adequate to cover a hospital’s costs. We do not believe that reimbursement has materially adversely affected our business to date, but continued cost containment measures by third-party payers could hurt our business in the future.

     In addition, the FDA has required that the label for our coronary products states that adjunctive balloon angioplasty was performed together with laser atherectomy in most of the procedures we submitted to the FDA for pre-market approval. Adjunctive balloon angioplasty requires the purchase of a balloon catheter in addition to the laser catheter. While all approved procedures using the excimer laser system are reimbursable, some third-party payers attempt to deny reimbursement for procedures they believe are duplicative, such as adjunctive balloon angioplasty performed together with laser atherectomy. Third-party payers may also attempt to deny reimbursement if they determine that a device used in a procedure was experimental, was used for a non-approved indication, or was not used in accordance with established pay protocols regarding cost-effective treatment methods. Hospitals that have experienced reimbursement problems or expect to experience reimbursement problems may not purchase our excimer laser systems.

Page 24

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

     Technological Change May Result in Our Products Becoming Obsolete. We derive substantially all of our revenue from the sale or lease of the CVX-300 laser unit, related disposable devices and service. Technological progress or new developments in our industry could adversely affect sales of our products. Many companies, some of which have substantially greater resources than we do, are engaged in research and development for the treatment and prevention of coronary artery disease and peripheral vascular disease. These include pharmaceutical approaches as well as development of new or improved angioplasty, atherectomy, thrombectomy or other devices. Our products could be rendered obsolete as a result of future innovations in the treatment of vascular disease.

     Our European Operations May Not Be Successful or May Not Be Able To Achieve Revenue Growth. In January 2001, we established a distributor relationship in Germany, and now utilize distributors throughout most of Europe. The sales and marketing efforts on our behalf by distributors in Europe could fail to attain long-term success.

     We Are Exposed to the Problems That Come From Having International Operations. For the three months ended March 31, 2005, our revenue from international operations represented 12 percent of consolidated revenue. Changes in overseas economic conditions, war, currency exchange rates, foreign tax laws or tariffs or other trade regulations could adversely affect our ability to market our products in these and other countries. The new product approval process in foreign countries is often complex and lengthy. For example, the reimbursement approval process in Japan has taken longer than anticipated due to the complexity of this process. As we expand our international operations, we expect our sales and expenses denominated in foreign currencies to expand.

     We Have Important Sole Source Suppliers and May Be Unable To Replace Them if They Stop Supplying Us. We purchase certain components of our CVX-300 laser unit from several sole source suppliers. We do not have guaranteed commitments from these suppliers and order products through purchase orders placed with these suppliers from time to time. While we believe that we could obtain replacement components from alternative suppliers, we may be unable to do so.

     Potential Product Liability Claims and Insufficient Insurance Coverage May Hurt Our Business and Stock Price. We are subject to risk of product liability claims. We maintain product liability insurance with coverage and aggregate maximum amounts of $5,000,000. The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future.

     Our Patents and Proprietary Rights May Be Proved Invalid, Which Would Enable Competitors To Copy Our Products; We May Infringe Other Companies’ Rights. We hold patents and licenses to use patented technology, and have patent applications pending. Any patents we have applied for may not be granted. In addition, our patents may not be sufficiently broad to protect our technology or to give us any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We do not have patents in many foreign countries. We could be adversely affected if any of our licensors terminate our licenses to use patented technology.

     There may be patents and patent applications owned by others relating to laser and fiber-optic technologies, which, if determined to be valid and enforceable, may be infringed by Spectranetics. Holders of certain patents, including holders of patents involving the use of lasers in the body, may contact us and request that we enter into license agreements for the underlying technology. For example, we have been made aware of a patent issued to Dr. Peter Rentrop for a certain catheter with a diameter of

Page 25

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition (cont’d)

less than 0.9 millimeters and are currently involved in litigation regarding this patent. See Part II, Item 1 — Legal Proceedings herein for further discussion of this litigation. We cannot guarantee a patent holder will not file a lawsuit against us and prevail. If we decide that we need to license technology, we may be unable to obtain these licenses on favorable terms or at all. We may not be able to develop or otherwise obtain alternative technology.

     Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the efforts of our management. An adverse ruling could subject us to significant liability, require us to seek licenses and restrict our ability to manufacture and sell our products.

     Our Stock Price May Continue To Be Volatile. The market price of our common stock, similar to other small-cap medical device companies, has been, and is likely to continue to be, highly volatile. The following factors may significantly affect the market price of our common stock:

	•	fluctuations in operating results;
	•	announcements of technological innovations or new products by Spectranetics or our competitors;
	•	governmental regulation;
	•	developments with respect to patents or proprietary rights;
	•	public concern regarding the safety of products developed by Spectranetics or others;
	•	the initiation or cessation in coverage of our common stock, or changes in ratings of our common stock, by securities analysts;
	•	past or future management changes;
	•	litigation;
	•	general market conditions; and
	•	financing of future operations through additional issuances of equity securities, which may result in dilution to existing stockholders and falling stock prices.

