10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from          to

Commission file number 0-19711

THE SPECTRANETICS CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	84-0997049
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

96 Talamine Court

Colorado Springs, Colorado 80907

(Address of principal executive offices and zip code)

Registrant’s Telephone Number, Including Area Code:

(719) 633-8333

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes o         No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes o         No þ

     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 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 þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.    o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o         Accelerated filer þ         Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes o         No þ

     The aggregate market value of the voting stock of the Registrant, as of June 30, 2006 computed by reference to the closing sale price of the voting stock held by non-affiliates on such date, was $320,858,165. As of March 12, 2007, there were outstanding 31,043,596 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2007, are incorporated by reference into Part III as specified herein.

TABLE OF CONTENTS

Agreement of Lease

Patent Purchase Agreement

Consent of Ehrhardt Keefe Steiner & Hottman PC

Consent of KPMG LLP

Rule 13(a)-14(A)/15d-14(a) Certification

Rule 13(a)-14(A)/15d-14(a) Certification

Section 1350 Certification

Section 1350 Certification

PART I

      The information set forth in this annual report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that section. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements are set forth below and include, but are not limited to, the following:

•  Market acceptance of excimer laser atherectomy technology;

•  Increased pressure on expense levels resulting from expanded sales, marketing, product development and clinical activities;

•  Dependence on new product development and new applications for excimer laser technology;

•  Uncertain success of our strategic direction;

•  Technological changes resulting in product obsolescence;

•  Intellectual property claims of third parties;

•  Adverse state or federal legislation and regulation;

•  Product defects;

•  Price volatility due to changes in ratings by securities analysts;

•  Ability to effectively manage growth;

•  Ability to manufacture sufficient volumes to fulfill customer demand;

•  Availability of vendor-sourced component products at reasonable prices; and

•  The risk factors listed from time to time in our filings with the Securities and Exchange Commission as well as those set forth in Item 1A — “Risk Factors.”

      We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.

ITEM 1. Business

General

      We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system for use with our proprietary excimer laser system. Excimer laser technology delivers relatively cool ultraviolet energy to ablate or remove arterial blockages including plaque, calcium and thrombus. Our laser system includes the CVX-300 laser unit and various disposable fiber-optic laser catheters. Our laser catheters contain hundreds of small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. We believe that our excimer laser system is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple, minimally invasive cardiovascular procedures. These procedures include atherectomy, which is a procedure to remove arterial blockages in the peripheral and coronary vasculature, and the removal of infected, defective or abandoned cardiac lead wires from patients with pacemakers or implantable cardiac defibrillators, or ICDs, which are electronic devices that regulate the heartbeat. As of December 31, 2006, our worldwide installed base of laser systems was 623, of which 488 were in the United States. We are focused on increasing recurring revenue, which includes disposable catheter sales, service and laser rental, which in the aggregate represented 94% of our revenue for 2006. Disposable catheter sales represented 80% of our revenue for 2006.

      Our products are designed to treat a wide range of cardiovascular disease, including peripheral and coronary arterial disease. Peripheral arterial disease, or PAD, is characterized by clogged or obstructed arteries in the upper or lower leg. The resulting lack of blood flow can cause leg pain and lead to tissue loss or amputation. According to the American Heart Association, as many as 12 million people in the United States have PAD, yet nearly 75% of these people do not have any symptoms or mistake the symptoms of PAD for

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another condition. Moreover, according to a 2004 report by the Sage Group, a market research firm, approximately 1.1 million people in the United States suffer from critical limb ischemia, or CLI, an advanced form of PAD. In addition, according to this report, within six months of diagnosis, the mortality rate for CLI patients is approximately 20%, with another 35% requiring amputation, of which an estimated 160,000 amputations resulting from CLI are performed each year in the United States alone. Based on data from iData Research, a market research firm, we estimate that the volume of interventional and surgical procedures comprised of atherectomy, angioplasty, cryoplasty, stenting and vascular grafts performed in the United States to treat PAD will increase from approximately 375,000 in 2005 to approximately 875,000 in 2010, which represents a compound annual growth rate of approximately 18%.

      We believe that physicians, including interventional cardiologists, vascular surgeons, and interventional radiologists, are looking for effective minimally invasive solutions to treat PAD. We believe that balloons and stents, although commonly used to treat PAD, have not been proven to have a long-lasting clinical benefit in the legs, while surgical bypass and amputation carry significant patient risk and cost. Recently, laser atherectomy has emerged as a viable treatment option for PAD, both as a stand-alone treatment and as an adjunctive treatment with other therapies, such as balloons and stents. We offer our CLiRpath atherectomy catheters in a broad range of sizes, enabling physicians to treat both smaller and larger diameter arteries. In addition, we believe our laser system and CLiRpath catheter technology offer a number of patient benefits, including a minimally invasive alternative to bypass surgery and amputation, as well as more predictable outcomes in addressing PAD, reduced procedure time and a better safety profile as compared with other atherectomy devices.

      In the coronary market, our disposable catheter devices are used to treat complex coronary artery disease as an adjunctive treatment to traditional percutaneous coronary interventions, or PCI, using balloons and stents. We are currently focused on the treatment of one of the most challenging coronary lesions, chronic total occlusions, or CTOs, leveraging our experience in the coronary market. According to a 2005 article in the Journal of Invasive Cardiology which cites a 2003 report by Arlington Medical Resources, a market research firm, the number of diagnostic catheterization procedures, or angiograms, performed annually in the United States is approximately 2.6 million. A 2002 article in the journal Circulation cited data based on published studies from 1997 to 1999 which showed the presence of a CTO in approximately 31% of patients who received a coronary angiogram, of which only approximately 7.5% were treated using minimally invasive techniques. According to a 2001 article in the Journal of Invasive Cardiology, patients whose CTOs could not be crossed using a guidewire were approximately three to five times more likely to undergo coronary artery bypass surgery than patients whose CTOs were successfully crossed. Coronary artery bypass surgery is highly invasive and carries significant procedural risks, and as a result of these risks, we believe that there is increased interest from interventional cardiologists to treat CTOs with minimally invasive techniques. With the recent demonstrated clinical efficacy of drug-eluting stents in coronary lesions, we believe that physicians are looking for ways to place drug-eluting stents in CTOs once they are crossed. We believe that our products will enable physicians to more effectively cross certain types of CTOs.

      We are also a leader in the market for selling devices for the removal of infected, defective or abandoned pacemaker and ICD leads. As a result of pacemakers or ICDs being replaced, we estimate that while more than 250,000 leads are left in the body each year in the United States, fewer than 10,000 leads are removed from the body. The current standard of care is simply to cap these leads and leave them in the body based on the risk of complications associated with lead removal and the perception that abandoned leads are benign. Data from our clinical trials indicates that the use of our CLeaRS product line, which includes our Spectranetics Laser Sheath, or SLS, and our Lead Locking Device, or LLD, may reduce the risk of complications associated with lead removal to less than 2%. We believe that clinical complications associated with abandoned leads, such as pocket infections, are more significant than generally believed. We are implementing various initiatives targeted at increasing the number of removals of abandoned or defective pacemaker or ICD leads by educating physicians as to the complications and costs associated with leaving these leads in the body.

      Spectranetics is a Delaware corporation formed in 1984. Our principal executive offices are located at 96 Talamine Court, Colorado Springs, Colorado 80907. Our telephone number is (719) 633-8333.

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      Our corporate website is located at www.spectranetics.com. A link to a third-party website is provided at our corporate website to access our SEC filings free of charge promptly after such material is electronically filed with, or furnished to, the SEC. We do not intend for information found on our website to be part of this document.

Our Solution

      Over our 22 year history, we have developed our proprietary excimer laser technology that we believe has enabled us to effectively meet the needs of physicians and their patients.

•  Proprietary technology. Our excimer laser technology delivers relatively cool, 308 nanometer wavelength ultraviolet energy pulses to an arterial blockage or lesion through optical fibers in a catheter, and is used to ablate or remove plaque, calcium and thrombus. Our laser catheter is inserted into an artery through a small incision and then guided to the site of the blockage or lesion using conventional angioplasty tools, such as guidewires. When the tip of the laser catheter has been placed at the site of the blockage or lesion, the physician activates the laser to ablate the blockage or lesion. Because our laser generates minimal heat and is a contact laser that only ablates materials within 50 microns (the width of a human hair) ahead of the laser tip, it is able to break down the molecular bonds of plaque, calcium and thrombus into particles smaller than red blood cells, without significant thermal damage to surrounding tissue. We believe that we offer the only FDA-approved laser system for the treatment of peripheral and coronary arterial disease and for the removal of infected, defective or abandoned pacemaker and ICD leads. We hold 40 issued U.S. patents and have rights to 17 additional U.S. patents under license agreements. We hold five issued patents in each of France, Germany, Italy and Japan; four issued patents in the Netherlands; and one in each of Spain and the United Kingdom.

•  Significant patient benefits. We believe our CLiRpath catheter technology offers a number of patient benefits, including a minimally invasive alternative to bypass surgery and amputation, as well as more predictable outcomes in addressing PAD, reduced procedure time and a better safety profile when compared with other atherectomy devices. We believe that our CLiRpath technology reduces the risk of distal embolization as compared with balloon and stent technology and other atherectomy devices because our laser can ablate blockages into particles smaller than red blood cells. Distal embolization occurs when particles dislodged during PCI or atherectomy create a blockage elsewhere in the vasculature.

•  Key physician benefits. Because our technology can be utilized to ablate all types of arterial blockages, including plaque, calcium and thrombus, we believe our system enables physicians to expand the number of minimally invasive procedures they can perform. For example, our system can be used to cross CTOs in the heart or the leg. We believe our 0.9 mm catheters are smaller than any approved balloon angioplasty catheter or any other approved mechanical atherectomy device, which enables the treatment of smaller arteries in the lower leg. Moreover, we believe that our CLiRpath technology enables physicians to perform procedures more rapidly than with other atherectomy devices, reducing radiation exposure from fluoroscopic imaging to both physicians and patients.

•  Compelling clinical data. During 2004 and 2005, seven clinical publications in peer-reviewed medical journals highlighted the use of our products for the treatment of PAD. In particular, we believe our Laser Angioplasty for Critical Limb Ischemia (LACI) trial is the only FDA-approved, multi-center registry targeted at the treatment of patients with CLI. The purpose of the study was to evaluate the effectiveness of laser-assisted PCI for CLI patients who were poor candidates for surgical revascularization and, as a result, at a higher risk for amputation. The primary endpoint of the trial was limb salvage (avoidance of amputation above the ankle) among the surviving patients at six months following the procedure. The limb salvage rate for the patients treated in the LACI trial was 93% (as compared to 87% for the historical control group treated with a variety of standard therapies, including bypass surgery) despite a challenging patient population suffering from other illnesses such as diabetes, hypertension and previous stroke or heart attack. An average of 2.7 lesions were treated per patient with an average treatment length of 16.2 cm. Although the design of the LACI trial resulted in the issuance of a non- approval letter from the FDA, a subset of the LACI data combined with data from

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similar clinical studies in the United States and Europe for the treatment of CTOs in the leg not crossable with a guidewire formed the basis for our FDA clearance received in April 2004. This data revealed that limb salvage was observed in 95% of patients surviving for six months with no increase in serious adverse events as compared with the LACI study.

Our Products

      Our products are focused in two categories: laser atherectomy and cardiac lead removal.

Laser Atherectomy

      We have developed a broad selection of proprietary laser devices designed to meet physician needs and have received regulatory clearance for multiple indications, including peripheral laser atherectomy in the upper and lower leg and coronary laser atherectomy. For the PAD market, we offer an adjunct or alternative to balloons, stents and other atherectomy or thrombectomy devices. For the coronary market, our laser atherectomy products are used adjunctively with other atherectomy devices such as balloons and stents. We believe the use of our laser adjunctively with other PCI treatments provides superior clinical outcomes in complex lesions that are not well-suited to stand-alone balloon angioplasty or stenting. Unlike conventional balloons that merely compress arterial plaque against the stent or vessel wall, laser atherectomy dissolves the blockage.

      Our laser catheters are designed to provide several advantages over other atherectomy devices. Our catheters, which we produce in sizes ranging from 0.9 to 2.5 millimeters in diameter, consist of concentric or eccentric bundles of optical fibers mounted within a thin plastic tubing. Our laser catheters contain hundreds of small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. These fibers are coupled to the laser using our intelligent connector which identifies the catheter type to our CVX-300 laser unit computer and automatically controls the calibration cycle and energy output. The catheter’s combination

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of trackability, flexibility and ablation characteristics enables the physician to access and effectively treat difficult to reach lesions. Our disposable catheters include the following:

	Sizes
	(mm unless			Vascular
	otherwise	Regulatory		System
Name	indicated)	Clearance		Indication	Key Features
CLiRpath Turbo Catheter(1)	0.9, 1.4, 1.7, 2.0, 2.3, 2.5		U.S. Europe	Peripheral	80-Hz; “continuous on” lasing and lubricous coating; available in rapid exchange (Rx) or over-the-wire (OTW) versions except for 2.3 and 2.5 (OTW only)
Turbo Elite Catheter(1)	0.9, 1.4, 1.7, 2.0, 2.3, 2.5		U.S. Europe	Peripheral	In addition to Turbo features: improved outer jacket and inner guidewire lumen, as well as additional laser fibers at tip, which add improved ablation capability, pushability, and trackability.
POINT 9 Catheter	0.9	U.S. Europe Canada		Coronary	Low profile design; used in balloon-refractory CTOs and small arteries; available in 80-Hz model (Point 9 X-80)
Vitesse E Laser Catheter	1.7, 2.0	U.S. Europe Canada		Coronary	Rx model, eccentric fiber array tip that can be rotated to address eccentric lesions
Vitesse Cos Catheter(2)	1.4, 1.7, 2.0	U.S. Europe Canada		Coronary	Rx model, concentric, optimally spaced fibers that enable greater ablation
Quick-Cross Support Catheter	0.014”, 0.018”, 0.035”	U.S. Europe Canada		Peripheral Coronary	Non-laser-based accessory product designed to support and assist standard guidewires to facilitate initial crossing of blockage

(1)	Our CLiRpath Turbo catheters are being replaced with our newer Turbo Elite line of products, which we expect will be completed by the end of the second quarter of 2007.
(2)	A first generation version of this catheter has received regulatory clearance for marketing in Japan; however, we have not yet received reimbursement approval in Japan.

Peripheral Laser Atherectomy

      According to the American Heart Association, as many as 12 million people in the United States have PAD, yet nearly 75% of these people do not have any symptoms or mistake the symptoms of PAD for another condition. Moreover, according to a 2004 report by the Sage Group, a market research firm, approximately 1.1 million people in the United States suffer from CLI. In addition, according to this report, within six months of diagnosis, the mortality rate for CLI patients is approximately 20%, with another 35% requiring amputation, of which an estimated 160,000 amputations resulting from CLI are performed each year in the United States alone. Based on data from iData Research, a market research firm, we estimate that the volume of interventional and surgical procedures comprised of atherectomy, angioplasty, cryoplasty, stenting and vascular grafts performed in the United States to treat PAD will increase from approximately 375,000 in 2005 to approximately 875,000 in 2010, which represents a compound annual growth rate of approximately 18%.

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      We currently have 510(k) clearance from the FDA to market our CLiRpath catheters for the treatment of CTOs in the legs that are not crossable with a guidewire. We offer the following disposable catheters for use in peripheral laser atherectomy:

      CLiRpath Turbo and Turbo Elite Catheters. Our CLiRpath family of over-the-wire (OTW) and rapid exchange (Rx) catheters is used for peripheral laser atherectomy. The CLiRpath laser catheter has good flexibility and an active ablation area covering a high percentage of the catheter tip. The CLiRpath laser catheter is available in 0.9, 1.4, 1.7, 2.0, 2.3 and 2.5 mm tip diameters. In October 2005, we received 510(k) clearance from the FDA to incorporate several new features (80-Hz capability, “continuous on” lasing and lubricous coating) into our entire CLiRpath product line. The launch of this CLiRpath Turbo product line, to replace the CLiRpath catheters, was completed in the second quarter of 2006. In October 2006, we received FDA clearance to market our TURBO Elite^tm product line, which added improved pushability, trackability and ablation capability as a result of an improved outer jacket and inner guidewire lumen, as well as additional laser fibers in most sizes, to our CliRpath Turbo lines. We launched a limited market release of these products in the fourth quarter of 2006, with full commercialization expected by the end of the second quarter of 2007.

      Quick-Cross Support Catheter. We offer our Quick-Cross support catheters in 0.014”, 0.018” and 0.035” models. These support catheters are non-laser-based accessory products designed for use in the cardiovascular system to support and assist standard guidewires to facilitate initial crossing of the blockage. They also facilitate exchange of standard guidewires without losing access to the blockage.

Coronary Laser Atherectomy

      Our CVX-300 laser and 1.4, 1.7 and 2.0 mm diameter fiber-optic catheters have received FDA clearance for the following seven indications for use in the treatment of coronary artery disease adjunctively with balloon angioplasty and stents:

•  saphenous vein grafts;

•  total occlusions crossable by a guidewire;

•  ostial lesions, or blockages at the beginning of arteries;

•  lesions with moderate calcification;

•  long lesions;

•  lesions where angioplasty balloon failures have occurred; and

•  restenosed stents prior to brachytherapy, or radiation therapy.

      In the coronary market, our disposable catheter devices are used to treat complex coronary artery disease as an adjunctive treatment to PCI using balloons and stents. We are currently focused on the treatment of CTOs, leveraging our extensive history in the coronary market. According to a 2001 article in the Journal of Invasive Cardiology, patients whose CTOs could not be crossed using a guidewire were approximately three to five times more likely to undergo coronary artery bypass surgery than patients whose CTOs were successfully crossed. This coronary artery bypass surgery is highly invasive and carries significant procedural risks, and as a result of these risks, we believe that there is increased interest from interventional cardiologists to treat CTOs with minimally invasive techniques. With the recent demonstrated clinical efficacy of drug-eluting stents in coronary lesions, we believe that physicians are looking for ways to place drug-eluting stents in CTOs once they are crossed. We believe that our products will enable physicians to more effectively cross certain types of CTOs. We are also currently evaluating various product designs targeted at CTOs that cannot be crossed by a guidewire.

      In the coronary market, we offer an adjunct to traditional balloon angioplasty and stenting. For CTOs that are crossable by a guidewire, we offer an alternative to coronary bypass surgery. Unlike conventional balloons that merely compress arterial plaque against the stent or vessel wall, coronary excimer laser atherectomy dissolves the material. We believe the use of our laser technology makes the treatment of complex lesions less complicated.

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      We offer the following disposable catheters for use in coronary laser atherectomy:

      Rapid Exchange (Rx) Catheter. Our Rx laser catheter, marketed under the Vitesse brand, is our directional coronary laser catheter. We offer our eccentric (one-sided) Rx catheter in 1.7 and 2.0 mm diameter sizes and our concentric Rx catheter in 1.4, 1.7, and 2.0 mm tip diameter models. Both of our Rx catheters incorporate a “monorail design” that can be threaded onto and exchanged over a guidewire more quickly than OTW models. They are also compatible with a wide range of guidewires. On our eccentric model, the fiber array at the tip can be rotated by the operator to create a larger channel through the blockage. The fibers in our concentric model are “optimally spaced,” and laboratory tests have demonstrated that it produces greater debulking, or plaque removal, compared with our eccentric model.

      Over-The-Wire (OTW) Catheter. Our OTW catheters, marketed for use in the coronary vasculature under the Extreme brand, have good flexibility and an active ablation area covering a high percentage of the catheter tip. Other features include the patented metal rim tip designed for visualization and alignment and a proprietary lubricious coating for easy access. Our OTW laser catheter is available in 0.9, 1.4, 1.7 and 2.0 mm tip diameters.

      POINT 9 Catheter. The POINT 9 concentric catheters, including our POINT 9 X-80 model that uses 80-Hz, are our smallest diameter atherectomy catheters and are designed for use in vessels as small as 1.5 mm in diameter, as well as larger vessels with total occlusions passable by a guidewire or where angioplasty balloon failures have occurred.

      Quick-Cross Support Catheter. We offer our Quick-Cross support catheters in 0.014” and 0.018” models. These support catheters are non-laser-based accessory products designed for use in the cardiovascular system to support and assist standard guidewires to facilitate initial crossing of the blockage. They also facilitate exchange of standard guidewires without losing access to the blockage.

Cardiac Lead Removal Systems

      We are also a leader in the market for selling devices for the removal of infected, defective or abandoned pacemaker and ICD leads. As a result of pacemakers or ICDs being replaced, we estimate that while more than 250,000 leads are left in the body each year in the United States, fewer than 10,000 leads are removed from the body. The current standard of care is simply to cap these leads and leave them in the body based on the risk of complications associated with lead removal and the perception that abandoned leads are benign. Data from our clinical trials indicates that the use of our CLeaRS product line, which includes our SLS and our LLD, may reduce the risk of complications associated with lead removal to less than 2%. We believe that clinical complications associated with abandoned leads, such as pocket infections, are more significant than generally believed. We are implementing various initiatives targeted at increasing the number of removals of abandoned or defective pacemaker or ICD leads by educating physicians as to the complications and costs associated with leaving these leads in the body.

      We believe that one of the key drivers of our cardiac lead removal business is the increased rate of ICD implantation. According to recent clinical research conducted by Guidant, Medtronic and St. Jude, patients suffering from congestive heart failure, as well as patients who have had prior heart attacks, may have reduced mortality risk as a result of the implant of an ICD. Since there are more leads attached to an ICD than a pacemaker and since ICD leads are typically larger in diameter than pacemaker leads, there is often a space problem in the subclavian vein when ICDs are implanted in patients that already have a pacemaker. Additionally, since many of the newer ICDs have three leads, the potential for venous obstruction is enhanced. As a result, we believe that the old leads are more likely to be removed in these situations.

      Competitive methods available to remove implanted leads include open-chest surgery and transvenous removal with plastic sheaths, each of which has significant drawbacks. For example, open-chest surgery is costly and traumatic to the patient. The plastic sheath method sometimes results in damage to the cardiovascular system, which may require surgery and may cause the lead to disassemble during the removal procedure.

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      Our CVX-300 excimer laser unit was initially approved by the FDA for lead removal procedures in December 1997, with several subsequent approvals and 510(k) clearances as we expanded our CLeaRS product line. This product line includes the following:

      Spectranetics Laser Sheath (SLS). We have designed a laser-assisted lead removal device, the Spectranetics Laser Sheath (SLS), to be used with our CVX-300 excimer laser unit to remove implanted leads with minimal force. The SLS consists of optical fibers arranged in a circle between inner and outer polymer tubing. The inner opening of the device is designed to allow a lead wire to pass through it as the device slides over the lead wire and toward the tip in the heart. Following the removal of scar tissue with the SLS, the lead wire is removed from the heart with counter-traction. The SLS uses excimer laser energy focused through the tip of the SLS to facilitate lead removal by removing scar tissue surrounding the lead. We believe that in addition to resulting in less trauma and a lower complication rate than mechanical lead removal methods, procedure time is reduced significantly.

      Lead Locking Device (LLD). Our Lead Locking Device, or LLD, product complements our current SLS product line and, since it is not laser-based, can also be used in connection with the mechanical removal of pacemaker or ICD leads. The LLD is a mechanical device that assists in the removal of faulty leads by providing traction to the leads, which are typically wire spirals. The LLD is inserted into the center lumen of the lead and then a braid surrounding the LLD expands to fill and grip the entire length of the lead’s inner circumference, in effect converting a spiral into a solid “pipe,” which can more easily be extracted. We believe that other devices on the market, which merely grip the lead at the far end, provide less stability and frequently release their grip on the lead. In March 2005, we received 510(k) clearance from the FDA for the LLD E, a next generation device that navigates more effectively within tortuous anatomy in the coronary vascular system. Due to the materials used, it is also more easily visualized under angiography than our earlier LLD products.

      For 2007, we intend to focus more resources on our lead removal business based on our belief that the cardiac rhythm management industry will continue to grow and that the potential lead extraction market is under-penetrated. Our investment will begin with establishing a small, dedicated sales team focused on lead removal.

Clinical Trials

Current Clinical Trials

      CELLO. We received FDA approval to begin our CLiRpath Excimer Laser System to Enlarge Lumen Openings, or CELLO trial, a pivotal IDE clinical trial for our TURBO-Booster catheter in the treatment of larger diameter arteries within the legs. Through March 14, 2007, we enrolled 61 of the planned 85 patients in the trial at 20 sites in the United States and Europe. Based on a review of the preliminary data, in March 2007 we agreed with representatives of the FDA that the clinical data from these 61 patients treated with the TURBO-Booster product was sufficient for submission to the FDA for review. The Company expects to complete the final data analysis and submit the 510(k) application to the FDA during the second quarter of 2007. The objective of the CELLO trial is to demonstrate atherectomy in the larger diameter superficial femoral artery. Clinical data from the registry will be used to seek FDA 510(k) clearance for the device. However, we cannot assure you that this FDA clearance will be received when anticipated or at all.

      AMI, or heart attack. The Extended Flow in Acute Myocardial Infarction patients after Laser Intervention trial, or Extended FAMILI trial, is a feasibility trial to rapidly restore blood flow in patients who have had a heart attack. This trial benchmarked quantitative endpoints common in other AMI trials, such as myocardial blush scores and ST-segment resolution, which is a measurement of heart muscle recovery following restoration of bloodflow to the heart after a heart attack, for a subset of patients. Enrollment in the trial was completed in 2005. The data from the trial was presented at the Trans Catheter Therapeutic (TCT) convention held in Washington, D.C. in October 2006. The myocardial blush scores compared favorably with other clinical trials using other thrombectomy or distal protection devices and the clinical trial investigators have submitted the data for publication in peer-reviewed medical journals.

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Historical Clinical Trials

      Initial FDA approval for use of our excimer laser for coronary indications was based on the results of the Percutaneous Excimer Laser Coronary Angioplasty Study, which evaluated a registry of laser usage in blocked coronary arteries. Of note, we achieved our goal of the registry in that there was no difference in success rate or complications for long lesions, total occlusions crossable with a guidewire, saphenous vein grafts and aorto-ostial lesions, suggesting that complex lesions could be safely and effectively treated with excimer laser coronary atherectomy.

      FDA clearance for use of our CVX-300 laser for the treatment of CTOs in the leg that are not crossable with a guidewire was based on the LACI trial, which deals with multi-vessel PAD in patients presenting with CLI who are not eligible for bypass surgery. The LACI trial enrolled 145 patients at 15 domestic and several European sites. The purpose of the study was to evaluate the effectiveness of laser-assisted PCI for CLI patients who were poor candidates for surgical revascularization, and, as a result, at a higher risk for amputation. The primary endpoint was limb salvage for a six-month follow-up period. Data from the trial indicated a 93% success rate as compared with 87% in the historical control group of 789 patients treated with a variety of standard therapies, including bypass surgery. There were no statistical differences in serious adverse events between the LACI group and the historical control group. Although the clinical trial endpoints were achieved, the advisory panel to the FDA recommended non-approval in October 2003, citing concerns over the non-randomized nature of the trial, use of a historical control group, and the inability to distinguish the specific benefit of laser treatment, since it was used adjunctively with balloons and stents. The FDA, which generally follows the advisory panel’s recommendation, issued a non-approval letter following the panel meeting. Based on input at the advisory panel meeting and subsequent discussions with the FDA, we elected to pursue 510(k) clearance to market our products to patients who have total occlusions that are not crossable with a guidewire, which is a subset of the LACI data. On January 14, 2004, we submitted data on 47 patients that showed a 95% limb salvage rate among the surviving patients six months after the procedure. The data consisted of 28 patients from the LACI trial supplemented with an additional 19 patients treated at two other sites that were not part of the original LACI trial, but followed the LACI trial protocol. There was no difference in serious adverse events as compared with the entire set of patients treated in the LACI trial. We received 510(k) clearance from the FDA on April 29, 2004.

      The Peripheral Excimer Laser Angioplasty, or PELA, trial enrolled 250 patients in a randomized trial comparing excimer laser treatment followed with balloon angioplasty to balloon angioplasty alone. The trial was designed to test the safety and efficacy of treating total occlusions of at least 10 cm in length within the superficial femoral artery. The trial was designed to determine if the laser group was superior to the balloon only group. The clinical results showed equivalence in most study endpoints, including the primary endpoint, which was primary patency (the degree in which the artery is open) as measured by a less than 50% diameter stenosis (blockage) at one year by ultrasound with no reintervention. The largest catheters used in the trial were 2.5 mm in diameter as compared to artery sizes treated in excess of 6.0 mm in diameter. We believe that the low catheter diameter in relation to artery diameter adversely affected results. We have recently received 510(k) clearance for our 2.5 Turbo catheter and the CELLO trial is evaluating our TURBO-Booster catheter for opportunities to treat the large diameter superficial femoral artery.

      With respect to our cardiac lead removal products, the Pacemaker Lead Extraction with the Excimer Sheath, or PLEXES, clinical trial was completed in October 1996 and demonstrated that use of our SLS increased the complete lead removal success rate to 94% as compared with 64% for mechanical lead removal techniques. This was a randomized trial that enrolled more than 750 patients. A more recent study completed in 1999 and published in December 2000 in the Journal of Interventional Cardiac Electrophysiology reported that using both our SLS and LLD increased our success rate to 98%.

Strategic Alliances

      ELANA. In 2004, we entered into a series of agreements with ELANA BV, a private company based in the Netherlands, which provides for us to supply laser systems and to develop and supply catheters to ELANA BV pursuant to their design requirements. A cross-licensing arrangement of selected intellectual property rights of Spectranetics and ELANA BV is also a part of the agreements. The products subject to these agreements are marketed by ELANA BV in Europe for use primarily in neurovascular bypass surgery.

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      Excimer Laser-Assisted Non-occlusive Anastomosis, or ELANA, is the only known surgical technique that enables surgeons to create a bypass without occluding the recipient vessel, ensuring continued blood supply during an operation. To make the anastomosis, which is the connection for the bypass graft, a platinum implant is attached onto the outside wall of the recipient vessel. The end of the bypass graft is stitched to the wall of the recipient vessel, using the implant as a guide. A specialized laser catheter is inserted through the bypass graft to the wall of the recipient vessel. Laser ablation is used to create a hole in the artery wall and the laser catheter removes the disc, enabling blood flow to the recipient vessel. Revenue derived from the agreements was approximately $280,000 for the year ended December 31, 2006.

      BIOSCAN. In May 2006, we entered into a catheter development agreement with Bioscan Technologies, Ltd., a privately held company in Israel (“Bioscan”). We will fund research as to the feasibility of combining Bioscan’s optical imaging technology with our fiber-optic laser catheters. The initial phase of the agreement will determine feasibility and, if feasibility is proven, product development activities will commence.

      In exchange for funding the feasibility and product development efforts and the payment of royalties and other costs associated with key milestones defined in the agreement, we will receive an exclusive, perpetual, worldwide license to Bioscan’s intellectual property held currently and developed during the course of the collaboration for use within the field of atherectomy.

Sales and Marketing

      Our sales goals are to increase the use of laser catheters and other disposable devices and to increase the installed base of our laser systems. We seek to educate and train physicians and institutions regarding the safety, efficacy, ease of use and growing number of applications addressed by our excimer laser technology through published studies of clinical applications and our various training initiatives. By leveraging the success of existing product applications, we hope to promote the use of our technology in new applications.

      Providing customers with answers about the cost of acquisition, use of the laser, types of lesions addressable by our excimer laser system and reimbursement codes is critical to the education process. Through the following marketing and distribution strategy, both in the United States and internationally, we believe that we are well positioned to capitalize not only on our core competency of our excimer laser technology in peripheral and coronary atherectomy, but also in lead extraction and in other new areas of development for excimer laser technology in the cardiovascular system.

Domestic Operations

      According to a 2001 report by the Society of Cardiovascular Angiography and Interventions, there were over 2,100 cardiac catheterization laboratories operating in the United States in 2001. Our goal is to expand our customer base by continuing to focus our sales efforts on the 1,000 hospitals with cardiac catheter labs that we believe perform the highest volume of interventional procedures, as well as on stand-alone peripheral intervention practices. Our United States sales and marketing organization consists of product marketing managers, region sales managers, and territory sales managers.

      Sales Organization Expansion. As of December 31, 2006 we had 78 field sales employees consisting of 10 region sales managers and 68 sales representatives with revenue quotas. The 78 field sales employees compares with 55 as of December 31, 2005. Our plans for 2007 include the continued expansion of the field sales organization. The roles of each member of the sales team are outlined below:

      Region Sales Managers are responsible for the overall management of a region, including sales of lasers and disposable products. They are directly responsible for the performance of the sales representatives in their district.

      Territory Sales Managers’ primary function in addition to sales of lasers and disposable products is to assist in training our customers and establishing relationship with physicians for the purpose of expanding their use of our laser devices within the accounts in their territory.

      In addition, for 2007, we intend to focus more resources on our lead removal business based on our belief that the cardiac rhythm management industry will continue to grow and that the potential lead extraction

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market is under-penetrated. Our investment will begin with establishing a small, dedicated sales team focused on lead removal.

      Master Summit Training Sessions. We seek to grow our revenue through increased sales of our higher margin disposable products to our existing installed base through training of additional physicians at our Master Summit training sessions. At these sessions, physicians observe live case demonstrations and educational presentations regarding the use of our excimer laser system. We believe that through hosting these sessions, we can accelerate physician training and enhance awareness of our products. During 2006, we held 14 Master Summits at which we trained a total of approximately 380 physicians.

      As of December 31, 2006, our field team in the United States also included 19 service engineers who are responsible for installation of each laser and participation in the training program at each site. We provide a one-year warranty on laser sales, which includes parts, labor and replacement gas. Upon expiration of the warranty period, we offer service to our customers under annual service contracts or on a fee-for-service basis.

      We are focused on expanding our product line and developing an appropriate infrastructure to support sales growth, and we have increased our sales and marketing capabilities over the last few years through the addition of personnel to our sales organization. Since the use of excimer laser technology is highly specialized, our marketing product managers and direct sales team must have extensive knowledge about the use of our products and the various physician groups we serve. Our marketing activities are designed to support our direct sales team and include advertising and product publicity in trade journals, newsletters, continuing education programs, and attendance at trade shows and professional association meetings. We currently have seven marketing product managers, which include product managers and associate product managers who are responsible for global marketing activities for each of our target markets

     International Operations

      We market and sell our products in Europe, the Middle East and Russia through Spectranetics International, B.V., a wholly-owned subsidiary, as well as through distributors.

      During 2006, we primarily utilized distributors throughout Europe and the Middle East with the exception of France, Germany, The Netherlands and Belgium, where we utilize a direct sales force. In 2006, Spectranetics International, B.V. revenues totaled $5,606,000, or 9% of our revenue compared with $4,408,000, or 10% of our revenue in 2005. On January 1, 2006, we commenced the marketing of our products directly to our German customers through our European sales and clinical organization, following the expiration of the agreement with our German distributor on December 31, 2005.

      In addition to the operations of Spectranetics International, B.V., we conduct international business in Japan and other selected countries in the Pacific Rim through distributors. We market and sell our products in Canada through our U.S. direct sales organization. In 2006, revenue from these foreign operations totaled $1,795,000, or 3% of our revenue compared with $1,476,000 or 3% of our revenue in 2005. In conjunction with our Japanese distributor, we have regulatory approval from the Japanese Ministry of Health and Welfare (MHW) to market our laser and various sizes of certain of our coronary catheters in Japan. We have submitted our application for reimbursement approval for these products in Japan from MHW. We do not expect our sales in Japan to increase unless and until reimbursement approval is attained. We are working with our current distributor, DVx Japan, to secure reimbursement approval in Japan, but we cannot assure you that our revenue in Japan will in fact increase if reimbursement approval is received. In addition, we are in various stages of the submission process to obtain regulatory approval in Japan for some of our newer products. Foreign sales may be subject to certain risks, including export/import licenses, tariffs, foreign exchange rate fluctuations, other trade regulations and foreign medical regulations and reimbursement. Tariff and trade policies, domestic and foreign tax and economic policies, exchange rate fluctuations and international monetary conditions have not significantly affected our business to date.

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Competition

      The industry in which we compete is highly competitive. Our primary competitors are manufacturers of products used in competing therapies within the peripheral and coronary atherectomy markets, such as:

•  atherectomy and thrombectomy, using mechanical methods to remove arterial blockages (peripheral and coronary);

•  balloon angioplasty and stents (peripheral);

•  bypass surgery (peripheral and coronary); and

•  amputation (peripheral).

      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 used as an adjunctive treatment to balloon angioplasty and stents in complex coronary procedures.

      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, and more experience than we have in research and development, marketing, manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and foreign regulatory approvals and marketing approved products. Our competitors may discover technologies and techniques, or enter into partnerships with collaborators, in order to develop competing products that are more effective or less costly than the products we develop. This may render our technology or products obsolete and noncompetitive. Academic institutions, government agencies, and other public and private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors. As a result, our competitors may be better equipped than we are to develop, manufacture, market and sell competing products. We expect competition to intensify.

      We believe that primary competitive factors in the interventional cardiology market include:

•  the ability to treat a variety of lesions safely and effectively as demonstrated by credible clinical data;

•  the impact of managed care practices, related reimbursement to the healthcare 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 SCIMED Life Systems, Inc. and, Guidant Corporation (both subsidiaries of Boston Scientific Corporation), Fox Hollow Technologies, Inc., Possis Medical, Inc. and Straub Medical AG. There are other potential competitors, such as Pathway Medical Technologies, Inc. and Cardiovascular Systems, Inc., that are currently seeking FDA clearance to market their mechanical atherectomy devices.

      We also compete with companies marketing lead extraction devices or removal methods, such as mechanical sheaths. In the lead removal market, we compete in the United States with lead removal devices manufactured by Cook Vascular Inc. and we compete in Europe with lead removal devices manufactured by VascoMed.

Manufacturing

      We assemble and test substantially all of our product line and have vertically integrated a number of manufacturing processes in an effort to provide increased quality and reliability of the components used in the production process. Many of our manufacturing processes are proprietary. We believe that our level of manufacturing integration allows us to better control costs, quality and process advancements, to accelerate new product development cycle time, to provide greater design flexibility and to scale manufacturing, should market demand increase.

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      Our manufacturing facilities are subject to periodic inspections by federal and state and other regulatory authorities, including QSR compliance inspections by the FDA and TÜV, which is a private company authorized by European medical agencies to assess and certify compliance with regulatory requirements. We have undergone nine inspections by the FDA for QSR compliance since 1990, and TÜV has conducted an inspection each year since 1993. Each inspection resulted in a limited number of noted observations, to which we believe we have provided adequate responses.

      We purchase certain components of our CVX-300 laser unit from several sole source suppliers. In addition, raw materials, components and subassemblies used in our disposable devices are purchased from outside suppliers and are generally readily available from multiple sources. We do not have guaranteed commitments from any of these suppliers, as we order products through purchase orders placed with these suppliers from time to time. While we believe we could obtain replacement components from alternative suppliers, we may be unable to do so. The loss of any of these suppliers could result in a disruption in our production. In addition, we may encounter difficulties in scaling up production of laser units and disposable devices and hiring and training additional qualified manufacturing personnel. Any of these difficulties could lead to quarterly fluctuations in operating results and adversely affect us.

Patents and Proprietary Rights

      We hold 40 issued U.S. patents and have rights to 17 additional U.S. patents under license agreements. We also hold five issued patents in each of France, Germany, Italy and Japan; four issued patents in the Netherlands; and one issued in each of Spain and the United Kingdom. Also, we hold 14 pending U.S. patent applications and seven pending foreign patent applications. Our patents cover the connection (coupler) between our laser catheters and the laser unit, general features of the laser system, the use of the laser and our catheters together, and specific design features of our catheters.

      Two of our licensed patents, relating to a laser method for severing or removing blockages within the body, expired in August and November 2005, respectively, and another of our licensed patents relating to the use of a laser in a body lumen expired in July 2006. In addition, certain of the coupler patents and system patents expire in 2010 and we are currently exploring new technology and design changes that may extend the patent protection for the coupler and system patents; however, we cannot assure you that we will be successful in doing so.

      Any patents for which we have applied may not be granted. Our patents may not be sufficiently broad to protect our technology or to provide us with any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, we have limited patent protection in foreign countries, and 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 could be adversely affected if any of our licensors terminates our licenses to use patented technology.

      It is our policy to require our employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions developed by the individual shall be our exclusive property, other than inventions unrelated to our business and developed entirely on the employee’s own time. There can be no assurance that these agreements will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.

      We also rely on trade secrets and unpatented know-how to protect our proprietary technology and may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how.

      We are party to several non-exclusive license agreements pursuant to which we license patents covering basic areas of laser technology and pay a royalty. We also pay a royalty under exclusive license agreements for patents covering laser-assisted lead removal and certain aspects of excimer laser technology in our products. In addition, we acquired an exclusive license for a proprietary catheter coating under which we pay a royalty.

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      We are party to a patent license agreement dated February 28, 1997 with Medtronic, Inc. pursuant to which Medtronic has granted us a worldwide exclusive license to commercialize products using certain Medtronic patents and technology. The license agreement expires on the date of expiration of the last licensed patent unless terminated earlier as a result of breach, insolvency, or our failure to perform for more than 180 days within any 12-month period due to force majeure. We pay Medtronic royalties as a specified percentage of net sales of products using the licensed Medtronic patents. For fiscal 2006, we incurred royalties of approximately $300,000 to Medtronic under this license agreement.

      We are party to an amended vascular laser angioplasty catheter license agreement with SurModics pursuant to which SurModics has granted us a worldwide exclusive license to use a lubricious coating that is applied to our products using certain SurModics patents. We pay SurModics royalties as a specified percentage of net sales of products using their patents or a quarterly minimum royalty. The license agreement expires on the later of the date of expiration of the last licensed patent or the fifteenth anniversary of the date a licensed product is first sold unless terminated earlier (1) by either party if the other party is involved with insolvency, dissolution or bankruptcy proceedings, (2) by us upon 90 days’ advance written notice, or (3) by SurModics upon 60 days’ advance written notice if we have failed to perform our obligations under the agreement and have not cured such breach during such 60-day period, or if the amount of royalties we pay SurModics is not greater than specified levels. For fiscal 2006, we incurred royalties of approximately $372,000 to SurModics under this license agreement.

      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. We are and have in the past been a party to legal proceedings involving our intellectual property and may be a party to future proceedings. See “Risk Factors” and “Legal Proceedings.”

Research and Development

      From inception through 1988, our primary emphasis in research and development was on the CVX-300 laser unit. Since 1988, our research and development efforts have focused on refinement of the CVX-300 laser unit, as well as on development of disposable catheter devices to address a broad range of cardiovascular applications. In 2005, we created dedicated product development and technology teams within our research and development organization to more effectively focus our resources on development of additional disposable devices addressing new disease indications and development of new technology, including visualization and our next-generation laser platform, respectively.

      Our team of research scientists, engineers and technicians performs substantially all of our research and development activities. Our research and development expense, which also includes clinical studies and regulatory costs, totaled $8,052,000 in 2006, $4,896,000 in 2005 and $3,798,000 in 2004. We expect these costs to increase in 2007 as we advance clinical research focused on peripheral arterial disease, as well as increased product development activities, including technology enhancements to our laser system.

Third-Party Reimbursement

      Our CVX-300 laser unit and related disposable devices are generally purchased by hospitals and stand-alone peripheral intervention practices, which then bill various third party payers for the healthcare services provided to their patients. These payers include Medicare, Medicaid and private insurance payers. Most public and private insurance payers base their coverage and payment systems upon the Medicare Program. Medicare coverage policies and payment rates depend on the setting in which the services are performed. For inpatient hospital services, hospitals generally are reimbursed for inpatient operating costs under the hospital inpatient prospective payment system, or IPPS. Payment under IPPS is determined by the patient’s condition and other patient data and procedures performed during the inpatient stay, which are classified into a Diagnosis-Related Group, or DRG. IPPS payment amounts, therefore, do not necessarily reflect the actual cost of the medical device used or the services provided. Hospitals performing inpatient procedures using our technology are paid the applicable DRG payment rate for the inpatient stay. For outpatient hospital services, payments also are made under a prospective payment system — the hospital outpatient prospective payment system, or OPPS. OPPS payments are based on Ambulatory Payment

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Classifications, or APCs, under which each procedure is categorized. Most procedures are assigned to APCs with other procedures that are comparable clinically and in terms of resources. In addition to payments made to hospitals for procedures using our technology, CMS makes separate payments to physicians for their professional services. Payments to physicians are made under the national Medicare Physicians Fee Schedule. Procedure costs and payment rates vary depending on the complexity of the procedure, various patient factors and geographical location. Private payers have, in the past, provided limited coverage for certain laser treatments and procedures, and they may institute new policies that negatively impact reimbursement levels or coverage of our products.

      At present, we believe that many of our customers using our CVX-300 laser unit for laser atherectomy are obtaining reimbursement for hospital services under atherectomy billing and reimbursement codes. We believe that lead removal procedures using the SLS and LLD are typically reimbursed using the same codes for non-laser lead removal or lead removal and replacement. Hospital outpatient and physician services billing and reimbursement codes differentiate atherectomy procedures from PCI procedures utilizing only balloons or only balloons and stents. We cannot provide assurances that the billing codes currently available will continue to be recognized by third-party payers for use by our customers.

      Most third-party payers currently cover and reimburse for procedures using our products. At least two private payers have determined that some procedures in which our technology is used should not be covered. While we believe that a laser atherectomy procedure offers a less costly alternative for the treatment of certain types of cardiovascular disease, we cannot assure you that the procedure will receive adequate coverage and reimbursement and will be viewed as cost-effective under future coverage and reimbursement guidelines or other healthcare payment systems, especially when used adjunctively with other therapies, such as balloons and stents.

Government Regulation

Overview of Medical Device Regulation

      Our products are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDCA. FDA regulations govern, among other things, the following activities that we will perform:

•  product development;

•  product testing;

•  product labeling;

•  product storage;

•  premarket clearance or approval;

•  advertising and promotion;

•  product sales and distribution; and

•  post-market safety reporting.

      To be commercially distributed in the United States, medical devices must receive either 510(k) clearance or PMA prior to marketing from the FDA pursuant to the FDCA. Devices deemed to pose relatively less risk are placed in either Class I or II, which requires the manufacturer to submit a premarket notification requesting permission for commercial distribution; this is known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a preamendment Class III device for which the FDA has not yet called for submission of PMA applications are placed in Class III requiring PMA.

      510(k) Clearance Pathway. To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously 510(k) cleared device or a device that was in commercial distribution before

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May 28, 1976. The FDA’s 510(k) clearance pathway usually takes from four to 12 months, but it can last longer.

      After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA is obtained.

      PMA Pathway. A product not eligible for 510(k) clearance must follow the PMA pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA pathway is much more costly, lengthy and uncertain. It generally takes from one to three years, but may take longer.

      A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with QSR requirements, which impose elaborate testing, control, documentation and other quality assurance procedures.

      Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which typically takes one to three years, but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a “not approvable” determination based on deficiencies in the application and require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years. During the review period, an FDA advisory committee, typically a panel of clinicians, likely will be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.

      If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an “approvable letter” requiring the applicant’s agreement to specific conditions (e.g., changes in labeling) or specific additional information (e.g., submission of final labeling) in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by the manufacturer. The PMA can include postapproval conditions that the FDA believes are necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in enforcement action, which could have material adverse consequences, including the loss or withdrawal of the approval.

      Even after a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.

      Clinical Trials. A clinical trial is almost always required to support a PMA application and is sometimes required for a premarket notification. In some cases, one or more smaller IDE studies may precede a pivotal clinical trial intended to demonstrate the safety and efficacy of the investigational device.

      All clinical studies of investigational devices must be conducted in compliance with FDA’s requirements. If an investigational device could pose a significant risk to patients (as defined in the regulations), the FDA must approve an IDE application prior to initiation of investigational use. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. FDA typically grants IDE approval for a specified number of patients to be treated at specified study centers. A nonsignificant risk device does not

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require FDA approval of an IDE. Both significant risk and nonsignificant risk investigational devices require approval from institutional review boards, or IRBs, at the study centers where the device will be used.

      During the study, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with all reporting and record keeping requirements. The IDE requirements apply to all investigational devices, whether considered significant or nonsignificant risk. Prior to granting PMA, the FDA typically inspects the records relating to the conduct of the study and the clinical data supporting the PMA application for compliance with IDE requirements.

      Although the QSR does not fully apply to investigational devices, the requirement for controls on design and development does apply. The sponsor also must manufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions of IDE approval that FDA may impose with respect to manufacturing.

      Postmarket. After a device is placed on the market, numerous regulatory requirements apply. These include: the QSR, labeling regulations, the FDA’s general prohibition against promoting products for unapproved or “off-label” uses, the Medical Device Reporting regulation (which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur), and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA).

      The FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:

•  fines, injunctions, and civil penalties;

•  recall or seizure of products;

•  operating restrictions, partial suspension or total shutdown of production;

•  refusing requests for 510(k) clearance or PMA of new products;

•  withdrawing 510(k) clearance or PMAs already granted; and

•  criminal prosecution.

      We cannot assure that the FDA will approve our current or future PMA applications or supplements or 510(k) applications on a timely basis or at all. The absence of such approvals could have a material adverse impact on our ability to generate future revenue.

      Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses.

      International sales of our products are subject to foreign regulations, including health and medical safety regulations. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements, and import restrictions on devices. Exports of products that have been approved by the FDA do not require FDA authorization for export. However, foreign countries often require a FDA Certificate to Foreign Government verifying that the product complies with FDCA requirements. To obtain a Certificate to Foreign Government, the device manufacturer must certify to the FDA that the product has been granted approval in the United States and that the manufacturer and the exported products are in substantial compliance with the FDCA and all applicable or pertinent regulations. The FDA may refuse to issue a Certificate to Foreign Government if significant outstanding QSR violations exist.

      With respect to our international operations, in November 1994, we received ISO 9001 certification from TÜV, which allows us to market our products in the European Community within compliance of the manufacturing quality regulations. In addition, we received CMDCAS (Canadian) certification by TÜV

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during January 2002. We have received CE (Communauté Européene) mark registration for all of our current products. The CE mark indicates that a product is certified for sale throughout the European Union and that the manufacturer of the product complies with applicable safety and quality standards.

      We are subject to certain federal, state and local regulations regarding environmental protection and hazardous substance controls, among others. To date, compliance with such environmental regulations has not had a material effect on our capital expenditures or competitive position.

Product Liability and Insurance

      Our business entails the risk of product liability claims. We maintain product liability insurance in the amount of $7 million per occurrence with an annual aggregate maximum of $7 million. We cannot assure, however, that product liability claims will not exceed such insurance coverage limits or that such insurance coverage limits will continue to be available on acceptable terms, or at all.

Employees

      As of December 31, 2006, we had 311 full time employees, including 29 in research and development and clinical and regulatory affairs; 121 in manufacturing and quality assurance; 117 in marketing, sales and field service; 28 in administration in the United States and 16 in marketing, sales and administration in Europe. None of our employees are covered by collective bargaining agreements. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. We believe that our relationship with our employees is good.

ITEM 1A. Risk Factors

Our ability to increase our revenue is largely dependent on our ability to successfully penetrate our target markets and develop new products for those markets.

      Our ability to increase our revenue from current levels depends largely on our ability to increase sales in the peripheral arterial disease, or PAD, market with our CLiRpath line of disposable catheters that was introduced in 2004. A substantial portion of our growth in 2006 and 2005 was derived from sales of our CLiRpath catheters and in order to increase future revenue, we must increase sales of these products to existing and new customers. Beyond CLiRpath, new products will need to be developed and approved by the FDA and foreign regulatory agencies to sustain revenue growth within the market. In that regard, while our focus is on the PAD market, we currently have FDA clearance for only one indication for the treatment of PAD. Additional clinical data and new products to treat coronary artery disease will also be necessary to grow revenue within the coronary market.

Our future growth depends on physician adoption of our products, which requires physicians to change their screening, referral and treatment practices.

      Although we believe there is a correlation between PAD and coronary artery disease, many physicians do not routinely screen for PAD while screening for coronary artery disease. We target our sales efforts to interventional cardiologists, vascular surgeons and interventional radiologists because they are often the primary care physicians diagnosing and treating both coronary artery disease and PAD. However, the initial point of contact for many patients may be other physicians, including general practitioners and podiatrists, each of whom commonly treats patients experiencing complications resulting from PAD. If we do not educate referring physicians about PAD in general and the existence of our products in particular, they may not refer patients to interventional cardiologists, vascular surgeons or interventional radiologists for treatment with our laser system. In addition, in order to grow sales of our lead removal products, we must change the current standard of care for abandoned pacemaker and ICD leads, which is simply to cap the abandoned leads and leave them in the body. If we are not successful in educating physicians about screening for PAD or about risks related to infected, defective or abandoned pacemaker and ICD leads, our ability to increase our revenue may be impaired.

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We may be unable to compete successfully with bigger companies in our highly competitive industry.

      The industry in which we compete is highly competitive. Our primary competitors are manufacturers of products used in competing therapies within the peripheral and coronary atherectomy markets, such as:

•  atherectomy and thrombectomy, using mechanical methods to remove arterial blockages (peripheral and coronary);

•  balloon angioplasty and stents (peripheral);

•  bypass surgery (peripheral and coronary); and

•  amputation (peripheral).

      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 used as an adjunctive treatment to balloon angioplasty and stents in complex coronary procedures. 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, and more experience than we have in research and development, marketing, manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and foreign regulatory approvals and marketing approved products. Our competitors may discover technologies and techniques, or enter into partnerships with collaborators, in order to develop competing products that are more effective or less costly than the products we develop. This may render our technology or products obsolete and noncompetitive. Academic institutions, government agencies, and other public and private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors. As a result, our competitors may be better equipped than we are to develop, manufacture, market and sell competing products. We expect competition to intensify.

      We believe that primary competitive factors in the interventional cardiology market include:

•  the ability to treat a variety of lesions safely and effectively as demonstrated by credible clinical data;

•  the impact of managed care practices, related reimbursement to the healthcare 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 SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific Corporation), Abbott Vascular, Fox Hollow Technologies, Inc., Possis Medical, Inc. and Straub Medical AG. There are other potential competitors, such as Pathway Medical Technologies, Inc. and Cardiovascular Systems, Inc., that are currently seeking FDA clearance to market their mechanical atherectomy devices.

      We also compete with companies marketing lead extraction devices or removal methods, such as mechanical sheaths. In the lead removal market, we compete in the United States with lead removal devices manufactured by Cook Vascular Inc. and we compete in Europe with lead removal devices manufactured by VascoMed-Institute fur Kathertechnologie GmbH, or VascoMed.

Our products may not achieve market acceptance.

      Our laser system and other products may not gain market acceptance. Market acceptance in the healthcare community, including physicians, patients and third-party payers, of our laser system and other products depends on many factors, including:

•  our ability to provide incremental clinical and economic data that shows the safety and clinical efficacy and cost effectiveness of, and patient benefits from, laser atherectomy and pacemaker and ICD lead removal;

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•  the availability of alternative treatments;

•  the inclusion of our products on insurance company formularies;

•  the willingness and ability of patients and the healthcare community to adopt new technologies;

•  the convenience and ease of use of our products relative to existing treatment methods;

•  the pricing and reimbursement of our products relative to existing treatment methods; and

•  marketing and distribution support for our products.

      In addition, if any of our products achieves market acceptance, we may not be able to maintain that market acceptance over time if competing products or technologies are introduced that are received more favorably or are more cost effective. Failure to achieve or maintain market acceptance would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations.

If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our products under development may be delayed and our business may be harmed.

      For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development and commercialization goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions and are subject to numerous risks and uncertainties. There is a risk that we will not be successful in achieving these milestones on a timely basis or at all. Moreover, even if we are successful in achieving these milestones, the actual timing of the achievement of these milestones can vary dramatically compared to our estimates — in many cases for reasons beyond our control — depending on numerous factors, including:

•  the rate of progress, costs and results of our clinical trials and research and development activities;

•  our ability to identify and enroll patients who meet clinical trial eligibility criteria;

•  the extent of scheduling conflicts with participating physicians and clinical institutions;

•  the receipt of marketing approvals and clearances by our competitors and by us from the FDA and other regulatory agencies;

•  other actions by regulators, including actions related to a class of products; and

•  actions of our development partners in supporting product development programs.

      If we do not meet these milestones for our products or if we are delayed in achieving any of these milestones, the development and commercialization of new products, modifications of existing products or sales of existing products for new approved indications may be prevented or delayed, which could damage our reputation or materially adversely affect our business.

If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, our business may be harmed.

      All of our potential products and improvements of our current products are subject to extensive regulation and will require approval or clearance from the FDA and other regulatory agencies prior to commercial sale and distribution. Pursuant to FDA regulations, unless exempt, the FDA permits commercial distribution of a new medical device only after the device has received 510(k) clearance or is the subject of an approved pre-market approval application, or PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. In some cases, a 510(k) clearance must be supported by preclinical and clinical data. The PMA application process is more costly, lengthy and uncertain than the 510(k) process, and must be supported by extensive data, including data from preclinical studies and human clinical trials. Therefore, in order to obtain regulatory approvals or clearance, we typically must, among other requirements, provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate to the satisfaction of the FDA and

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such other authorities that our products satisfy the criteria for approval or clearance. Preclinical testing and clinical trials must comply with the regulations of the FDA and other government authorities in the United States and similar agencies in other countries.

      Clinical development is a long, expensive and uncertain process and is subject to delays and to the risk that products may ultimately prove ineffective in treating the indications for which they are designed. Completion of the necessary clinical trials usually takes several years or more. We cannot assure you that we will successfully complete clinical testing of our products within the time frame we have planned, or at all. Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. A number of companies in the medical device industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials.

      We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval for new products, modification of existing products, or new approved indications for existing products including the following:

•  the FDA or similar foreign regulatory authorities may find that the product is not sufficiently safe or effective;

•  officials at the FDA or similar foreign regulatory authorities may interpret data from preclinical testing and clinical trials in different ways than we do;

•  there may be delays or failure in obtaining approval of our clinical trial protocols from the FDA or other regulatory authorities;

•  there may be delays in obtaining institutional review board approvals or government approvals to conduct clinical trials at prospective sites;

•  the FDA or similar foreign regulatory authorities may find our or our suppliers’ manufacturing processes or facilities unsatisfactory;

•  the FDA or similar foreign regulatory authorities may change their approval policies or adopt new regulations that may negatively affect or delay our ability to bring a product to market or receive approvals or clearances for the treatment of new indications;

•  our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing or to abandon programs;

•  we may experience difficulties in managing multiple clinical sites;

•  trial results may not meet the level of statistical significance required by the FDA or other regulatory authorities;

•  we have experienced delays in enlisting an adequate number of patients in prior clinical trials, and we may be unable to attract subjects for our clinical trials when competing with larger companies who are able to offer larger financial incentives to their customers to support their clinical trials;

•  enrollment in our clinical trials may be slower than we anticipate, or we may experience high drop-out rates of subjects in our clinical trials, resulting in significant delays;

•  we may experience delays in reaching agreement on acceptable terms with third party research organizations and trial sites that will conduct the clinical trials;

•  our products may be, or may be perceived by healthcare providers to be, unsafe or ineffective for a particular indication; and

•  we, or regulators, may suspend or terminate our clinical trials because the participating patients are being exposed to unacceptable health risks.

      Failures or perceived failures in our clinical trials will delay and may prevent our product development and regulatory approval process, damage our business prospects and negatively affect our reputation and competitive position.

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Our small sales and marketing team may be unable to compete with our larger competitors or to reach potential customers.

      Although we are expanding our sales and marketing organizations, most of our competitors have substantially 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. We are providing sales training, and as we add new field sales employees we will attempt to recruit candidates with more sales experience. However, we cannot assure you that our sales training and recruiting will improve productivity within our field sales organization. Further, we may experience higher turnover within our field sales organization than we have in the past because we are shifting our emphasis to sales personnel with sales experience rather than a clinical background.

Regulatory compliance is expensive and approvals can often be denied or significantly delayed.

      Our products are regulated as medical devices, which are subject to extensive regulation by the FDA and comparable state and foreign agencies. Complying with these regulations is costly and time consuming. FDA regulations are wide-ranging and govern, among other things:

•  product design, development, manufacture and testing;

•  product safety and efficacy;

•  product labeling;

•  product storage and shipping;

•  record keeping;

•  pre-market clearance or approval;

•  advertising and promotion;

•  product sales and distribution; and

•  post-market surveillance and reporting of deaths or serious injuries.

      Additionally, we may be required to obtain PMAs, PMA supplements or 510(k) pre-market clearances to market modifications to our existing products. The FDA requires device manufacturers themselves to make and document a determination of whether or not a modification requires an approval, supplement or clearance; however, the FDA can review a manufacturer’s decision. The FDA may not agree with our decisions not to seek approvals, supplements or clearances for particular device modifications. If the FDA requires us to obtain PMAs, PMA supplements or pre-market clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA clearance or approval and we may be subject to significant regulatory fines or penalties. In addition, there can be no assurance that the FDA will clear or approve such submissions in a timely manner, if at all.

      International regulatory approval processes may take longer than the FDA approval process. If we fail to comply with applicable FDA and foreign regulatory requirements, we may not receive regulatory approvals or 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, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance 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. A failure or delay in obtaining necessary regulatory approvals would materially adversely affect our business.

Some of our licensed patents have recently expired and others will expire in 2010, and our patents and proprietary rights may be proved invalid, which would enable competitors to copy our products.

      We hold patents and licenses to use patented technology, and have pending patent applications. Our patents cover the connection (coupler) between our laser catheters and the laser unit, general features of the laser system, system patents that include the use of our laser and our catheters together, and specific design

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features of our catheters. Two of our licensed patents relating to a laser method for severing or removing blockages within the body expired in August and November 2005, respectively, and another of our licensed patents relating to the use of a laser in a body lumen expired in July 2006. In addition, certain of our coupler patents and system patents expire in 2010. We are currently exploring new technology and design changes that may extend the patent protection for the coupler and system patents; however, we cannot assure you that we will be successful in doing so. As a result, upon expiration of these patents, our competitors may seek to produce products that include this technology which is no longer subject to patent protection and this increase in competition may negatively affect our business.

We have a history of losses and may not be able to maintain profitability.

      We incurred losses from operations since our inception in September 1984 until the second quarter of 2001, and we incurred net losses in the first and second quarters of 2002 and throughout most of 2006. At December 31, 2006, we had accumulated $73.8 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.

The adoption of Statement 123R will have an adverse impact on our results of operations.

      As of January 1, 2006, we adopted Statement 123R, which requires companies to measure all employee stock-based compensation awards using a fair value method and to record that expense in their financial statements. We have adopted Statement 123R on a modified prospective basis as defined in the statement and, under this adoption method, we have begun recording expense relating to employee stock-based compensation awards in the periods subsequent to December 31, 2005. Accordingly, our statements of operations for years ended December 31, 2005 and prior do not reflect the effect of Statement 123R, whereas our statement of operations for subsequent periods will reflect the impact of Statement 123R. The adoption of Statement 123R had an adverse effect on our results of operations for the year ended December 31, 2006, and we expect it will continue to do so for subsequent periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies,” and Note 1(m) to our consolidated financial statements.

The amount of our net operating loss carryovers may be limited.

      We have net operating loss carryovers, or NOLs, which may be used by us as an offset against taxable income, if any, for U.S. federal income tax purposes. However, the amount of NOLs that we may use in any year could be limited by Section 382 of the Internal Revenue Code of 1986, as amended, in addition to certain limitations we are currently subject to. In general, Section 382 would limit our ability to use NOLs for U.S. federal income tax purposes in the event of certain changes in ownership of our company. Any limitation of our use of NOLs could (depending on the extent of such limitation and the amount of NOLs previously used) result in us retaining less cash after payment of U.S. federal income taxes during any year in which we have taxable income (rather than losses) than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal income tax reporting purposes.

      We also have tax loss carryforwards in the Netherlands, which have no expiration date. However, in 2004, the Netherlands tax authorities proposed that substantially all of the tax loss carryforwards be disallowed. We are actively defending the availability of these loss carryforwards. These foreign loss carryforwards have been fully reserved with a valuation allowance. If the tax loss carryforwards are ultimately disallowed, there will be no negative impact to our statement of operations, although it may adversely affect our future cash flow and financial position.

Our products are subject to recalls after receiving FDA or foreign approval or clearance, which would divert managerial and financial resources, harm our reputation, and could adversely affect our business.

      We are subject to medical device reporting regulations that require us to report to the FDA or similar foreign governmental authorities if our products cause or contribute to death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to

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occur. The FDA and similar foreign governmental authorities have the authority to require the recall of our products in the event of any failure to comply with applicable laws and regulations or defects in design or manufacture. A government mandated or voluntary product recall by us could occur as a result of, among other things, component failures, device malfunctions, or other adverse events, such as serious injuries or deaths, or quality-related issues such as manufacturing errors or design or labeling defects. For example, in May 1999 we initiated a recall and field correction for our CVX-300 laser unit to correct a narrow gap in the internal protective housing which could possibly have allowed direct line of sight access to the laser beam. The corrective action and the FDA audit of our actions were completed by November 1999. Any future recalls of any of our products could divert managerial and financial resources, harm our reputation, and could adversely affect our business.

The FDA requires the use of adjunctive balloon angioplasty in coronary procedures performed using our products, which increases the cost of performing these procedures.

      The FDA has required that the label for the CVX-300 laser unit state that adjunctive balloon angioplasty was performed together with laser atherectomy in the coronary procedures we submitted to the FDA for PMA. This means that our laser system cannot be used alone to treat coronary conditions. Adjunctive balloon angioplasty requires the purchase of a balloon catheter in addition to the laser catheter. The requirement that our coronary procedures be performed together with balloon angioplasty increases the aggregate cost of performing these procedures. As a result, third-party payers may attempt to deny or limit reimbursement, including 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 acquire or may cease using our laser system.

Technological change may result in our products becoming obsolete.

      The medical device market is characterized by extensive research and development and rapid technological change. We derive most of our revenue from the sale of our disposable catheters. Technological progress or new developments in our industry could adversely affect sales of our products. Other companies, many of which have substantially greater resources than we do, are engaged in research and development for the treatment and prevention of peripheral and coronary arterial disease. These include pharmaceutical approaches as well as development of new or improved balloon angioplasty, atherectomy, thrombectomy, stents or other devices. Our products could be rendered obsolete as a result of future innovations in the treatment of cardiovascular disease.

      In addition, the patents we own and license may not be sufficiently broad to protect our technology or to give us any competitive advantage. We could also be adversely affected if any of our licensors terminates our licenses to use patented technology. In addition, we have limited patent protection in foreign countries and 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. Any of the foregoing could have a material adverse effect on our business.

Third parties may infringe our patents or challenge their validity or enforceability.

      Our patents could be challenged as invalid or circumvented by competitors. The issuance of a patent is not conclusive as to its validity or enforceability. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which our products are marketed. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or technologies may infringe. Challenges raised in patent infringement litigation may result in determinations that our patents or licensed patents are invalid, unenforceable or otherwise subject to limitations. In the event of any such determination, third parties may be able to use the discoveries or technologies without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property. In addition, enforcing the patents that we hold or license may require significant expenditures regardless of the outcome of such efforts.

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We and our component suppliers may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect on our business, financial condition and results of operations.

      As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (QSR) requirements, which require manufacturers of medical devices to adhere to certain good manufacturing practice regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Our component suppliers are also required to meet certain standards applicable to their manufacturing processes.

      We cannot assure you that we or any of our component suppliers is in compliance or that we will be able to maintain compliance with all regulatory requirements. The failure by us or one of our component suppliers to achieve or maintain compliance with these requirements or quality standards may disrupt our ability to supply products sufficient to meet demand until compliance is achieved or, in the case of a component supplier, until a new supplier has been identified and evaluated. In addition, our failure to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. Furthermore, we cannot assure you that if we find it necessary to engage new suppliers to satisfy our business requirements, that we will be able to locate new suppliers who are in compliance with regulatory requirements. Our failure to do so could have a material adverse effect on our business.

      In the European Union, we are required to maintain certain International Organization for Standardization (ISO) certifications in order to sell our products and must undergo periodic inspections by notified bodies, including TUV, to obtain and maintain these certifications. If we fail these inspections or fail to meet these regulatory standards, our business could be materially adversely affected.

Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive coverage and reimbursement practices of third-party payers could decrease the demand for our products, the prices that customers are willing to pay for those products and the number of procedures performed using our devices, which could have an adverse effect on our business.

      Our products are purchased principally by hospitals and stand-alone peripheral intervention practices, which typically bill various third-party payers, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain appropriate coverage and reimbursement for our products and services from private and governmental third-party payers is critical to our success. The availability of coverage and reimbursement affects which products customers purchase and the prices they are willing to pay.

      Reimbursement varies from country to country, state to state and plan to plan and can significantly impact the acceptance of new products and services. Certain private third-party payers may view some of the procedures using our products as experimental and may not provide coverage. We cannot assure you that third-party payers will cover and reimburse the procedures using our products in whole or in part in the future or that payment rates will be adequate. Further, the adequacy of coverage and reimbursement by third-party payers is also related to the existence of billing codes to describe procedures that are performed using our products. There are currently a number of billing codes that are used by hospitals and physicians to bill for such procedures. We cannot provide assurances that the billing codes currently available will continue to be recognized by third-party payers for use by our customers.

      After we develop a new product or seek to market our products for new approved indications, we may find limited demand for the product unless adequate coverage and reimbursement is obtained from private and governmental third-party payers. Even with reimbursement approval and coverage by private and government

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payers, providers submitting reimbursement claims may face delay in payment if there is confusion on the part of providers regarding the appropriate codes to use in seeking reimbursement. Such delays may create an unfavorable impression within the marketplace regarding the level of reimbursement or coverage available for our products.

      Demand for our current or new products or new approved indications for our existing products may fluctuate over time if federal or state legislative or administrative policy changes affect coverage or reimbursement levels for our products or the services related to our products. In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the healthcare system, some of which could significantly affect our business. For instance, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which, among other things, established a new prescription drug benefit and changed reimbursement methodologies for drugs and devices used in hospitals and in the home. Future legislative or policy initiatives directed at increasing the accessibility of healthcare and reducing costs could be introduced on either the federal or state level. In regards to foreign markets, for example, the reimbursement approval process in Japan is taking longer than anticipated due to the complexity of this process. Legislative or administrative reforms to the U.S. or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures could have a material adverse effect on our business.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.

      Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws. Such laws include the federal Anti-Kickback Statute and related state anti-kickback laws, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing, purchasing, leasing or ordering of, or arranging for or recommending the furnishing, purchasing, leasing or ordering of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. The federal Stark law and self-referral prohibitions under analogous state laws restrict referrals by physicians and, in some instances, other healthcare providers, practitioners and professionals, to entities with which they have indirect or direct financial relationships for furnishing of designated health services. These healthcare fraud and abuse laws are subject to evolving interpretations by various state and federal enforcement and regulatory authorities. Under current interpretations of the federal false claims act and certain similar state laws, some of these laws may also be subject to enforcement in a qui tam lawsuit brought by a private party “whistleblower,” with or without the intervention of the government.

      If our past or present operations, including our laser system placement programs, clinical research and consulting arrangements with physicians who use our product or our “Cap Free” or other sales or marketing programs, are found to be in violation of these laws and not protected under a statutory exception or regulatory safe harbor provision to the applicable fraud and abuse laws, we, our officers or our employees may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and other federal healthcare program participation, including the exclusion of our products from use in treatment of Medicare or other federal healthcare program patients. If federal or state investigations or enforcement actions were to occur, our business and financial condition would be harmed.

If we fail to obtain regulatory approvals in other countries for our products, we will not be able to market our products in such countries, which could harm our business.

      The requirements governing the conduct of clinical trials and manufacturing and marketing of our products, new products or additional indications for our existing products outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional testing and different clinical trial designs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval processes. Some foreign regulatory agencies also must approve the reimbursement policies related to specific products. We have experienced difficulties in the past in obtaining reimbursement approvals for our products in Europe and are

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currently seeking reimbursement approval for our products in Japan. We do not expect our sales in Japan to increase unless and until reimbursement approval is attained. We cannot assure you that this approval will be obtained or that revenue in Japan will increase if this approval is received. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We may not be able to file for regulatory approvals and may not receive necessary approvals to market our existing products in any foreign country. If we fail to comply with these regulatory requirements or obtain and maintain required approvals in any foreign country, we will not be able to sell our products in that country and our ability to generate revenue could be materially adversely affected.

We are exposed to the problems that come from having international operations.

      For the year ended December 31, 2006, our revenue from international operations represented 12% of consolidated revenue, of which 9% was generated in Europe, the Middle East and Russia. Changes in overseas political or economic conditions, war or other conflicts, currency exchange rates, foreign laws regulating the approval and sales of medical devices, foreign tax laws or tariffs, other trade regulations or intellectual property protection could adversely affect our ability to market our products outside the United States. Any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment where we will conduct international operations may have a material adverse impact on our business. To the extent we expand our international operations, we expect our sales and expenses denominated in foreign currencies to expand, therefore increasing the risk that we will be adversely affected by fluctuations in currency exchange rates. We currently do not hedge against foreign currency fluctuations, which could result in reduced consolidated revenue or increased operating expenses.

Our European operations may not be successful or may not be able to achieve revenue growth.

      We use distributors for sales of our products throughout most of Europe. The sales and marketing efforts on our behalf by distributors in Europe could fail to attain long-term success. On January 1, 2006, we commenced the marketing of products directly to our German customers through our European sales and clinical organization, following the expiration of an agreement with our German distributor on December 31, 2005. We cannot assure you, however, that our direct sales effort in Germany will be successful.

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, as we 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. The loss of any of these suppliers could result in a disruption in our production. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors. In addition, establishing additional or replacement suppliers for these materials may take a substantial period of time, as certain of these suppliers must be approved by regulatory authorities. If we are unable to secure on a timely basis sufficient quantities of the materials we depend on to manufacture our CVX-300 laser units, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable cost, then the manufacture of our CVX-300 laser unit may be disrupted, which could increase our costs and have a material adverse effect on our business.

From time to time we engage outside parties to perform services related to certain of our clinical studies and trials, and any failure of those parties to fulfill their obligations could result in costs and delays.

      From time to time we engage consultants and contract research organizations to help design and monitor and analyze the results of certain of our clinical studies and trials. The consultants and contract research organizations we engage interact with clinical investigators to enroll patients in our clinical trials. As a result, we depend on these clinical investigators, consultants and contract research organizations to perform the clinical studies and trials and monitor and analyze data from these studies and trials in accordance with the investigational plan and protocol for the study or trial and in compliance with regulations and standards,

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commonly referred to as good clinical practice, for conducting, recording and reporting results of clinical studies or trials to assure that the data and results are credible and accurate and the trial participants are adequately protected, as required by the FDA and foreign regulatory agencies. The consultants and contract research organizations are responsible for protecting confidential patient data and complying with U.S. and foreign laws and regulations related to data privacy, including but not limited to the Health Insurance Portability and Accountability Act. We may face delays in our regulatory approval process if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. This risk is heightened for our clinical studies and trials conducted outside of the United States, where it may be more difficult to ensure that our studies and trials are conducted in compliance with FDA requirements. Any third parties that we hire to help design or monitor and analyze results of our clinical studies and trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If these third parties do not successfully carry out their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical trial protocols or for other reasons, our clinical studies or trials may be extended, delayed or terminated or may otherwise prove to be unsuccessful, and our development costs will increase. In addition, we may not be able to establish or maintain relationships with these third parties on favorable terms, or at all. If we need to enter into replacement arrangements because a third party is not performing in accordance with our expectations, we may not be able to do so without undue delays or considerable expenditures or at all.

If we do not effectively manage our growth, our business may be harmed.

      We have experienced increased unit volume demand and our ability to fulfill customer demand is becoming more difficult. To manage our growth, we must expand our facilities, hire and train additional qualified personnel, scale-up our manufacturing capacity and expand our marketing and distribution capabilities. Our manufacturing and assembly process is complex, and we must scale this entire process to satisfy customer expectations and increased demand. In addition, in January 2006, we announced that we entered into a new lease in December 2006 for a 75,000 square foot building. We plan to consolidate all of our current U.S. operations into the new facility in two phases, which we expect to be completed by the end of 2008. There can be no assurance that this transition will occur smoothly or on the timetable that we have set. If we are unable to transition our manufacturing operations to our new facility as planned, we may experience delays or disruptions in our ability to manufacture and ship product as requested by our customers. We also expect to continue to expand the number of sales and marketing personnel as we expand our business. The number of our full-time employees increased from 208 as of December 31, 2005 to 311 as of December 31, 2006. We cannot be certain that our personnel, systems and procedures will be adequate to support our future operations. If we cannot manage our growth effectively, our business will suffer.

Product liability and other claims against us may reduce demand for our products or result in substantial damages.

      Our business exposes us to potential liability for risks that may arise from the clinical testing of our product candidates, the use of our products by physicians and the manufacture and sale of any approved products. An individual may bring a product liability claim against us, including frivolous lawsuits, if one of our products causes, or merely appears to have caused, an injury. We maintain product liability insurance in the amount of $5 million per occurrence with an annual aggregate maximum of $5 million. The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business. We do not maintain clinical trial insurance. Any product liability claim or series of claims or class actions brought against us, with or without merit, could result in:

•  liabilities that substantially exceed our insurance levels, which we would then be required to pay from other sources, if available;

•  an increase of our product liability insurance rates or the inability to renew or obtain product liability insurance coverage in the future on acceptable terms, or at all;

•  withdrawal of clinical trial volunteers or patients;

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•  damage to our reputation and the reputation of our products;

•  regulatory investigations that could require costly recalls or product modifications;

•  litigation costs; and

•  the diversion of management’s attention from managing our business.

      Claims may be made by consumers, healthcare providers or others selling our products. We may be subject to claims against us even if an alleged injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to perform the medical procedures and related processes relating to our products. If these medical personnel are not properly trained or are negligent in using our products, the therapeutic effect of our products may be diminished or the patient may suffer injury, which may subject us to liability. In addition, an injury resulting from the activities of our suppliers may serve as a basis for a claim against us. We do not promote our products for off-label or otherwise unapproved uses. However, we cannot prevent a physician from using our products for any off-label applications. If injury to a patient results from such an inappropriate use, we may become involved in a product liability suit, which will likely be expensive to defend.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, which could result in substantial costs and liability.

      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 us. 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 and pay them royalties, which could be substantial. For example, we are currently involved in litigation regarding a patent issued to Dr. Peter Rentrop for a certain catheter with a diameter of less than 0.9 mm and a jury has returned an unfavorable verdict in the case, which is ongoing. See Item 3 — Legal Proceedings for more detail regarding this matter. We cannot guarantee that another patent holder will not file a lawsuit against us and prevail. If we decide that we need to obtain a license to use any intellectual property, we may be unable to obtain these licenses on favorable terms or at all or we may be required to make substantial royalty or other payments to use this intellectual property. Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the attention of our management from our business operations. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. An unfavorable outcome in an interference proceeding or patent infringement suit could require us to pay substantial damages, cease using the technology or to license rights, potentially at a substantial cost, from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we are able to obtain rights to a third party’s patented intellectual property, those rights may be non-exclusive and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business. To the extent we are found to be infringing on the intellectual property of others, we may not be able to develop or otherwise obtain alternative technology. If we need to redesign our products to avoid third party patents, we may suffer significant regulatory delays associated with conducting additional studies or submitting technical, manufacturing or other information related to any redesigned product and, ultimately, in obtaining regulatory approval. Further, any such redesigns may result in less effective and/or less commercially desirable products.

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If we are not able to protect and control unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.

      In addition to patented intellectual property, we also rely on unpatented technology, trade secrets, confidential information and know-how to protect our technology and maintain our competitive position, particularly when we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment agreements with our employees, consultants and others. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover trade secrets and proprietary information that have been licensed to us or that we own, and in such case, we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using trade secrets that have been licensed to us or that we own is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Future litigation proceedings may materially adversely affect our business.

      From time to time we are a defendant or plaintiff in various legal actions. Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us may cause us to pay substantial damages or result in injunctions against future product sales. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management from our business operations, which could have a material adverse effect on our business.

Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.

      Federal, state, local and foreign laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. If our or our suppliers’ operations result in the contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have a material adverse effect on our financial condition. Although we maintain insurance for certain environmental risks, subject to substantial deductibles, we cannot assure you that we will be able to continue to maintain this insurance in the future at an acceptable cost or at all. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations.

We depend on attracting and retaining key management, clinical, scientific and sales and marketing personnel, and the loss of these personnel could impair the development and sales of our products.

      Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical, scientific and sales and marketing personnel. We do not have employment agreements with any of our employees. Their employment with us is “at will,” and each employee can terminate his or her agreement with us at any time and choose to work for our competitors. We do not carry “key person” insurance covering members of senior management. The competition for qualified personnel in the medical device industry is intense. We will need to hire additional personnel as we continue to expand our development activities and drive sales of our products. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel.

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The initial cost of purchasing our laser unit is not reimbursed by third-party payers, which may hurt sales of both our laser units and our disposable products.

      Our laser-based procedures require that the healthcare provider use one of our CVX-300 laser units. We sell our CVX-300 laser units primarily to hospitals, which then bill third-party payers, such as government programs and private insurance plans, for the services the hospitals provide to individual patients using the CVX-300 laser unit. However, hospitals and other healthcare providers are not reimbursed for the substantial initial cost of purchasing the laser unit and the amount reimbursed to a hospital for procedures involving our products may not be adequate to allow them to recoup their initial investment in our laser unit. By contrast, many competing products and procedures, like balloon angioplasty do not require the up-front investment in the form of a capital equipment purchase, lease, or rental. As a result, the initial cost of purchasing our laser unit may prevent hospitals and other healthcare providers from using our disposable devices, which in turn would adversely affect our revenue from the sale and rental of laser units. Moreover, because our catheters and other disposable products generally can be used only in conjunction with our laser unit, any limitation of the acquisition of our laser units by hospitals and other healthcare providers will adversely affect sales of our disposable products.

If we make acquisitions, we could encounter difficulties that harm our business.

      We may acquire companies, products or technologies that we believe to be complementary to the present or future direction of our business. If we engage in such acquisitions, we may have difficulty integrating the acquired personnel, financials, operations, products or technologies. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities, and increase our risk of litigation, all of which could harm our business. If we use cash to acquire companies, products or technologies, it may divert resources otherwise available for other purposes. If we use our common stock to acquire companies, products or technologies, our stockholders may experience substantial dilution.

Our stock price may continue to be volatile.

      The market price of our common stock, similar to other 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:

•  actual or anticipated fluctuations in our operating results and the operating results of competitors;

•  announcements of technological innovations or new products by us or our competitors;

•  results of clinical trials or studies by us or our competitors;

•  governmental regulation;

•  developments with respect to patents or proprietary rights, including assertions that our intellectual property infringes the rights of others;

•  public concern regarding the safety of products developed by us or others;

•  the initiation or cessation in coverage of our common stock, or changes in estimates or recommendations concerning us or our common stock, by securities analysts;

•  changes in accounting principles;

•  past or future management changes;

•  litigation;

•  changes in general market and economic conditions; and

•  the possibility of our financing future operations through additional issuances of equity securities, which may result in dilution to existing stockholders.