     Protections Against Unsolicited Takeovers in Our Rights Plan, Charter and Bylaws May Reduce or Eliminate Our Stockholders’ Ability To Resell Their Shares at a Premium Over Market Price. We have a stockholders’ rights plan that may prevent an unsolicited change of control of Spectranetics. The rights plan may adversely affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares. Under the rights plan, rights to purchase preferred stock in certain circumstances have been issued to holders of outstanding shares of common stock, and rights will be issued in the future for any newly issued common stock. Holders of the preferred stock are entitled to certain dividend, voting and liquidation rights that could make it more difficult for a third party to acquire Spectranetics. No preferred stock has been issued under the stockholders’ rights plan.

     Our charter and bylaws contain provisions relating to issuance of preferred stock, special meetings of stockholders and amendments of the bylaws that could have the effect of delaying, deferring or preventing an unsolicited change in the control of Spectranetics. Our Board of Directors is elected for staggered three-year terms, which prevents stockholders from electing all directors at each annual meeting and may have the effect of delaying or deferring a change in control.

Page 26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. Our exposure to market rate risk for changes in interest rates relate primarily to our investment portfolio. We attempt to place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We maintain an investment portfolio of various issuers, types and maturities, which consist of both fixed and variable rate financial instruments. Marketable securities are classified as available-for-sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component in stockholders’ equity, net of applicable taxes. At any time, sharp changes in interest rates can affect the value of our investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. Since our investment securities have maturities that are generally less than one year and never more than two years, we do not expect interest rate fluctuations to have a significant impact on the fair value of our investment securities. As of March 31, 2005, the unrealized loss on our investment securities was approximately $101,000.

     As of March 31, 2005, we had cash and cash equivalents of $2.6 million, and current and long-term investment securities of $13.4 million. Overall average duration to maturity for all cash and investment securities is less than one year with 60% of the portfolio under one year and the remaining 40% between one and two years. At March 31, 2005, the investment securities consisted of government or government agency securities.

     Our exposure to foreign currency fluctuations is primarily related to sales of our products in Europe, which are denominated in the euro. Changes in the exchange rate between the euro and the U. S. dollar could adversely affect our revenue and net income. Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses. For the three months ended March 31, 2005, and 2004, approximately $62,000 and $102,000, respectively, of increased revenue and $41,000 and $75,000, respectively, of increased operating expenses were the result of exchange rate fluctuations of the U.S. dollar in relation to the euro. Accordingly, the net impact of exchange rate fluctuations on consolidated net income for the three months ended March 31, 2005 and 2004 was an increase in net income of $21,000 and $27,000, respectively.

Item 4. Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Page 27

     There has been no change in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

     In July, 2003, Spectranetics filed a complaint in the United States District Court for the District of Colorado against Dr. Peter Rentrop, which Spectranetics amended in September, 2003, seeking declaratory relief that (1) Spectranetics’ products do not infringe any claims of Dr. Rentrop’s United States Patent No. 6,440,125 (the “’125 patent”); (2) the claims of the ‘125 patent are invalid and unenforceable; and (3) in the event that the Court finds that the claims of the patent to be valid and enforceable, that Spectranetics is, through its employees, a joint owner of any invention claimed in the ‘125 patent. Spectranetics also brought claims against Dr. Rentrop for damages based upon Dr. Rentrop’s (1) misappropriation of Spectranetics’ trade secrets; (2) breach of the parties’ Confidentiality Agreement; and (3) wrongful taking of Spectranetics’ confidential and proprietary information.

     On January 6, 2004, the United States Patent and Trademark Office issued to Dr Rentrop a continuation patent to the ‘125 patent, United States Patent No. 6,673,064 (the “’064 patent”). On the same day, Dr. Rentrop filed in the United States District Court for the Southern District of New York, a complaint for patent infringement against Spectranetics, under the ‘064 patent (the “New York case”).

     On January 26, 2004, the Court in Colorado granted Dr. Rentrop’s Motion to Dismiss the Amended Complaint on the basis that the Court lacked personal jurisdiction over Dr. Rentrop, a resident of New York. Spectranetics decided to forgo appealing that decision, thus, there no longer is any case pending in Colorado.

     On March 9, 2004, Spectranetics filed its Answer, Affirmative Defenses and Counterclaims against Dr. Rentrop in the New York case. Spectranetics’ claim is that, in connection with consultation services provided to Spectranetics by Dr. Rentrop, Spectranetics provided Dr. Rentrop with confidential and proprietary information concerning certain of Spectranetics’ laser catheter technology. Spectranetics claims that rather than keeping such information confidential as required by agreement with Spectranetics, Dr. Rentrop used the information to file patent applications associated with the ‘125 and ‘064 patents, which incorporate and claim inventions to which Spectranetics’ personnel contributed significantly and materially, if not exclusively, thus entitling Spectranetics’ personnel to designation at least as co-inventors. Spectranetics also seeks declaratory judgments of non-infringement, invalidity and unenforceability of the patents-in-suit, and has alleged counterclaims against Dr. Rentrop for breach of confidentiality agreement, misappropriation of trade secrets, and conversion.