      In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in

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substantial costs and divert management’s attention and resources from our business and could require us to make substantial payments to settle those proceeding or satisfy any judgments that may be reached against us.

Protections against unsolicited takeovers in our charter and bylaws may reduce or eliminate our stockholders’ ability to resell their shares at a premium over market price.

      Our charter and bylaws contain provisions relating to issuance of preferred stock, special meetings of stockholders and advance notification procedures for stockholder proposals that could have the effect of discouraging, delaying 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 discouraging, delaying or preventing a change in control.

      We are subject to Section 203 of the Delaware General Corporation law, which in general and subject to exceptions, prohibits a publicly held Delaware corporation from engaging in a “business combination” (as defined in Section 203) with an “interested stockholder” (as defined in Section 203) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless certain conditions are met. Section 203 may discourage, delay or prevent an acquisition of our company even at a price our stockholders may find attractive.

ITEM 1B. Unresolved Staff Comments

Not applicable

ITEM 2. Properties

      Our domestic operations are currently located in four buildings in Colorado Springs, Colorado. These facilities contain approximately 35,000 square feet of manufacturing space and approximately 30,000 square feet devoted to marketing, research and administrative activities. Three of these facilities are leased and have lease expiration dates of March 31, 2008; March 31, 2009 and December 31, 2010, respectively. We purchased for cash consideration the fourth facility, which was previously under lease, on March 29, 2005 for $1,350,000.

      In December, 2006 we entered into a ten-year lease agreement for a 75,000 square foot building in northern Colorado Springs, with expansion rights for an additional 40,000 square feet on the same property, at our option, during the first four years of the lease. We plan to consolidate all of our current U.S. operations into the new facility in two phases. All research and development, clinical studies, regulatory marketing, sales support and administrative functions are expected to move to the new facility in the first half of 2007, while all manufacturing and related support functions are expected to relocate in 2008. Upon occupancy of the new building, we plan to pursue subleases or lease buyouts of our existing leased buildings, and we plan to market for sale our owned building.

      Spectranetics International B.V. leases 3,337 square feet in Leusden, The Netherlands. The facility houses our operations for the marketing and distribution of products in Europe, and the lease expires June 30, 2008.

      We believe these facilities are adequate to meet our requirements for the foreseeable future.

ITEM 3.      Legal Proceedings

Rentrop

      In July, 2003, we filed a complaint in the United States District Court for the District of Colorado against Dr. Peter Rentrop, which We amended in September 2003, seeking declaratory relief that (1) our 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 we are, through our employees, a joint owner of any invention claimed in the ’125 patent. We also brought claims against Dr. Rentrop for damages based upon Dr. Rentrop’s (1) misappropriation of our trade secrets; (2) breach of the parties’ Confidentiality Agreement; and (3) wrongful taking of our 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,

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Dr. Rentrop filed in the United States District Court for the Southern District of New York (the “New York Court”), a complaint for patent infringement against us, 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. We decided to forgo appealing that decision; thus, there no longer is any case pending in Colorado.

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

      After mediation hearings occurred in February 2006, with no settlement reached, the case was returned to the New York Court for trial, which began in November 2006. In December 2006, the trial was concluded and the jury returned a verdict in favor of Dr. Rentrop, awarding him $500,000 in royalties and $150,000 in legal fees. We have filed several post-trial motions with the New York Court and the verdict will not be deemed accepted until the judge rules on these post-trial motions. In the event that our post-trial motions are unsuccessful, and the judge accepts the verdict, we currently plan to exhaust all of our appeal options. However, in light of the jury verdict, we have accrued $690,000 in expenses related to the verdict (the $650,000 awarded, and an additional $40,000 for royalties subsequent to the effective date of the jury award and through December 31, 2006), which is included in accrued liabilities on our consolidated balance sheet at December 31, 2006.

Cardiomedica

      We have been engaged in a dispute with Cardiomedica S.p.A. (Cardiomedica), an Italian company, over the existence of a distribution agreement between Cardiomedica and us. Cardiomedica originally filed the suit in July 1999, and the lower court’s judgment was rendered on April 3, 2002. In June 2004, 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 profits. Cardiomedica had asserted lost profits of approximately 1,300,000 euros, which was based on their estimate of potential profits during the three-year period. In December 2006, the court made an interim judgment which narrowed the scope of Cardiomedica’s claim from their original claim of lost profits associated with 10 hospitals down to lost profits on two hospitals during the period from 1999 to 2001. Spectranetics BV estimates that the lost profits to Cardiomedica for the period related to these two hospitals, plus estimated interest and awarded court costs, are no more than $293,000, and such amount is included in accrued liabilities at December 31, 2006. We intend to vigorously defend the calculation of lost profits.

Kenneth Fox

      We are the defendant in a lawsuit brought in the District Court of Utrecht, the Netherlands (“the Dutch Court”) by Kenneth Fox. Mr. Fox is an inventor named on patents licensed to Spectranetics under a license agreement assigned to Interlase LP. In this action, Mr. Fox claims an interest in royalties payable under the license and seeks alleged back royalties of approximately $2.2 million. However, in an interpleader action, the United States District Court for the Eastern District of Virginia, Alexandria Division, has already decided that any royalties owing under the license should be paid to a Special Receiver for Interlase. We have made all such payments. The United States District Court has also held Mr. Fox in contempt of the Court’s permanent injunction that bars him from filing actions like the pending action in the Netherlands, and the Court has

33

ordered Mr. Fox to dismiss the Dutch action and to pay our costs and expenses. Mr. Fox has not yet complied with the United States District Court’s contempt order. In September 2006, the Dutch Court ruled that it does not have jurisdiction over The Spectranetics Corporation (U.S. corporation) and the proceedings will move forward on the basis of jurisdiction over Spectranetics B.V. only. We believe that this decision significantly narrows the scope of the claim. Mr. Fox is currently in the process of appealing the Dutch Court’s jurisdiction decision. We intend to continue to vigorously defend the Dutch action.

Krauth

      On December 31, 2005, our agreement with KRAUTH medical KG (“KRAUTH”) expired. The agreement set forth the terms by which KRAUTH would be the exclusive distributor of our products within Germany. Prior to the expiration of the agreement, we were in negotiations with KRAUTH to continue our business relationship on a modified basis; however, no agreement was reached. In February 2006, KRAUTH filed a lawsuit in the District Court of Hamburg, Germany. The lawsuit sought goodwill compensation of 643,159.14 euros plus interest in the amount of eight percentage points above the base interest rate pursuant to Section 247 of the German Civil Code calculated as of January 26, 2006. We disagreed both on the merits of the claim and with the assumptions used to calculate KRAUTH’s alleged goodwill compensation.

      In September 2006, a hearing was held with the judge in the case, which focused on mediating a settlement of the case. A settlement was reached in the amount of $297,000, of which $75,000 had been accrued in our financial statements at December 31, 2005. As a result, the financial statements for the quarter ended September 30, 2006 included a charge of $222,000. Full payment of the settlement was made to KRAUTH in the fourth quarter of 2006, and the matter is now closed.

Edwards Lifesciences

      During August 2004, one of our licensors initiated arbitration proceedings involving a disagreement over royalties paid to them since the inception of a license agreement in October 2000. The disagreement centered on the treatment of certain service-based revenue, including repair and maintenance, and physician and clinical training services. We believed these are beyond the scope of the license agreement.

      Arbitration proceedings were held during 2005 regarding this matter. In July 2005, the arbitrator ruled that we were required to pay royalties on certain service-based revenue. At December 31, 2005 we had accrued costs of $2,905,000 associated with the resolution of this matter based on the arbitrator’s awards. This included $387,000 in interest on the settlement, for which we recorded a provision during the fourth quarter of 2005. In January 2006, we remitted a payment of $2,905,000 to the licensor, Edwards Lifesciences Corporation, which closed this matter.

Blaha

      On March 8, 2006, Robert Blaha and Terence Blaha filed a product liability/wrongful death action in the Arizona Superior Court (Maricopa County) naming us as a defendant in our role as the manufacturer and seller of a laser catheter product used in a medical procedure during which a patient died. The plaintiffs’ complaint did not specify the amount of damages. We believe that we have meritorious defenses against this complaint, and we intend to vigorously defend our position in this matter.

Other

      We are involved in other legal proceedings in the normal course of business and do not expect them to have a material adverse effect on our business.

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

      None.

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PART II

ITEM 5. Market for the Registrant’s Common Stock and Related Shareholder Matters

      Our Common Stock is traded on the NASDAQ National Market under the symbol “SPNC.” The table below sets forth the high and low sales prices for the Company’s Common Stock as reported on the NASDAQ National Market for each calendar quarter in 2006 and 2005. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent the sales prices in actual transactions.

		High		Low
Year Ended December 31, 2006
	1st Quarter	$	11.90	$	9.95
	2nd Quarter		14.40		10.43
	3rd Quarter		13.49		9.56
	4th Quarter		13.56		10.42
Year Ended December 31, 2005
	1st Quarter	$	6.35	$	5.07
	2nd Quarter		6.81		4.50
	3rd Quarter		9.73		6.20
	4th Quarter		13.38		7.55

      We have not paid cash dividends on our Common Stock in the past and do not expect to do so in the foreseeable future. The payment of dividends in the future will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.

      The closing sales price of our Common Stock on March 12, 2007, was $9.81. On March 12, 2007, we had 603 shareholders of record.

      The following table provides information as of December 31, 2006 about equity awards under the Company’s equity compensation plans:

							Number of Securities
							Remaining Available for
	Number of Securities			Weighted-Average			Future Issuance Under
	to Be Issued Upon			Exercise Price of			Equity Compensation Plans
	Exercise of Outstanding			Outstanding Options,			(Excluding Securities
	Options, Warrants and Rights			Warrants and Rights			Reflected in Column (a))
Plan Category	(a)			(b)			(c)
Equity compensation plans approved by security holders(1)		3,837,811	(2)	$	4.89	(2)		833,533	(3)

(1)	These plans consist of: (1) The Spectranetics Corporation 2006 Incentive Award Plan (the “2006 Plan”) (2) The 1997 Equity Participation Plan of the Spectranetics Corporation, (the “1997 Plan”), and (3) The Employee Stock Purchase Plan (the “ESPP Plan”).
(2)	The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the ESPP Plan or the weighted average exercise price of outstanding rights under the ESPP Plan. Accordingly, the number of shares listed in column (a) and the weighted average exercise price listed in column (b) apply only to options outstanding under the 2006 Plan and the 1997 Plan. The ESPP Plan provides that shares of the Company’s Common Stock may be purchased at a per share price equal to 85% of the fair market value of the Common Stock at the beginning or end of the six month offering period, whichever is lower.
(3)	Of these shares of Common Stock, 471,310 remain available for issuance under the 2006 plan, and 362,543 remain available for issuance under the ESPP Plan. No shares of Common Stock are available for future issuance under the 1997 Plan.

ITEM 6. Selected Consolidated Financial Data

      The following selected consolidated financial data, as of and for each year in the five-year period ended December 31, 2006, is derived from our consolidated financial statements. The information set forth below should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and

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Results of Operations, and the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. The selected balance sheet data as of December 31, 2006 and 2005, and statement of operations data for each year in the three-year period ended December 31, 2006, have been derived from our audited financial statements also included elsewhere herein. The selected historical balance sheet data as of December 31, 2004, 2003 and 2002, and statement of operations data for the years ended December 31, 2003 and 2002, are derived from, and are qualified by reference to, audited financial statements of the Company not included herein.

      In September 2005, we filed a Current Report on Form 8-K announcing that we had engaged Ehrhardt Keefe Steiner & Hottman PC (“EKS&H”) as our independent registered public accounting firm beginning with the fiscal year ended December 31, 2005. As a result, our consolidated financial statements as of and for the years ended December 31, 2006 and 2005 have been audited by EKS&H, and our consolidated financial statements for the year ended December 31, 2004 have been audited by KPMG LLP. In connection with the consent from KPMG to incorporate their report on our consolidated financial statements for the year ended December 31, 2004 into this Annual Report on Form 10-K, we have agreed to indemnify KPMG LLP from all legal costs and expenses it may incur in connection with its successful defense of any legal action or proceeding arising as a result of KPMG’s consent to the incorporation by reference of such report.

		Years Ended December 31,
		2006			2005			2004			2003			2002
		(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA(1):
Revenue		$	63,490		$	43,212		$	34,708		$	27,869		$	28,097
Cost of revenue			16,955			10,523			8,801			7,900			8,983
Selling, general and administrative			39,824			24,149			19,347			15,261			14,586
Research, development and other technology			9,910			6,661			5,355			3,812			4,510
Proxy contest and settlement obligations			—			—			—			—			1,837
Reorganization costs and litigation reserves reversal			—			—			—			(32	)		—
Operating (loss) income			(3,199	)		1,879			1,205			928			(1,819	)
Interest income			1,954			432			238			104			480
Interest expense related to litigation settlement			—			(387	)		—			—			—
Other (expense) income, net			(37	)		(8	)		(9	)		2			(157	)
(Loss) income before income taxes			(1,282	)		1,916			1,434			1,034			(1,496	)
Income tax (expense) benefit			(165	)		(878	)		1,518			(105	)		(65	)
Net (loss) income(2)		$	(1,447	)	$	1,038		$	2,952		$	929		$	(1,561	)
(Loss) income from continuing operations per share:
	Basic	$	(0.05	)	$	0.04		$	0.12		$	0.04		$	(0.07	)
	Diluted	$	(0.05	)	$	0.04		$	0.11		$	0.04		$	(0.07	)
Weighted average common shares outstanding:
	Basic		29,130			25,940			25,080			24,254			23,809
	Diluted		29,130			28,568			27,060			25,443			23,809

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	As of December 31,
	2006		2005		2004		2003		2002
	(In thousands)
BALANCE SHEET DATA:
Working capital	$	52,552	$	15,213	$	13,662	$	11,966	$	10,508
Cash, cash equivalents, and investment securities		56,467		16,913		17,410		13,281		11,430
Restricted cash		—		—		—		1,133		1,123
Property, plant, & equipment, net		16,176		8,801		4,362		3,633		3,478
Total assets		91,494		38,775		33,038		26,082		23,836
Long-term liabilities		3		31		83		173		—
Shareholders’ equity		78,288		27,184		23,489		18,212		15,855

(1)

As of January 1, 2006, we adopted Statement 123R, which requires companies to measure all employee stock-based compensation awards using a fair value method and to record that expense in their consolidated financial statements. We have adopted Statement 123R on a modified prospective basis as defined in the statement and, under this adoption method, we will record expense relating to employee stock- based compensation awards in the periods subsequent to December 31, 2005. Accordingly, our statement of operations data for the five years ended December 31, 2005 does not reflect the effect of Statement 123R, whereas our statement of operations for subsequent periods will reflect the impact of Statement 123R. The adoption of Statement 123R will have an adverse effect, which could be material, on our results of operations in periods ending subsequent to December 31, 2005. For the year ended December 31, 2006 we recorded stock compensation expense of $2,663,000, of which $2,361,000 is included in selling, general and administrative expense and $302,000 is included in research, development and technology expense. See “Risk Factors — The adoption of Statement 123R will have an adverse impact on our results of operations,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies,” and Note 1(m) to our consolidated financial statements included elsewhere in this report.

(2)

Net income for the year ended December 31, 2004 included a $1,615,000 income tax benefit, which represented the release of a valuation allowance that we determined was no longer required on specific deferred taxes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corporate Overview

      We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system for use with our proprietary excimer laser system. Excimer laser technology delivers relatively cool ultraviolet energy to ablate or remove arterial blockages including plaque, calcium and thrombus. Our laser system includes the CVX-300 laser unit and various disposable fiber-optic laser catheters. Our laser catheters contain hundreds of small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. We believe that our excimer laser system is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple, minimally invasive cardiovascular procedures. These procedures include atherectomy, which is a procedure to remove arterial blockages in the peripheral and coronary vasculature, and the removal of infected, defective or abandoned cardiac lead wires from patients with pacemakers or ICDs, which are electronic devices that regulate the heartbeat. As of December 31, 2006, our worldwide installed base of laser systems was 623, of which 488 were in the United States. We are focused on increasing recurring revenue, which includes disposable catheter sales, service and laser rental, which in the aggregate represented 94% of our revenue for 2006. Disposable catheter sales represented 80% of our revenue for 2006.

      Loss before income taxes was $(1,282,000) for the year ended December 31, 2006, compared with income before income taxes $1,916,000 for the year ended December 31, 2005. An increase in revenue (primarily due to increased sales of our CLiRpath atherectomy products for use in the peripheral vasculature system) was partially offset by increased operating expenses related to the overall growth of our business. Additionally, the decrease in pre-tax income was due to our adoption of Statement 123R, which requires companies to measure all employee stock-based compensation awards using a fair value method and to record that expense in their financial statements. In 2006, we recorded stock compensation expense of $2,663,000; no stock compensation expense was recorded in 2005 prior to the adoption of FAS 123(R) which was effective

37

January 1, 2006. Net loss was $(1,447,000) or $(0.05) per diluted share for the year ended December 31, 2006, compared with net income of $843,000 or $0.04 per diluted share for the year ended December 31, 2005.

Revenue by Product Line

	2006		2005		2004
	(In thousands)
Disposable products	$	50,643	$	33,045	$	25,657
Service and other revenue*		6,971		5,472		5,279
Laser equipment		5,876		4,695		3,772
Total revenue	$	63,490	$	43,212	$	34,708

*  Other revenue consists of sales of custom products and sales to ELANA BV (see “Strategic Alliances”), offset by a provision for sales returns.

Financial Results by Geographical Segment

	2006		2005		2004
	(In thousands)
Revenue
United States	$	57,884	$	38,804	$	31,420
Europe		5,606		4,408		3,288
Total revenue	$	63,490	$	43,212	$	34,708

	2006			2005		2004
	(In thousands)
Net (loss) income
United States	$	(2,037	)	$	794	$	2,990
Europe		590			244		(38	)
Total net (loss) income	$	(1,447	)	$	1,038	$	2,952*

*  Results for 2004 includes an income tax benefit of $1,615,000, related to a reduction in the valuation allowance against our deferred tax assets. At December 31, 2004, we recorded a net deferred tax asset of $1,615,000 which represented our best estimate of the amount of our deferred tax assets that were more likely than not to be realized through the reduction of income taxes payable in future years.

Year Ended December 31, 2006 Compared With Year Ended December 31, 2005

      Revenue during the year ended December 31, 2006 was $63,490,000, an increase of 47% compared with $43,212,000 during the year ended December 31, 2005, as a result of increased revenue in all revenue categories, but driven primarily by growth in disposable products revenue.

      Disposable products revenue was $50,643,000 for the year ended December 31, 2006, which was 53% higher than disposable products revenue of $33,045,000 during the same period in 2005. We separate our disposable products revenue into two separate categories — atherectomy and lead removal. For the year ended December 31, 2006, our atherectomy revenue totaled $33,408,000 (66% of disposable products revenue) and our lead removal revenue totaled $17,235,000 (34% of our disposable products revenue). Atherectomy revenue, which includes products used in both the coronary and peripheral vascular system, grew 75% and was the main driver of disposable product revenue growth in 2006 compared with 2005. Atherectomy revenue growth was primarily due to unit volume increases from the continued penetration of our CliRpath product line since its launch 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. Approximately 20% of the atherectomy revenue growth compared with the prior year was due to unit price increases related to our CliRpath Turbo product line, the launch of which was completed in the second quarter of 2006. Additionally, our Quick-Cross support catheters contributed to the atherectomy revenue growth, accounting for 32% of the growth. Atherectomy revenue growth from current levels will depend on our ability to increase market acceptance of the CliRpath product line and our ability to continue to increase the worldwide installed base of lasers, as well

38

as the future success of our ongoing clinical research and product development within the coronary and peripheral atherectomy markets.

      Lead removal revenue grew 24% during 2006 compared with 2005. We continue to believe our lead removal revenue is increasing primarily as a result of the increase in 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 may be removed to minimize the potential for venous obstruction when the new ICD leads are implanted. Recent clinical studies (Multicenter Automatic Defibrillator Implantation Trial II, or MADIT II, and Sudden Cardiac Death in Heart Failure Trial, or ScDHeft) have shown results expanding the patient population that may benefit from defibrillator implants. The results of the MADIT clinical trial became available in 2002 and the SCD-Heft clinical trial results were made public in March 2004. Growth in the ICD market may accelerate, depending on the establishment of referral patterns to electrophysiologists for this expanded patient pool and the additional reimbursement recently established for the hospitals and electrophysiologists who treat these patients, although there can be no assurance that this will occur. 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 to remove them. We have initiated programs to examine the costs and frequency of complications associated with abandoned leads, but there are no assurances that these programs will be successful or will change the current standard of care.

      Laser equipment revenue in 2006 was $5,876,000 compared with $4,695,000 in 2005, which represents an increase of 25%. As of December 31, 2006 our worldwide installed base of laser systems was 623 (488 in the United States) compared with 494 (377 in the United States) as of December 31, 2005. This represents new laser placements in 2005 of 129 laser systems compared to 77 new laser systems placed during 2005. The increase in laser placements in 2006 is largely driven by customer interest in our CLiRpath product line used for the treatment of peripheral vascular disease. Data as to our installed base of laser systems and new laser placements includes outright sales, rentals and lasers being evaluated during a trial period by potential purchasers.

      Laser sales revenue, which is included in laser equipment revenue, increased 24% to $3,519,000 for 2006 as compared to $2,846,000 for 2005. The increase was due to the sale of six additional units, partially offset by a decrease in average sale prices for the units sold (due to a higher mix of rental/evaluation conversions as compared to sales from inventory.) Rental revenue increased to $2,357,000 for the year ended December 31, 2006 from $1,849,000 for 2005, due mainly to an increase in systems placed with customers under our various rental programs, particularly our “Cap-Free” program, which was introduced in the second quarter of 2005. Most of the increase in our laser system placements from 2005 to 2006 related to systems placed under our Cap-Free and Evergreen rental program, as opposed to outright sales, and we expect in 2007 that the large majority of our new laser placements will continue to be under the Cap-Free program. We believe that laser system placements is a more relevant metric for measuring our progress within the equipment business, as it represents new customers that have elected to acquire or are considering the acquisition of a laser system, whether it be from an outright sale from inventory, or an evaluation or rental program. The laser system placement represents an opportunity to sell our higher-margin disposable products.

      Service and other revenue of $6,971,000 during 2006 increased 27% from $5,472,000 for 2005. Service and other revenue is generated through the repair and maintenance services offered to our customers and is associated exclusively with our laser systems. The growth in service and other revenue is a result of an increase in our installed base.

      Gross profit decreased to 73% as a percentage of revenue during the year ended December 31, 2006 as compared with 76% during the year ended December 31, 2005. This decrease was mainly due to an increase in manufacturing personnel, equipment and related costs targeted at raising production capacity. Additionally, an increase in lower-margin capfree program revenue also had a negative effect on overall gross margins. This was partially offset by an increase in unit prices related to our CliRpath Turbo product line.

      Selling, general and administrative expenses increased 65% to $39,824,000 for the year ended December 31, 2006 as compared with $24,149,000 in 2005. Approximately $2,361,000 of the increase relates to stock

39

compensation expense recorded to selling, general and administrative expense for the first time in 2006 upon the adoption of FAS 123(R) as of January 1, 2006. The remainder of increase is due to the following:

•  Selling expenses increased approximately $10,900,000 due to the following factors:

•  Approximately $4,900,000 relates to personnel-related expenses associated with the hiring of 23 additional employees in 2006 within our sales organization. These increased costs include salaries and benefits, recruiting and travel costs. An additional $3,400,000 of the increase relates to higher commissions expense as a result of our increased revenue compared with the prior year.

•  Additional convention, meeting and education costs, 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, accounted for approximately $1,500,000 of the increase.

•  Increased expenses associated with the operations of Spectranetics International, B.V., our wholly-owned subsidiary in the Netherlands that serves the European market represented approximately $550,000 of the increase. The majority of this increase relates to costs associated with the hiring of five additional employees for the European sales organization and for the payment of additional commissions on increased sales in Europe for 2006 as compared to 2005. Approximately $220,000 of the increase relates to an additional reserve recorded by the Company related to the settlement of the Krauth matter, which is discussed in Note 15, “Commitments and Contingencies” to the consolidated financial statements included in this report.

•  Approximately $400,000 of the increase relates to increased materials and supplies costs consumed by our various sales and marketing departments.

•  General and administrative expenses increased approximately $2,400,000 as a result of:

•  Increased personnel-related costs of approximately $800,000 associated with increased staffing.

•  Increased costs of approximately $600,000 as compared with 2005 related to accrued Company-wide incentive compensation based on financial performance in relation to established targets.

•  Increased expenses related to our information technology and telecommunications infrastructure, including depreciation and amortization expense related to new enterprise software upgrades and telecommunications systems installed in the first quarter of 2006, as well as increased technology consulting expenses. As a whole, these expenses increase approximately $460,000 for the year ended December 31, 2006 as compared to 2005.

•  Increased legal fees of approximately $200,000, primarily due to the legal proceedings associated with the Rentrop lawsuit. Legal matters are discussed within Part I, Item 3 — Legal Proceedings within this report. Additionally, other outside consulting fees increased by approximately $200,000.

•  Increased insurance expense of approximately $160,000 associated with higher premiums for most of our coverages.

      Research, development and other technology expenses include royalty expenses, research and development expenses, and clinical study expenses. Research, development and other technology expenses of $9,910,000 for the year ended December 31, 2006 increased 49% from $6,661,000 for the year ended December 31, 2005. Approximately $302,000 of the increase relates to stock compensation expense recorded to research and development departments for the first time in 2006 upon the adoption of FAS 123(R) as of January 1, 2006. The remainder of the increase is primarily due to:

•  Increased personnel-related costs of approximately $1,230,000 due to the hiring of additional engineering staff for the development of new products for our technology.

•  Increased research and development outside services expense of approximately $1,300,000 which includes increased expenses of approximately $600,000 related to the Company’s catheter development agreement with Bioscan Technologies, Ltd.; increased fees paid to outside vendors assisting us with technology enhancements to our laser system of approximately $550,000; and an increase of $150,000 legal expenses related to maintaining our intellectual property;

40

•  Increased materials and other supplies costs of approximately $560,000 due to increased research and development activities during 2006 as compared to 2005.

      Interest income for 2006 was $1,954,000, compared with $432,000 for 2005. The increase in interest income in 2006 is mainly due to the invested net proceeds of the secondary stock offering we completed in the second quarter of 2006. Our investment securities portfolio consists primarily of government or government agency securities with maturities less than two years.

      Interest expense of $387,000 for the year ended December 31, 2005 was entirely related to interest which was awarded to Edwards LifeSciences by an arbitrator’s decision in a royalty dispute case that is further discussed in Note 15 to the consolidated financial statements. No interest expense was recorded in 2006.

      For the year ended December 31, 2006, we recorded income tax expense of $165,000, compared to income tax expense of $878,000 for the prior year. We recorded income tax expense in 2006 despite a pretax loss primarily because of two significant items which were accounted for as permanent differences between our pretax book loss and our taxable income. The more significant of these items, the portion of the stock compensation expense we recorded in 2006 that related to incentive stock options for which we cannot assume a tax deduction, was new for 2006. The other permanent difference was non-deductible meals and entertainment expense. After adding back these two items to our pretax loss, taxable income resulted, against which we recorded an income tax provision of $165,000. Our 2005 effective tax rate exceeded the 34% federal statutory rate due primarily to provisions for state taxes as well as non-deductible meals and entertainment expense.

      Net loss for the year ended December 31, 2006 was $(1,447,000), or $(0.05) per diluted share, compared with net income of $1,038,000 or $0.04 per diluted share during the year ended December 31, 2005. The net loss for 2006 includes $2,663,000 in stock compensation expense recorded for the first time in 2006. No stock compensation expense was recorded in 2005 prior to the adoption of FAS 123(R) which was effective January 1, 2006.

Year Ended December 31, 2005 Compared With Year Ended December 31, 2004

      Revenue during the year ended December 31, 2005 was $43,212,000, an increase of 25% compared with $34,708,000 during the year ended December 31, 2004, as a result of increased revenue in all revenue categories, but driven primarily by growth in disposable products revenue.

      Disposable products revenue was $33,045,000 for the year ended December 31, 2005, which was 29% higher than disposable products revenue of $25,657,000 during the same period in 2004. The revenue growth was primarily due to unit volume increases; however, average unit prices also increased slightly across virtually all of our disposable product categories, accounting for approximately 4% of the disposables revenue growth, primarily due to a higher mix of CLiRpath catheters which carry a higher unit selling price than our other products.

      We separate our disposable products revenue into two categories — atherectomy and lead removal. For the year ended December 31, 2005, our atherectomy revenue totaled $19,128,000 (58% of disposable products revenue) and our lead removal revenue totaled $13,917,000 (42% of our disposable products revenue). Atherectomy revenue grew 41% and was the main driver of disposable product revenue growth in 2005 compared with 2004. Atherectomy revenue includes products used in both the peripheral and coronary vascular system. Additionally, our Quick-Cross support catheters contributed to 26% of the atherectomy revenue growth.

      Lead removal revenue grew 15% during 2005 compared with 2004. We continue to believe our lead removal revenue is increasing primarily as a result of the increase in use of ICD devices. When an ICD is implanted, it often replaces a pacemaker. In these cases, the old pacemaker leads may be removed to minimize venous obstruction when the new ICD leads are implanted. Recent clinical studies (Multicenter Automatic Defibrillator Implantation Trial II, or MADIT II, and Sudden Cardiac Death in Heart Failure Trial, or ScDHeft) have shown results expanding the patient population that may benefit from defibrillator implants. The results of the MADIT II clinical trial became available in 2002 and the SCD-Heft clinical trial results were made public in March 2004. Growth in the ICD market may accelerate, depending on the

41

establishment of referral patterns to electrophysiologists for this expanded patient pool and the additional reimbursement recently established in the U.S. for the hospitals and electrophysiologists who treat these patients, although there can be no assurance that this growth will occur. Generally, growth in the ICD 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 to remove them. We have initiated programs to examine the costs and frequency of complications associated with abandoned leads, but there are no assurances that these programs will be successful or will change the current standard of care.

      Laser equipment revenue in 2005 was $4,695,000 compared with $3,772,000 in 2004, which represents an increase of 24%. The increase was primarily due to higher rental revenue from laser systems placed with customers under our various rental programs. Most of the increase in our laser system placements from 2004 to 2005 related to systems placed under our Evergreen and “Cap-Free” rental programs, as opposed to outright sales, and we expect in 2006 that the majority of our future laser placements will be under the “Cap-Free” program. We believe that laser system placements is a more relevant metric for measuring our progress within the equipment business, as it represents new customers that have elected to acquire or are considering the acquisition of a laser system, whether it be from an outright sale from inventory, or an evaluation or rental program. The laser system placement represents an opportunity to sell our higher-margin disposable products. As of December 31, 2005, our worldwide installed base of laser systems was 494 (of which 377 were in the United States) compared with 417 (of which 311 were in the United States) as of December 31, 2004. This represents new laser placements in 2005 of 77 laser systems compared to 34 new laser systems placed during 2004. The increase in laser placements in 2005 was largely driven by customer interest in our CLiRpath product line used for the treatment of PAD. Information as to our installed base of laser systems and new laser placements includes outright sales, rentals and lasers being evaluated during a trial period by potential purchasers.

      Service and other revenue of $5,472,000 during 2005 increased 4% from $5,279,000 for 2004. Service and other revenue is generated through the repair and maintenance services offered to our customers and is associated exclusively with our laser systems. The growth in service and other revenue was a result of an increase in our installed base.

      Gross profit increased to 76% as a percentage of revenue during the year ended December 31, 2005 as compared with 75% during the year ended December 31, 2004. The improved gross margin was primarily attributable to increased manufacturing efficiencies within laser system and catheter manufacturing as a result of increased unit volumes.

      Selling, general and administrative expenses increased 25% to $24,149,000 for the year ended December 31, 2005 as compared with $19,347,000 in 2004, due primarily to the following:

•  Selling expenses increased approximately $4,100,000 due to the following factors:

•  Approximately $1,200,000 related to personnel-related expenses associated with the hiring of 19 additional employees in 2005 within our sales organization. These increased costs included salaries, recruiting and travel costs. An additional $1,490,000 of the increase related to higher commissions expense as a result of our increased revenue compared with the prior year.

•  Additional physician training costs incurred primarily in peer-to-peer clinical training sessions combined with increased convention, meeting and education costs — primarily the result of attendance at an increasing number of tradeshows and conventions — accounted for approximately $640,000 of the increase.

•  Increased expenses associated with the operations of Spectranetics International, B.V., our wholly-owned subsidiary in the Netherlands that serves Europe, the Middle East and Russia represented approximately $491,000 of the increase. Of this amount, approximately $130,000 related to costs associated with the hiring of an additional employee for the European sales organization and for the payment of additional commissions on increased sales in Europe for 2005 as compared to 2004. An additional increase of approximately $290,000 was due to increased expenses associated with

42

	convention attendance and other marketing-related activities and materials. The remaining $70,000 of the increase was associated with the strengthening euro in relation to the U.S. dollar.
•	Approximately $200,000 of the increase related to higher commissions paid to our independent distributor for increased sales made in Asia.
•	Additional depreciation costs of $140,000 associated with a higher number of evaluation systems in place at December 31, 2005 compared with 2004. See “— Critical Accounting Policies — Revenue Recognition” below for a further discussion of these programs.

•  General and administrative expenses increased approximately $700,000, primarily as a result of:

•  Increased legal fees of approximately $200,000, primarily due to the legal proceedings associated with the Rentrop and Edwards Lifesciences lawsuits. See “Business — Legal Proceedings.”

•  Increased outside professional services fees of approximately $220,000, which included an increase in the amounts spent during early 2005 relating to the completion of Sarbanes-Oxley compliance for 2004; recruiting fees paid for additional personnel; and increased information technology costs to support our growth.

•  An increase in the provision for bad debts of approximately $100,000 associated with certain slow-paying accounts.

•  Increased property and franchise taxes of approximately $75,000.

      Research, development and other technology expenses include royalty expenses, research and development expenses, and clinical study expenses. For the year ended December 31, 2005, research, development and other technology expenses rose 24% to $6,661,000 from $5,355,000 during the year ended December 31, 2004, due primarily to the following:

•  Increased personnel-related costs of approximately $690,000 due to the hiring of additional engineering staff for the development of new products for our technology.

•  Increased legal fees of approximately $110,000 related mainly to the application and maintenance of patents and the fees associated with the preparation of project and other agreements as well as increased other outside professional services of approximately $140,000 related primarily to consulting services engaged in specific development projects.

•  Higher royalty expenses of approximately $200,000 due primarily to an additional provision of $280,000 to increase the reserve for the estimated settlement of the Edwards Lifesciences royalty dispute as discussed in Note 12 to our consolidated financial statements which are included elsewhere in this prospectus supplement. This was partially offset by the expiration of certain patents underlying licensed technology and decreased royalty rates for certain other existing license agreements.

•  Increased materials and other supplies costs of approximately $160,000 due to increased research and development activities during 2005 as compared to 2004.

      Other income of $37,000 for the year ended December 31, 2005 decreased from other income during 2004 of $229,000 due to $387,000 of interest expense which was awarded to Edwards Lifesciences by an arbitrator’s decision in a royalty dispute case that is further discussed in Note 12 to our consolidated financial statements which are included elsewhere in this prospectus supplement. This was partially offset by an increase in interest income of approximately $200,000 due primarily to an increase in our investment portfolio interest rate yields consistent with overall changes in the interest rate environment during 2005. Our investment securities portfolio consists primarily of government or government agency securities with maturities of less than two years.

      For the year ended December 31, 2005, we recorded a provision for income taxes of $878,000, or 45% of income before income tax expense, compared to an income tax benefit of $1,518,000 for the prior year. The income tax benefit recognized in 2004 included the release of $1,615,000 related to a valuation allowance that we determined is no longer required on specific deferred taxes. The amount represented the value of net operating losses and future temporary deductible differences between book and taxable income that we determined were more likely than not going to be realized in the form of reduced taxable income in future

43

years. Subsequent to recording the net deferred tax asset in 2004, in 2005 we have provided the full amount of income tax expense against current earnings. Our 2005 effective tax rate exceeds the 34% federal statutory rate due primarily to provisions for state taxes as well as non-deductible meals and entertainment expense. At December 31, 2005, we had net operating loss carryforwards for United States federal income tax purposes of approximately $37 million. This amount does not include approximately $19 million of net operating loss carryforwards which are limited under Section 382 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $19 million of net operating losses as we have determined that we will not receive any future tax benefit from this $19 million before their expiration. Our ability to use these NOLs in the future may be limited. See “Risk Factors — The amount of our net operating loss carryovers may be limited.”

      Net income for the year ended December 31, 2005 was $1,038,000, or $0.04 per diluted share, compared with $2,952,000 or $0.11 per diluted share during the year ended December 31, 2004. Net income decreased in 2005 based on the reasons discussed herein, primarily due to the change in income tax benefit (expense).

Income Taxes

      At December 31, 2006, we had net operating loss carryforwards for United States federal income tax purposes of approximately $28 million. This amount does not include approximately $13 million of net operating loss carryforwards which are limited under Section 382 of the Internal Revenue Code of 1986 in addition to certain limitations to which we are currently subject. No deferred tax asset has been provided for $13 million of net operating losses as we have determined that we will not receive any future tax benefit from this $13 million before their expiration. Our ability to use these NOLs in the future may be limited. See “Risk Factors — The amount of our net operating loss carryovers may be limited.”

      We also have tax loss carryforwards in The Netherlands, which currently have no expiration date, of approximately 30 million euros (U.S. $39 million) available to offset future taxable income, if any, in the Netherlands. However, in 2004, the Netherlands tax authorities proposed that substantially all of the tax loss carryforwards be disallowed. We are actively defending the availability of these loss carryforwards. These foreign loss carryforwards have been fully reserved with a valuation allowance. If the tax loss carryforwards are ultimately disallowed, there will be no negative impact to our historical statement of operations, although it may adversely affect our cash flow and financial position.

      An alternative minimum tax credit carryforward of approximately $360,000 is available to offset future regular tax liabilities and has no expiration date. For alternative minimum tax purposes, we have unrestricted net operating loss carryforwards for United States federal income tax purposes of approximately $27 million. This amount does not include approximately $13 million of net operating loss carryforwards which are limited under Section 382 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $13 million of net operating losses as we have determined that we will not receive any future tax benefit from this $13 million before their expiration.

      We also have research and experimentation tax credit carryforwards for federal income tax purposes at December 31, 2006 of approximately $580,000, which are available to reduce future federal income taxes, if any, and expire at varying dates through 2024. This amount does not include approximately $1.1 million of research and experimentation tax credit carryforwards which are limited under Section 383 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $1.1 million of research and experimentation tax credits as we have determined that we will not receive any future tax benefit from this $1.1 million before their expiration.

      At December 31, 2006, based upon the level of historical income and projections for future income, we have recorded a net deferred tax asset of $758,000, as we have determined it is more likely than not a portion of the deferred tax assets will be recoverable.

Liquidity and Capital Resources

      As of December 31, 2006, we had cash, cash equivalents and current and long-term investment securities of $56,467,000, an increase of $39,554,000 from $16,913,000 at December 31, 2005. The increase was primarily due to the $47.8 million of net proceeds from the secondary stock offering we completed in May

44

2006. We consider the total of cash, cash equivalents and investment securities to be available for operating activities since the cash equivalents and investment securities can be readily converted to cash.

      Cash and cash equivalents were $9,999,000 at December 31, 2006 compared with $6,183,000 at December 31, 2005, an increase of $3,816,000. The increase was due to a decision to keep a small portion of the proceeds from the secondary stock offering in cash equivalent money market accounts in anticipation of our short-term working capital needs to support the growth of our business. Our current and long-term investment securities portfolio totaled $46,468,000 at December 31, 2006 compared with $10,730,000 at December 31, 2005. Long-term investment securities have a maturity of more than one year but not more than two years.

      For the year ended December 31, 2006, cash used in operating activities totaled $6,673,000 and consisted primarily of the following:

•  An increase in equipment held for rental or loan of $6,639,000 as a result of expanding placement activity of our laser systems through “Cap-Free”, rental, or evaluation programs.

•  An increase in trade accounts receivable of $3,079,000 due to increased sales.

•  A payment of $2,905,000 made in January 2006 to Edwards Lifesciences Corporation in settlement of a royalty dispute (see “Item 3 — Legal Proceedings”).

•  Increased inventories of $2,064,000, primarily the result of higher stocking levels to meet the increase in laser and catheter demand.

      The above uses of cash by operating activities were partially offset by the following sources for the year ended December 31, 2006:

•  Net loss of $1,447,000, plus non-cash expenses of $5,626,000, which consisted of depreciation and amortization of $2,953,000; stock compensation expense of $2,663,000 and the fair value of options granted for consulting services of $10,000.

•  An increase in accounts payable and accrued liabilities of $4,427,000 (exclusive of the $2,905,000 reduction in accrued liabilities related to the Edwards payment noted above) as a result of increased purchasing activity, increased payroll-related accruals and increased royalty (and related interest) accruals.

      We continue to stay focused on the management of accounts receivable as measured by days’ sales outstanding and will continue this focus in 2007 with the goal of maintaining the current level of days’ sales outstanding, although there can be no assurances this goal will be achieved. For the equipment held for rental or loan account, any increases will be based on the level of evaluation or rental (including Cap-Free) laser placements offset by sales of laser systems previously placed under evaluation or rental programs. We continue to expect the majority of our laser placement activity in 2007 to be in the form of Cap-Free units.

      For the year ended December 31, 2006, cash used by investing activities was $39,283,000. Most of this amount represented purchases of investment securities of $44,524,000, net of sales of investment securities of $8,811,000, made from the proceeds of the secondary stock offering completed in May 2006. The remainder of cash used in investing activities was primarily for capital expenditures during 2006 which totaled $3,545,000. These expenditures included manufacturing capacity expansion projects, additional capital items for research and development projects and additional enterprise software purchases. Capital expenditures are expected to increase further in 2007 due to additional capital items for research and development projects, continued manufacturing expansion projects, software purchases, and capital expenditures related to a new facility for which we signed a 10 year lease in January 2007.

      Net cash provided by financing activities was $49,668,000 during the year ended December 31, 2006, $47,832,000 of which related to the proceeds of our seconding stock offering completed in May 2006. The remaining $1,836,000 of cash provided by financing activities consisted of proceeds from the sale of common stock to employees, primarily through the exercise of stock options but also as a result of stock purchases through the employee stock purchase plan.

45

      We believe our cash and cash equivalents will be sufficient to meet our currently budgeted operating needs for the coming twelve months.

      At December 31, 2006 and 2005, we had placed a number of systems on “Cap-Free”, rental, and evaluation programs. A total of $16,319,000 and $9,805,000 was recorded as equipment held for rental or loan at December 31, 2006 and 2005, respectively, and is being depreciated over three to five years, depending on whether the laser system is remanufactured or new.

Contractual Obligations

      The Company leases office space, furniture and equipment under noncancelable operating leases with initial terms that expire at various dates through 2010. Purchase obligations consist of purchase orders issued primarily for inventory. The future minimum payments under noncancelable operating leases and purchase obligations as of December 31, 2006 are as follows (in thousands):

				Less Than		1-3		3-5		More Than
		Total		1 Year		Years		Years		5 Years
Operating Leases		$	11,679		817		2,576		2,324		5,962
Purchase Obligations			7,459		7,459		—		—		—
	Total	$	19,138		8,276		2,576		2,324		5,962

Critical Accounting Policies

      Our consolidated financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation.

      Below is a discussion of our critical accounting policies and their impact on the preparation of our consolidated financial statements.

      Use of Estimates. On an ongoing basis, management evaluates its estimates and judgments, including those relating to product returns, bad debts, inventories, income taxes, warranty obligations, royalty obligations, reorganization costs, contingencies, and litigation. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances. These judgments and estimates form the basis for the carrying values of certain assets and liabilities that are not objectively available from other sources. Carrying values of these assets and liabilities may differ under different assumptions or conditions.

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

      We offer three laser system placement programs, which are described below, in addition to the sale of laser systems:

      1. Cap-Free rental program — Under this program, we retain title to the laser system and the customer agrees to a catheter price list that includes a per-unit surcharge. Customers are expected, but not required, to make minimum purchases of catheters at regular intervals, and we reserve the right to have the unit returned should the minimum purchases not be made. We recognize the total surcharge as revenue each month, believing it to be the best measurement of revenue associated with the customers’ use of the laser unit each month. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and the depreciation expense related to the system is included in cost of revenue

46

based upon a three-to-five-year expected life of the unit, depending on whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred.

      2. 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 revenue based upon a three-to five-year expected life of the unit, depending on whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred. We also offer a straight monthly rental program, and there are a small number of hospitals that pay rent of $3,000 to $5,000 per month under this program.

      3. 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 our 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, depending on whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred.

      We adopted Emerging Issues Task Force Bulletin (EITF) 00-21, Revenue Arrangements with Multiple Deliverables, on July 1, 2003. The primary impact of the adoption of EITF 00-21 was 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. Revenue allocated to the laser element is recognized upon completion of contractual obligations in the sales contract, which generally includes delivery and installation of the laser system and, in some cases, completion of physician training. Prior to July 1, 2003, revenue for the sale of laser equipment and the one-year warranty was recognized upon shipment of the laser. Deferred revenue associated with service to be performed during the warranty period totaled $570,000 and $446,000 as of December 31, 2006 and 2005, respectively.

      Allowance for Sales Returns. We estimate product sales returns based on historical experience. The provision for sales returns is recorded as a reduction of revenue based on our estimates. Actual sales returns may vary depending on customer inventory levels, new product introductions and other factors. Although we believe our estimates are reasonable based on facts in existence at the time of estimation, these facts are subject to change.

      Royalty liability. We license certain patents from various licensors pursuant to license agreements. Royalty expense is calculated pursuant to the terms of the license agreements and is included in research, development and other technology in the accompanying financial statements. We have established liabilities for royalty payment obligations based on these calculations, which involve management estimates that require judgment. Although we believe the estimates to be reasonable based on facts in existence at the time of estimation, the estimates are subject to change based on changes in the underlying facts and assumptions used to develop these estimates. We have recorded a loss contingency within our accrued royalty liability of approximately $690,000 related primarily to patent litigation with Dr. Peter Rentrop (which is discussed in further detail in Note 15, “Commitments and Contingencies”, to our consolidated financial statements) based on amounts awarded to Dr. Rentrop by the jury in a recent trial.

      Stock-based compensation. On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their consolidated financial statements. SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R) to its valuation methods.

47

      The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires recognition of expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for periods prior to the date of adoption have not been restated to reflect, and do not include, the impact of SFAS 123(R). The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes options pricing model. Stock-based compensation expense recognized under SFAS 123(R) for year ended December 31, 2006 was $2,663,000, which consisted of compensation expense related to (1) employee stock options based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period, and (2) the estimated value to be realized by employees related to shares expected to be issued under the Company’s employee stock purchase plan.

      SFAS No. 123(R) requires companies to estimate the fair value of stock options on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s condensed consolidated statement of operations. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under the intrinsic value method, compensation expense for stock option grants issued to employees was recorded to the extent the fair market value of the stock on the date of grant exceeded the option price.

      Income Taxes. We account for income taxes pursuant to SFAS 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 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 provided 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. As of December 31, 2006, we have a net deferred tax asset of $758,000.

New Accounting Pronouncements

      In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109”. FIN 48 establishes a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007 as required. We are currently evaluating the impact that the adoption of FIN 48 will have, if any, on our consolidated financial statements and notes thereto. However, we do not expect the adoption of FIN 48 to have a material effect on our financial position or operating results.

      In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our consolidated financial position or results of operations.

      In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP requiring use of fair

48

value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.

      In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under which an entity may elect to record certain financial assets or liabilities at fair value upon their initial recognition. Subsequent changes in fair value would be recognized in earnings as those changes occur. The election of the fair value option would be made on a contract-by contract basis and would need to be supported by concurrent documentation or a preexisting documented policy. SFAS 159 requires an entity to separately disclose the fair value of these items on the balance sheet or in the footnotes to the financial statements and to provide information that would allow the financial statement user to understand the impact on earnings from changes in the fair value. SFAS 159 is effective for us beginning with fiscal year 2008. We are currently evaluating the impact that the adoption of SFAS 159 will have on our consolidated financial statements.

ITEM 7A. Quantitative and Qualitative Disclosure 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 not 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 December 31, 2006, the unrealized loss on our investment securities was $57,000.

      As of December 31, 2006, we had cash and cash equivalents of $10.0 million, and current and long-term investment securities of $46.5 million. Overall average duration to maturity for all cash and marketable securities is less than one year with 82% of the portfolio under one year and the remaining 18% between one and two years. The weighted average interest rate earned on the portfolio is 4.9%. At December 31, 2006, the marketable securities consisted of government or government agency securities and certificates of deposit.

      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 operating results. 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 year ended December 31, 2006, approximately $49,000 of decreased revenue and $6,000 of decreased 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 year ended December 31, 2006 was a decrease in net income of $43,000.

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ITEM 8. Financial Statements and Supplementary Data

      See the Index to Consolidated Financial Statements appearing on page F-1 of this Form 10-K.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

      We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the 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 December 31, 2005. 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.

      In the third quarter of 2006, upon discovery of the inventory matter described below, the Company implemented and modified certain internal controls over financial reporting as described below:

      On July 31, 2006, we conducted a physical inventory of certain raw materials inventory at our manufacturing site in Colorado Springs, Colorado and identified discrepancies in certain raw materials inventory relating to disposable products between quantities shown in our perpetual records and quantities actually on-hand. As a result of this physical inventory, we determined that the carrying value of our inventory was overstated and the resulting adjustments were recorded in the financial statements for the period ended June 30, 2006. Our investigation of this matter revealed that certain transactions within raw materials inventory were not being properly recorded in our enterprise software system including (1) incorrect materials transfers due to erroneous quantities of a certain component within our support catheter bill of materials and (2) insufficient identification of inventory scrap transactions. As a result, in the third quarter of 2006, we implemented the following procedures designed to improve our internal controls over raw materials inventory quantities as well as enhance the overall inventory control environment: (i) more frequent and comprehensive cycle counts of the affected inventory locations; and (ii) increased review of bill of materials additions and changes. At December 31, 2006, we believe these additional procedures are functioning as intended and have appropriately addressed the inventory matter.

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Management’s Annual Report on Internal Control over Financial Reporting

      Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

      Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

      Management has used the framework set forth in the report entitled Internal Control — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. Ehrhardt Keefe Steiner & Hottman PC, an independent registered public accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting.

/s/ John G. Schulte

JOHN G. SCHULTE

President and Chief Executive Officer

/s/ Guy A. Childs

GUY A. CHILDS

Vice President, Chief Financial Officer

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ITEM 9B. Other Information

      None

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

      The information required by Item 10 is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

      Audit Committee Financial Expert. This information is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

      Identification of the Audit Committee. This information is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

      Section 16(a) Beneficial Ownership. This information is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

      Code of Ethics. This information is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

ITEM 11. Executive Compensation

      The information required by Item 11 is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required by Item 12 is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

      The information required by Item 13 is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

ITEM 14. Principal Accountant Fees and Services

      The information required by Item 14 is incorporated by reference from the registrant’s definitive Proxy Statement to be used in connection with its 2007 Annual Meeting of Shareholders.

      In connection with the consent from KPMG to include their report on our consolidated statements of operations and cash flows for the year ended December 31, 2004 included in this Annual Report on Form 10-K, which is incorporated by reference into our registration statements on Forms S-8 and S-3, we have agreed to indemnify KPMG LLP from all legal costs and expenses it may incur in connection with its successful defense of any legal action or proceeding arising as a result of KPMG’s consent to the incorporation by reference in this Annual Report on Form 10-K of such report.

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PART IV

ITEM 15. Exhibits and Financial Statement Schedules

      (a) Documents Filed as a Part of The Report

(1) Consolidated Financial Statements

See Index to Consolidated Financial Statements at page F-1 of this Form 10-K.

(2) Financial Statement Schedules

Not applicable.

(3) Exhibits

See Exhibit Index on page 54.

53

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Colorado Springs, State of Colorado, on this 15th day of March, 2007.

THE SPECTRANETICS CORPORATION

By:  /s/ John G. Schulte

John G. Schulte

President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.

Signature	Title	Date
/s/ John G. Schulte John G. Schulte	President and Chief Executive Officer, Director (Principal Executive Officer)	March 15, 2007
/s/ Guy A. Childs Guy A. Childs	Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)	March 15, 2007
/s/ Emile J. Geisenheimer Emile J. Geisenheimer	Director and Chairman of the Board of Directors	March 15, 2007
/s/ David G. Blackburn David G. Blackburn	Director	March 15, 2007
/s/ R. John Fletcher R. John Fletcher	Director	March 15, 2007
/s/ Martin T. Hart Martin T. Hart	Director	March 15, 2007
/s/ Joseph M. Ruggio, M.D. Joseph M. Ruggio, M.D.	Director	March 15, 2007
/s/ Craig M. Walker, M.D. Craig M. Walker, M.D.	Director	March 15, 2007

54

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm (Ehrhardt Keefe Steiner & Hottman PC)		F-2
Report of Independent Registered Public Accounting Firm (KPMG LLP)		F-4
Consolidated Balance Sheets, December 31, 2006 and 2005		F-5
Consolidated Statements of Operations and Comprehensive Income (Loss), Years ended December 31, 2006, 2005, and 2004		F-6
Consolidated Statements of Shareholders’ Equity, Years ended December 31, 2006, 2005, and 2004		F-7
Consolidated Statements of Cash Flows, Years ended December 31, 2006, 2005, and 2004		F-8
Notes to Consolidated Financial Statements		F-9

F-1

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

The Spectranetics Corporation:

      We have audited the accompanying consolidated balance sheets of The Spectranetics Corporation (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2006. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in

F-2

Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

      As discussed in Note 1, the Company has changed its accounting method for stock-based compensation by adopting SFAS 123(r), “Share-Based Payment” effective January 1, 2006.

/s/ Ehrhardt Keefe Steiner & Hottman PC

March 16, 2007

Denver, Colorado

F-3

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

The Spectranetics Corporation:

      We have audited the accompanying consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows of The Spectranetics Corporation and subsidiary (collectively, the Company) for the year ended December 31, 2004. 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 audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of The Spectranetics Corporation and its subsidiary for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

      As discussed in note 1(j) to the consolidated financial statements, on July 1, 2003 the Company adopted Emerging Issues Task Force Abstract No. 00-21, Revenue Arrangements with Multiple Deliverables.

/s/ KPMG LLP

March 30, 2005

Denver, Colorado

F-4

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2006 and 2005

			2006			2005
			(In thousands, except
			share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	9,999		$	6,183
	Investment securities available for sale			38,015			8,754
	Trade accounts receivable, less allowance for doubtful accounts and sales returns of $327 and $435, respectively			11,185			8,141
	Inventories, net			5,067			2,967
	Deferred income taxes, net			49			65
	Prepaid expenses and other current assets			1,440			663
		Total current assets		65,755			26,773
Property and equipment, net				16,176			8,801
Goodwill, net				308			308
Other intangible assets, net				50			52
Long-term deferred income taxes, net				709			782
Other assets				43			83
Long-term investment securities available for sale				8,453			1,976
		Total assets	$	91,494		$	38,775
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,623		$	1,284
	Accrued liabilities			9,596			8,388
	Deferred revenue			1,984			1,888
		Total current liabilities		13,203			11,560
Accrued liabilities, net of current portion				3			15
Deferred revenue, net of current portion				—			16
		Total liabilities		13,206			11,591
Commitments and contingencies
Shareholders’ equity:
	Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued			—			—
	Common stock, $0.001 par value. Authorized 60,000,000 shares; issued and outstanding 30,853,948 shares in 2006 and 26,250,924 shares in 2005			31			26
	Additional paid-in capital			152,011			99,674
	Accumulated other comprehensive income (loss)			64			(145	)
	Accumulated deficit			(73,818	)		(72,371	)
		Total shareholders’ equity		78,288			27,184
		Total liabilities and shareholders’ equity	$	91,494		$	38,775

See accompanying notes to consolidated financial statements.

F-5

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Consolidated Statements of Operations and Comprehensive Income (Loss)

Years ended December 31, 2006, 2005, and 2004

			2006			2005			2004
			(In thousands, except share and per share
			amounts)
Revenue			$	63,490		$	43,212		$	34,708
Cost of revenue				16,955			10,523			8,801
		Gross profit		46,535			32,689			25,907
Operating expenses:
	Selling, general, and administrative			39,824			24,149			19,347
	Research, development, and other technology			9,910			6,661			5,355
		Total operating expenses		49,734			30,810			24,702
		Operating (loss) income		(3,199	)		1,879			1,205
Other income (expense):
	Interest income			1,954			432			238
	Interest expense related to litigation settlement			—			(387	)		—
	Other, net			(37	)		(8	)		(9	)
				1,917			37			229
		(Loss) income before income taxes		(1,282	)		1,916			1,434
Income tax (expense) benefit				(165	)		(878	)		1,518
		Net (loss) income		(1,447	)		1,038			2,952
Other comprehensive (loss) income				209			(195	)		45
		Comprehensive (loss) income	$	(1,238	)	$	843		$	2,997
(Loss) earnings per share:
	Net (loss) income per share, basic		$	(0.05	)	$	0.04		$	0.12
	Net (loss) income per share, diluted		$	(0.05	)	$	0.04		$	0.11
Weighted average shares outstanding:
	Basic			29,130,172			25,940,200			25,080,097
	Diluted			29,130,172			28,568,033			27,060,001

See accompanying notes to consolidated financial statements.

F-6

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Consolidated Statements of Shareholders’ Equity

Years ended December 31, 2006, 2005, and 2004

									Accumulated
									Other
	Common Stock					Additional			Comprehensive						Total
						Paid-In			Income			Accumulated			Shareholders’
	Shares			Amount		Capital			(Loss)			Deficit			Equity
	(In thousands, except share amounts)
Balances at January 1, 2004		24,452,491		$	24	$	94,544		$	5		$	(76,361	)	$	18,212
Exercise of stock options		765,723			1		1,796			—			—			1,797
Shares purchased under employee stock purchase plan		159,725			—		446			—			—			446
Options granted for consulting services		—			—		37			—			—			37
Unrealized loss on investment securities		—			—		—			(64	)		—			(64	)
Foreign currency translation adjustment		—			—		—			109			—			109
Net income		—			—		—			—			2,952			2,952
Balances at December 31, 2004		25,377,939			25		96,823			50			(73,409	)		23,489
Exercise of stock options		796,958			1		2,484			—			—			2,485
Shares purchased under employee stock purchase plan		76,027			—		354			—			—			354
Options granted for consulting services		—			—		13			—			—			13
Unrealized loss on investment securities		—			—		—			(17	)		—			(17	)
Foreign currency translation adjustment		—			—		—			(178	)		—			(178	)
Net income		—			—		—			—			1,038			1,038
Balances at December 31, 2005		26,250,924			26		99,674			(145	)		(72,371	)		27,184
Exercise of stock options		428,834			1		1,753			—			—			1,754
Shares purchased under employee stock purchase plan		78,108			—		554			—			—			554
Shares redeemed/retired		(43,918	)		—		(471	)		—			—			(471	)
Shares issued in secondary public offering		4,140,000			4		51,746			—			—			51,750
Stock issuance costs		—			—		(3,918	)		—			—			(3,918	)
Paid in capital from stock option expense		—			—		2,663			—			—			2,663
Options granted for consulting services		—			—		10			—			—			10
Unrealized gain on investment securities		—			—		—			25			—			25
Foreign currency translation adjustment		—			—		—			184			—			184
Net loss		—			—		—			—			(1,447	)		(1,447	)
Balances at December 31, 2006		30,853,948		$	31	$	152,011		$	64		$	(73,818	)	$	78,288

See accompanying notes to consolidated financial statements.

F-7

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2006, 2005, and 2004

					2006			2005			2004
					(In thousands)
Cash flows from operating activities:
	Net (loss) income				$	(1,447	)	$	1,038		$	2,952
	Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
		Depreciation and amortization				2,953			1,748			1,534
		Stock compensation expense				2,663			—			—
		Provision for excess and obsolete inventories				129			67			83
		Fair value of options granted for consulting services				10			13			37
		Loss on retirement of assets				14			—			—
		Deferred income taxes				89			768			(1,615	)
		Changes in operating assets and liabilities:
			Trade accounts receivable, net			(3,079	)		(1,665	)		(1,624	)
			Inventories			(2,193	)		(1,297	)		74
			Equipment held for rental or loan, net			(6,639	)		(3,495	)		(1,646	)
			Prepaid expenses and other current assets			(791	)		149			(227	)
			Other assets			44			68			128
			Accounts payable and accrued liabilities			1,522			2,214			1,249
			Deferred revenue			52			(73	)		231
				Net cash (used in) provided by operating activities		(6,673	)		(465	)		1,176
Cash flows from investing activities:
	Sales of investment securities					8,811			10,006			19,624
	Purchases of investment securities					(44,524	)		(7,347	)		(31,094	)
	Capital expenditures					(3,545	)		(1,343	)		(439	)
	Purchase of land and building					—			(1,350	)		—
	Purchase of intangible assets					(25	)		—			(25	)
	Net change in restricted cash					—			—			1,133
				Net cash used in investing activities		(39,283	)		(34	)		(10,801	)
Cash flows from financing activities:
	Proceeds from sale of common stock to employees					1,837			2,839			2,243
	Net proceeds from secondary stock offering					47,832			—			—
				Net cash provided by financing activities		49,669			2,839			2,243
Effect of exchange rate changes on cash						103			(161	)		105
				Net increase (decrease) in cash and cash equivalents		3,816			2,179			(7,277	)
Cash and cash equivalents at beginning of year						6,183			4,004			11,281
Cash and cash equivalents at end of year					$	9,999		$	6,183		$	4,004
Supplemental disclosures of cash flow information:
	Cash paid during the year for interest				$	387		$	—		$	—
	Cash paid during the year for income taxes					95			69			158

See accompanying notes to consolidated financial statements.

F-8

THE SPECTRANETICS CORPORATION

AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

     (a) Organization, Nature of Business, and Basis of Presentation

      The accompanying 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. The Company’s primary business is the design, manufacture, and marketing of single use medical devices used in minimally invasive surgical procedures within the vascular system in conjunction with its proprietary excimer laser system.

      The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangibles, assets, valuation allowances for receivables, inventories and deferred income tax assets, and accrued warranty and royalty expenses. Actual results could differ from those estimates.

     (b) Cash and Cash Equivalents

      The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents of approximately $8,265,000 and $3,703,000 at December 31, 2006 and 2005, respectively, consist primarily of money market accounts, commercial paper, and repurchase agreements stated at cost, which approximates fair value.

     (c) Investment Securities

      Investment securities at December 31, 2006 and 2005, are classified as available-for-sale for purposes of Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and, accordingly are carried at fair value. The difference between cost and fair value is recorded as an unrealized gain or loss on investment securities and recorded within accumulated other comprehensive income (loss). At December 31, 2006 and 2005, the unrealized loss totaled $57,000 and $82,000, respectively. The Company’s investment securities are comprised of U.S. Treasury and agency notes as well as certificates of deposit and have contractual maturities that range from one month to two years at December 31, 2006.

     (d) Trade Accounts Receivable

      Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment. Past due balances over 30 days are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote. The allowance for sales returns is the Company’s best estimate of the amount of probable losses in the Company’s existing accounts receivable due to future sales returns and price adjustments.

      The allowance for sales returns is determined based upon an analysis of revenue transactions and historical experience of sales returns and price adjustments. Adjustments to customer account balances for returns and price adjustments are charged against the allowance for sales returns.

F-9

     (e) Inventory

      Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

     (f) Property and Equipment

      Property and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred.

      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. The building is depreciated using the straight-line method over its remaining estimated useful life of 20 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

     (g) Goodwill and Other Intangible Assets

      Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Pursuant to Statement 142, goodwill and intangible assets acquired in a purchase business combination and determined to have indefinite useful lives are not amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. Intangible assets, which consist primarily of patents, are amortized using the straight-line method over periods ranging from 5 to 17 years.

     (h) Long-Lived Assets

      The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment at least annually and whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset are separately identifiable and are less than the carrying value. Fair value is determined by reference to quoted market prices, if available, or the utilization of certain valuation techniques such as cash flows discounted at a rate commensurate with the risk involved. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. No impairments of long-lived assets have been recognized.

     (i) Financial Instruments

      At December 31, 2006 and 2005, the carrying value of financial instruments approximates the fair value of the instruments based on terms and related interest rates. Financial instruments include cash and cash equivalents, investment securities, trade accounts receivable and accounts payable.

     (j) Revenue Recognition

      Revenue from the sale of the Company’s disposable products is recognized when products are shipped to the customer and title transfers. The Company records a provision for sales returns based on historical returns experience. Revenue from the sale of excimer laser systems is recognized after completion of contractual obligations, which generally include delivery and installation of the systems. The Company’s field service engineers are responsible for installation of each laser. The Company generally provides a one-year warranty on laser sales, which includes parts, labor and replacement gas. 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. 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 from warranty service and service contracts is initially recorded as deferred revenue and recognized on a straight-line basis over the related

F-10

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

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

      Cap-Free rental program — Under this program, the Company retains title to the laser system and the customer agrees to a catheter price list that includes a per-unit surcharge. Customers are expected but not required to make minimum purchases of catheters at regular intervals, and the Company reserves the right to have the unit returned should the minimum purchases not be made. The Company recognizes the total surcharge as rental revenue each month, believing it to be the best measurement of revenue associated with the customers’ use of the laser unit for the month. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is included in cost of revenue based upon a three-to-five year expected life of the unit, depending upon whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred. As of December 31, 2006, 131 laser units were in place under the Cap-Free program.

      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 included in cost of revenue based upon a three-to five-year expected life of the unit, depending on whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred. The Company also offers a straight monthly rental program and there are a small number of hospitals that pay rent of $3,000 to $5,000 per month under this program. As of December 31, 2006, 83 laser units were in place under the Evergreen program.

      Evaluation program — 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 our 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, depending on whether it is a remanufactured unit or a new laser unit. Costs to maintain the equipment are expensed as incurred. As of December 31, 2006, 79 laser units were in place under the evaluation program

      The Company adopted Emerging Issues Task Force Bulletin (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”), on July 1, 2003. The primary impact of the adoption of EITF No 00-21 was 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. Revenue recognized associated with service to be performed during the warranty period totaled $570,000 and $446,000 for the twelve months ended December 31, 2006 and 2005, respectively.

     (k) Warranties

      The Company generally provides a one-year warranty on the sale of its excimer laser and the parts and labor during the warranty period are provided by the Company’s field service engineers. Prior to July 1, 2003, the Company recorded estimated warranty expense as cost of revenue at the time of the sale based on historical experience. As warranty costs were incurred, they were charged against the warranty liability. As a result of the adoption of EITF 00-21, service costs incurred for warranty periods beginning after July 1, 2003 are recorded as expense in the period incurred as noted above.

     (l) Royalty Liability

      The Company licenses certain patents from various licensors pursuant to license agreements. Royalty expense is calculated pursuant to the terms of the license agreements. The Company has established reserves

F-11

for royalty payment obligations based on these calculations, which involve management estimates that require judgment.

     (m) Stock-Based Compensation

      On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their consolidated financial statements. SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R) to its valuation methods.

      The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires recognition of expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for periods prior to the date of adoption have not been restated to reflect, and do not include, the impact of SFAS 123(R). The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes options pricing model. Stock-based compensation expense recognized under SFAS 123(R) for the twelve months ended December 31, 2006 was $2,663,000, which consisted of compensation expense related to (1) employee stock options based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period, and (2) the estimated value to be realized by employees related to shares expected to be issued under the Company’s employee stock purchase plan. Stock-based compensation expense related to employee stock options disclosed but not recognized in the financial statements for the twelve months ended December 31, 2005 and 2004 was $1,874,000 and $875,000, respectively, before income tax benefit.

      SFAS No. 123(R) requires companies to estimate the fair value of stock options on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s condensed consolidated statement of operations. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under the intrinsic value method, compensation expense for stock option grants issued to employees was recorded to the extent the fair market value of the stock on the date of grant exceeds the option price.

      Prior to adoption of SFAS No. 123(R) on January 1, 2006, the Company followed SFAS No. 123 which allowed for the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), provided that pro forma results of operations were disclosed for those options granted under the fair value method. Accordingly, the Company accounted for stock options granted to employees and directors of the Company under the intrinsic value method. Had the Company reported compensation costs as determined by the fair value method of accounting for option grants to employees and directors, net income and net income

F-12

per common share would approximate the following pro forma amounts (in thousands, except per share amounts):

		Twelve Months Ended			Twelve Months Ended
		December 31, 2005			December 31, 2004
Net income as reported		$	1,038		$	2,952
	Deduct: Total equity-based compensation expense determined under the fair value method, net of tax		(1,155	)		(534	)
	Net (loss) income, pro forma, under FAS No. 123	$	(117	)	$	2,418
Net income per common share — basic — as reported		$	0.04		$	0.12
Net income per common share — diluted — as reported		$	0.04		$	0.11
Net (loss) income per common share — basic — proforma		$	( —	)	$	0.10
Net (loss) income per common share — diluted — proforma		$	( —	)	$	0.09

      For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period.

      The per-share weighted average fair value of stock options granted during 2005 and 2004, was $7.40 and $4.23 per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2005			2004
Risk free interest rate		4.2	%		3.5	%
Expected life		5.0			5.5
Expected volatility		159.2	%		116.4	%
Expected dividend yield		—	%		—	%

     (n) Research and Development

      Research and development costs are expensed as incurred and totaled $5,817,000, $3,443,000, and $2,295,000, for the years ended December 31, 2006, 2005, and 2004, respectively. The Company also sponsors clinical trials intended to obtain the necessary clinical data required to obtain approval from the Food and Drug Administration and other foreign governing bodies to market new applications for its technology. Costs associated with these clinical trials totaled $2,235,000, $1,453,000, and $1,503,000, during the years ended December 31, 2006, 2005, and 2004, respectively.

     (o) Foreign Currency Translation

      The Company’s functional currency is the U.S. dollar. Certain transactions of the Company and its subsidiary are denominated in currencies other than the U.S. dollar. Realized gains and losses from these transactions are included in the consolidated statements of operations as they occur.

      Spectranetics International, B.V. used its local currency (Euro) as its functional currency for the years presented. Accordingly, net assets are translated to U.S. dollars at year-end exchange rates while income and expense accounts are translated at average exchange rates during the year. Adjustments resulting from these translations are reflected in shareholders’ equity as accumulated other comprehensive income (loss).

     (p) Advertising Costs

      The Company expenses advertising costs as incurred. Advertising costs of $336,000, $164,000, and $101,000 were expensed in 2006, 2005, and 2004, respectively.

     (q) 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 tax consequences

F-13

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 provided 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.

     (r) Reclassification

      Certain amounts from the prior consolidated financial statements have been reclassified to conform with the 2006 presentation.

     (s) Recent Accounting Pronouncements

      In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109”. FIN 48 establishes a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007 as required. The Company is currently evaluating the impact that the adoption of FIN 48 will have, if any, on its consolidated financial statements and notes thereto. However, the Company does not expect the adoption of FIN 48 to have a material effect on our financial position or operating results.

      In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our consolidated financial position or results of operations

      In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.

      In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under which an entity may elect to record certain financial assets or liabilities at fair value upon their initial recognition. Subsequent changes in fair value would be recognized in earnings as those changes occur. The election of the fair value option would be made on a contract-by contract basis and would need to be supported by concurrent documentation or a preexisting documented policy. SFAS 159 requires an entity to separately disclose the fair value of these items on the balance sheet or in the footnotes to the financial statements and to provide information that would allow the financial statement user to understand the impact on earnings from changes in the fair value. SFAS 159 is effective for us beginning with fiscal year 2008. The Company is currently evaluating the impact that the adoption of SFAS 159 will have on its consolidated financial statements.

F-14

(2) Investment Securities

      Investment securities consist of the following at December 31:

		2006		2005
		(In thousands)
Short-term investments:
	U.S. Treasury and agency notes	$	38,015	$	8,754
Long-term investments:
	U.S. Treasury and agency notes with maturities> 1 year	$	8,453	$	1,976

      The Company classifies investment securities with maturities of one year or less as short-term and maturities of greater than one year as long-term.

      Unrealized loss at December 31, 2006 and 2005, respectively, was $57,000 and $82,000. For the year ended December 31, 2006, an unrealized gain of $25,000 was included in other comprehensive income. For the years ended December 31, 2005 and 2004, the amount of unrealized loss included in other comprehensive income was $17,000 and $64,000, respectively. Realized gains and losses are determined using the specific identification method. There were no significant realized gains or losses during 2006, 2005, or 2004.

(3) Inventories

      Inventories consist of the following (in thousands):

	December 31
	2006			2005
Raw materials	$	1,449		$	709
Work in process		1,932			1,314
Finished goods		1,928			1,098
Less reserves for obsolescence and variance		(242	)		(154	)
	$	5,067		$	2,967

(4) Property and Equipment, net

      Property and equipment, net, consists of the following (in thousands):

	December 31
	2006			2005
Land	$	270		$	270
Building and improvements		1,223			1,106
Manufacturing equipment and computers		9,601			6,944
Leasehold improvements		778			666
Equipment held for rental or loan		16,319			9,805
Furniture and fixtures		235			179
Less: accumulated depreciation and amortization		(12,250	)		(10,169	)
	$	16,176		$	8,801

      Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $2,703,000, $1,642,000 and $1,366,000, respectively.

F-15

(5) Goodwill and Other Intangible Assets

Intangible Assets

      Acquired intangible assets as of December 31 are as follows (in thousands):

		2006			2005
Patents and other assets		$	3,832		$	3,808
	Less accumulated amortization		(3,782	)		(3,756	)
		$	50		$	52

      Aggregate amortization expense for amortizing intangible assets was $27,000, $72,000 and $118,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Estimated amortization expense for each of the next five years is expected to be approximately $1,500.

Goodwill

      During 2001, the Company entered into a series of purchase and license agreements with Fogazzi, an Italian medical device manufacturer. The Company acquired certain assets from Fogazzi and has granted a license to Fogazzi for the manufacture of certain laser catheters used to treat blockages in the leg. Goodwill of $340,000 was recorded, and $32,000 of amortization expense was recognized during the year ended December 31, 2001. In accordance with the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, which was adopted January 1, 2002, no amortization expense has been recorded for the years ended December 31, 2006 and 2005. At December 31, 2006 and 2005, the balance of goodwill was $308,000.

      The Company evaluates goodwill and other intangible assets for impairment in accordance with the provisions of Statement 142. The Company has not recognized an impairment loss as a result of such analyses.

(6) Accrued Liabilities

      Accrued liabilities consist of the following (in thousands):

	December 31,
	2006		2005
Accrued payroll and employee related expenses	$	4,792	$	2,845
Accrued royalty expense		996		2,818
Accrued legal expenses		584		55
Employee stock purchase plan liability		409		229
Accrued clinical study expense		151		213
Accrued warranty expense		40		39
Accrued interest expense		—		391
Other accrued expenses		2,624		1,798
	$	9,596	$	8,388

(7) Deferred Revenue

      Deferred revenue was $1,984,000 and $1,904,000 at December 31, 2006 and 2005, 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.

(8) Stock-Based Compensation and Employee Benefit Plans

      At December 31, 2006 and 2005, the Company had two stock-based compensation plans which are described below.

F-16

     (a) Stock Option Plan

      The Company maintains stock option plans which provide for the grant of incentive stock options, nonqualified stock options, restricted stock and stock appreciation rights. The plans provide that incentive stock options be granted with exercise prices not less than the fair value at the date of grant. Options granted through December 31, 2006 generally vest over three to four years and expire ten years from the date of grant. Options granted to the board of directors generally vest over three years from date of grant and expire ten years from the date of grant. At December 31, 2006, there were 471,310 shares available for future issuance under these plans.

Valuation and Expense Information under SFAS 123(R)

      The fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provision and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual maturity. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant. The following is a summary of the assumptions used and the weighted average grant-date fair value of the stock options granted during the twelve months ended December 31, 2006 using the Black-Scholes pricing model:

	Twelve Months Ended
	December 31,
	2006
Expected life (years)		4.97
Risk-free interest rate		4.81	%
Expected volatility		155.8	%
Expected dividend yield		None
Weighted average fair value	$	10.46

      The following table summarizes stock option activity during the three-year period ended December 31, 2006:

						Weighted Avg.
				Weighted		Remaining
				Average		Contractual Term		Aggregate Intrinsic
	Shares			Exercise Price		(In Years)		Value
Options outstanding at January 1, 2004		4,780,874		$	2.95
Granted		528,170			5.08
Exercised		(766,412	)		2.35
Canceled		(184,203	)		3.17
Options outstanding at December 31, 2004		4,358,429			3.30
Granted		601,000			7.94
Exercised		(796,177	)		3.12
Canceled		(325,341	)		3.99
Options outstanding at December 31, 2005		3,837,911			4.08
Granted		529,250			11.29
Exercised		(428,209	)		4.13
Canceled		(101,141	)		6.89
Options outstanding at December 31, 2006		3,837,811			4.89		5.81	$	24,711,856

F-17

      The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $11.29 on December 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as December 31, 2006 was 2,779,744. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $2,978,000, $2,731,000 and $2,180,000, respectively.

	Outstanding and Exercisable by Price Range as of December 31, 2006
	Number		Weighted				Number
	Outstanding		Average				Exercisable
	as of		Remaining		Weighted		as of		Weighted
	December 31,		Contractual Life		Average		December 31,		Average
Range of Exercise Prices	2006		(Years)		Exercise Price		2006		Exercise Price
$1.56 - $2.60		645,321		4.45	$	2.00		645,321	$	2.00
$2.63		700,000		6.15		2.63		656,247		2.63
$2.66 - $3.05		488,911		3.35		2.98		451,566		2.98
$3.06 - $4.00		482,425		3.84		3.55		474,921		3.55
$4.16 - $5.62		481,234		5.50		5.04		352,528		4.95
$5.67 - $10.59		543,920		8.10		7.98		173,036		7.09
$10.61 - $13.75		496,000		9.28		11.49		26,125		11.66
		3,837,811						2,779,744

      As of December 31, 2006 there was $6,454,344 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock option plans. The cost is expected to be recognized over a weighted-average period of 2.9 years.

      During 2004, the Company granted 4,470 fully vested options to certain nonemployees for past services. The fair value of the options approximated $12,000, as determined using the Black-Scholes options pricing model assuming no dividends, 98% volatility, risk-free interest rate of 4.5%, and an expected life of four years. This expense was recognized in 2004 and is included in selling, general and administrative expenses in the accompanying consolidated statement of operations and other comprehensive income (loss).

      During 2003 and 2002, the Company granted 25,000 options each year to nonemployees for consulting services. The total fair value of the options was amortized to expense on a straight-line basis over the vesting period. The expense recognized was $10,000, $13,000, and $26,000 during the years ended December 31, 2006, 2005, and 2004, respectively, and is included in selling, general and administrative expenses in the accompanying statements of operations and other comprehensive income (loss). All of these options are vested at December 31, 2006.

     (b) Stock Purchase Plan

      The Company also maintains an employee stock purchase plan which provides for the sale of up to 1,350,000 shares of common stock. The plan provides eligible employees the opportunity to acquire common stock in accordance with Section 423 of the Internal Revenue Code of 1986. Stock can be purchased each six-month period per year (twice per year). The purchase price is equal to 85% of the lower of the price at the beginning or the end of the respective six-month period. Shares issued under the plan totaled 78,108, 84,017, and 159,725 in 2006, 2005, and 2004, respectively.

      The weighted average fair value of the employees’ purchase rights granted in 2005 and 2004 that was included in the accompanying pro forma stock-based compensation disclosure was $4.88, and $1.42, respectively, per right, which was estimated using the Black-Scholes model with the following assumptions:

	2005			2004
Risk free interest rate		3.5	%		1.6	%
Expected life		6 months			6 months
Expected volatility		196.9	%		56.9	%
Expected dividend yield		—	%		—	%

F-18

     (c) 401(k) Plan

      The Company maintains a salary reduction savings plan under Section 401(k) of the Internal Revenue Code, which the Company administers for participating employees’ contributions. All full-time employees are covered under the plan after meeting minimum service requirements. The Company accrued contributions of $235,000, $169,000, and $135,000 to the plan in 2006, 2005, and 2004, respectively, based on a match of 25% of the first 4% of each employee’s contribution and an additional Company discretionary match.

(9) Sale of Common Stock

      On May 9, 2006, the Company completed a public offering of 4,140,000 shares of its common stock, which amount included the exercise in full by the underwriters of an over-allotment option of 540,000 shares, at a price (before underwriters discounts and commissions) of $12.50 per share. The Company intends to use the net proceeds from the offering of approximately $47.9 million for capital expenditures, working capital and other general corporate purposes and business development activities.

(10) 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 No. 128, basic earnings per share is computed by dividing net income (loss) 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 is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during the period using the treasury stock method.

      Diluted net loss per share is the same as basic loss per share for the year ended December 31, 2006 as potential common stock instruments are anti-dilutive. Potentially dilutive common shares which have been excluded from the computation of diluted income per share as of December 31, 2006, 2005, and 2004 were 2,723,734, 619,322, and 688,180 because their effect would have been antidilutive.

			2006			2005		2004
			(In thousands, except per share
			amounts)
Net (loss) income			$	(1,447	)	$	1,038	$	2,952
Common shares outstanding:
	Historical common shares outstanding at beginning of year			26,251			25,378		24,452
	Weighted average common shares issued			2,879			562		628
		Weighted average common shares outstanding — basic		29,130			25,940		25,080
Effect of dilution from stock options				—			2,628		1,980
		Weighted average common shares outstanding — diluted		29,130			28,568		27,060
Net income per share, basic				$(0.05)			$0.04		$0.12
Net income per share, diluted				(0.05)			0.04		0.11

(11) Leases

      The Company leases office space, furniture and equipment under noncancelable operating leases with initial terms that expire at various dates through 2017. All assets held under capital leases were fully depreciated at December 31, 2006 and 2005.

F-19

      The future minimum payments under noncancelable operating leases as of December 31, 2006, are as follows:

			Operating
			Leases
			(In thousands)
Years ending December 31:
	2007			817
	2008			1,274
	2009			1,302
	2010			1,282
	2011 and beyond			7,004
		Total minimum lease payments	$	11,679

      Rent expense under operating leases totaled approximately $532,000, $508,000, and $591,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

      In December, 2006 the Company entered into a ten-year lease agreement for a 75,000 square foot building in northern Colorado Springs, with expansion rights for an additional 40,000 square feet on the same property, at its option, during the first four years of the lease. The Company plans to consolidate all of its current U.S. operations into the new facility in two phases. All research and development, clinical studies, regulatory, marketing, sales support and administrative functions are expected to move to the new facility in the first half of 2007, while all manufacturing and related support functions are expected to relocate in 2008.