     The discovery phase of this case is complete and a trial date has been set for September 2005.

     On June 24, 2004, the Court of Appeal of Amsterdam rejected an appeal made by Spectranetics International, B.V. (Spectranetics BV), on a judgment awarded to Cardiomedica S.p.A. (Cardiomedica), an Italian company, by the District Court of Amsterdam. Cardiomedica originally filed the suit in July 1999, and the lower court’s judgment was rendered on April 3, 2002. The Court of Appeal of Amsterdam affirmed the lower court’s opinion that an exclusive distributor agreement for the Italian market was entered into between the parties for the three-year period ending December 31, 2001, and that Cardiomedica may exercise its right to compensation from Spectranetics BV for its loss of profits during such three-year period. The appellate court awarded Cardiomedica the costs of the appeal, which approximated $20,000, and has referred the case back to the lower court for determination of the loss of

Page 28

profits. Cardiomedica asserts lost profits of approximately $1,500,000, which is based on their estimate of potential profits during the three-year period. Spectranetics BV estimates that the lost profits to Cardiomedica for the period, plus estimated interest and awarded court costs, totaled $260,000 for the three-year period, and such amount is included in accrued liabilities at March 31, 2005. We intend to vigorously defend the calculation of lost profits.

     On or about August 30, 2004, SurModics filed a lawsuit against Spectranetics in the United States District Court for the District of Minnesota, alleging that Spectranetics underpaid royalties for the period since January 2001 under a license agreement with SurModics. SurModics claims that Spectranetics took improper deductions from royalty-bearing revenue, resulting in an alleged underpayment. In February 2005, Spectranetics settled its dispute with SurModics and executed an amendment to the license agreement that incorporated such settlement. Under the terms of the amendment, which has a noncancelable term of four years, Spectranetics agreed to pay SurModics $275,000 in back royalties. Such amount was included in accrued liabilities at December 31, 2004 and paid in February 2005. Additionally, the license was converted to nonexclusive and the royalty rate for products sold using the associated technology was reduced effective October 1, 2004. Spectranetics also agreed to increase its minimum quarterly royalty payment to $50,000 from $25,000 beginning July 1, 2005.

     Spectranetics has a disagreement with another licensor regarding the level of past royalty payments since inception of a license agreement that was executed in October 2000. The disagreement over past royalty payments centers on the treatment of certain service-based revenue, including repair and maintenance, and physician and clinical training services. We believe that these are beyond the scope of the license agreement. In August 2004, the licensor commenced arbitration proceedings as provided for under the license agreement, and a resolution to the matter in anticipated in mid to late 2005. Spectranetics has accrued costs of approximately $1,826,000 associated with the resolution of this matter as of March 31, 2005, which represents our best estimate of costs to resolve the matter. Management intends to vigorously defend its position in such arbitration proceedings.

     The Company is involved in other legal proceedings in the normal course of business and does not expect them to have a material adverse effect on our business.

Items 2-4. Not applicable

Item 5. Other Information

     As discussed in Note 11 of the unaudited notes to the condensed consolidated financial statements, in February 2005, the Company entered into an agreement with a Dr. Craig Walker, a director of the Company, whereby Dr. Walker agreed to provide training services to outside physicians on behalf of the Company. The total to be paid under the agreement to Dr. Walker is $75,000. The agreement expires on December 31, 2005.

     As discussed in Part II, Item 1 – Legal Proceedings, in February 2005, the Company settled its dispute with SurModics and executed an amendment to the license agreement that incorporated such settlement. Under the terms of the amendment, which has a noncancelable term of four years, the Company agreed to pay SurModics $275,000 in back royalties. Additionally, the license was converted to nonexclusive and the royalty rate for products sold was reduced effective October 1, 2004. The Company also agreed to increase its minimum quarterly royalty payment to $50,000 from $25,000 beginning July 1, 2005.

Page 29

Item 6. Exhibits

     Exhibits.

10.36 Consulting Agreement dated February 14, 2005 between the Company and Dr. Craig Walker.

10.37 Settlement and Amendment to License Agreement executed in February 2005 and effective October 1, 2004 between the Company and SurModics, Inc. (confidential treatment has been requested for portions of this agreement).

31.1(a) Rule 13(a)-14(a)/15d-14(a) Certification.

31.1(b) Rule 13(a)-14(a)/15d-14(a) Certification.

32.1(a) Section 1350 Certification.

32.1(b) Section 1350 Certification

SIGNATURES

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

Page 30

EXHIBIT INDEX

10.36 Consulting Agreement dated February 14, 2005 between the Company and Dr. Craig Walker.

10.37 Settlement and Amendment to License Agreement executed in February 2005 and effective October 1, 2004 between the Company and SurModics, Inc. (confidential treatment has been requested for portions of this agreement).

31.1(a) Rule 13(a)-14(a)/15d-14(a) Certification.

31.1(b) Rule 13(a)-14(a)/15d-14(a) Certification.

32.1(a) Section 1350 Certification.

32.1(b) Section 1350 Certification