      Based on an expected occupancy date of April 2007, the original lease term would expire in April 2017. Provided the Company is not in default of any lease term, the Company has the option to extend the lease for two additional periods of five years each. Upon full occupancy of the facility in the second year of the lease, the annual base rent is $917,000 per year, subject to annual increases of 3-4% each year. Leasehold improvements related to this lease will be amortized over the remaining initial lease term.

(12) Income Taxes

      The sources of (loss) income before income taxes are as follows (in thousands):

		2006			2005			2004
United States		$	(1,532	)	$	1,953		$	2,139
Foreign			250			(37	)		(705	)
	(Loss) income before income taxes	$	(1,282	)	$	1,916		$	1,434

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

			2006		2005		2004
Current:
	Federal		$	—	$	38	$	45
	State			76		72		52
	Foreign			—		—		—
				76		110		97
Deferred:
	Federal			77		683		(1,430	)
	State			12		85		(185	)
	Foreign			—		—		—
				89		768		(1,615	)
		Income tax expense (benefit)	$	165	$	878	$	(1,518	)

F-20

      Income tax expense (benefit) attributable to income (loss) before income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income (loss) before income taxes as a result of the following (in thousands):

			2006			2005		2004
Computed expected tax expense (benefit)			$	(436	)	$	652	$	488
Increase (reduction) in income taxes resulting from:
	State and local income taxes, net of federal impact			10			103		94
	Nondeductible stock compensation expense related to incentive stock options			503			—		—
	Nondeductible expenses			188			111		121
	Change in valuation allowance			(15	)		—		(2,218	)
	Foreign operations			(85	)		12		—
	Other, net			—			—		(3	)
		Income tax expense (benefit)	$	165		$	878	$	(1,518	)

      During 2004, the valuation allowance decreased by $7,824,000. Such amount is reconciled to the above change in the valuation allowance of $2,218,000 due primarily to the expiration of U.S. net operating losses and the adjustment of the research and experimentation tax credit which is limited under Section 383 of the Internal Revenue Code of 1986.

      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31 are as follows:

			2006			2005
			(In thousands)
Current:
	Royalty reserve		$	382		$	1,230
	Warranty reserve			5			11
	Accrued liabilities			418			409
	Inventories			125			104
	Deferred revenue			762			675
				1,692			2,429
	Less valuation allowance			(1,643	)		(2,364	)
				49			65
Noncurrent:
	Net operating loss carryforwards — U.S. and related states			10,745			14,182
	Foreign net operating loss carryforwards			12,537			14,061
	Research and experimentation tax credit			578			578
	Equipment			(276	)		(88	)
	Stock compensation expense related to nonqualified stock options			521			—
	Alternative minimum tax credit			357			358
		Total net deferred tax assets		24,462			29,091
	Less valuation allowance			(23,753	)		(28,309	)
				709			782
		Net deferred tax assets	$	758		$	847

      An income tax benefit of $989,000, $692,000 and $444,000 related to the exercise of stock options during 2006, 2005 and 2004, respectively, will be added to other paid-in capital if, and when, the tax benefit is realized.

F-21

      At December 31, 2006, the Company has net operating loss carryforwards for United States federal income tax purposes of approximately $28 million. This amount does not include approximately $13 million of net operating loss carryforwards which are limited under Section 382 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $13 million of net operating losses as the Company has determined that it will not receive any future tax benefit from this $13 million before their expiration.

      As of December 31, 2006, the Company has unrestricted federal net operating loss carryforwards of approximately $28 million to reduce future taxable income which expire as follows (in thousands):

			Regular Tax
			Net Operating
			Losses
Expiration date:
	2007			8,894
	2008			970
	2009			8,930
	2010			1,177
	2011			2
	2012 through 2026			8,010
		Total	$	27,983

      The Company also has tax loss carryforwards in The Netherlands, which have no expiration date, of approximately 30 million Euros ($39 million) available to offset future taxable income, if any. In 2004, The Netherlands tax authorities contacted the Company and are proposing to disallow substantially all of the tax loss carryforwards. The Company is actively defending these loss carryforwards. In 2006 and 2005, the foreign loss carryforwards were fully reserved with a valuation allowance. If the tax loss carryforwards are ultimately disallowed, there will be no negative impact to the consolidated financial statements due to the valuation allowance.

      An alternative minimum tax credit carryforward of $357,000 is available to offset future regular tax liabilities and has no expiration date. For alternative minimum tax purposes, the Company has unrestricted net operating loss carryforwards for United States federal income tax purposes of approximately $27 million. This amount does not include approximately $13 million of net operating loss carryforwards which are limited under Section 382 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $13 million of net operating losses as the Company has determined that it will not receive any future tax benefit from this $13 million before their expiration.

      The Company also has research and experimentation tax credit carryforwards at December 31, 2006, for federal income tax purposes of approximately $580,000, which are available to reduce future federal income taxes, if any, and expire at varying dates through 2024. This amount does not include approximately $1.1 million of research and experimentation tax credit carryforwards which are limited under Section 383 of the Internal Revenue Code of 1986. No deferred tax asset has been provided for $1.1 million of research and experimentation tax credits as the Company has determined that it will not receive any future tax benefit from this $1.1 million before their expiration.

      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. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the recorded valuation allowances at December 31, 2006.

F-22

(13) Concentrations of Credit Risk

      Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by the Financial Accounting Standards Board’s Statement No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk, consist primarily of cash, cash equivalents, investment securities, and accounts receivable.

      The Company’s cash, cash equivalents, and investment securities consist of financial instruments issued by various institutions and government entities that management believes are credit worthy. The Company is exposed to credit risk in the event of default by these financial institutions for amounts in excess of Federal Deposit Insurance Corporation insured limits. The Company’s investment policy is designed to limit the Company’s exposure to concentrations of credit risk.

      The Company’s accounts receivable are due from a variety of health care organizations and distributors throughout the United States, Europe and Asia. No single customer represented more than 10% of accounts receivable for any period. The Company provides for uncollectible amounts upon recognition of revenue and when specific credit problems arise. Management’s estimates for uncollectible amounts have been adequate during historical periods, and management believes that all significant credit risks have been identified at December 31, 2006.

      The Company has not entered into any hedging transactions nor any transactions involving financial derivatives.

(14) 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 consisting of developing, manufacturing, marketing, and distributing 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.

(a)     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 Food and Drug Administration (FDA). At December 31, 2006, FDA-approved products were used in multiple vascular procedures, including coronary and peripheral atherectomy as well as the removal of infected, defective or abandoned cardiac lead wires from patients with 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 guide wire 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 December 31, 2006, 2005, and 2004, cost allocations of these functions to Europe Medical have not been performed.

      Revenue associated with intersegment transfers to Europe Medical was $2,205,000, $1,549,000, and $1,681,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation. For each of the years ended December 31, 2006, 2005, and 2004, intersegment revenue and intercompany profits are not included in the segment information in the table shown below.

F-23

     (b) 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):

			2006			2005			2004
Revenue:
	Equipment		$	4,916		$	3,853		$	3,210
	Disposables			46,735			29,915			23,241
	Service			6,522			5,233			4,877
	Other, net of provision for sales returns			(289	)		(197	)		92
		Subtotal — U.S. Medical		57,884			38,804			31,420
	Equipment			960			842			562
	Disposables			3,908			3,130			2,416
	Service			600			427			310
	Other			138			9			—
		Subtotal — Europe Medical		5,606			4,408			3,288
		Total revenue	$	63,490		$	43,212		$	34,708

      In 2006, 2005, and 2004, no individual customer represented 10% or more of consolidated revenue.

			2006		2005		2004
Interest income:
	U.S. Medical		$	1,938	$	420	$	227
	Europe Medical			16		12		11
		Total interest income	$	1,954	$	432	$	238

			2006		2005		2004
Interest expense:
	U.S. Medical		$	—	$	387	$	—
	Europe Medical			20		12		17
		Total interest expense	$	20	$	399	$	17

			2006		2005		2004
Depreciation expense:
	U.S. Medical		$	2,443	$	1,447	$	1,195
	Europe Medical			260		196		172
		Total depreciation	$	2,703	$	1,643	$	1,367

			2006		2005		2004
Amortization expense:
	U.S. Medical		$	248	$	97	$	158
	Europe Medical			2		8		9
		Total amortization	$	250	$	105	$	167

F-24

			2006			2005		2004
Segment net (loss) income:
	U.S. Medical		$	(2,037	)	$	794	$	2,990
	Europe Medical			590			244		(38	)
		Total net (loss) income	$	(1,447	)	$	1,038	$	2,952

			2006		2005		2004
Capital expenditures:
	U.S. Medical		$	3,500	$	2,671	$	430
	Europe Medical			45		22		9
		Total capital expenditures	$	3,545	$	2,693	$	439

			2006		2005
Segment assets:
	U.S. Medical		$	88,192	$	36,149
	Europe Medical			3,302		2,626
		Total assets	$	91,494	$	38,775

      The Company operates in several countries outside of the United States. Revenue from foreign operations by segment is summarized as follows:

		2006		2005		2004
U.S. Medical		$	1,795	$	1,476	$	614
Europe Medical			5,606		4,408		3,288
	Total foreign revenue	$	7,401	$	5,884	$	3,902

      There were no individual countries, other than the United States, that represented at least 10% of consolidated revenue in 2006, 2005, or 2004. Long-lived assets located in foreign countries are concentrated in Europe, and totaled $1,209,000 and $795,000 as of December 31, 2006 and 2005, respectively.

(15) Related Party Transactions

      During the years ended December 31, 2006 and 2005, the Company paid $90,000 and $75,000, respectively, to a director of the Company under an agreement whereby the director agreed to provide training services to outside physicians on behalf of the Company.

      During the year ended December 31, 2006, the Company paid $65,000 in fees to a consulting firm in which a director of the Company is a partner. The fees related to work done by the consulting firm in connection with the evaluation of a new market opportunity.

(16) Commitments and Contingencies

Rentrop

      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,

F-25

Dr. Rentrop filed in the United States District Court for the Southern District of New York (the “New York Court”), 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 sought declaratory judgments of non-infringement, invalidity and unenforceability of the patents-in-suit, and alleged counterclaims against Dr. Rentrop for breach of confidentiality agreement, misappropriation of trade secrets, and conversion.

      After mediation hearings occurred in February 2006, with no settlement reached, the case was returned to the New York Court for trial, which began in November 2006. In December 2006, the trial was concluded and the jury returned a verdict in favor of Dr. Rentrop, awarding him $500,000 in royalties and $150,000 in legal fees. Spectranetics has filed several post-trial motions with the New York Court and the verdict will not be deemed accepted until the judge rules on these post-trial motions. In the event that Spectranetics’ post-trial motions are unsuccessful, and the judge accepts the verdict, Spectranetics currently plans to exhaust all of its appeal options. However, in light of the jury verdict, Spectranetics has accrued $690,000 in expenses related to the verdict (the $650,000 awarded, and an additional $40,000 for royalties subsequent to the effective date of the jury award and through December 31, 2006), which are included in accrued liabilities on the Company’s consolidated balance sheet at December 31, 2006.

Cardiomedica

      The Company has been engaged in a dispute with Cardiomedica S.p.A. (Cardiomedica), an Italian company, over the existence of a distribution agreement between Cardiomedica and Spectranetics. Cardiomedica originally filed the suit in July 1999, and the lower court’s judgment was rendered on April 3, 2002. In June 2004, 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 profits. Cardiomedica had asserted lost profits of approximately 1,300,000 euros, which was based on their estimate of potential profits during the three-year period. In December 2006, the court made an interim judgment which narrowed the scope of Cardiomedica’s claim from their original claim of lost profits associated with 10 hospitals down to lost profits on two hospitals during the period from 1999 to 2001. Spectranetics BV estimates that the lost profits to Cardiomedica for the period related to these two hospitals, plus estimated interest and awarded court costs, are no more than $293,000, and such amount is included in accrued liabilities at December 31, 2006. The Company intends to vigorously defend the calculation of lost profits.

Kenneth Fox

      The Company is the defendant in a lawsuit brought in the District Court of Utrecht, the Netherlands (“the Dutch Court”) by Kenneth Fox. Mr. Fox is an inventor named on patents licensed to Spectranetics under a license agreement assigned to Interlase LP. In this action, Mr. Fox claims an interest in royalties payable under the license and seeks alleged back royalties of approximately $2.2 million. However, in an interpleader action, the United States District Court for the Eastern District of Virginia, Alexandria Division,

F-26

has already decided that any royalties owing under the license should be paid to a Special Receiver for Interlase. We have made all such payments. The United States District Court has also held Mr. Fox in contempt of the Court’s permanent injunction that bars him from filing actions like the pending action in the Netherlands, and the Court has ordered Mr. Fox to dismiss the Dutch action and to pay our costs and expenses. Mr. Fox has not yet complied with the United States District Court’s contempt order. In September 2006, the Dutch Court ruled that it does not have jurisdiction over The Spectranetics Corporation (U.S. corporation) and the proceedings will move forward on the basis of jurisdiction over Spectranetics B.V. only. The Company believes that this decision significantly narrows the scope of the claim. Mr. Fox is currently in the process of appealing the Dutch Court’s jurisdiction decision. The Company intends to continue to vigorously defend the Dutch action.

Krauth

      On December 31, 2005, our agreement with KRAUTH medical KG (“KRAUTH”) expired. The agreement set forth the terms by which KRAUTH would be the exclusive distributor of our products within Germany. Prior to the expiration of the agreement, we were in negotiations with KRAUTH to continue our business relationship on a modified basis; however, no agreement was reached. In February 2006, KRAUTH filed a lawsuit in the District Court of Hamburg, Germany. The lawsuit sought goodwill compensation of 643,159.14 euros plus interest in the amount of eight percentage points above the base interest rate pursuant to Section 247 of the German Civil Code calculated as of January 26, 2006. We disagreed both on the merits of the claim and with the assumptions used to calculate KRAUTH’s alleged goodwill compensation.

      In September 2006, a hearing was held with the judge in the case, which focused on mediating a settlement of the case. A settlement was reached in the amount of $297,000, of which $75,000 had been accrued in our financial statements at December 31, 2005. As a result, the financial statements for the quarter ended September 30, 2006 included a charge of $222,000. Payment of the full settlement was made to KRAUTH in the fourth quarter of 2006, and the matter is now closed.

Edwards Lifesciences

      During August 2004, one of our licensors initiated arbitration proceedings involving a disagreement over royalties paid to them since the inception of a license agreement in October 2000. The disagreement centered on the treatment of certain service-based revenue, including repair and maintenance, and physician and clinical training services. We believed these are beyond the scope of the license agreement.

      Arbitration proceedings were held during 2005 regarding this matter. In July 2005, the arbitrator ruled that the Company was required to pay royalties on certain service-based revenue. At December 31, 2005 we had accrued costs of $2,905,000 associated with the resolution of this matter based on the arbitrator’s awards. This included $387,000 in interest on the settlement, for which we recorded a provision during the fourth quarter of 2005. In January 2006, we remitted a payment of $2,905,000 to the licensor, Edwards Lifesciences Corporation, which closed this matter.

Blaha

      On March 8, 2006, Robert Blaha and Terence Blaha filed a product liability/wrongful death action in the Arizona Superior Court (Maricopa County) naming us as a defendant in our role as the manufacturer and seller of a laser catheter product used in a medical procedure during which a patient died. The plaintiffs’ complaint did not specify the amount of damages. We believe that we have meritorious defenses against this complaint, and we intend to vigorously defend our position in this matter.

Other

      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.

F-27

(16) Valuation and Qualifying Accounts

		Balance at		Additions
		Beginning		Charged to					Balance at
Description		of Year		Expense			Deductions		End of Year
		(In thousands)
Year ended December 31, 2004:
	Accrued warranty liability	$	206	$	—		$	152	$	54
	Accrued royalty and litigation liability		1,511		1,830			858		2,483
	Allowance for doubtful accounts and sales returns		460		(139	)		82		239
	Accrued inventory obsolescence reserves		30		83			84		29
Year ended December 31, 2005:
	Accrued warranty liability	$	54	$	—		$	15	$	39
	Accrued royalty and litigation liability		2,483		1,738			1,157		3,064
	Allowance for doubtful accounts and sales returns		239		386			190		435
	Accrued inventory obsolescence reserves		29		66			15		80
Year ended December 31, 2006:
	Accrued warranty liability	$	39	$	—		$	1	$	38
	Accrued royalty and litigation liability		3,064		1,905			3,679		1,290
	Allowance for doubtful accounts and sales returns		435		305			413		327
	Accrued inventory obsolescence reserves		80		104			87		97

(17) Selected Quarterly Financial Data (Unaudited)

		2006											2005
		Q1			Q2		Q3			Q4			Q1		Q2		Q3		Q4
		(In thousands, except per share amounts)
Net sales		$	13,617		$	15,997	$	16,194		$	17,682		$	9,053	$	10,645	$	11,230	$	12,284
Gross profit			9,970			11,789		11,931			12,845			6,877		8,006		8,587		9,219
Net (loss) income			(638	)		308		(165	)		(952	)		75		242		506		215
Net (loss) income per share:
	Basic	$	(0.02	)	$	0.01	$	(0.01	)	$	(0.03	)	$	0.00	$	0.01	$	0.02	$	0.01
	Diluted		(0.02	)		0.01		(0.01	)		(0.03	)		0.00		0.01		0.02		0.01

F-28

EXHIBIT INDEX

Exhibit
Number			Description
	3	.1	Restated Certificate of Incorporation.(1)
	3	.1(a)	Certificate of Amendment to Restated Certificate of Incorporation.(9)
	3	.1(b)	Certificate of Amendment to Restated Certificate of Incorporation.(14)
	3	.2	Bylaws of the Company.(2)
	3	.2(a)	First Amendment to Bylaws.(16)
	3	.2(b)	Second Amendment to Bylaws.(17)
	4	.1	Form of Common Stock Certificate of the Company.(3)
	10	.2(e)	Lease covering a portion of the Company’s facilities between the Company and John Sanders, dated April 19, 2006.(25)
	10	.3(d)	Amendment to lease covering a portion of the Company’s facilities between the Company and Full Circle Partnership dated May 2, 2005.(23)
	10	.8	Nonemployee Director Stock Option Plan.(6)
	10	.8(a)	Stock Option Plan for Outside Directors.(8)
	10	.9	Employee Stock Purchase Plan (as amended).(7)
	10	.10	The 1997 Equity Participation Plan of The Spectranetics Corporation.(12)
	10	.10(c)	Form of NonQualified Stock Option Agreement for Officers.(12)
	10	.10(d)	Form of NonQualified Stock Option Agreement for Employees.(12)
	10	.10(e)	Form of NonQualified Stock Option Agreement for Independent Directors.(12)
	10	.10(f)	Form of Incentive Stock Option Agreement for Officers.(12)
	10	.10(g)	Form of Incentive Stock Option Agreement for Employees.(12)
	10	.12	License Agreement with Pillco Limited Partnership, dated February 1, 1993 (confidential treatment has been granted for portions of this agreement).(5)
	10	.13	Vascular Laser Angioplasty Catheter License Agreement with Bio-Metric Systems, Inc., dated April 7, 1992 (confidential treatment has been granted for portions of this agreement).(4)
	10	.15	License Agreement between Medtronic, Inc. and the Company, dated February 28, 1997 (confidential treatment has been granted for portions of this agreement).(10)
	10	.16	License Agreement between United States Surgical Corporation and the Company, dated September 25, 1997 (confidential treatment has been granted for portions of this agreement).(11)
	10	.17	Supply Agreement between United States Surgical Corporation and the Company, dated September 25, 1997 (confidential treatment has been granted for portions of this agreement).(11)
	10	.22	First Amendment to the 1997 Equity Participation Plan.(14)
	10	.23	Second Amendment to the 1997 Equity Participation Plan.(13)
	10	.25	Third Amendment to the 1997 Equity Participation Plan.(15)
	10	.29	Form of Indemnification Agreement entered into between the Company and each of its directors as of May 10, 2002.(16)
	10	.30	Fourth Amendment to the 1997 Equity Participation Plan.(17)
	10	.31	Fifth Amendment to the 1997 Equity Participation Plan.(17)
	10	.32	Letter agreement dated January 20, 2003 between the Company and John G. Schulte.(18)
	10	.33	Asset purchase agreement between the Company and LaTIS, Inc.(19)
	10	.34	Settlement Agreement between the Company and Interlase Limited Partnership dated November 19, 2003.(20)
	10	.35	Third Amendment to Employee Stock Purchase Plan.(21)
	10	.36	Consulting Agreement dated February 14, 2005 between the Company and Dr. Craig Walker.(22)

55

Exhibit
Number			Description
	10	.37	Settlement and Amendment to License Agreement expected in February 2005 and effective October 1, 2004 between the Company and Surmodics, Inc. (confidential treatment has been granted for portions of this agreement).(22)
	10	.38	Employment letter agreement between the Company and Will McGuire dated September 14, 2005.(24)
	10	.39	Employment letter agreement between the Company and Stephen D. Okland dated February 10, 2006.(25)
	10	.40	Catheter Development Agreement dated May 3, 2006 between the Company and Bioscan Technologies Ltd. (confidential treatment has been granted for portions of this agreement).(26)
	10	.41	Agreement of Lease by and between 9965 Federal Drive, LLC and The Spectranetics Corporation dated December 29, 2006.
	10	.42	Patent Purchase Agreement dated February 20, 2007 between The Spectranetics Corporation and Joseph M. Ruggio.
	21	.1	Subsidiary of the Company.(15)
	23	.1	Consent of Independent Registered Public Accounting Firm (Ehrhardt Keefe Steiner & Hottman PC).
	23	.2	Consent of Independent Registered Public Accounting Firm (KPMG LLP).
	31	.1	Rule 13(a) — 14(a)/15d — 14(a) Certifications.
	32	.1	Section 1350 Certifications.

(1)	Incorporated by reference to the Company’s 1993 Annual Report on Form 10-K filed on March 31, 1994.
(2)	Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-1, filed December 5, 1991 (File No. 33-44367).
(3)	Incorporated by reference to exhibits previously filed by the Company with its Amendment No. 2 to the Registration Statement, filed January 24, 1992 (File No. 33-44367).
(4)	Incorporated by reference to exhibits previously filed by the Company with its Amendment No. 1 to the Registration Statement on Form S-1, filed January 10, 1992 (File No. 33-44367).
(5)	Incorporated by reference to exhibits previously filed by the Company with its Annual Report for 1992 on Form 10-K filed March 31, 1993.
(6)	Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed April 1, 1992 (File No. 33-46725).
(7)	Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed December 30, 1994 (File No. 33-88088).
(8)	Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed November 16, 1995 (File No. 33-99406).
(9)	Incorporated by reference to exhibits previously filed by the Company with its 1994 Annual Report on Form 10-K filed on March 31, 1995.

(10)	Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended on March 31, 1997.
(11)	Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended on September 30, 1997.
(12)	Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed June 17, 1998 (File No. 333-57015).
(13)	Incorporated by reference to exhibit previously filed by the Company with its Registration Statement on Form S-8 filed on November 22, 2000.
(14)	Incorporated by reference to exhibit previously filed by the Company with its 2000 Annual Report on Form 10-K filed on March 30, 2001.
(15)	Incorporated by reference to exhibit previously filed by the Company with its 2001 Annual Report on Form 10-K filed on March 30, 2002.
(16)	Incorporated by reference to exhibits previously filed by the Company with its Current Report on Form 8-K filed on June 7, 2002.
(17)	Incorporated by reference to exhibits previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

56

(18)	Incorporated by reference to exhibits previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(19)	Incorporated by reference to exhibits previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
(20)	Incorporated by reference to exhibit previously filed by the Company with its 2003 Annual Report on Form 10-K filed on March 29, 2004.
(21)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
(22)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
(23)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
(24)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
(25)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006
(26)	Incorporated by reference to exhibit previously filed by the Company with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

57 EX-10.41 2 d44374exv10w41.htm AGREEMENT OF LEASE

Exhibit 10.41

AGREEMENT OF LEASE
by and between

9965 FEDERAL DRIVE, LLC
and

THE SPECTRANETICS CORPORATION

[9965 FEDERAL DRIVE]
COLORADO SPRINGS, COLORADO

AGREEMENT OF LEASE
9965 FEDERAL DRIVE, LLC
THE SPECTRANETICS CORPORATION

TABLE OF CONTENTS

1.	Definitions and Attachments	1
2.	Demise	3
3.	Term	3
4.	Advance Rent	5
5.	Use	6
6.	Rent	6
7.	Requirements of Applicable Law	11
8.	Certificate of Occupancy	12
9.	Contest-Statute, Ordinance	12
10.	Tenant’s Improvements	12
11.	Repairs and Maintenance	13
12.	Conduct on Premises	15
13.	Insurance	15
14.	Rules and Regulations	16
15.	Mechanics’ Liens	16
16.	Tenant’s Failure to Repair	17
17.	Property – Loss, Damage	17
18.	Destruction – Fire or Other Casualty	17
19.	Eminent Domain	18
20.	Assignment	18
21.	Default; Remedies; Bankruptcy of Tenant	19
23.	Services and Utilities	22
24.	Electric Current	23
25.	Telephone and Telecommunications	23
26.	Acceptance of Premises	24
27.	Inability to Perform	24
28.	No Waivers	24
29.	Access to Premises and Change in Services	24
30.	Estoppel Certificates	25
31.	Subordination	25
32.	Attornment	25
33.	Notices	25
34.	Intentionally Deleted	26
35.	Tenant’s Space	26
36.	Quiet Enjoyment	28
37.	Vacation of Premises	28
38.	Members’ Liability	28
39.	Separability	28

i

40.	Indemnification	28
41.	Captions	29
42.	Brokers	29
43.	Recordation	29
44.	Successors and Assigns	29
45.	Integration of Agreements	30
46.	Hazardous Material; Indemnity	30
47.	Americans With Disabilities Act	32
48.	Several Liability	33
49.	Financial Statements	33
50.	Definition of Day and Days	33
51.	Tenant’s Anti-Terrorism Representation	33
52.	Parking	33
53.	Right of Expansion	33
54.	Exterior Signage	36
55.	Landlord’s Warranties and Covenants	36
56.	Landlord Default	37
57.	Right of First Refusal to Purchase	37

ii

AGREEMENT OF LEASE

     THIS AGREEMENT OF LEASE (this “Lease”) made this 29th day of December, 2006 (the “Effective Date”), by and between 9965 FEDERAL DRIVE, LLC (the “Landlord”) and THE SPECTRANETICS CORPORATION (the “Tenant”), witnesseth that the parties hereby agree as follows:

W I T N E S S E T H:

     THAT FOR AND IN CONSIDERATION of the mutual covenants and agreements herein contained, the parties hereto do hereby covenant and agree as follows:

1. Definitions and Attachments.

     1.1 Certain Defined Terms.

          1.1.1 “Building” means the office building located at 9965 Federal Drive, Colorado Springs, which is located within El Paso County, Colorado.

          1.1.2 “Rentable Area of the Building” means 74,749 rentable square feet, subject to adjustment in accordance with BOMA standards.

          1.1.3 “Phase I Premises” means that portion of the Building described on the schedules attached hereto as Exhibits “A-1, A-2 and A-3” and made a part hereof.

          1.1.4 “Phase II Premises” means that portion of the Building described on the schedules attached hereto as “Exhibits “A-1 and A-3” and made a part hereof.

          1.1.5 “Premises” means the Phase I Premises until the Phase II Commencement Date (as defined herein), and thereafter shall mean both the Phase I Premises and the Phase II Premises, which shall be the entire Building.

          1.1.6 “Rentable Area of the Premises” means the Rentable Area of Phase I Premises until the Phase II Commencement Date, and thereafter shall mean, collectively, the “Rentable Area of Phase I Premises” and the “Rentable Area of Phase II Premises.”

          1.1.7 “Rentable Area of Phase I Premises” means 41,120 rentable square feet.

          1.1.8 “Rentable Area of Phase II Premises” means 33,629 rentable square feet.

          1.1.9 “Initial Term” means a period of ten (10) years plus the part of a month mentioned in Section 3.1, commencing and ending as provided in Section 3.1.

          1.1.10 “Renewal Terms” shall have the meaning set forth in Section 3.3.

1

          1.1.11 “Annual Base Rent” means the amount set forth on the following schedule:

Lease Year	Annual Base Rent			Monthly Installments of Annual Base Rent
1	$	486,432.25	*	$	40,536.02
2 (prior to Phase II	$	506,992.25	**	$	42,249.35
Commencement Date)
2 (after Phase II	$	916,639.75		$	76,386.65
Commencement Date)
3	$	954,014.25		$	79,501.19
4	$	991,388.75		$	82,615.73
5	$	1,028,763.25		$	85,730.27
6	$	1,066,137.75		$	88,844.81
7	$	1,103,512.25		$	91,959.35
8	$	1,140,886.75		$	95,073.90
9	$	1,178,261.25		$	98,188.44
10	$	1,215,635.75		$	101,302.98

*	No Base Rent shall be due until the Phase I Rent Commencement Date. See Section 6.1.1. .
**	The parties acknowledge that a portion of the Base Rent for the Phase II Premises shall be abated in accordance with Section 6.1.2.

          1.1.12 “Phase I Target Date” means March 15, 2007.

          1.1.13 “Phase II Target Date” means the first (1^st) anniversary of the Phase I Commencement Date.

          1.1.14 “Advance Rent” means the sum of $40,536.02. See Section 4.

          1.1.15 “Tenant’s Proportionate Share” means that percentage which is computed by a fraction, the numerator of which is the Rentable Area of the Premises and the denominator of which is the Rentable Area of the Building. As of the Phase I Commencement Date, as defined herein, Tenant’s Proportionate Share is 55%. As of the Phase II Commencement Date, as defined herein, Tenant’s Proportionate Share will be 100%.

          1.1.16 “Tenant Notice Address” means

Prior to Commencement Date:

96 Talamine Court
Colorado Springs, CO 80907-5186
Attn: Chief Financial Officer
Telephone: (719) 633-8833
Telecopier: (719) 442-2525

After the Commencement Date:

9965 Federal Drive
Colorado Springs, Colorado 80920
Attn: Chief Financial Officer
Telephone (719) 633-8333
Telecopier (719) 442-2525

          1.1.17 “Allowance” shall have the meaning set forth in Section 35.

2

          1.1.18 “Broker” means, collectively, NAI Highland Commercial Group, LLC and Equis Corporation.

1.2 Additional Defined Terms.

     The following additional terms are defined in the places in this Lease noted below:

Term	Section
“ADA”	47
“Applicable Laws”	7
“Building Expenses”	6.2.2
“Commencement Date”	3.1
“Common Areas”	6.2.4
“Default Rate”	6.6
“Hazardous Material”	46
“HVAC”	23
“Landlord’s Notice”	3.3
“Lease Year”	6.2.5
“Mortgagee”	31
“Prevailing Market Rate”	3.3
“Property”	6.2.1
“Substantially Complete”	3.2
“Successor”	32
“Taxes”	6.2.3
“Tenant Improvements”	35
“Term”	3.4

1.3 Attachments.

     The following documents are attached hereto, and such documents, as well as all drawings and documents prepared pursuant thereto, shall be deemed to be a part hereof:

Exhibit “A-1”	- Floor Plan for First Floor of Premises
Exhibit “A-2”	- Floor Plan for Second Floor of Premises
Exhibit “A-3”	- Floor Plan for Third Floor of Premises
Exhibit “B”	- Rules and Regulations
Exhibit “C”	- Schedule of Tenant Improvements
Exhibit “D”	- Estoppel Certificate
Exhibit “E”	- Commencement Date Agreement
Exhibit “F”	- Signage
Exhibit “G:	- Tenant’s Fixtures
Exhibit “H”	- Equipment to be Maintained by Landlord
Exhibit “I”	- Janitorial Specifications
Exhibit “J”	- Equipment to be Maintained by Tenant
Exhibit “K”	- Form of Purchase and Sale Agreement

2. Demise. Landlord hereby leases unto Tenant, and Tenant does hereby rent from Landlord the Premises. In addition thereto, Tenant shall have the right to use, on a non-exclusive basis, and in common with the other tenants of the Building the Common Areas of the Building (as that term is defined in Section 6.2.4 hereof). The parties acknowledge that Tenant will require and will have access to the Premises and the Common Areas 24 hours per day, 7 days per week.

3. Term.

     3.1 Commencement Date and Term.

          3.1.1 The parties acknowledge that Tenant shall take possession of the Premises in two phases. This Lease shall commence on the “Phase I Commencement Date” (as herein defined) and shall be for the Initial Term, plus the portion of a calendar month, if any, from the

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Phase I Rent Commencement Date (as defined herein) to the last day of the calendar month in which such Phase I Rent Commencement Date occurs. As used in this Lease, the term “Phase I Commencement Date”, as advanced or postponed pursuant to the terms hereof, shall be defined as the earlier to occur of (a) the date on which Tenant takes possession and occupancy of the Phase I Premises to conduct business or (b) five (5) days following that date which is the last on which all of the following events have occurred, namely (i) the Premises are “substantially completed”, as defined in Section 3.2 following, and (ii) Landlord has given Tenant notice that the Phase I Premises are “substantially completed.”

          3.1.2 As used in this Lease, the term “Phase II Commencement Date,” as advanced or postponed pursuant to the terms hereof, shall be defined as the earlier to occur of (a) the date on which Tenant takes possession and occupancy of the Phase II Premises to conduct business or (b) five (5) days following that date which is the last on which all of the following events have occurred, namely (i) the Premises are “substantially completed,” as defined in Section 3.2 following, (ii) Landlord has given Tenant notice that the Phase II Premises are “substantially completed,” and (iii) the Phase II Target Date has arrived. Notwithstanding the foregoing, the parties acknowledge and agree that the Phase II Premises includes the Clean Room (as defined herein) and that Tenant shall be responsible for constructing the Clean Room. For purposes of determining whether the Phase II Premises is “substantially complete,” the status of construction of the Clean Room shall not be taken into account.

          3.1.3 Within fifteen (15) days after request from Landlord, Tenant shall execute and deliver the Commencement Date Agreement in substantially the form attached hereto as Exhibit “E” to memorialize the Phase I Commencement Date and the Phase II Commencement Date.

     3.2 Substantial Completion. Landlord shall use its reasonable efforts to “substantially complete” the Premises by the Phase I Target Date and the Phase II Target Date, respectively, provided that such dates shall be extended for the number of days that Tenant fails to satisfy its obligations under Section 35. “Substantially complete” means that: (i) the construction of the improvements described in Section 35 has been completed so that Tenant can use the Phase I Premises or Phase II Premises, as applicable, for its intended purposes without material interference to Tenant conducting its ordinary business activities, (ii) the Phase I Premises or the Phase II Premises, as applicable, have been approved for occupancy by governmental authorities having jurisdiction and a certificate of occupancy or temporary certificate of occupancy has been issued for the Phase I Premises or the Phase II Premises, as applicable, (iii) Tenant has ready access to the Building and the Phase I Premises or the Phase II Premises, as applicable, through the lobby, hallways and elevators, (iv) the Phase I Premises or the Phase II Premises, as applicable, are ready for installation of any equipment, furniture, fixtures or decoration that Tenant will install, and (v) the Phase I Premises tenant finish work or the Phase II Premises tenant finish work, as applicable, has been installed and completed in a good and workmanlike manner and in compliance with all laws, rules, regulations and ordinances. Landlord shall keep Tenant advised as to its progress with regard to “substantially completing” the Phase I Premises by the Phase I Target Date and with regard to “substantially completing” the Phase II Premises by the Phase II Target Date. Notwithstanding the foregoing, the requirements of subsection (ii) shall be deemed satisfied if all of the other subsections have been satisfied and the government approval is delayed as a result of the installation of furniture, fixtures or equipment which is not included and is a part of Tenant’s responsibilities under Section 35 below. Notwithstanding anything in this Lease to the contrary, if substantial completion has not occurred for the Phase I Premises on or before the date that is 165 days following the Effective Date (the “Required Phase I Delivery Date”), and such delay is not a result of a Tenant Caused Delay (as defined herein) or for any reason listed in Section 27 of this Lease, then Tenant will receive a day for day rent credit following the Phase I Commencement Date for each day that the Phase I Commencement Date is delayed beyond the Required Phase I Delivery Date. For example, if the Required Phase I Delivery Date is June 15, 2007, and the Phase I Commencement Date occurs on July 20, 2007, then Tenant will receive a 35 day rent credit following the Phase I Rent Commencement Date.

     3.3 Option to Extend Lease Term. Provided Tenant is not in default of any term, covenant or condition of this Lease beyond all applicable cure periods, Tenant shall have the

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option to extend the Initial Term of this Lease for two (2) additional periods of five (5) years each (the “First Renewal Term”, the “Second Renewal Term” or collectively the “Renewal Terms”) to commence immediately upon the expiration of the Initial Term or the First Renewal Term, as applicable.

     Tenant’s rental of the Premises during the First Renewal Term and Second Renewal Term shall be upon the same terms, covenants and conditions contained in this Lease, except that Tenant shall pay to Landlord as Base Rent ninety-five percent (95%) of the “Prevailing Market Rate” for the Premises for the First Renewal Term or the Second Renewal Term, as applicable, as hereinafter defined (including annual adjustments). For purposes of this Section 3.3, the term “Prevailing Market Rate” shall mean the then prevailing market rate being charged for comparable space in comparable office buildings within a ten (10) mile radius of the Premises, with consideration given for the size of the Premises, the economic strength of the tenant, construction allowances, commissions, free rent, and other concessions or premiums. In order to exercise its option granted herein, Tenant shall notify Landlord in writing of its intent to renew not less than two hundred seventy (270) days but not more than five hundred forty (540) days prior to the expiration of the Initial Term or the First Renewal Term, as applicable. Within thirty (30) days following the exercise by Tenant of its option to extend the Lease for the First Renewal Term or the Second Renewal Term, as applicable, Landlord shall notify Tenant in writing of its determination of the Prevailing Market Rate for the First Renewal Term or the Second Renewal Term, as applicable, as reasonably determined by Landlord (“Landlord’s Notice”). Within ten (10) days after receipt of Landlord’s Notice, Tenant shall notify Landlord in writing of Tenant’s acceptance or rejection of such rate. If Tenant shall accept such Prevailing Market Rate, Landlord and Tenant shall enter into an amendment to this Lease acknowledging such renewal and setting forth any terms at variance with the terms of this Lease. If within the ten (10) day period, Tenant shall reject such Prevailing Market Rate as determined by Landlord for the First Renewal Term or the Second Renewal Term, as applicable, then within twenty (20) days thereafter, Landlord and Tenant shall meet at a mutually acceptable time and place and shall use their reasonable efforts to agree upon the Prevailing Market Rate. If Landlord and Tenant shall fail to agree upon such Prevailing Market Rate within the twenty (20) day period, Landlord and Tenant shall each appoint an independent commercial leasing broker licensed in the Colorado area within the next ten (10) days (the “Brokers”). Such Brokers shall deliver their respective estimates of the Prevailing Market Rate within ten (10) days after being appointed. If the estimates of the Prevailing Market Rate as quoted by the Brokers are within ten percent (10%) of each other, the Prevailing Market Rate shall be deemed to be the average of the estimates presented by the Brokers. If the estimates of the Prevailing Market Rate as quoted by the Brokers differ by more than ten percent (10%), then Landlord and Tenant shall jointly appoint a third independent commercial leasing broker licensed in the Colorado area within ten (10) days after the receipt of the initial brokers’ estimates (the “Third Broker”) who shall deliver its estimate of the Prevailing Market Rate within ten (10) days after being appointed and such estimate shall be deemed to be the Prevailing Market Rate. Tenant shall notify Landlord within ten (10) days after receipt of the estimate of the Prevailing Market Rate (whether as resulting from the average of the Brokers or from the Third Broker, as applicable), whether Tenant shall accept such Prevailing Market Rate, whereupon Landlord and Tenant shall enter into an amendment to this Lease acknowledging such renewal and setting forth any terms at variance with the terms of this Lease. If (i) Tenant shall fail to respond to Landlord’s Notice as provided above, (ii) Tenant shall fail to deliver the requisite notice exercising its option to extend by the date prescribed above, (iii) Tenant does not respond within ten (10) days following receipt of Landlord’s Notice or (iv) Tenant does not accept the Prevailing Market Rate within ten (10) days following Landlord’s notification of the Prevailing Market Rate, as determined either by the average of the Brokers or from the Third Broker, as applicable, then Tenant’s option to extend this Lease for the First Renewal Term or the Second Renewal Term, as the case may be, shall be void and inoperable. Landlord and Tenant shall each pay the fee of the broker designated by them originally and shall split the fees of the Third Broker.

     3.4 Definition of “Term”. As used herein, the word “Term” shall refer to the Initial Term and the Renewal Term, if applicable.

4. Advance Rent. Upon execution of this Lease, Tenant shall pay Landlord the Advance Rent to be held as advance rent and security and which Landlord shall be entitled to retain,

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without limitation of other remedies, for any Event of Default by Tenant under this Lease occurring prior to the commencement of the Term. If no such Event of Default occurs, the Advance Rent shall be applied by Landlord against first installments of Annual Base Rent payable by Tenant hereunder.

5. Use. Tenant shall use the Premises during the Term of this Lease solely for general office purposes, light manufacturing, and research and development activities in accordance with applicable zoning regulations and for no other purposes, without Landlord’s prior written consent. For purposes of this Lease, the term “general office use” shall not include use as a school, college, university or educational institution of any type, use for any purpose which is not consistent with the operation of the Building as a first-class office building, or use as an recruitment or temporary help service or agency. Tenant acknowledges that violation of the allowable uses shall be a material breach of this Lease.

6 Rent.

     6.1 Annual Base Rent. As rent for the Premises during each year of the Term, except as otherwise set forth in Section 56 of this Lease, Tenant shall pay to Landlord an Annual Base Rent, in equal monthly installments, in advance on the first day of each calendar month during the Term, and without deduction, setoff or demand in accordance with the schedule set forth in Section 1.1.11 above.

          6.1.1 Base Rent for Phase I Premises. Notwithstanding the foregoing and subject to Paragraph 3.2 above, the first installment of Base Rent for the Phase I Premises shall be due on the one hundred fifty-first (151^st) day following the Phase I Commencement Date (the “Phase I Rent Commencement Date”). If the Phase I Rent Commencement Date should occur on a day other than the first day of a calendar month, Tenant shall pay to Landlord upon the Phase I Rent Commencement Date, a sum equaling that percentage of the monthly rent installment which equals the percentage of such calendar month from and after the Phase I Rent Commencement Date through the end of such calendar month.

          6.1.2 Base Rent for Phase II Premises. The parties acknowledge that Tenant’s payments of Base Rent shall be phased in for the Phase II Premises. During the period between the Phase II Commencement Date and the Phase II Full Rent Commencement Date (as defined herein), Tenant’s Monthly Installment of Annual Base Rent shall be reduced by that portion of the Annual Base Rent attributable to that portion of the Phase II Premises that shall be designated as the “Clean Room,” up to a maximum of 13,000 rentable square feet. At the time of completion of the Clean Room, Landlord and Tenant shall execute an amendment to this Lease to memorialize the square footage of the Clean Room and to set forth the reduction in Tenant’s Monthly Installment of Annual Base Rent for that period. On the ninety-first (91^st) day following the Phase II Commencement Date (the “Phase II Full Rent Commencement Date”), Tenant shall pay Base Rent for the entire Phase II Premises.

     6.2 Definitions For the purposes hereof, the following definitions shall apply:

          6.2.1 “Property” shall mean the Building, the land upon which same is situated and all fixtures and equipment thereon or therein, all commonly owned or shared appurtenances, including but not limited to, parking areas, walkways, landscaping and utilities, whether located on the land upon which the Building is situated or elsewhere.

          6.2.2 “Building Expenses” shall be all those expenses paid or incurred by Landlord or Landlord’s property manager directly and actually incurred in connection with the owning, maintaining, operating and repairing of the Property or any part thereof, in a manner deemed reasonable and appropriate by Landlord and shall include, without limitation, the following:

               6.2.2.1 All costs and expenses of operating, repairing, lighting, cleaning, and insuring (including liability for personal injury, death and property damage and workers’ compensation insurance covering personnel) the Property or any part thereof, as well as all costs incurred in removing snow, ice and debris therefrom and of policing and regulating traffic with

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respect thereto, and depreciation of all machinery and equipment used therein or herein to the extent that such machinery and equipment are being used beyond Normal Business Hours, which purposes of this Section 6.2.2.1 shall mean 8:00 a.m. to 6:00 p.m. on business days and from 8:00 a.m. to 1:00 p.m. on Saturdays, replacing or repairing of pavement, parking areas, curbs, walkways, drainage, lighting facilities, landscaping (including replanting and replacing flowers and other planting);

               6.2.2.2 Electricity, steam and fuel used in lighting, heating, ventilating and air conditioning and all costs, charges, and expenses incurred by Landlord in connection with any change of any company providing electricity service, including, without limitation, maintenance, repair, installation and service costs associated therewith, as well as all expenses associated with the installation of any energy or cost savings devices;

               6.2.2.3 Maintenance and repair of mechanical and electrical equipment including heating, ventilating and air conditioning equipment;

               6.2.2.4 Window cleaning and janitor service, including equipment, uniforms, and supplies;

               6.2.2.5 Maintenance of elevators, stairways, rest rooms, lobbies, hallways and other Common Areas;

               6.2.2.6 Repainting of all Common Areas;

               6.2.2.7 Repair and maintenance of the parking areas, including without limitation, the resurfacing and striping of said areas;

               6.2.2.8 Sales or use taxes on supplies or services;

               6.2.2.9 Management fees equal to 3.5% of the gross rents and expenses (excluding utilities and janitorial services) of the Building, which covers wages, salaries and compensation of all persons engaged in the management of the Property and the provision of amenities to all tenants in the Property (including Landlord’s share of all payroll taxes and the cost of an on-site or near site office and segregated storage area for Landlord’s parts, tools and supplies);

               6.2.2.10 Accounting and engineering fees and expenses, except for those related to disputes with tenants or that are a result of and/or are based on Landlord’s negligence or other tortious conduct;

               6.2.2.11 Costs and expenses that may result from compliance with any governmental laws or regulations that were not applicable to the Property and the Common Areas (if applicable) as of the Phase I Commencement Date; and

               6.2.2.12 All other expenses which under generally accepted accounting principles would be considered as an expense of maintaining, operating, or repairing the Property. Notwithstanding the foregoing, all expenses (whether or not such expenses are enumerated on items 1 through 11 of this Section 6.2.2) which would be considered capital in nature under generally accepted accounting principles shall be excluded from “Building Expenses” unless same are amortized in accordance with generally accepted accounting principles (“GAAP”), and the following items will also be excluded:

               (a) Costs of decorating, redecorating, or special cleaning or other services not provided on a regular basis to tenants of the Building;

               (b) Wages, salaries, fees, and fringe benefits paid to employees of Landlord above the level of property manager;

               (c) Any charge for depreciation of the Building and any interest or other financing charge;

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               (d) Any charge for Landlord’s income taxes, excess profit taxes, franchise taxes, or similar taxes on Landlord’s business;

               (e) All costs relating to activities for the solicitation and execution of leases of space in the Building;

               (f) All costs for which Tenant or any other tenant in the Building is being charged other than pursuant to Article 6 or comparable sections in other tenants’ leases;

               (g) The cost of correcting defects in the construction of the Building or in the Building equipment, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear will not be deemed defects for the purpose of this category;

               (h) The cost of any repair made by Landlord because of the total or partial destruction of the Building or the condemnation of a portion of the Building;

               (i) The cost of any items for which Landlord is reimbursed by insurance or otherwise compensated by parties other than tenants of the Building;

               (j) The cost of any additions to the Building subsequent to the Phase I Commencement Date, except as such expenses may be amortized in accordance with GAAP;

               (k) intentionally deleted;

               (l) Any operating expense representing an amount paid to a related corporation, entity, or person which is in excess of the amount which would be paid in the absence of such relationship; and

               (m) The cost of overtime or other expense to Landlord in curing its defaults or performing work expressly provided in this Lease to be borne at Landlord’s expense.

          6.2.3 “Taxes” shall mean all real property taxes including currently due installments of assessments, sewer rents, ad valorem charges, water rates, rents and charges, front foot benefit charges, and all other governmental impositions in the nature of any of the foregoing. Excluded from Taxes are (i) federal, state or local income taxes, (ii) franchise, gift, transfer, excise, capital stock, estate or inheritance taxes, and (iii) penalties or interest charged for late payment of Taxes. If at any time during the Term the method of taxation prevailing at the commencement of the Term shall be altered so as to cause the whole or any part of the items listed in the first sentence of this subparagraph to be levied, assessed or imposed, wholly or partly as a capital levy, or otherwise, on the rents received from the Building, wholly or partly in lieu of imposition of or in addition to the increase of taxes in the nature of real estate taxes issued against the Property, then the charge to Landlord resulting from such altered additional method of taxation shall be deemed to be within the definition of “Taxes.”

          6.2.4 “Common Areas” shall mean those areas and facilities which may be from time to time furnished to the Building by Landlord for the non-exclusive general common use of tenants and other occupants of the Building, their officers, employees, and invitees, including (without limitation) the hallways, stairs, parking facilities, washrooms, and elevators.

          6.2.5 “Lease Year” shall mean the period commencing on the Phase I Commencement Date and ending the last day of the twelfth (12^th) month after the Phase I Rent Commencement Date and each succeeding twelve (12) month period thereafter up to the end of the Term; provided, however, that if the Phase I Rent Commencement Date shall occur on a day other than the first day of a calendar month, then the first Lease Year shall include that portion of a calendar month in which the Phase I Rent Commencement Date occurs in addition to the first twelve (12) month period.

          6.2.6 “Operating Year” shall mean each calendar year or part thereof occurring during the Term.

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     6.3 Rent Adjustments for Taxes. Tenant further agrees to pay to Landlord as Additional Rent Tenant’s Proportionate Share of the Taxes for any calendar year or any part thereof occurring during the Term. Such payment shall be made within thirty (30) days after receipt of a bill from Landlord, accompanied with a copy of the tax bill and Landlord’s computation of Tenant’s Proportionate Share thereof. Prior to the commencement of each Operating Year, Landlord may, at its option, furnish to Tenant a written statement setting forth Landlord’s estimate of the amount of Taxes for such Operating Year. Tenant shall pay its Proportionate Share of Landlord’s estimated Taxes in equal monthly installments, in advance, as additional rent together with Base Rent. At the expiration of each Operating Year, Landlord shall certify to Tenant the actual Taxes for such Operating Year and within thirty (30) days after receipt of certification, Tenant shall, pay, as Additional Rent, the deficiency, if any, in Taxes payable by Tenant for such Operating Year (the “Annual Tax Statement”). If at the end of such Operating Year, the total amount paid by Tenant as Tenant’s Proportionate Share of Taxes is greater than the amount required to be paid for such Operating Year, then, if Tenant is not in default hereunder (after the giving of any required notices and the expiration of any cure periods), the amount of such excess payment will be applied by Landlord to the next succeeding monthly installment of Base Rent due hereunder. If there are any such excess payments made during the final Operating Year, then, if Tenant is not in default hereunder (after the giving of any required notices and the expiration of any cure periods), the amount of such excess will be refunded to Tenant within thirty (30) days after such certification. Supplementing the provisions of the immediately preceding sentence, if Tenant is in default, then Landlord agrees to credit such excess payments against any Base Rent, additional rent and/or other amounts due from Tenant. Notwithstanding anything to the contrary set forth above, the parties acknowledge and agree that during the period between the Phase I Commencement Date and the Phase I Rent Commencement Date, Tenant shall pay Tenant’s Proportionate Share of Taxes for the Phase I Premises and shall continue to pay Tenant’s Proportionate Share of Taxes for the Phase I Premises only until the Phase II Commencement Date. As of the Phase II Commencement Date, Tenant shall pay Tenant’s Proportionate Share of Taxes for the entire Premises.

     All reasonable expenses incurred by Landlord (including attorneys’, appraisers’ and consultants’ fees, and other costs) in contesting any increase in Taxes or any increase in the assessment of the Property shall be included as an item of Taxes for the purpose of computing additional rent due hereunder. If Tenant wants to contest any increase in Taxes, Tenant shall send Landlord written notice requesting that Landlord file a contest, which notice shall include copies of all necessary documentation supporting Tenant’s position that such an appeal is reasonable, and Landlord, in good faith, shall review such documentation and decide whether to proceed with such a contest.

     6.4 Rent Adjustments for Building Expenses. Prior to the commencement of each Operating Year, Landlord shall furnish to Tenant a written statement setting forth Landlord’s estimate of the amount of Building Expenses for such Operating Year. Tenant shall pay Tenant’s Proportionate Share of Landlord’s estimated Building Expenses in equal monthly installments, in advance, as additional rent together with Base Rent. Within one hundred twenty (120) days after expiration of each Operating Year, Landlord shall certify to Tenant the actual Building Expenses for such Operating Year (the “Annual Building Expense Statement,” together with the Annual Tax Statement, the “Annual Statements”), and within thirty (30) days after receipt of such certification, Tenant shall pay as additional rent, the deficiency if any, in charges payable by Tenant for such Operating Year. If, at the end of such Operating Year, the total amount paid by Tenant as Tenant’s Proportionate Share of such charges is greater than the amount required to be paid for such Operating Year, then, if Tenant is not in default hereunder (after the giving of any required notices and the expiration of any cure periods), the amount of such excess payment shall be applied by Landlord to the next succeeding monthly installment of Base Rent due hereunder. If there are any such excess payments made during the final Operating Year, then, if Tenant is not in default hereunder (after the giving of any required notices and the expiration of any cure periods), the amount of such excess will be refunded to Tenant by Landlord within thirty (30) days after such certification. Supplementing the provisions of the immediately preceding sentence, if Tenant is in default then Landlord agrees to credit such excess payments against any Base Rent, additional rent and/or other amounts due from Tenant. In the event the Commencement Date shall be a day other than January 1, or the date fixed for the expiration of the full Term hereof shall be a day other than December 31, then, in either such

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event, in applying the provisions of this paragraph with respect to any Operating Year in which such event occurred, appropriate adjustments shall be made to reflect the result of such event, taking into consideration the portion of such Operating Year which should have elapsed prior to the Commencement Date or after the date of such expiration. Tenant’s right to receive the excess payments shall survive the expiration or earlier termination of this Lease. Tenant acknowledges that with regard to certain Building Expenses, some tenants may be paying various fees directly to the service provider (including, without limitation, janitorial services and electricity charges), in which event the computation of Building Expenses per rentable square foot for such items shall be determined by using the total rentable square footage of the Building reduced by the rentable square footage of the tenants who are paying such fees directly to the service provider. Notwithstanding anything to the contrary set forth above, the parties acknowledge and agree that during the period between the Phase I Commencement Date and the Phase I Rent Commencement Date, Tenant shall pay Tenant’s Proportionate Share of Building Expenses for the Phase I Premises and shall continue to pay Tenant’s Proportionate Share of Building for the Phase I Premises only until the Phase II Commencement Date. As of the Phase II Commencement Date, Tenant shall pay Tenant’s Proportionate Share of Building Expenses for the entire Premises. Notwithstanding the foregoing, during the first three (3) Lease Years, Tenant shall not be responsible for any Building Expenses related to a Major Repair (as defined herein) of any of the following: boilers, chillers, air make up units, HVAC infrastructure, parking lot resurfacing, roof and elevator. For purposes of this Section 6.4.2, “Major Repair” shall constitute any individual repair, the cost of which exceeds Two Thousand Five Hundred and no/Dollars ($2500.00). As of the commencement of the fourth Lease Year and for the remainder of the Term, Landlord shall be entitled to pass through Building Expenses for a Major Repair performed at any time after the commencement of the fourth Lease Year, provided that such Major Repair is amortized in accordance with GAAP over its useful life, and the Building Expenses shall only include that portion of the useful life that falls within the Term. Notwithstanding anything to the contrary set forth above, a “Major Repair” shall not include routine maintenance of the boilers, chillers, air make up units, HVAC infrastructure, parking lot resurfacing, roof and elevator, regardless of whether the cost for such maintenance exceeds $2500, and Landlord shall be entitled to pass through the cost of such maintenance in Building Expenses at any time during the Term.

     Notwithstanding anything to the contrary set forth in this Section 6, to the extent any of the Building Expenses are within Landlord’s reasonable control (the “Controllable Expenses”), the actual Controllable Expenses incurred by Landlord shall not increase by more than five percent (5%) of the previous calendar year’s Controllable Expenses on a cumulative basis. The parties agree and acknowledge that the following are non-controllable Building Expenses and shall not be subject to the foregoing cap: Taxes, insurance, utilities, snow removal and security expenses (the “Non-Controllable Expenses”). The parties acknowledge that for purposes of this Section 6.4.2, the Building Expenses shall be computed separately as between the Controllable Expenses and the Non-Controllable Expenses. The annual statement provided to Tenant pursuant to this Section 6.4.2 shall include computation for both the Controllable Expenses and the Non-Controllable Expenses as well as a combined total thereof reflecting Tenant’s overpayment or underpayment for the applicable calendar year.

     6.5 Right to Audit. If Tenant disputes the amount set forth in the Annual Statements, Tenant shall have the right, at Tenant’s sole expense, not later than one hundred twenty (120) days following receipt of the Annual Statements, to cause Landlord’s books and records in respect to the calendar year which is the subject of the Annual Statement to be audited by a nationally or regionally recognized independent certified public accountant or other certified public accountant mutually acceptable to Landlord and Tenant. The audit shall take place at the offices of Landlord where its books and records are located at a mutually convenient time during Landlord’s regular business hours. Tenant shall have no right to conduct an audit or to give Landlord notice that it desires to conduct an audit at any time that there is an uncured Event of Default under the Lease. The accountant conducting the audit shall be compensated by Tenant on an hourly or flat fee basis and shall not in any manner be compensated based upon a percentage of overcharges it discovers or on any other contingency fee basis. No subtenant shall have any right to conduct an audit, and no assignee shall conduct an audit for any period during which such assignee was not the tenant under the Lease. Tenant’s right to undertake an audit with respect to any calendar year shall expire one hundred twenty (120) days after Tenant’s

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receipt of the Annual Statement for such Operating Year, and such Annual Statement shall be final and binding upon Tenant and shall, as between the parties, be conclusively deemed correct, at the end of such 120-day period, unless prior thereto Tenant shall have given Landlord written notice of its intention to audit operating costs for the calendar year which is the subject of the Annual Statement. If Tenant gives Landlord written notice of its intention to audit Building Expenses, Tenant must commence such audit within thirty (30) days after such notice is delivered to Landlord, and the audit must be completed within ninety (90) days after such notice is delivered to Landlord. If Tenant does not commence and complete the audit within such periods, the Annual Statement that Tenant elected to audit shall be deemed final and binding upon Tenant and shall, as between the parties, be conclusively deemed correct. Tenant agrees that the results of any audit shall be kept strictly confidential by Tenant and shall not be disclosed to any other person or entity (other than Tenant’s accountants, attorneys and advisors) except as required by law. The time frames hereunder shall be extended for Landlord delays and force majeure delays. Any overpayments of Building Expenses or Taxes by Tenant shall be credited or refunded as provided herein, and any underpayments shall be paid to Landlord. if Tenant’s audit hereunder shows that the Building Expenses or Taxes so reviewed were overstated by Landlord by more than five percent (5%), then Landlord shall reimburse Tenant for the actual reasonable out-of-pocket costs and expenses incurred by Tenant in such audit; provided that the amount of such reimbursement shall be based on a reasonable hourly rate and reasonable out-of-pocket expenses and not on any contingent fee. This provision shall survive the termination or expiration of this Lease.

     6.6 Additional Rent Payments. Tenant’s obligation to pay any additional rent accruing during the Term pursuant to Sections 6.3 and 6.4 hereof shall apply pro rata to the proportionate part of a calendar year as to Taxes and Building Expenses, in which this Lease begins or ends, for the portion of each such year during which this Lease is in effect. Such obligation to make payments of such additional rent shall survive the expiration or sooner termination of the Term.

     6.7 Payments. All payments or installments of any rent hereunder and all sums whatsoever due under this Lease (including but not limited to court costs and attorneys’ fees) shall be deemed rent and shall be paid to Landlord at the address designated by Landlord. If any amount of Annual Base Rent or additional rent shall remain unpaid for ten (10) calendar days after such payment becomes due, Tenant shall pay Landlord, without notice or demand, a late charge equal to the greater of (i) $50 or (ii) five percent (5%) of such overdue amount to partially compensate Landlord for its administrative costs in connection with such overdue payment; which administrative costs Tenant expressly acknowledges are reasonable and do not constitute a penalty. In addition, such overdue amounts shall bear interest at the rate of fifteen percent (15%) per annum (but not more than the maximum allowable legal rate applicable to Tenant) (the “Default Rate”) until paid. Notwithstanding the foregoing to the contrary, Landlord shall waive such late charge and interest with respect to the first two (2) late payments in any twelve (12) month period, provided Tenant makes the applicable payment within five (5) business days after written notice to Tenant. Additionally, if any of Tenant’s checks for payment of rent or additional rent are returned to Landlord for insufficient funds, Tenant shall pay to Landlord as additional rent the greater of (i) $50.00 or (ii) the amount of actual charges incurred by Landlord, for each such check returned for insufficient funds, and if two or more of Tenant’s checks in payment of rent or additional rent due hereunder are returned for insufficient funds in any calendar year, Landlord reserves the right upon ten (10) days advance notice to Tenant to thereafter require Tenant to pay all rent and additional rent and other sums whatsoever due under this Lease in cash, by money order or by certified check or cashier’s check If an attorney is employed to enforce Landlord’s rights under this Lease, Tenant shall pay all reasonable fees and expenses of such attorney whether or not legal proceedings are instituted by Landlord. Time is of the essence in this Lease.

7. Requirements of Applicable Law. Landlord warrants that on the Commencement Date, the Premises shall comply in all material respects with all applicable laws, ordinances, rules and regulations of governmental authorities having jurisdiction over the Property (“Applicable Laws”). Tenant, at its sole cost and expense, shall thereafter comply promptly with all Applicable Laws now in force or which may hereafter be in force, which relate solely to Tenant’s specific use of the Premises that do not relate to office buildings generally; provided,

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however, that Landlord and not Tenant shall correct all structural defects in the Building necessary to comply with Applicable Laws, and make all repairs, changes or alterations necessary because the Building was not constructed in compliance with any of the Applicable Laws.

8. Certificate of Occupancy. Tenant shall not use or occupy the Premises in violation of any certificate of occupancy, permit, or other governmental consent issued for the Building. If any governmental authority, after the commencement of the Term, shall contend or declare that the Premises is being used for a purpose which is in violation of such certificate of occupancy, permit, or consent, then Tenant shall, upon ten (10) days’ notice from Landlord, immediately discontinue such use of the Premises. If thereafter the governmental authority asserting such violation threatens, commences or continues criminal or civil proceedings against Landlord for Tenant’s failure to discontinue such use, in additional to any and all rights, privileges and remedies given to Landlord under this Lease for an Event of Default by Tenant herein, Landlord shall have the right to terminate this Lease forthwith. Tenant shall protect, defend, indemnify and hold Landlord and the Property harmless of and from any and all liability for any such violation or violations by Tenant.

9. Contest-Statute, Ordinance. Tenant may, after notice to Landlord, by appropriate proceedings conducted promptly at Tenant’s own expense in Tenant’s name and whenever necessary in Landlord’s name, contest in good faith the validity or enforcement of any such statute, ordinance, law, order, regulation or requirement and may similarly contest any assertion of violation of any certificate of occupancy, permit, or any consent issued for the Building. Tenant may, pending such contest, defer compliance therewith if, in the reasonable opinion of counsel for Landlord, such deferral shall not subject either Landlord or the Premises or the Property (or any part thereof) to any penalty, fine or forfeiture, and if Tenant shall post a bond with corporate surety approved by Landlord sufficient, in Landlord’s opinion, fully to indemnify Landlord from loss.

10. Tenant’s Improvements. Tenant, at its option, may make such non-structural improvements to the Premises as it may deem necessary from time to time, at its sole cost and expense, without Landlord’s consent (but subject to all other obligations set forth in this Section 10) and costing less than $25,000 in the aggregate. Tenant shall not make any alterations, installations, additions or improvements to the Premises in excess of $50,000 or affecting the structural components of the Building, including but not limited to, the installation of any fixtures, amenities, equipment, appliances, or other apparatus, without Landlord’s prior written consent, which consent will not be unreasonably withheld, and then only be contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld. All such work, alterations, installations, additions or improvements shall be done at Tenant’s sole expense, and at such times and in such manner as Landlord may from time to time designate, if at any point during the Term, Tenant is not the sole occupant of the Building. Landlord’s consent to and/or approval of Tenant’s plans and specifications for the aforesaid improvements shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. Tenant shall promptly pay for the costs associated with any such alterations or additions, and shall protect, defend, indemnify and hold harmless Landlord and the Property from and against any and all liens, costs, damages and expenses incurred by Landlord in connection therewith, including any reasonable attorneys fees incurred by Landlord, if Landlord shall be joined in any action or proceeding involving such improvements. Landlord may, at its option, pay sums due in order to release such liens, in which event any such sums paid by Landlord shall be due to Landlord by Tenant, as Additional Rent, upon demand. Under no circumstances shall Tenant commence any such work until Landlord has been provided with certificates evidencing that all the contractors and subcontractors performing such work have in full force and effect adequate workmen’s compensation insurance as required by the laws of the State of Colorado, public liability and builders risk insurance in such amounts and according to terms reasonably satisfactory to Landlord. Landlord shall at all times have the right to post or keep posted on the Premises, or in the immediate vicinity thereof, any notices of non-responsibility for any construction, alteration or repair of the Premises by Tenant, and Tenant hereby agrees to give Landlord at least ten (10) business days prior notice of Tenant’s plans to commence such work so as to enable Landlord an opportunity to post such notices. All

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alterations, installations, additions or improvements made by either of the parties hereto upon the Premises, except movable office furniture and any trade fixtures of Tenant as set forth on Exhibit “G” attached hereto and made a part hereof (all of which will be removed by Tenant at the expiration of the Lease Term) put in at the expense of Tenant or Landlord and other items as mutually agreed upon in writing, shall be the property of Landlord and shall remain upon and be surrendered with the Premises at the termination of this Lease without molestation or injury. Upon request by Landlord, such request to be made at the time Tenant requests consent for the applicable improvement under this Section 10, Tenant, at Tenant’s expense, shall remove any and all special improvements to the Premises or Common Areas made by or on behalf of Tenant, including, without limitation, supplemental HVAC and raised flooring. If Tenant fails to remove any such items, Landlord shall have the right, but not the obligation, to remove and dispose of such items, and restore the Premises accordingly and Tenant shall reimburse Landlord for the costs of such removal, disposal and restoration within thirty (30) days after receipt of an invoice therefore, together with interest at the Default Rate, which shall accrue from the date the costs were incurred by Landlord. Notwithstanding the foregoing, Landlord reserves the right to withdraw a request to remove improvements and to request that such improvements remain upon and be surrendered with the Premises.

11. Repairs and Maintenance.

     11.1 Tenant’s Care of the Premises and Building. During the Term, Tenant shall:

          (i) keep the interior of the Premises and the fixtures, appurtenances and improvements therein in good order and condition, including, without limitation, the maintenance, repairs and replacements of any systems and/or equipment that solely serve the Clean Room, including, without limitation, all HVAC filters, pumping and electric systems located in or attached to the Clean Room, or to the extent such systems and/or equipment serve both the Premises and the Clean Room and would ordinarily be Landlord’s responsibility hereunder, Tenant’s obligations shall only apply to those portions of the systems and/or equipment that are wholly-contained in the Clean Room; provided, however, that in no event shall Tenant be responsible for maintaining those items of equipment for which Landlord has agreed to maintain, as more particularly listed on Exhibit “H” attached hereto and made a part hereof . Tenant shall engage its own custodial and janitorial service to perform, at a minimum, the services set forth on Exhibit “I” attached hereto and made a part hereof. If Landlord determines that Tenant is not providing adequate custodial or janitorial services to the Premises, Landlord shall give Tenant 30 days’ prior written notice and opportunity to cure (or a shorter cure period if Landlord reasonably determines that a shorter time period is warranted to protect the Building and the Property), and thereafter Landlord shall have the right to engage its own contractors and Tenant shall pay for such costs within thirty (30) days after receipt of a written invoice from Landlord. Tenant shall deposit its trash in a dumpster in the Common Areas to be provided by Landlord and the costs to maintain such dumpster and to remove the trash from the dumpster shall be included within the computation of Building Expenses;

          (ii) make repairs and replacements to the Premises required because of Tenant’s misuse or primary negligence, except to the extent that the repairs or replacements are covered by Landlord’s insurance as required hereunder;

          (iii) repair and replace special equipment or decorative treatments installed by or at Tenant’s request and that serve the Premises only, except to the extent the repairs or replacements are needed because of Landlord’s misuse or primary negligence, and are not covered by Tenant’s insurance as required hereunder;

          (iv) pay for all damage to the Property, the Building and the Common Areas, and their respective fixtures and appurtenances, as well as all damages sustained by Tenant or occupants of the Building due to any waste, misuse or neglect of the Premises, its fixtures and appurtenances by Tenant, except to the extent that the repair of such damage is covered by Landlord’s insurance as required hereunder to the extent that Landlord actually receives proceeds therefrom; and

          (v) not commit waste.

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     In addition Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which such floor was designed to carry and which may be allowed under Applicable Laws. Landlord reserves the right to reasonably prescribe the weight and position of all heavy equipment brought onto the Premises and reasonably prescribe any reinforcing required under the circumstances, all such reinforcing to be at Tenant’s expense.

     11.2 Landlord’s Repairs. Except for the repairs and replacements that Tenant is required to make pursuant to Section 11.1 above and/or pursuant to Exhibit “J” attached hereto and made a part hereof, Landlord shall make all other repairs, maintenance and replacements to the Premises, Common Areas and Building (including Building fixtures and equipment and including without limitation (a) sidewalks, driveways, lighting, gardening, landscaping, elevators, service areas, curbs, glass and parking; the exterior and to the structure of the Building, including, but not limited to, the roof (including water tightness of the Building and the Premises), walls (including caulking), floors, all Building systems, including without limitation all plumbing, electrical, lighting and mechanical equipment, fixtures and systems serving the Premises, the Common Area and the Building, and foundations and landscape maintenance, and the Building equipment; (b) which are required because of damage or destruction by fire or other peril covered by the all risk insurance policies, or by reason of acts of God applicable to the Premises and the Building; (c) which require a capital expenditure; (d) which are required because of faulty construction or latent defect; (e) which are required in order to comply with any and all federal, state or local law(s) and regulation(s) now in effect or which may hereafter be in effect relating to the Premises, the Building, the property and to any systems, facilities, equipment, components, structures or services therein) as shall be reasonably deemed necessary to maintain the Building in a condition comparable to other first class office buildings in the Colorado Springs North I-25 corridor and (f) which are expressly set forth on Exhibit “H”.         . This maintenance shall include the roof, foundation, exterior walls, interior structural walls, all structural components, and all systems such as mechanical, electrical, multi-tenant HVAC (if applicable), and plumbing. The costs associated with such repairs shall be deemed a part of Building Expenses; provided, however, that costs of all of such repairs which would be considered capital in nature under generally accepted accounting principles shall be paid by Landlord as a portion of Building Expenses and amortized in accordance with generally accepted accounting principles as described in Section 6.2.2.12 above. There shall be no allowance to Tenant for a diminution of rental value, no abatement of rent, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making any repairs or performing maintenance as provided for herein. Notwithstanding anything to the contrary set forth above, the parties acknowledge and agree that Landlord shall maintain, repair and/or replace the HVAC system as necessary, and shall pass through the costs of such maintenance or repair to Tenant as additional rent hereunder. Provided that the replacement of the HVAC system is not caused by Tenant’s misuse hereunder, Landlord shall not pass through the costs of any replacement of the HVAC system.

     If Landlord fails to make the repairs required under this Section 11.2, and such failure is not the result of any reason listed in Section 27 herein or the result of any action or inaction on Tenant’s part, and as a result thereof, Tenant shall be not able to use all or any portion of the Premises and does not in fact use all or any portion of the Premises for a period of ten (10) consecutive business days or more after notice thereof to Landlord then, except as provided herein with respect to casualty, Tenant shall be entitled to abate Base Rent and additional rent, such abatement commencing as of the eleventh (11^th) business day after Tenant ceased using all or such portion of the Premises and shall continue to be abated until such time as the applicable repair has been completed.

     11.3 Time for Repairs. Repairs or replacements required pursuant to Section 11.1 and 11.2 above shall be made within a reasonable time (depending on the nature of the repair or replacement needed — generally no more than fifteen (15) days) after receiving notice or having actual knowledge of the need for a repair or replacement.

     11.4 Surrender of the Premises. Upon the termination of this Lease, without the need for prior notice from Landlord, Tenant shall surrender the Premises to Landlord in the same broom clean condition that the Premises were in on the Commencement Date except for:

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          (i) ordinary wear and tear;

          (ii) damage by the elements, fire, and other casualty unless Tenant would be required to repair under the provisions of this Lease;

          (iii) damage arising from any cause not required to be repaired or replaced by Tenant; and

          (iv) alterations as permitted by this Lease unless consent was conditioned on their removal.

     On surrender Tenant shall remove from the Premises its personal property, trade fixtures and any alterations required to be removed pursuant to the terms of this Lease and repair any damage to the Premises caused by this removal. Any items not removed by Tenant as required above shall be considered abandoned. Landlord may dispose of abandoned items as Landlord chooses and bill Tenant for the cost of their disposal.

12. Conduct on Premises. Tenant shall not do, or permit anything to be done in the Premises, or bring or keep anything therein which shall, in any way, increase the rate of fire insurance on the Building, or invalidate or conflict with the fire insurance policies on the Building, fixtures or on property kept therein, or obstruct or interfere with the rights of Landlord or of other tenants, or in any other way injure or annoy Landlord or the other tenants, or subject Landlord to any liability for injury to persons or damage to property, or interfere with the good order of the Building, or conflict with Applicable Laws. Tenant agrees that any increase of fire insurance premiums on the Building or contents caused by the occupancy of Tenant and any expense or cost incurred in consequence of negligence or carelessness or the willful action of Tenant, Tenant’s employees, agents, servants, or invitees shall, as they accrue be added to the rent heretofore reserved and be paid as a part thereof; and Landlord shall have all the rights and remedies for the collection of same as are conferred upon Landlord for the collection of rent provided to be paid pursuant to the terms of this Lease.

13. Insurance.

     13.1 Tenant’s Insurance. Tenant shall keep in force at its own expense, so long as this Lease remains in effect, (a) commercial general liability insurance, including insurance against assumed or contractual liability under this Lease, with respect to the Premises, to afford protection with limits, per person and for each occurrence, of not less than Two Million Dollars ($2,000,000), combined single limit, with respect to bodily injury and death and property damage, such insurance to provide for only a reasonable deductible, (b) all-risk property and casualty insurance, including theft, written at replacement cost value and with replacement cost endorsement, covering all of Tenant’s personal property in the Premises and all improvements and installed in the Premises by or on behalf of Tenant whether pursuant to the terms of Section 35, Section 10, or otherwise, such insurance to provide for only a reasonable deductible, (c) if, and to the extent, required by law, workmen’s compensation or similar insurance offering statutory coverage and containing statutory limits, (d) shall insure all plate and other interior glass in the Premises for and in the name of Landlord, (e) business interruption insurance in an amount sufficient to reimburse Tenant for loss of earnings attributable to prevention of access to the Building or the Premises for a period of at least twelve (12) months and (f) pollution coverage insurance of not less than One Million Dollars ($1,000,000.00). Such policies shall be maintained in companies and in form reasonably acceptable to Landlord and shall be written as primary policy coverage and not contributing with, or in excess of, any coverage which Landlord shall carry. Tenant shall deposit the policy or policies of such required insurance or certificates thereof with Landlord prior to the Commencement Date, which policies shall name Landlord or its designee and, at the request of Landlord, its mortgagees, as additional insured and shall also contain a provision stating that such policy or policies shall not be canceled except after thirty (30) days’ written notice to Landlord or its designees. All such policies of insurance shall be effective as of the date Tenant occupies the Premises and shall be maintained in force at all times during the Term of this Lease and all other times during which Tenant shall occupy the Premises. In addition to the foregoing insurance coverage, Tenant shall require any contractor

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retained by it to perform work on the Premises to carry and maintain, at no expense to Landlord, during such times as contractor is working in the Premises, a non-deductible (i) comprehensive general liability insurance policy, including, but not limited to, contractor’s liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement and contractor’s protective liability coverage, to afford protection with limits per person and for each occurrence, of not less than Two Hundred Thousand Dollars ($200,000.00), combined single limit, with respect to personal injury and death and property damage, such insurance to provide for no deductible, and (ii) workmen’s compensation insurance or similar insurance in form and amounts as required by law. In the event of damage to or destruction of the Premises and the termination of this Lease by Landlord pursuant to Section 18 herein, Tenant agrees that it shall pay Landlord all of its insurance proceeds relating to improvements made in the Premises by or on behalf of Tenant whether pursuant to the terms of Section 35, Section 10, or otherwise. If Tenant fails to comply with its covenants made in this Section, if such insurance would terminate or if Landlord has reason to believe such insurance is about to be terminated, Landlord may at its option cause such insurance as it in its sole judgment deems necessary to be issued, and in such event Tenant agrees to pay promptly upon Landlord’s demand, as additional rent the premiums for such insurance.

     13.2 Landlord’s Insurance. Landlord shall keep in force at its own expense (a) contractual and comprehensive general liability insurance, including commercial general liability and property damage, with a minimum combined single limit of liability of Two Million Dollars ($2,000,000.00) for bodily injuries or death of persons occurring in or about the Building and Premises, and (b) all-risk property and casualty insurance written at replacement cost value covering the Building and all of Landlord’s improvements in and about same.

     13.3 Waiver of Subrogation. Each party hereto waives claims arising in any manner in its favor and against the other party and agrees that neither party hereto shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to the Building, the Premises or other tangible property, or any resulting loss of income, or losses under worker’s compensation laws and benefits, or against liability on or about the Building, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees if any such loss or damage is covered by insurance benefiting the party suffering such loss or damage as was required to be covered by insurance carried pursuant to this Lease. Landlord shall cause each insurance policy carried by it insuring against liability on or about the Building or insuring the Premises and the Building or income resulting therefrom against loss by fire or any of the casualties covered by the all-risk insurance carried by it hereunder to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Tenant in connection with any loss or damage covered by such policies. Tenant shall cause each insurance policy carried by it insuring against liability or insuring the Premises (including the contents thereof and Tenant’s Improvements installed therein by Tenant or on its behalf) against loss by fire or any of the casualties covered by the all-risk insurance required hereunder to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Landlord in connection with any loss or damage covered by such policies.

14. Rules and Regulations. Tenant shall be bound by the rules and regulations set forth on the schedule attached hereto as Exhibit “B” and made a part hereof. Landlord shall have the right, from time to time, to issue additional or amended rules and regulations regarding the use of the Building, so long as the rules shall be reasonable and non-discriminatory between tenants. When so issued the same shall be considered a part of this Lease and Tenant covenants that the additional or amended rules and regulations shall likewise be faithfully observed by Tenant, the employees of Tenant and all persons invited by Tenant into the Building, provided, that the additional or amended rules are made applicable to all office tenants similarly situated as Tenant. Landlord shall not be liable to Tenant for the violation of any of the rules and regulations, or the breach of any covenant or condition in any lease, by any other tenant in the Building.

15. Mechanics’ Liens. Tenant shall not do or suffer to be done any act, matter or thing whereby Tenant’s interest in the Premises, or any part thereof, may be encumbered by any mechanics’ lien. Tenant shall discharge, or bond off, within twenty (20) days after the date of filing, any mechanics’ liens filed against Tenant’s interest in the Premises, or any part thereof,

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purporting to be for labor or material furnished or to be furnished to Tenant. Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and no mechanics’ or other lien for labor or materials shall attach to or affect the reversionary or other estate or interest of Landlord in and to the Premises, or the Property.

16. Tenant’s Failure to Repair. In the event that Tenant fails after reasonable prior notice from Landlord, which will be no less than 30 days’ written notice unless such condition and/or repair, in Landlord’s reasonable discretion, should be performed in a shorter period of time, to keep the Premises or commence to keep the Premises in a good state of condition and repair pursuant to Section 11 above, or to do any act or make any payment required under this Lease or otherwise fails to comply herewith, Landlord may, at its option (but without being obliged to do so) immediately, or at any time thereafter and without additional notice, perform the same for the account of Tenant, including the right to enter upon the Premises at all reasonable hours to make such repairs, or do any act or make any payment or compliance which Tenant has failed to do, and upon ten (10) days’ written demand, Tenant shall reimburse Landlord for any such expense incurred by Landlord including but not limited to any costs, damages and counsel fees. Any moneys expended by Landlord, as aforesaid, shall be deemed additional rent, collectible as such by Landlord. All rights given to Landlord in this Section shall be in addition to any other right or remedy of Landlord herein contained.

17. Property — Loss, Damage. Landlord, its agents and employees shall not be liable to Tenant for (i) any damage or loss of property of Tenant placed in the custody of persons employed to provide services for or stored in or about the Premises and/or the Building, unless such damage or loss is the result of the negligence of Landlord, (ii) any injury or damage to persons, property or the business of Tenant resulting from a latent defect in or material change in the condition of the Building to the extent such change was not caused by the negligence or willful misconduct of Landlord and (ii) interference with the light, air, or other incorporeal hereditaments of the Premises.

18. Destruction — Fire or Other Casualty. In case of partial damage to the Premises by fire or other casualty insured against by Landlord, Tenant shall give immediate notice thereof to Landlord, who shall thereupon cause damage to all property owned by it to be repaired with reasonable speed at expense of Landlord, to the extent of insurance proceeds actually received by Landlord, due allowance being made for reasonable delay which may arise by reason of adjustment of loss under insurance policies on the part of Landlord and/or Tenant, and for reasonable delay on account of “labor troubles” or any other cause beyond Landlord’s control, and to the extent that the Premises are rendered untenantable the rent shall proportionately abate from the date of such casualty, provided the damage above mentioned occurred without the fault or neglect of Tenant, Tenant’s servants, employees, agents or invitees. If such partial damage is due to the fault or neglect of Tenant, Tenant’s servants, employees, agents or invitees, the damage shall be repaired by Landlord to the extent of Landlord’s insurance coverage, but there shall be no apportionment or abatement of rent. In the event the damage shall be so extensive to the whole Building as to render it uneconomical, in Landlord’s opinion, to restore for its present uses and Landlord shall decide not to repair or rebuild the Building, this Lease, at the option of Landlord, shall be terminated upon notice to Tenant and the rent shall, in such event, be paid to or adjusted as of the date of such damage, and the terms of this Lease shall expire by lapse of time and conditional limitation upon the third day after such notice is mailed, and Tenant shall thereupon vacate the Premises and surrender the same to Landlord, but no such termination shall release Tenant from any liability to Landlord arising from such damage or from any breach of the obligations imposed on Tenant hereunder, or from any obligations accrued hereunder prior to such termination.

     In addition, in the event that (a) Landlord estimates that its repairs will take more than two hundred seventy (270) days for any areas of the Premises, or (b) Tenant is actually deprived of the use of all or any substantial portion of the Premises for a period in excess of two hundred seventy (270) days for any areas of the Premises, Tenant shall have the right, by written notice to Landlord to terminate the Lease as of the date of the casualty, provided that Tenant gives its within thirty (30) days after receipt of Landlord’s notice of the estimated time to complete the restoration or repair in the case of subparagraph (a) above, or within thirty (30) days after failing to meet the deadline set forth in subparagraph (b) above.

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19. Eminent Domain. If (1) the whole or more than fifty percent (50%) of the floor area of the Premises shall be taken or condemned by eminent domain for any public or quasi-public use or purpose, and either party shall elect, by giving notice to the other, or (2) more than twenty-five percent (25%) of the floor area of the Building shall be so taken, and Landlord shall elect, in its sole discretion, by giving notice to Tenant, any notice to be given not more than sixty (60) days after the date on which title shall vest in such condemnation proceeding, to terminate this Lease, then, in either such event, the Term of this Lease shall cease and terminate as of the date of title vesting. In case of any taking or condemnation, whether or not the Term of this Lease shall cease and terminate, the entire award shall be the property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in and to any such award, except that Tenant shall be entitled to claim, prove and receive in the proceedings such awards as may be allowed for Tenant’s trade fixtures, , moving expenses, loss of profit and fixtures and other alterations and equipment installed by it which shall not, under the terms of this Lease, be or become the property of Landlord at the termination hereof, but only if such awards shall be made by condemnation, court or other authority in addition to, and be stated separately from, the award made by it for the Property or part thereof so taken.

20. Assignment. So long as no Event of Default on the part of Tenant is pending, and so long as no other failure by Tenant to perform or observe any covenant or agreement under this Lease exists which could, with the giving of notice and/or the passage of time, become an Event of Default, then after the giving of all required notices and the expiration of all cure periods, Landlord shall not unreasonably withhold its consent to an assignment of this Lease or sublease of the Premises for any of the then remaining portion of the unexpired Term provided: (i) the net assets of the assignee shall not be less than Twenty Million and no/Dollars ($20,000,000.00) provided that the net assets of Tenant at the time of the proposed assignment are equal to or greater than the net assets of Tenant at the time of the signing of this Lease; (ii) the net assets of the assignee are not less than eighty percent (80%) of the net assets of Tenant at the time of the signing of this Lease if Tenant’s net assets have decreased since the original date of this Lease, (iii) the sublessee has sufficient net worth to satisfy its obligations under the sublease; (iv) in the event of an assignment, such assignee shall assume in writing all of Tenant’s obligations under this Lease; (v) in the event of a sublease, such sublease shall in all respects be subject to and in conformance with the terms of this Lease; and (vi) in all events Tenant continues to remain liable on this Lease for the performance of all terms, including but not limited to, payment of all rent due hereunder. Landlord and Tenant acknowledge and agree that it shall not be unreasonable for Landlord to withhold its consent to an assignment if in Landlord’s reasonable business judgment, the assignee lacks sufficient business experience or net worth to successfully operate its business within the Premises in accordance with the terms, covenants and conditions of this Lease. If this Lease be assigned, or if the Premises or any part thereof be sublet or occupied by anybody other than Tenant, Landlord may, after an Event of Default by Tenant, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved, but no such collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further observance and performance by Tenant of the covenants herein contained. In addition, in the event of a proposed assignment, Landlord shall have the right, but not the obligation, to terminate this Lease by giving Tenant thirty (30) days’ advance notice (“Landlord’s Termination Notice”); provided, however, that Tenant shall have the right to abrogate Landlord’s Termination Notice by notifying Landlord within ten (10) days after receipt of Landlord’s Termination Notice of the withdrawal of the request for consent to the assignment. For purposes of the foregoing, a transfer by operation of law or transfer of a controlling interest in Tenant as same exists as of the date hereof, shall be deemed to be an assignment of this Lease; however, the foregoing shall not apply to changes in ownership on a public exchange. No assignment or sublease, regardless of whether Landlord’s consent has been granted or withheld, shall be deemed to release Tenant from any of its obligations nor shall the same be deemed to release any person guaranteeing the obligations of Tenant hereunder from their obligations as guarantor. Landlord’s acceptance of any name submitted by Tenant, an agent of Tenant, or anyone acting by, through or under Tenant for the purpose of being listed on the Building directory will not be deemed, nor will it substitute for, Landlord’s consent, as required by this Lease, to any sublease, assignment, or other occupancy of the Premises by anyone other than Tenant or Tenant’s employees. Fifty percent (50%) of any profit or additional consideration or rent in excess of the Annual Base Rent or additional rent

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payable by Tenant hereunder which is payable to Tenant as a result of any assignment or subletting, net of Tenant’s reasonable and actual out of pocket third party transaction costs (including without limitation brokerage fees and tenant improvement costs), shall be paid to Landlord as additional rent when received by Tenant. All the foregoing notwithstanding, Tenant shall not enter into any lease, sublease, license, concession or other agreement for the use, occupancy or utilization of the Premises or any portion thereof, which provides for a rental or other payment for such use, occupancy or utilization based in whole or in part on the income or profits derived by any person or entity from the property leased, used, occupied or utilized. Any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use or occupancy of any part of the Premises. Any consent by Landlord hereunder shall not constitute a waiver of strict future compliance by Tenant with the provisions of this Section 20. In no event shall the proposed assignee or sublessee be occupying other space in the Building as a direct tenant (and not as a sublessee or assignee of Tenant), nor shall it be a prospective tenant then negotiating with Landlord.

     Notwithstanding the foregoing, provided that Tenant maintains the same or better net worth, Tenant shall have the right, without Landlord’s consent, to (i) assign the Lease or sublease the Premises or any portion thereof (however, Tenant shall endeavor to provide ten (10) days’ prior written notice thereof along with a true and complete copy of the sublease or assignment document) to any subsidiary or affiliate of Tenant or (ii) assign the Lease or sublease the Premises in the event of a merger or a sale of all or substantially all of the Tenant’s assets, and in any event shall notify Landlord in writing within thirty (30) days of the effective date of such assignment or sublease. For the purposes hereof, “affiliate” shall mean an entity or individual that controls, is controlled by or is under the common control with Tenant. Tenant shall remain liable under the terms hereof if Tenant exercises its rights under this paragraph to the extent it survives such corporate event.

21. Events of Default . Any one or more of the following events shall constitute an “Event of Default” hereunder, at Landlord’s election:

     (a) the sale of Tenant’s interest in the Premises under attachment, execution or similar legal process or, the adjudication of Tenant as a bankrupt or insolvent, unless such adjudication is vacated within sixty (60) days;

     (b) the filing of a voluntary petition proposing the adjudication of Tenant (or any guarantor of Tenant’s obligations hereunder) as a bankrupt or insolvent, or the reorganization of Tenant (or any such guarantor), or an arrangement by Tenant (or any such guarantor) with its creditors, whether pursuant to the Federal Bankruptcy Code or any similar federal or state proceeding, unless such petition is filed by a party other than Tenant (or any such guarantor) and is withdrawn or dismissed within sixty (60) days after the date of its filing;

     (c) the admission, in writing, by Tenant (or any such guarantor) of its inability to pay its debts when due;

     (d) the appointment of a receiver or trustee for the business or property of Tenant (or any such guarantor), unless such appointment is vacated within sixty (60) days of its entry;

     (e) the making by Tenant (or any such guarantor) of an assignment for the benefit of its creditors, or if, in any other manner, Tenant’s interest in this Lease shall pass to another by operation of law;

     (f) the failure of Tenant to pay any Annual Base Rent, additional rent or any other rent or sums of money owing hereunder when due, where such failure continues for a period of ten (10) days after receipt of notice that the same is past due hereunder;

     (g) if Tenant fails to pay any Annual Base Rent, additional rent or any other rent or sums of money owing hereunder when due after Landlord shall have given Tenant notice with respect to such non-payment twice in any twelve (12) month period as provided in subsection (f) above; and

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     (h) the default by Tenant in the performance or observance of any covenant or agreement of this Lease (other than a default involving the payment of money), which default is not cured within thirty (30) days after the giving of notice thereof by Landlord, unless such default is of such nature that it cannot be cured within such thirty (30) day period, in which case no Event of Default shall occur so long as Tenant shall commence the curing of the default within such thirty (30) day period and shall thereafter diligently prosecute the curing of same to completion.

22. Remedies; Bankruptcy of Tenant Upon the occurrence and continuance of an Event of Default, Landlord, with such notice to Tenant as provided for by law or as expressly provided for herein, may do any one or more of the following:

     (a) perform, on behalf of and at the expense of Tenant, any obligation of Tenant under this Lease which Tenant has failed to perform and of which Landlord shall have given Tenant notice, the cost of which performance by Landlord, together, with interest thereon at the Default Rate from the date of such expenditure, shall be deemed additional rent and shall be payable by Tenant to Landlord upon demand;

     (b) elect to terminate this Lease and the tenancy created hereby by giving notice of such election to Tenant, in which event Tenant shall be liable, in addition to any other amounts due up until the time of such termination, for Annual Base Rent, additional rent and all other rent or sums of money owing hereunder that otherwise would have been payable by Tenant during the remainder of the Term had there been no Event of Default, and on notice reenter the Premises, by summary proceedings or otherwise, and remove Tenant and all other persons and property from the Premises, and store such property in a public warehouse or elsewhere at the cost and for the account of Tenant, without resort to legal process and without Landlord being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby; and also the right, but not the obligation, to re-let the Premises for any unexpired balance of the Term, and collect the rent therefor. In addition, Landlord shall also recover from Tenant any rent exemption, deferred rent or excused rent which Landlord may have granted to Tenant as an inducement to Tenant’s execution hereof, it being understood that Landlord’s granting of such rent holiday is in consideration of Tenant’s compliance with the terms and provisions hereof. In the event of such reletting by Landlord, the reletting shall be on such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and the proceeds that may be collected from the same, after deducting all of Landlord’s reasonable expenses in connection with such reletting, including, but not limited to, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting, shall be applied upon Tenant’s rental obligation as set forth in this Lease for the unexpired portion of the Term. Tenant shall be liable for any balance that may be due under this Lease, although Tenant shall have no further right of possession of the Premises;

     (c) at Landlord’s discretion without further demand or notice or resort to judicial proceedings, to terminate Tenant’s right to possession of the Premises, to reenter and take possession of the Premises or any part thereof without terminating the Lease, and repossess the same as Landlord’s former estate and expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purpose as may be necessary, without being liable for prosecution thereof, without being deemed guilty any manner of trespass, and without prejudice to any remedies for arrears of Annual Base Rent, additional rent or any other rent or sums of money owing hereunder. No such reentry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord’s part to terminate this Lease, unless a written notice of termination, specifically stating Landlord’s intention to terminate, shall be given to Tenant. Should Landlord elect to reenter as provided above, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided by law, then such repossession shall not relieve Tenant of its obligations and liability under this Lease, all of which shall survive such repossession. Following such repossession, Landlord may, from time to time, without terminating this Lease, relet the Premises or any part thereof in Landlord or Tenant’s name, for such term or terms (which may be greater or less than

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the period which would otherwise have constituted the balance of the Term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the rents therefore. In the event that Landlord elects to take possession as provided in this subparagraph (d), Tenant shall pay to Landlord (i) the Annual Base Rent, additional rent and other rent or sums of money owing hereunder which would have been payable hereunder if such repossession had not occurred, less (ii) the net proceeds, if any, of any reletting of the Premises after deducting all of Landlord’s reasonable expenses in connection with such reletting, including, but not limited to, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. Tenant shall pay such amounts to Landlord monthly on the day on which Annual Base Rent and additional rent would have been payable hereunder if possession had not been retaken. In addition, Landlord shall also recover from Tenant any rent exemption, deferred rent or excused rent which Landlord may have granted to Tenant as an inducement to Tenant’s execution hereof, it being understood that Landlord’s granting of such rent holiday is in consideration of Tenant’s compliance with the terms and provisions hereof. Landlord reserves the right following any such reentry and/or reletting to exercise its right to terminate the Lease under the provisions of subparagraph (b) above by giving Tenant such written notice, in which event the Lease will terminate as specified in such notice; and

     (d) sue Tenant for any Annual Base Rent, additional rent or any other rent or sums of money owing hereunder, or exercise any other legal or equitable right or remedy which it may have at law or in equity.

     Notwithstanding the provisions of clause (a) above and regardless of whether an Event of Default shall have occurred, Landlord may exercise the remedy described in clause (a) without any notice to Tenant if Landlord, in its good faith judgment, believes it would be materially injured by the failure to take rapid action, or if the unperformed obligation of Tenant constitutes an emergency.

     TO THE EXTENT PERMITTED BY LAW, TENANT HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS OF REDEMPTION, GRANTED BY OR UNDER ANY PRESENT OR FUTURE LAWS IN THE EVENT OF TENANT’S BEING EVICTED OR DISPOSSESSED FOR ANY CAUSE, OR IN THE EVENT OF LANDLORD’S OBTAINING POSSESSION OF THE PREMISES, BY REASON OF THE VIOLATION BY TENANT OF ANY OF THE COVENANTS AND CONDITIONS OF THIS LEASE, OR OTHERWISE. LANDLORD AND TENANT HEREBY EXPRESSLY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER PARTY ON ANY AND EVERY MATTER, DIRECTLY OR INDIRECTLY ARISING OUT OF OR WITH RESPECT TO THIS LEASE, INCLUDING, WITHOUT LIMITATION, THE RELATIONSHIP OF LANDLORD AND TENANT, THE USE AND OCCUPANCY BY TENANT OF THE PREMISES, ANY STATUTORY REMEDY AND/OR CLAIM OF INJURY OR DAMAGE REGARDING THIS LEASE.

     Any costs and expenses incurred by Landlord (including, without limitation, reasonable attorneys’ fees) in enforcing any of its rights or remedies under this Lease shall be deemed to be additional rent and shall be repaid to Landlord by Tenant upon demand.

     Notwithstanding any of the other provisions of this Lease, in the event Tenant shall voluntarily or involuntarily come under the jurisdiction of the Federal Bankruptcy Code and thereafter Tenant or its trustee in bankruptcy, under the authority of and pursuant to applicable provisions thereof, shall have the power and so using same determine to assign this Lease, Tenant agrees that (i) Tenant or its trustee shall provide to Landlord sufficient information enabling it to independently determine whether Landlord will incur actual and substantial detriment by reason of such assignment and (ii) “adequate assurance of future performance” under this Lease, as that term is generally defined under the Federal Bankruptcy Code, shall be provided to Landlord by Tenant and its assignee as a condition of the assignment.

     Notwithstanding anything to the contrary set forth above, Landlord hereby agrees to use its commercially reasonably efforts to relet the Premises, or a portion thereof, to one or more

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substitute tenants, whether for a greater or lesser term than that specified herein for Tenant, and at commercially reasonable rates then applicable in the Colorado Springs North I-25 corridor. Notwithstanding the foregoing, Tenant agrees that any such duty to mitigate shall be satisfied, and Landlord shall be deemed to have used commercially reasonable efforts to fill the Premises by doing the following: (a) advising Landlord’s leasing agent, if any, of the availability of the Premises; (b) advising at least one outside commercial brokerage entity of the availability of the Premises; and (c) offering to such leasing agents and outside commercial brokerage entities the usual and customary commissions that landlords offer for similar properties in Colorado Springs North I-25 corridor; provided, however, that Landlord shall not be obligated to solicit or entertain negotiations with any other prospective tenant for the Premises while other premises in the Colorado Springs North I-25 corridor or other properties within a five (5) mile vicinity of the Property (under the ownership or control of Landlord and/or its affiliates) suitable for that prospective tenant’s use are (or soon will be) available. In addition, Tenant agrees that Landlord shall be deemed to be acting reasonably (and Tenant waives any right to claim otherwise) if Landlord enters into a substitute lease(s) which specifies Base Rent which is seventy-five percent (75%) or more than the then current prevailing market rent. If Landlord receives any payments from the reletting of the Premises and is required to mitigate damages (despite the intent of the parties hereunder), any such payment shall first be applied to any costs or expenses incurred by Landlord as a result of the Event of Default.

     Notwithstanding anything to the contrary contained herein, Tenant shall be considered in “Habitual Default” of this Lease upon (a) Tenant’s failure, on three (3) or more occasions during any twelve month period to pay when due any installment of Annual Base Rent, additional rent or any other sum required by the terms of this Lease, or upon (b) Tenant’s failure, on three (3) or more occasions during any twelve month period to comply with any term, covenant or condition of this Lease after notice by Landlord to Tenant. Upon the occurrence of an event of Habitual Default on the part of Tenant, then without limiting any other rights or remedies to which Landlord may be entitled as a result of such Habitual Default or any other Event of Default by Tenant hereunder: (i) Tenant shall immediately be deemed to have relinquished any and all options or rights granted, or to be granted, to Tenant under the terms of this Lease or any amendment hereto (including, without limitation, any rights granted under Sections 3.3 and 53 of this Lease, rights to terminate, rights of first offer or rights of first refusal); and (ii) in the event of a monetary event of Habitual Default, Tenant shall thereafter pay all Annual Base Rent and additional rent and other sums whatsoever due under this Lease in cash, by money order or by certified check or cashier’s check. Notwithstanding the foregoing, in the event there is a bona fide dispute between Landlord and Tenant with respect to whether there has been a nonmonetary default, such default shall not be used as one of the three defaults for purposes of determining that Tenant is in Habitual Default unless and until such dispute is resolved with a finding that Tenant had in fact committed a nonmonetary default.

23. Services and Utilities. Landlord shall provide the following listed services and utilities, namely:

     (a) heating, ventilation, and air conditioning (“HVAC”) for the Premises in accordance with Section 11 of this Lease;

     (b) electric energy in accordance with Section 24 following;

     (c) hot and cold water sufficient for drinking, lavatory toilet and ordinary cleaning purposes from fixtures either within the Premises (if provided pursuant to this Lease) or on the floor on which the Premises are located; and

     (d) maintenance of Common Areas in a manner comparable to other first class suburban office buildings in the Colorado Springs North I-25 corridor.

     Landlord reserves the right to stop service of the HVAC, elevator, plumbing and electric systems, when necessary, by reason of accident, or emergency, or for repairs, alterations, replacements, or improvements, which in the judgment of Landlord are desirable or necessary to be made, until the repairs, alterations, replacements, or improvements shall have been completed. Landlord shall have no responsibility or liability for failure to supply HVAC,

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elevator, plumbing, cleaning, and electric service, during the period when prevented from so doing by laws, orders, or regulations of any Federal, State, County or Municipal authority or by strikes, accidents or by any other cause whatsoever beyond Landlord’s control. Landlord’s obligations to supply HVAC are subject to applicable laws and regulations as to energy conservation and other such restrictions. In the event that Tenant should require supplemental HVAC for the Premises, any maintenance repair and/or replacement required for such supplemental service shall be performed by Landlord but the cost of such maintenance repair and/or replacement (including labor and materials) shall be paid by Tenant as additional rent.

     Landlord warrants to Tenant that electricity, water, sanitary and drainage sewers, telephone and natural gas will be available to the Premises throughout the term of this Lease. Notwithstanding anything in this Lease to the contrary, if any such utility service becomes unavailable or interrupted for more than ten (10) consecutive business days after notice thereof to Landlord and such unavailability or interruption is not the result of any reason listed in Section 27 herein or the fault of Tenant or its agents, servants, employees or invitees or (b), and as a result thereof, Tenant shall be not able to use all or such portion of the Premises and does not in fact use all or such portion of the Premises for such 10-business day period, then Tenant shall be entitled to an abatement of rent commencing with the eleventh (11^th) business day that the same are unavailable; provided, however, that Tenant shall not be entitled to any abatement of rent under the foregoing due to unavailability (i) caused directly or indirectly by any act or omission of Tenant or any of Tenant’s servants, employees, agents, contractors, visitors or licensees, (ii) where Tenant makes a decoration, alteration, improvement or addition which requires interruption of services, or (iii) where the service in question is one which Tenant is obligated to furnish or pay for under the provisions of this Lease.

24. Electric Current. Landlord has supplied or will supply the Premises with the necessary lines to provide electric service to the Premises for normal office and data center operations, as well as separate meters so that Tenant’s consumption of electric power can be separately measured and charged to Tenant. Tenant shall pay all charges (including meter installation and adjustment) for electric and similar utilities or services so supplied directly to the utility company supplying same when due and before penalties or late charges on same shall accrue. Tenant shall not at any time overburden or exceed the capacity of the mains, feeders, ducts, conduits, or other facilities by which electric and similar utilities are supplied to, distributed in or serve the Premises. If Tenant desires to install any equipment which shall require additional electric or similar facilities of a greater capacity than as provided by Landlord, such installation shall be subject to Landlord’s prior written approval of Tenant’s plans and specifications therefor, which approval shall not be unreasonably withheld. If such installation is approved by Landlord, all costs for providing such additional electrical and similar facilities shall be paid by Tenant.

25. Telephone and Telecommunications. Landlord has arranged for the installation of telephone service within the Building to the ground floor telephone utility closet and conduit to the ground floor telephone and electrical riser closets. Tenant shall be responsible for contacting the utility company supplying the telephone service and arranging to have such telephone facilities as it may desire to be extended and put into operation in the Premises, including without limitation, obtaining a low voltage permit for phone and data wiring. Tenant acknowledges and agrees that all telephone and telecommunications services desired by Tenant shall be ordered and utilized at the sole expense of Tenant. All costs related to installation and the provision of such service shall be borne and paid for directly by Tenant. Upon request by Landlord, Tenant, at Tenant’s expense, shall remove the telephone facilities at the expiration or sooner termination of the Term. Tenant shall obtain the requisite permit and complete the ceiling work in cooperation with Landlord in order not to interfere with or delay the completion of the Tenant Improvements by Landlord pursuant to Section 35, including, without limitation, the closing of the ceiling and the carpet installation, if applicable. Landlord will allow Tenant access for wiring, including electric, data and telecom, within the Building’s public areas and designated chases, but will not guarantee access of the wiring through another tenant’s space. Tenant, at Tenant’s expense, shall be responsible for the relocation and its associated costs, if requested, of any data, telecom or electrical wiring that runs through another tenant’s space, including the plenum area or otherwise.

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     In the event Tenant wishes to utilize the services of a telephone or telecommunications provider whose equipment is not servicing the Building at such time Tenant wishes to install its telecommunications equipment serving the Premises (“Provider”), no such Provider shall be permitted to install its lines or other equipment without first securing the prior written consent of Landlord, which consent shall not be unreasonably withheld. Prior to the commencement of any work in or about the Building by the Provider, the Provider shall agree to abide by such rules and regulations, job site rules, and such other requirements as reasonably determined by Landlord to be necessary to protect the interest of the Building and Property, the other tenants and occupants of the Building and Landlord, including, without limitation, providing security in such form and amount as reasonably determined by Landlord. Each Provider must be duly licensed, insured and reputable. Landlord shall incur no expense whatsoever with respect to any aspect of Provider’s provision of its services, including without limitation, the costs of installation, materials and service.

     In addition, Landlord reserves exclusively to itself and its successors and assigns the right to install, operate, maintain, repair, replace and remove fiber optic cable and conduit and associated equipment and appurtenances within the Building and the Premises so as to provide telecommunications service to and for the benefit of tenants and other occupants of the Building.

26. Acceptance of Premises. Tenant shall have reasonable opportunity to examine the Premises to determine the condition thereof. Tenant shall not interfere with Landlord’s work if it enters the Premises at any time prior to the Commencement Date. Upon taking possession of the Premises, Tenant shall be deemed to have accepted same as being satisfactory and in the condition called for hereunder, except for punch list items previously noted to Landlord and latent defects. Landlord, at its sole cost and expense will promptly remedy any latent defects within a reasonable time after discovery.

27. Inability to Perform. Landlord and Tenant will be allowed a reasonable time for delay, except with respect to any obligations for the payment of money, due to strikes or labor troubles or any outside cause whatsoever including, but not limited to, governmental preemption in connection with a National Emergency, or by reason of any rule, order or regulation of any department or subdivision of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. Similarly, Landlord shall not be liable for any interference with any services supplied to Tenant by others if such interference is caused by any of the reasons listed in this Section. Nothing contained in this Section shall be deemed to impose any obligation on Landlord not expressly imposed by other sections of this Lease.

28. No Waivers. The failure of Landlord to insist, in any one or more instances, upon a strict performance of any of the covenants of this Lease, or to exercise any option herein contained, shall not be construed as a waiver, or a relinquishment for the future, of such covenant or option, but the same shall continue and remain in full force and effect. The receipt by Landlord of rent, with knowledge of the breach of any covenant hereof, shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision hereof shall be deemed to have been made unless expressed in writing and signed by Landlord.

29. Access to Premises and Change in Services. Landlord shall have the right, without abatement of rent, to enter the Premises at any hour to examine the same, or to make such repairs and alterations as Landlord shall deem necessary for the safety and preservation of the Building, and also to exhibit the Premises to be let; provided, however, that except in the case of emergency such entry shall only be after notice first given to Tenant. If, during the last month of the Term, Tenant shall have removed all or substantially all of Tenant’s property therefrom, Landlord may immediately enter and alter, renovate and redecorate the Premises, without elimination or abatement of rent, or incurring liability to Tenant for any compensation, and such acts shall have no effect upon this Lease. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair, of the Building or any part thereof, other than as herein elsewhere expressly provided. Landlord shall also have the right at any time, without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to reasonably change the arrangement and/or location of entrances or passageways, doors and

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doorways, and corridors, stairs, toilets, elevators, or other public parts of the Building, and to change the name by which the Building is commonly known and/or its mailing address.

30. Estoppel Certificates. Tenant agrees, at any time and from time to time, upon not less than ten (10) days’ prior request by Landlord to execute, acknowledge and deliver to Landlord an estoppel certificate substantially in the form attached hereto as Exhibit “D” or such other reasonable form requested by Landlord which certifies that this Lease is unmodified and in full force (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and the dates through which the rent and other charges have been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate Landlord is in default in performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered hereunder may be relied upon by third parties not a party to this Lease. Tenant expressly agrees that the thirty (30) day cure period concerning Tenant’s failure to perform or observe any covenant or agreement of this Lease (other than a default involving the payment of money) as set forth in Section 21, subsection (i) above shall not apply to Tenant’s obligation to timely provide the foregoing estoppel certificate to Landlord, and that Tenant shall be deemed to have committed an Event of Default if such estoppel certificate is not provided to Landlord within an additional five (5) days’ written notice of non-delivery.

31. Subordination. Tenant accepts this Lease, and the tenancy created hereunder, subject and subordinate to any mortgages, overleases, leasehold mortgages or other security interests now or hereafter a lien upon or affecting the Building or the Property or any part thereof. Tenant shall, at any time hereafter, within ten (10) days after request from Landlord, execute a Subordination, Non-Disturbance Agreement in a form reasonably requested by any instruments or leases or other documents that may be required by any mortgage or mortgagee or overlandlord (herein a “Mortgagee”) for the purpose of subjecting or subordinating this Lease and the tenancy created hereunder to the lien of any such mortgage or mortgages or underlying lease. Tenant expressly agrees that the thirty (30) day cure period concerning Tenant’s failure to perform or observe any covenant or agreement of this Lease (other than a default involving the payment of money) as set forth in Section 21, subsection (i) above shall not apply to Tenant’s obligation to timely provide the foregoing Subordination, Non-Disturbance Agreement to Landlord, and that Tenant shall be deemed to have committed an Event of Default if such Subordination, Non-Disturbance Agreement is not provided to Landlord within an additional five (5) day period after written notice of non-delivery. Landlord shall use commercially reasonable efforts to obtain an SNDA from any future Mortgagee on a form reasonably acceptable to both Mortgagee and Tenant.

32. Attornment. Tenant agrees that upon any termination of Landlord’s interest in the Premises, Tenant shall, upon request, attorn to the person or organization then holding title to the reversion of the Premises (the “Successor”) and to all subsequent Successors, and shall pay to the Successor all of the rents and other monies required to be paid by Tenant hereunder and perform all of the other terms, covenants, conditions and obligations in this Lease contained; provided, however, that if in connection with such attornment Tenant shall so request from such Successor in writing, such Successor shall execute and deliver to Tenant an instrument wherein such Successor agrees that as long as Tenant performs all of the terms, covenants and conditions of this Lease, on Tenant’s part to be performed, Tenant’s possession under the provisions of this Lease shall not be disturbed by such Successor. In the event that the Mortgagee succeeds to the interest of Landlord hereunder and is advised by its counsel that all or any portion of the Annual Base Rent or additional rent payable by Tenant hereunder is or may be deemed to be unrelated business income within the meaning of the United States Internal Revenue Code or regulations issued thereunder, Mortgagee, as Landlord, shall have the right at any time, from time to time, to notify Tenant in writing of the required changes to the Lease. Tenant shall execute all documents necessary to effect any such amendment within ten (10) days after written request from Mortgagee, as landlord, provided that in no event shall such amendment increase Tenant’s payment obligations or other liability under this Lease or reduce Landlord’s obligations hereunder.

33. Notices. All notices and other communications to be made hereunder shall be in writing and shall be delivered to the addresses set forth below by any of the following means: (a)

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personal service or receipted courier service; (b) telecopying (if confirmed in writing sent by the methods specified in clauses (a), (c) or (d) of this Section), (c) registered or certified first class mail, return receipt requested, or (d) nationally-recognized overnight delivery service. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (a) or (b) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, if sent pursuant to subsection (c) shall be deemed received five (5) days following deposit in the mail and/or if sent pursuant to subsection (d) shall be deemed received the next succeeding business day following deposit with such nationally recognized overnight delivery service.

If to Landlord:	9965 FEDERAL DRIVE, LLC
	c/o Corporate Office Properties, L.P.
	6711 Columbia Gateway Drive, Suite 300
	Columbia, Maryland 21046
	Attn: General Counsel
	Telecopier: 443-285-7650
If to Tenant:	To Tenant’s Notice Address.

Any party may designate a change of address by notice to the above parties, given at least ten (10) days before such change of address is to become effective.

34. Intentionally Deleted.

35. Tenant’s Space. Attached hereto as Exhibit “C” is a copy of Landlord’s “Tenant Improvements,” specifying the materials and manner in which Landlord shall finish the Premises (the “Tenant Improvements”).

     35.1 Tenant Allowance. Landlord shall pay Two Million Nine Hundred Eighty-Nine Thousand Nine Hundred Sixty and no/Dollars ($2,989,960.00) towards the costs of completing the Tenant Improvements (the “Allowance”). If the cost to complete the Tenant Improvements exceeds the Allowance, Landlord shall advance up to an additional Seven Hundred Forty-Seven Thousand Four Hundred Ninety and no/Dollars ($747,490.00) (the “Amortized Amount”). Tenant shall notify Landlord in writing within fifteen (15) days after receipt of a written invoice from Landlord, whether it (a) desires Landlord to advance all or any portion of the Amortized Amount or (b) it elects to pay the amount directly to Landlord. The parties acknowledge that while Tenant is required to notify Landlord of its intent to pay the foregoing amount directly within 15 days after receipt of the written invoice, Tenant’s actual payment thereof shall not be due until thirty (30) days following receipt of the applicable invoice. Such portion of the Amortized Amount which has been advanced shall be repaid by Tenant to Landlord on a monthly basis, together with Base Rent, as additional rent, in an amount equal to the amount of the Amortized Amount which has been advanced, amortized over a ten (10) year term, with interest accruing at nine percent (9%) per annum. Tenant shall execute an amendment to this Lease or an acknowledgment of the Amortized Amount within fifteen (15) days after receipt of a written statement from Landlord, together with reasonable supporting documentation. Any costs to complete the Tenant Improvements in excess of Three Million Seven Hundred Thirty-Seven Thousand Four Hundred Fifty and no/Dollars ($3,737,450.00) (which is the sum of the Allowance and the Amortized Amount), shall be paid by Tenant to Landlord within thirty (30) days after receipt of a written invoice, together with reasonable supporting documentation.

     35.2 Allowance for Phase I Premises. The parties acknowledge and agree that the construction of Phase II shall occur subsequent to the Phase I Commencement Date and that the Allowance and the Amortized Amount are calculated based on the entire square footage in both the Phase I Premises and the Phase II Premises. Accordingly, Landlord shall not disburse more than $1,644,800.00 of the Allowance to complete construction of the Phase I Premises, and if the cost to construct the Phase I Premises exceeds $1,644,800.00, Landlord shall advance up to $411,200.00 of the Amortized Amount in accordance with Section 35.1. Any Allowance or Amortized Amount that is not applied toward the cost of construction for the Phase I Premises may be applied towards the construction of the Phase II Premises.

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     35.3 Unused Allowance. Notwithstanding anything to the contrary contained in this Section 35 or this Lease, if Tenant does not use all of the Allowance towards Tenant’s Work, provided that the construction of the Phase II Premises is complete, Tenant shall have the right to use up to Three Hundred Seventy-Three Thousand Seven Hundred Forty-Five and no/Dollars ($373,745.00) of the undisbursed Allowance either (i) towards soft construction costs, including, architectural and engineering services, voice and data cabling, exterior building signage, furniture, fixtures and equipment, and any moving costs or, (ii) upon written notice to Landlord, as a credit against any future installments of Annual Base Rent until such costs are fully credited; provided, however that no more than fifty percent (50%) of any installment of Annual Base Rent shall be withheld by Tenant.

     35.4 Construction of Phase II Premises. The parties acknowledge that Landlord shall be performing the construction for the Phase II Premises after the Phase I Commencement Date. Landlord shall notify Tenant of its intent to enter the Phase I Premises, if necessary, to complete the Phase II construction and the areas of the Phase I Premises in which Landlord shall need access, and Tenant shall move all personal property that may interfere with Landlord’s ability to complete its work. While performing the construction of the Phase II Premises, Landlord assumes no liability for any damage to Tenant’s personal property contained in the Premises, and Tenant shall not be entitled to any elimination or abatement of rent, unless such damage is caused by the negligence, recklessness or willful misconduct of Landlord, its agents, employees and/or contractors. The parties acknowledge and agree that Tenant shall be responsible for construction of the Clean Room, and Tenant shall comply with the terms and conditions of Section 10 of this Lease in its performance of such construction. To the extent Tenant chooses to apply the Allowance towards construction of the Clean Room, Landlord shall reimburse Tenant for amounts actually paid by Tenant in connection therewith to Tenant’s vendors, suppliers or contractor, provided that Landlord shall have received (i) a certificate signed by Tenant and Tenant’s architect setting forth (a) that the sum then requested was paid by Tenant to contractors, subcontractors, materialmen, engineers and other persons who have rendered services or furnished materials in connection with work on the Clean Room, (b) a complete description of the services and materials and the amounts paid or to be paid to each of such persons in respect thereof, and (c) a statement that the work described in the certificate has been completed substantially in accordance with the plans and specifications approved by Landlord in accordance with Section 10, and (ii) paid receipts or such other proof of payment as Landlord shall reasonably require for all such work completed. Landlord shall reimburse Tenant within thirty (30) days after Landlord’s receipt of a written request for reimbursement from Tenant and shall debit the Allowance therefor.

     35.5 Construction Management Fee. Landlord shall provide Tenant with a reasonable amount of construction management services in connection with the construction of Tenant’s Work for a construction management fee in the amount of (i) five percent (5%) of the aggregate construction costs incurred in connection with the Tenant Improvements for the Phase I Premises and (ii) three percent (3%) of the aggregate construction costs incurred in connection with the Tenant Improvements for the Phase II Premises, both of which amounts shall be deducted from the Allowance. Such construction management services shall include (i) coordination of Tenant’s access to the Building including the parking areas and rear entrances, loading dock, one (1) freight elevator and one (1) stairwell during construction of Tenant’s Work, (ii) overview of the installation of Tenant’s telecommunication equipment, (iii) confirmation that Tenant’s security/alarm system and fire alarm system is consistent with the system installed by Landlord in the Building, (iv) coordination with the Base Building security during construction, (v) coordination of all noise related work in an occupied Building (i.e., tie in to fire alarm and sprinkler systems, hammer-drilling, core drilling during non-business hours), and (vi) location of dumpster. In addition to Landlord’s construction management services, Tenant may select its own construction manager, subject to the prior approval of Landlord, which shall not be unreasonably withheld, conditioned or delayed.

     35.6 Tenant Caused Delay. If Tenant interferes with Landlord’s ability to substantially complete the Phase I Premises by the Phase I Target Date in any way (i.e., delays in selection of finishes, issuing stop orders, requesting change orders, requesting the performance of work not included as Tenant Improvements, failing to provide timely responses to Landlord’s request for

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approved plans and specifications) (“Tenant Delay”), and such Tenant Delay is a direct cause of Landlord’s inability to substantially complete the Phase I Premises by the Phase I Target Date, then and in such event the Phase I Commencement Date shall be deemed to be the date that substantial completion of the Phase I Premises would have occurred (but in no event prior to the Phase I Target Date) in the absence of the Tenant Caused Delay.

     35.7 Budget for Tenant Improvements. Landlord shall provide Tenant with a copy of a budget outlining Landlord’s anticipated costs for completing the Tenant Improvements (the “Budget”). To the extent Landlord’s work hereunder would cause the overall cost of the Tenant Improvements to exceed the Budget, Landlord shall notify Tenant in writing of such overrun, and Tenant shall have five (5) days to notify Landlord if it disapproves of such overrun, provided that Tenant shall not unreasonably withhold its approval hereunder. If Tenant does not notify Landlord in writing of its disapproval thereof, such overrun shall be deemed approved. If Tenant disapproves of Landlord’s projected overrun, Tenant shall cooperate with Landlord to devise alternatives to alleviate any possible overruns. To allow Tenant to monitor the Budget, Landlord shall provide copies to Tenant of the invoices paid in connection with the Tenant Improvements.

36. Quiet Enjoyment. Tenant, upon the payment of rent and the performance of all the terms of this Lease, shall at all times during the Term peaceably and quietly enjoy the Premises without any disturbance from Landlord or any other person claiming through Landlord.

37. Vacation of Premises. Tenant shall vacate the Premises at the end of the Term. If Tenant fails to vacate at such time there shall be payable to Landlord an amount equal to one hundred fifty percent (150%) of the monthly Annual Base Rent stated in Section 1.1.11 paid immediately prior to the holding over period for each month or part of a month that Tenant holds over, plus all other payments provided for herein, and the payment and acceptance of such payments shall not constitute an extension or renewal of this Lease. In event of any such holdover, Landlord shall also be entitled to all remedies provided by law for the speedy eviction of tenants, and to the payment of all attorneys’ fees and expenses incurred in connection therewith. Notwithstanding the foregoing, for the first thirty (30) days during which Tenant holds over pursuant to this Section 37, Tenant shall pay an amount equal to one hundred ten percent (110%) of the monthly Annual Base Rent stated in Section 1.1.11 paid immediately prior to the holding over period.

38. Members’ Liability. It is understood that the Owner of the Building is a Colorado limited liability company. All obligations of the Owner hereunder are limited to the net assets of the Owner from time to time. No member of Owner, or of any successor entity, whether now or hereafter a member, shall have any personal responsibility or liability for the obligations of Owner hereunder.

39. Separability. If any term or provision of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term or provision of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.

40. Indemnification.

     40.1 Tenant’s Indemnification. Tenant shall indemnify and hold harmless Landlord and all of its and their respective members, partners, directors, officers, agents and employees from any and all liability, loss, cost or expense arising from all third-party claims resulting from or in connection with:

          40.1.1 any act, omission or negligence of Tenant or any of its subtenants, assignees or licensees or its or their partners, directors, officers, agents, employees, invitees or contractors;

          40.1.2 any accident, injury or damage whatever occurring in, at or upon the Premises other than those items covered under Landlord’s indemnity as described in Section 40.2; and

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together with all costs and expenses reasonably incurred or paid in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorney’s fees and expenses.

     In case any action or proceeding is brought against Landlord and/or any of its and their respective partners, directors, officers, agents or employees and such claim is a claim from which Tenant is obligated to indemnify Landlord pursuant to this Section, Tenant, upon written notice from Landlord shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). The obligations of Tenant under this Section shall survive termination of this Lease.

     40.2 Landlord’s Indemnification. Landlord shall indemnify and hold harmless Tenant and all of its and their respective members, partners, directors, officers, agents and employees from any and all liability, loss, cost or expense arising from all third-party claims resulting from or in connection with any act, omission or negligence of Landlord or any of its tenants or licensees or its or their partners, directors, officers, agents, employees, invitees or contractors; and

together with all costs and expenses reasonably incurred or paid in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorney’s fees and expenses.

     In case any action or proceeding is brought against Tenant and/or any of its and their respective partners, directors, officers, agents or employees and such claim is a claim from which Landlord is obligated to indemnify Tenant pursuant to this Section, Landlord, upon written notice from Tenant shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Tenant). The obligations of Landlord under this Section shall survive termination of this Lease.

41. Captions. All headings anywhere contained in this Lease are intended for convenience or reference only and are not to be deemed or taken as a summary of the provisions to which they pertain or as a construction thereof.

42. Brokers. Tenant represents that Tenant has dealt directly with, only with, the Broker as broker in connection with this Lease, and Tenant warrants that no other broker negotiated this Lease or is entitled to any commissions in connection with this Lease. Landlord shall pay the Broker pursuant to the terms of a separate written agreement by and between Landlord and Broker.

43. Recordation. Tenant covenants that it shall not, without Landlord’s prior written consent, which consent may be withheld in Landlord’s sole and absolute discretion, record this Lease or any memorandum of this Lease or offer this Lease or any memorandum of this Lease for recordation. If at any time Landlord or any mortgagee of Landlord’s interest in the Premises shall require the recordation of this Lease or any memorandum of this Lease, such recordation shall be at Landlord’s expense. If at any time Tenant shall request the recordation of this Lease or any memorandum of this Lease, and to the extent Landlord consents to such recordation as described above, then such recordation shall be at Tenant’s expense. If the recordation of this Lease or any memorandum of this Lease shall be required by any valid governmental order, or if any government authority having jurisdiction in the matter shall assess and be entitled to collect transfer taxes or documentary stamp taxes, or both transfer taxes and documentary stamp taxes on this Lease or any memorandum of this Lease, Tenant shall execute such acknowledgments as may be necessary to effect such recordations and pay, upon request of Landlord, one half of all recording fees, transfer taxes and documentary stamp taxes payable on, or in connection with this Lease or any memorandum of this Lease or such recordation.

44. Successors and Assigns. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant, and their respective heirs, personal representatives, successors and assigns (subject, however, to the terms of Section 20 hereof).

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45. Integration of Agreements. This writing is intended by the Parties as a final expression of their agreement and is a complete and exclusive statement of its terms, and all negotiations, considerations and representations between the Parties are incorporated. No course of prior dealings between the Parties or their affiliates shall be relevant or admissible to supplement, explain, or vary any of the terms of this Lease. Acceptance of, or acquiescence to, a course of performance rendered under this Lease or any prior agreement between the Parties or their affiliates shall not be relevant or admissible to determine the meaning of any of the terms or covenants of this Lease. Other than as specifically set forth in this Lease, no representations, understandings, or agreements have been made or relied upon in the making of this Lease.

46. Hazardous Material; Indemnity. Tenant further agrees to the following:

     46.1 As used in this Lease, the following terms shall have the following meanings:

          46.1.1 “Environmental Laws” shall mean all federal, state or local statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, authorizations, agreements, ordinances, administrative or judicial rulings or similar items relating to the protection of the environment or the protection of human health, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, Releases or Threats of Releases (as defined below) of Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials or relating to storage tanks.

          46.1.2 “Hazardous Materials” shall mean (i) any substance, gas, material or chemical which is defined as or included in the definition of “hazardous substances”, “toxic substances”, “hazardous materials”, “hazardous wastes” under any federal, state or local statute, law, or ordinance or under the regulations adopted or guidelines promulgated pursuant thereto, including, but not limited to, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. §§ 9061 et seq. (“CERCLA”); the Hazardous Materials Transportation Act, as amended 49 U.S.C. §§ 1801, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. §§ 6901, et seq.; (ii) radon gas in excess of four (4) picocuries per liter, friable asbestos, urea formaldehyde foam insulation, petroleum products, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent; and (iii) any other substance, gas, material or chemical, exposure to or release of which is prohibited, limited or regulated by any governmental or quasi-governmental entity or authority that asserts or may assert jurisdiction over the Premises, the Building or the Property.

          46.1.3 “Hazardous Materials Inventory” shall mean a comprehensive inventory of all Hazardous Materials used, generated, stored, treated or disposed of by Tenant at the Premises.

          46.1.4 “Losses” shall mean all claims, liabilities, obligations, losses (including, without limitation, diminution in the value of the Premises, the Building, or the Property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, the Building and/or the Property, damages arising from any adverse impact on marketing of space), damages, penalties, fees, actions, judgments, lawsuits, costs, expenses, disbursements, orders or decrees, including, without limitation, attorneys’ and consultants’ fees and expenses.

          46.1.5 “Release” means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping into soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or proximate to and affecting the Premises, the Building or the Property.

          46.1.6 “Threat of Release” means a substantial likelihood of a Release which requires action to prevent or mitigate damage to the soil, surface waters, groundwaters, land,

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stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or proximate to and affecting the Premises, the Building or the Property.

     46.2 Tenant shall not generate, use, manufacture, recycle, handle, store, place, transport, treat or Release any Hazardous Materials at, on, in or near the Premises, the Building or the Property or cause any of the foregoing to occur at, on, in, or near the Premises, the Building or the Property and shall comply with all Environmental Laws in connection with Tenant’s use or occupancy of the Premises and the Building, and promptly shall take all remedial action, at Tenant’s sole cost and expense, but with Landlord’s prior approval, necessary or desirable to remedy, clean-up and remove the presence of any Hazardous Materials resulting from Tenant’s violation of the prohibitions set forth in this sentence or Tenant’s failure to comply with Environmental Laws. Notwithstanding the foregoing, Tenant shall not be deemed to be prohibited from using products containing Hazardous Materials so long as such products are commonly found in an office or a medical device manufacturing and product development environment and are handled, stored, used and disposed of in compliance with all Environmental Laws. In addition, Tenant shall (i) obtain, maintain in full force and effect, and comply with, all permits required under Environmental Laws; (ii) comply with all record keeping and reporting requirements imposed by Environmental Laws concerning the use, handling, treatment, storage, disposal or release of Hazardous Materials on the Premises, the Building and the Property; (iii) report to Landlord any Release of Hazardous Materials by Tenant or of which Tenant has knowledge within two (2) business days of such discharge or release; (iv) provide to Landlord copies of all written reports concerning such discharge of Hazardous Materials that are required to be filed with governmental or quasi-governmental entities under Environmental Laws; (vi) maintain and annually update a Hazardous Materials Inventory with respect to Hazardous Materials used, generated, treated, stored or disposed of at the Premises, the Building and the Property; and (vii) make available to Landlord for inspection and copying, at Landlord’s expense, upon reasonable notice and at reasonable times, such Hazardous Materials Inventory and any other reports, inventories or other records required to be kept under Environmental Laws concerning the use, generation, treatment, storage, disposal or release of Hazardous Materials.

     46.3 Without limitation on any other indemnities by or obligations of Tenant to Landlord under this Lease or otherwise, Tenant hereby covenants and agrees to protect, defend, indemnify and hold harmless Landlord from and against any Losses incurred by Landlord as a result of Tenant’s breach of any representation, covenant or warranty hereof; or as a result of any claim, demand, liability, obligation, right or cause of action, including, but not limited to governmental action or other third party action (collectively, “Claims”), that is asserted against Landlord, the Premises, the Building or the Property as a result of or which arises directly or indirectly, in whole or in part, out of a Release, Threat of Release, treatment, transport, handling or disposal of any Hazardous Materials at, on, under, in, about, or from the Premises, the Building or the Property attributable to or arising out of the operations or activities or presence of Tenant or any assignee, sublessee, agent or representative of Tenant at or about the Premises, the Building or the Property. This indemnification of Landlord and its Mortgagee(s) by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Building.

     46.4 Landlord shall not Release any Hazardous Materials at, on, in or near the Premises, the Building or the Property and shall comply with all Environmental Laws in connection with Landlord’s use or occupancy of the Premises and the Building, and promptly shall take all remedial action, at Landlord’s sole cost and expense, necessary or desirable to remedy, clean-up and remove the presence of any Hazardous Materials with respect to any Release by Landlord or Landlord’s failure to comply with Environmental Laws. Notwithstanding the foregoing, Landlord shall not be deemed to be prohibited from using products containing Hazardous Materials so long as such products are commonly found in an office or a medical device manufacturing and product development environment and are handled, stored, used and disposed of in compliance with all Environmental Laws. In addition, Landlord shall (i) obtain, maintain in full force and effect, and comply with, all permits required under Environmental Laws and (ii) comply with all record keeping and reporting requirements imposed by

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Environmental Laws concerning the use, handling, treatment, storage, disposal or release of Hazardous Materials on the Premises, the Building and the Property

     46.5 Without limitation on any other indemnities by or obligations of Landlord to Tenant under this Lease or otherwise, Landlord hereby covenants and agrees to protect, defend, indemnify and hold harmless Tenant from and against all third party claims asserted against Tenant, the Premises, the Building or the Property resulting from Landlord’s breach of any representation, covenant or warranty hereof(collectively, “Claims”) or which arises directly out of a Release or Threat of Release of any Hazardous Materials at, on, under, in, about, or from the Premises, the Building or the Property attributable to or arising out of the operations or activities or presence of Landlord or representative of Landlord at or about the Premises, the Building or the Property

     46.6 The indemnities, warranties and covenants contained in this Article shall survive termination of this Lease.

47. Americans With Disabilities Act. Notwithstanding any other provisions contained in this Lease and with the purpose of superseding any such provisions herein that might be construed to the contrary, it is the intent of Landlord and Tenant that at all times while this Lease shall be in effect that the following provisions shall be deemed their specific agreement as to how the responsibility for compliance (and cost) with the Americans With Disabilities Act and amendments to same (“ADA”), both as to the Premises and the Property, shall be allocated between them, namely:

     47.1 Landlord and Tenant agree to cooperate together in the initial design, planning and preparation of specifications for construction of the Premises so that same shall be in compliance with the ADA. Any costs associated with assuring that the plans and specifications for the construction of the Premises are in compliance with the ADA shall be borne by the party whose responsibility it is hereunder to bear the cost of preparation of the plans and specifications. Similarly those costs incurred in the initial construction of the Premises so that same are built in compliance with the ADA shall be included within Tenant’s Improvements and handled in the manner as provided for in other Sections of this Lease.

     47.2 Subject to Section 47.4, modifications, alterations and/or other changes required to and within the Common Areas which are not capital in nature shall be the responsibility of Landlord to perform and the cost of same shall be considered a part of the Building Expenses and treated as such.

     47.3 Subject to Section 47.4, modifications, alterations and/or other changes required to and within the Common Areas which are capital in nature shall be the responsibility of Landlord to perform and the cost of same shall be considered a part of the Building Expenses, but shall be amortized in accordance with generally accepted accounting principles as described in Section 6.2.2.12 above.

     47.4 Modifications, alterations and/or other charges required to and within the Common Areas, whether capital in nature or not, which are required as a result of Tenant’s specific use of the Premises, as compared to office uses generally, shall be paid by Tenant within thirty (30) days after receipt of an invoice from Landlord, together with reasonable supporting documentation.

     47.5 Modifications, alterations and/or other changes required to and within the Premises (after the initial construction of same), whether capital in nature or non-capital in nature, shall be the responsibility of Tenant and at its cost and expense; unless the changes are structural in nature and result from the original design of the Building, in which instance they shall be the responsibility of Landlord and at its cost and expense.

     Each party hereto shall indemnify and hold harmless the other party from any and all liability, loss, cost or expense arising as a result of a party not fulfilling its obligations as to compliance with the ADA as set forth in this Section.

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48. Several Liability. If Tenant shall be one or more individuals, corporations or other entities, whether or not operating as a partnership or joint venture, then each such individual, corporation, entity, joint venturer or partner shall be deemed to be both jointly and severally liable for the payment of the entire rent and other payments specified herein.

49. Financial Statements. Tenant represents and warrants to Landlord that the financial statements heretofore delivered by Tenant to Landlord are true, correct and complete in all respects, have been prepared in accordance with generally accepted accounting principles, and fairly represent the financial condition of Tenant as of the date thereof, and that no material change has thereafter occurred in the financial conditions reflected therein. Within fifteen (15) days after request from Landlord, Tenant agrees to deliver to Landlord such future financial statements and other information as Landlord from time to time may reasonably request.

50. Definition of “Day” and “Days” . As used in the Lease, the terms “day” and “days” shall refer to calendar days unless specified to the contrary; provided, however, that if the deadline established for either party’s performance hereunder occurs on a Saturday, Sunday or banking holiday in the States of Colorado or Maryland, the date of performance shall be extended to the next occurring business day.

51. Tenant’s Anti-Terrorism Representation. Tenant hereby represents and warrants that neither Tenant, nor any of its respective officers, directors, shareholders, partners, members or affiliates (including without limitation indirect holders of equity interests in Tenant) is or will be an entity or person: (i) that is listed in the Annex to, or is otherwise subject to the provisions of Executive Order 13224 issued on September 24, 2001 (“EO13224”); (ii) whose name appears on the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) most current list of “Specifically Designated National and Blocked Persons” (which list may be published from time to time in various mediums including, but not limited to, the OFAC website); (iii) who commits, threatens to commit or supports “terrorism”, as that term is defined in EO13224; (iv) is subject to sanctions of the United States government or is in violation of any federal, state, municipal or local laws, statutes, codes, ordinances, orders, decrees, rules or regulations relating to terrorism or money laundering, including, without limitation, EO13224 and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001; or (v) who is otherwise affiliated with any entity or person listed above (any and all parties or persons described in clauses (i) – (v) above are herein referred to as a “Prohibited Person”).

     Neither Tenant, nor any of their respective officers, directors, shareholders, partners, members or affiliates (including without limitation indirect holders of equity interests in Tenant) shall (a) conduct any business, nor engage in any transaction or dealing, with any Prohibited Person, including, but not limited to, the making or receiving of any contribution of funds, goods, or services, to or for the benefit of a Prohibited Person, or (b) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in EO13224. Tenant agrees to indemnify and hold Landlord harmless from and against all claims, lawsuits, costs (including reasonable counsel fees), losses, damages and liabilities that arise out of or relate to Landlord’s engagement in any activity associated with either (a) or (b) set forth above. If Tenant violates the provisions of this Section, such violation shall be considered an immediate Event of Default and Landlord shall not be required to grant Tenant any cure period prior to exercising its rights under this Lease, including, without limitation, termination of the Lease.

52. Parking. During the Initial Term, Tenant shall have the non-exclusive right, on a first-come, first-serve basis, to park in the surface parking, at no cost or expense to Tenant or its employees or agents, at a ratio of approximately 4 spaces per 1,000 rentable square feet of the Premises, as such Premises may be expanded pursuant to Section 53 herein.

53. Right of Expansion. The parties acknowledge and agree that Landlord has the capacity to build an addition onto the Building (the “Building Addition”). At any time prior to the fourth (4^th) anniversary of the Phase I Commencement Date, provided that (i) Tenant is not in default at the time of exercising its rights under this Section 53, (ii) Tenant occupies the Premises and is open for business in the entire Premises (which shall only include the Phase I Premises until the

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Phase II Commencement Date) (and will not have reduced the size of the Premises in any subsequent amendments or agreements after the date of this Lease) and (iii) Landlord shall have determined, in its reasonable business judgment, that Tenant has sufficient financial net worth to fulfill its obligations under this Lease for both the Premises and the Expansion Space (as defined herein), Tenant shall have the one-time right to require Landlord to construct a minimum of an additional twenty-five thousand (25,000) rentable square feet up to a maximum of forty thousand (40,000) rentable square feet (the “Expansion Space”). Tenant shall notify Landlord in writing of its intent to exercise its rights under this Section 53 (“Tenant’s Request”).

     53.1 Terms of Rental for Expansion Space within Building. If Tenant exercises its option to expand, Tenant’s lease of the Expansion Space shall be subject to the following terms and conditions:

(a) the Base Rent for the Expansion Space for the first Lease Year shall be equal to Tenant’s Percentage Share of Total Development Costs (as defined herein) multiplied by nine percent (9%), with annual Fifty Cent ($.50) increases after the first Lease Year;

(b) Landlord shall build out the core and shell of the Building Addition with at least 25,000 rentable square feet;

(c) Landlord shall construct such tenant improvements in the Expansion Space as are mutually agreed upon by both Landlord and Tenant (the “Expansion Improvements”);

(d) Landlord shall pay for the cost of the Expansion Improvements up to an amount equal to the product of (i) Forty-One and no/Dollars ($41.00) and the rentable area of the Expansion Space if Tenant exercises its rights during the first Lease Year, (ii) Forty-Two and no/Dollars ($42.00) and the rentable area of the Expansion Space if Tenant exercises its rights during the second Lease Year, (iii) Forty-Three and no/Dollars ($43.00) and the rentable area of the Expansion Space if Tenant exercises its rights during the third Lease Year or (iv) Forty-Four and no/Dollars ($44.00) and the rentable area of the Expansion Space if Tenant exercises its rights during the fourth Lease Year (the “Expansion Allowance);

(e) If the cost to complete the Expansion Improvements exceeds the Expansion Allowance, at Tenant’s option, Tenant shall either reimburse Landlord directly for such excess costs or Landlord shall advance up to an additional amount equal to the product of Ten and no/Dollars ($10.00) and the rentable area of the Expansion Space (the “Expansion Amortized Amount”), which amount shall be repaid by Tenant to Landlord on a monthly basis, together with Base Rent, as additional rent, in an amount equal to the amount of the Expansion Amortized Amount which has been advanced, amortized over a ten (10) year term, with interest accruing at nine percent (9%) per annum;

(f) The term of the Lease for the Expansion Space shall be ten (10) years from the commencement date for the Expansion Space, and the term for the Premises shall be extended to be coterminous therewith, with the Base Rent for the Premises increasing during such extension in the same proportion as the increases during the then current Term;

(g) The commencement date for the Expansion Space shall be the earlier to occur of (a) the date on which Tenant takes possession and occupancy of the Expansion Space to conduct business or (b) the date five (5) days following that date which is the last on which all of the following events have occurred, namely (x) the Expansion Space is “substantially completed,” as defined in Section 3.2 above, and (y) Landlord has given Tenant notice that the Expansion Space is “substantially completed;” Provided, however, that the target date for the Expansion Space commencement date shall be eighteen (18) months following full execution of an amendment to this Lease pursuant to Section 53.3; and

(h) Landlord shall provide Tenant with a copy of a budget outlining Landlord’s anticipated costs for completing the Expansion Improvements (the “Expansion Budget”).

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To the extent Landlord’s work hereunder would cause the overall cost of the Expansion Improvements to exceed the Expansion Budget, Landlord shall notify Tenant in writing of such overrun, and Tenant shall have five (5) days to notify Landlord if it disapproves of such overrun, provided that Tenant shall not unreasonably withhold its approval hereunder. If Tenant does not notify Landlord in writing of its disapproval thereof, such overrun shall be deemed approved. If Tenant disapproves of Landlord’s projected overrun, Tenant shall cooperate with Landlord to devise alternatives to alleviate any possible overruns. To allow Tenant to monitor the Expansion Budget, Landlord shall provide copies to Tenant of the invoices paid in connection with the Expansion Improvements.

     Notwithstanding the foregoing, prior to the commencement of construction of the Expansion Space, Landlord shall provide Tenant with its estimate of the Total Development Costs (the “Development Cost Statement”). Within fourteen (14) days following receipt of the Development Cost Statement, Tenant shall notify Landlord in writing either directing Landlord to proceed with the construction of the Expansion Space, or withdrawing Tenant’s Request, at which time Tenant’s rights under this Section 53 shall be null and void and of no further force and effect and Tenant shall reimburse Landlord for Landlord’s actual costs in designing the Expansion Space incurred as of the date of Landlord’s Development Cost Statement, including, without limitation, the architectural and engineering costs, mechanical, electrical and plumbing costs, subdivision costs and the costs to produce the construction drawings but in no event more than $7.80 per rentable area of the Expansion Space .

     53.2 Tenant’s Share of Total Development Costs.

          53.2.1 The term, “Total Development Costs,” shall mean any and all hard and soft costs incurred by Landlord in completing the Building Addition and the Expansion Space, which costs shall include, but not be limited to:

(a) that portion of the acquisition cost of the Land that is attritubable to the Building Addition;

(b) architectural and engineering costs associated with the design of the Building Addition and the Expansion Improvements;

(c) construction costs of the Building Addition;

(d) construction costs of the Expansion Improvements;

(e) development soft costs and the interest carried on such development costs during the construction of the Building Addition;

(f) construction management fee of five percent (5%) of the aggregate construction costs incurred in connection with the construction of the Building Addition and the Expansion Space;

(g) brokerage commissions;

(h) attorneys’ fees (excluding such fees incurred for lease negotiations);

(i) land studies, if necessary, including soil tests, surveys and environmental studies;

(j) utility upgrades, if required;

(k) landscaping;

(l) parking lot expansion, if required;

(m) traffic studies, if necessary;

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(n) development plan and subdivision costs;

(o) costs of offsite improvements, if required to construct the Building Addition;

(p) appraisals and insurance;

(q) any loan fees incurred to finance the construction of the Building Addition; and

(r) signage, if installed at Landlord’s expense.

          53.2.2 The term, “Tenant’s Share,” for purposes of this Section 53 shall mean the rentable area of the Expansion Space divided by the rentable area of the Building Addition.

     53.3 Entry into Lease Amendment. Within thirty (30) days after the date of Tenant’s Request, Landlord and Tenant shall enter into a written amendment to this Lease which adds the Expansion Space to the definition of the “Premises” and addresses such other matters that are at variance with the terms and conditions of this Lease. At such time as the Total Development Costs are ascertainable, Landlord and Tenant shall enter into an additional amendment to this Lease setting forth the Base Rent for the Expansion Space, with rent commencing on the Expansion Space upon the commencement date for the Expansion Space, as set forth in Section 53.1.

     53.4 Miscellaneous Matters. The expansion rights shall not be severed from this Lease, or separately sold, assigned or transferred, but may only be assigned or transferred as a part of this Lease. Tenant acknowledges and agrees that this provision is personal to Landlord and shall not survive any assignment of this Lease or transfer of Landlord’s rights under this Lease to any subsequent third-party owner or Mortgagee.

54. Exterior Signage. Provided Tenant occupies at least fifty percent (50%) of the Rentable Area of the Building, Tenant, at Tenant’s expense, shall have the right to install two (2) exterior signs on the Building on the locations shown on Exhibit “F” attached hereto and made a part hereof, provided that (i) there is no Event of Default outstanding at anytime, (ii) Tenant obtains Landlord’s prior written approval, such approval not to be unreasonably withheld, with regard to the size, and method of installation of the signage and (iii) Tenant remains open for business in the Premises. Tenant, at Tenant’s expense, shall maintain the signage, and obtain all required permits from any governmental authorities. At the expiration or sooner termination of this Lease, Tenant shall remove the exterior signage on the Building and restore the Building’s surface to that condition which existed immediately prior to the installation of the signage. In addition, if, after installation of the signage, any of the conditions set forth in subsections (i) through (iii) inclusive of the first sentence of this paragraph are not satisfied, Tenant, at Tenant’s expense, shall remove the signage upon fifteen (15) days’ advance written notice from Landlord and restore the Building’s surface to that condition which existed immediately prior to the installation of the signage.

55. Landlord’s Warranties and Covenants. Notwithstanding anything in this Lease to the contrary, Landlord represents and warrants to Tenant that it is the sole owner in fee simple of the Building, that no mortgages or deeds of trusts presently encumber Landlord’s title to the Building; no encumbrances on the Building shall prohibit or impede the use of the Premises as contemplated herein or create any financial obligation on the part of Tenant except as expressly set forth herein; that Landlord has the full right, power and authority to enter into this Lease and make the agreements contained herein on its part to be performed; that the execution, delivery and performance of this Lease has been duly authorized by Landlord; that the Lease constitutes the valid and binding obligation of Landlord, enforceable in accordance with its terms; that other than as set forth in any Phase I reports provided to Tenant by Landlord, to Landlord’s knowledge, there are no Hazardous Materials in, on or under the Premises or the Building; and that the making of this Lease and the performance thereof will not violate any present zoning laws or ordinances or the terms or provisions of any mortgage, lease or other agreement to which

36

Landlord is a party or under which Landlord is otherwise bound, or which restricts Landlord in any way with respect to the use or disposition of the Premises.

56. Landlord Default. If at any time or times Landlord shall be in default in the performance or observance of any of its covenants, agreements or undertakings provided in this Lease, and if Landlord shall not cure or remedy such default within thirty (30) days after Tenant gives written notice thereof to Landlord, or, if such default cannot reasonably be cured and remedied within thirty (30) days, if Landlord shall not commence in good faith to cure and remedy such default within thirty (30) days after receipt of such notice from Tenant and continue with due diligence until such default is cured and remedied, then Tenant may, but shall not be obligated to, take such action as in Tenant’s good faith judgment is reasonably appropriate to cure and remedy such default by Landlord, and Landlord shall, within thirty (30) days after receipt of demand therefor, pay to Tenant an amount equal to all reasonable costs and expenses incurred by Tenant in so curing and remedying such default. If Landlord fails to pay Tenant within the 30-day period, Tenant shall only be permitted to offset the amount due against Base Rent after obtaining a final, unappealable decision in its favor from an adjudicatory body.

57. Right of First Refusal to Purchase. During the Term of this Lease, provided that Tenant is occupying the entire Premises, has not reduced the size of the Premises in any subsequent amendments or agreements after the date of this Lease and has not subleased any portion of the Premises (the “ROFR Conditions”), Tenant shall have a continuing right of first refusal in connection with the purchase of the Building from Landlord, subject to the limitations set forth in this Section. When Landlord receives a bona-fide offer to purchase the Building from a company that produces medical devices (the “Third Party”) that Landlord is willing to accept, provided that Tenant has satisfied the ROFR Conditions, Landlord shall notify Tenant in writing of the terms and conditions under which the Third Party is willing to purchase the Building (“Landlord’s Offer Notice”). Within five (5) business days after Tenant’s receipt of Landlord’s Offer Notice, Tenant shall exercise the foregoing right of first refusal by delivering written notice of its intention to purchase the Building on equal or better terms and conditions than those set forth in Landlord’s Offer Notice (“Tenant’s Acceptance Notice”). Tenant’s failure to provide Tenant’s Acceptance Notice within the foregoing 5-business day period shall be deemed rejection of Landlord’s Offer Notice.

     57.1 Purchase and Sale Agreement. If Tenant exercises its rights in a timely fashion under Section 57 above, within ten (10) days after receipt of Tenant’s Acceptance Notice, the parties shall execute the agreement of sale which is attached hereto as Exhibit “K” (the “Agreement of Sale”). Upon the closing of the purchase of the Building, this Lease shall terminate and Tenant shall have no further rights or obligations hereunder, except as expressly survive the expiration or sooner termination of this Lease. In the event that the purchase of the Building does not close pursuant to the terms of the Agreement of Sale, then, in addition to the applicable provisions of the Agreement of Sale, this Lease shall continue in full force and effect pursuant to the terms set forth herein, except that Tenant’s Right of First Refusal in this Section 57 shall be void and of no further force or effect.

     57.2 Miscellaneous Matters. If (i) Tenant is then in default beyond any applicable cure period under the terms of this Lease at the time of exercising its rights under this Section 57, (ii) Tenant fails to deliver Tenant’s Acceptance Notice within the five (5) business day period specified above, (iii) Tenant fails to execute the Agreement of Sale within the ten (10) day period, unless the Agreement of Sale is not executed for any reason within Landlord’s reasonable control or (iv) Tenant declines to exercise its rights as provided above, then Landlord shall be free to sell the Building based on the terms and conditions specified in Landlord’s Offer Notice. Tenant acknowledges and agrees that the rights granted by this Section 57 are personal to Landlord and to Tenant and shall not survive any assignment of this Lease by Landlord or Tenant nor shall it survive any transfer of Landlord’s rights under this Lease to any subsequent third-party owner or Mortgagee.

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     IN WITNESS WHEREOF, Landlord and Tenant have respectively affixed their hands and seals to this Lease as of the day and year first above written.

WITNESS OR ATTEST:	LANDLORD: 9965 FEDERAL DRIVE, LLC
/s/ Stephanie L. Shack	By:	/s/ Roger A. Waesche, Jr.     (SEAL)
		Name: Roger A. Waesche, Jr.
		Title: Executive Vice President
WITNESS OR ATTEST:	TENANT: THE SPECTRANETICS CORPORATION
/s/ Wade Bowe	By:	/s/ Guy A. Childs     (SEAL)
		Name: Guy A. Childs
		Title: Chief Financial Officer

STATE OF MARYLAND, COUNTY OF HOWARD, TO WIT:

     I HEREBY CERTIFY, that on this                      day of                     , 2006, before me, the undersigned Notary Public of the State, personally appeared Roger A. Waesche, Jr., who acknowledged himself to be the Executive Vice President of 9965 FEDERAL DRIVE, LLC, a Colorado limited liability company, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same on behalf of the limited liability company for the purposes therein contained as the duly authorized Executive Vice President of the limited liability company by signing the name of the limited liability company by himself as such Executive Vice President.

     WITNESS my hand and Notarial Seal.

Notary Public

My Commission Expires:                                                            

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STATE OF COLORADO	)
	)	ss.
COUNTY OF EL PASO	)

     The foregoing instrument was acknowledged before me this ___day of                      20___, by                      as                      of The Spectranetics Corporation, a                     , as                      of The Spectranetics Corporation, a                     , on behalf of such                     .

     Witness my hand and official seal.

     My commission expires:                                        

[SEAL] Notary Public

39

EXHIBIT “A”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

FLOOR PLAN

[TO BE ATTACHED]

EXHIBIT “B”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

RULES AND REGULATIONS

     To the extent that any of the following Rules and Regulations, or any Rules and Regulations subsequently enacted conflict with the provisions of the Lease, the provisions of the Lease shall control.

     1. Tenant shall not obstruct or permit its agents, clerks or servants to obstruct, in any way, the sidewalks, entry passages, corridors, halls, stairways or elevators of the Building, or use the same in any other way than as a means of passage to and from the offices of Tenant; bring in, store, test or use any materials in the Building which could cause a fire or an explosion or produce any fumes or vapor; make or permit any improper noises in the Building; smoke in the elevators, the Premises, the Building or the Common Areas except in the exterior areas specifically designated by Landlord; throw substances of any kind out of the windows or doors, or down the passages of the Building, in the halls or passageways; sit on or place anything upon the window sills; or clean the windows.

     2. Waterclosets and urinals shall not be used for any purpose other than those for which they were constructed; and no sweepings, rubbish, ashes, newspaper or any other substances of any kind shall be thrown into them. Waste and excessive or unusual use of electricity or water is prohibited.

     3. Tenant shall not (i) obstruct the windows, doors, partitions and lights that reflect or admit light into the halls or other places in the Building, or (ii) inscribe, paint, affix, or otherwise display signs, advertisements or notices in, on, upon or behind any windows or on any door, partition or other part of the interior or exterior of the Building without the prior written consent of Landlord which shall not be unreasonably withheld. If such consent be given by Landlord, any such sign, advertisement, or notice shall be inscribed, painted or affixed by Landlord, or a company approved by Landlord, but the cost of the same shall be charged to and be paid by Tenant, and Tenant agrees to pay the same promptly, on demand.

     4. Intentionally omitted.

     5. When electric wiring of any kind is introduced, it must be connected as directed by Landlord, and no stringing or cutting of wires shall be allowed, except with the prior written consent of Landlord which shall not be unreasonably withheld, and shall be done only by contractors approved by Landlord. The number and location of telephones, telegraph instruments, electric appliances, call boxes, etc., shall be subject to Landlord’s approval. No tenants shall lay linoleum or other similar floor covering so that the same shall be in direct contact with the floor of the Premises; and if linoleum or other similar floor covering is desired to be used, an interlining of builder’s deadening felt shall be first affixed to the floor by a paste or other material, the use of cement or other similar adhesive material being expressly prohibited.

     6. No additional lock or locks shall be placed by Tenant on any door in the Building, without prior written consent of Landlord. Two keys will be furnished Tenant by Landlord; two additional keys will be supplied to Tenant by Landlord, upon request, without charge; any additional keys requested by Tenant shall be paid for by Tenant. Tenant, its agents and employees, shall not have any duplicate keys made and shall not change any locks. All keys to doors and washrooms shall be returned to Landlord at the termination of the tenancy, and in the event of any loss of any keys furnished, Tenant shall pay Landlord the cost thereof.

     7. Intentionally omitted.

     8. No vehicles or animals of any kind (other than animals to assist the disabled), shall be brought into or keep in or about the Premises. No bicycle shall be brought into or out of the front lobby or be stored in or around the front entrance of the Building.

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     9. Tenant shall not conduct, or permit any other person to conduct, any auction upon the Premises; manufacture or store goods, wares or merchandise upon the Premises, without the prior written approval of Landlord, except the storage of usual supplies and inventory to be used by Tenant in the conduct of its business; permit the Premises to be used for gambling; make any unusual noises in the Building; permit to be played any musical instrument in the Premises; permit to be played any radio, television, recorded or wired music in such a loud manner as to disturb or annoy other tenants; or permit any unusual odors to be produced upon the Premises. Tenant shall not permit any portion of the Premises to be used for the storage, manufacture, or sale of intoxicating beverages, narcotics, tobacco in any form, or as a barber or manicure shop.

     10. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises, without the prior written consent of Landlord which consent shall not be unreasonably withheld. Such curtains, blinds and shades must be of a quality, type, design, and color, and attached in a manner reasonably approved by Landlord.

     11. Canvassing, soliciting and peddling in the Building are prohibited, and Tenant shall cooperate to prevent the same.

     12. There shall not be used in the Premises or in the Building, either by Tenant or by others in the delivery or receipt of merchandise, any hand trucks except those equipped with rubber tires and side guards.

     13. Tenant, before closing and leaving its Premises, shall ensure that all entrance doors to same are locked.

     14. Landlord shall have the right to prohibit any advertising by Tenant which in Landlord’s opinion tends to impair the reputation of the Building or its desirability as a building for offices, and upon notice from Landlord, Tenant shall refrain from or discontinue such advertising.

     15. Landlord hereby reserves to itself any and all rights not granted to Tenant hereunder, including, but not limited to, the following rights which are reserved to Landlord for its purposes in operating the Building:

(a) the exclusive right to the use of the name of the Building for all purposes, except that Tenant may use the name as its business address and for no other purpose; (b) the right to change the name or address of the Building, without incurring any liability to Tenant for so doing;

(c) the right to install and maintain a sign or signs on the exterior of the Building;
(d) the exclusive right to use or dispose of the use of the roof of the Building;

(e) the non-exclusive right to use the area above the ceiling of the Premises for the purpose of installing and maintaining telecommunications, water lines, utility lines, other conduit, sprinklers, drainlines, ductwork and HVAC connections and any other equipment necessary to provide services to any area in the Building;

(f) the right to limit the space on the directory of the Building to be allotted to Tenant if at any time Tenant is not the sole occupant of the Building; and

(g) the right to grant to anyone the right to conduct any particular business or undertaking in the Building.

     16. As used herein the term “Premises” shall mean and refer to the “Premises” as defined in Section 1 of the Lease.

B-2

     17. Tenant shall not operate space heaters or other heating or ventilating equipment without the express prior written consent of Landlord in each instance first obtained. Tenant shall not install or operate any electrical equipment, appliances or lighting fixtures in the Premises which are not listed and labeled by Underwriter’s Laboratories or other testing organization acceptable to Landlord.

B-3

EXHIBIT “C”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

SCHEDULE OF TENANT IMPROVEMENTS

PER CONSTRUCTION DRAWINGS DATED OCTOBER 4, 2006

[PAGE 1 OF CONSTRUCTION DRAWINGS TO BE ATTACHED]

EXHIBIT “D”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

ESTOPPEL CERTIFICATE

[The following is subject to any actual disclosure necessitated by true facts.]

Tenant:	THE SPECTRANETICS CORPORATION
To:	9965 FEDERAL DRIVE, LLC
	c/o Corporate Office Properties Trust
	Suite 300, 6711 Columbia Gateway Drive
	Columbia, Maryland 21046
Re:
	Colorado Springs, Colorado

1.	, a                      corporation, is the named Tenant (“Tenant”), and                     . is the Landlord (“Landlord”) under a Lease dated                     , located at the Property (“Property”) identified above. The Lease, together with the amendments:
	(collectively, “Lease”) constitutes the entire agreement between Landlord and Tenant with respect to the Property and the Premises. There are no other lease documents, commitments, options or rights with respect to the Property or the Premises and there are no other representations, warranties, agreements, concessions, commitments, or other understandings between the Tenant and the Landlord regarding the Property or the premises demised other than as set forth in the Lease or this paragraph 1.
2.	Tenant occupies Suite ___, with a Rentable Square Footage Area of ___ rentable square feet (the “Premises”). Tenant’s Pro Rata Share of the Property is ___% (___).
3.	The Term of the Lease commenced                      and will expire                     . Tenant is the actual occupant in possession of the Premises and has not sublet, assigned or hypothecated its leasehold interest. All improvements to be constructed on the Premises by Landlord have been completed and accepted by Tenant and any tenant construction or improvement allowances have been paid.
4.	As of this date, no breach or default exists on the part of Tenant under the Lease, and there exists no facts that, with the passage of time or the giving of notice, or both, would constitute a default. To the best of Tenant’s knowledge, no breach or default exists on the part of Landlord under the Lease, and there exists no facts that, with the passage of time or the giving of notice, or both, would constitute a default. Neither Tenant nor Landlord has commenced any action or given or received any notice for the purpose of terminating the Lease.
5.	Base Rent is currently payable in the amount of $                     per month (which includes an expense stop equal to the amount of the operating expenses incurred by Landlord in the ___ calendar year and a real estate expense stop equal to the amount of the real estate taxes incurred by Landlord in the ___ calendar year). The base year amounts for operating expenses are $                     and for real estate taxes are $                     (please specify either dollar amounts or per square foot amounts). Pursuant to the Lease, Tenant is obligated to pay as additional rent its pro-rata share of operating expenses and real estate taxes that exceed the operating expense stop and real estate expense stop set forth in the Lease. The monthly base rent has been paid through

D-1

	and all additional rent has been paid on a current basis in the manner required under the Lease.
6.	Tenant has paid the first monthly installment of rent in advance, and Tenant has no claim or defense against Landlord under the Lease and is asserting no offsets or credits against either the rent or Landlord. Tenant has no claim against Landlord for any security or other deposits except $                      which was paid pursuant to the Lease. Tenant has no right to any free rent, rent abatement, rent credit, or other rent concession, except:
	.
7.	Tenant has no right to renew or extend the term of the Lease, or to expand the size of the Premises, except:
	Tenant has no interest in or option or preferential right to purchase all or any part of the Premises or the Property of which it forms a part, other than its right to lease the Premises as Tenant under the Lease.
8.	Tenant has no rights of termination with the terms of the Lease except as set forth in the Lease and except:
	.
9.	All insurance required of Tenant by the Lease has been provided by Tenant and all premiums paid.
10.	There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or any state thereof, or any other action brought under said bankruptcy laws with respect to Tenant.
11.	Tenant has not received any written notice of Landlord’s prior sale, transfer, or assignment, hypothecation or pledge of the Lease or any of the rents or other amounts to be paid by Tenant pursuant thereto.
12.	Tenant has received no written notice from any governmental authority or other person or party claiming a violation of, or requiring compliance with, any Federal, State or local statute, ordinance, rule or regulation or the requirement of law for environmental contamination at the Premises, to the best knowledge of Tenant, the Tenant is in compliance with all applicable provisions of the Industry Site Recovery Act, and no hazardous, toxic, or polluting substances or wastes have been generated, treated, manufactured, stored, refined, used, handled, transported, released, spilled, disposed of or deposited by Tenant on, in or under the Premises.

This Tenant Estoppel Certificate may be relied upon by the Landlord, Corporate Office Properties, L.P. and any lender providing financing to acquire the Property.

D-2

     Effective Date:                                                            

WITNESS/ATTEST:	, a                                corporation
	By:
	Printed Name:
	Title:
	Date:

D-3

EXHIBIT “E”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

FORM OF COMMENCEMENT DATE AGREEMENT

COMMENCEMENT DATE AGREEMENT

     THIS COMMENCEMENT DATE AGREEMENT is made this ___day of ___, 200___, between 9965 FEDERAL DRIVE, LLC (“Landlord”) and THE SPECTRANETICS CORPORATION (“Tenant”).

     Landlord and Tenant have entered into a certain Agreement of Lease (the “Lease”) dated ___, 2006 demising certain space consisting of ___ rentable square feet in the in the building located at and having an address of 9965 Federal Drive, Colorado Springs, Colorado (the “Building”). All of the capitalized terms herein shall have the same respective definitions as set forth in the Lease.

     Pursuant to the provisions of Article 3 of the Lease, Landlord and Tenant, intending to be legally bound hereby, acknowledge and agree that the Commencement Date shall be the ___day of ___, 200___, and that the term of the Lease shall end on the ___day of ___, 20___, at 11:59 p.m., unless sooner terminated or extended, as provided in the Lease. As supplemented hereby, the Lease shall continue in full force and effect.

     IN WITNESS WHEREOF, the parties hereto have duly executed this Commencement Date Agreement on this ___day of ___, 200___.

WITNESS OR ATTEST:	LANDLORD: 9965 FEDERAL DRIVE, LLC
	By:		(SEAL)
		Name: Roger A. Waesche, Jr.
		Title: Executive Vice President
WITNESS OR ATTEST:	TENANT: THE SPECTRANETICS CORPORATION
	By:		(SEAL)
	Name:
	Title:

EXHIBIT “F”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

TENANT’S SIGNAGE

[TO BE ATTACHED]

EXHIBIT “G”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

TENANT’S TRADE FIXTURES

Deionized water system
Delivery lines for Argon and Nitrogen,
cleam room- CeilingTiles, walls, Filters, pass through’s and doors.
Compressed air lines

EXHIBIT “H”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

EQUIPMENT TO BE MAINTAINED BY LANDLORD

Pumps

Tag No:	CHWP 1
Make:	California Hydraulics
Model No:	3196-71/2SS
Serial No:	840982
Electrical:	460/3
HP:	25
Tag No:	CHWP 2
Make:	California Hydraulics
Model No:	3196-71/2SS
Serial No:	840981
Electrical:	460/3
HP:	25
Tag No:	CWP 1
Make:	Aurora Pump
Model No:	84-14231-1
Type No:	411-BF
Electrical:	460/3
HP:	20
Tag No:	CWP 2
Make:	Aurora Pump
Model No:	84-1423-3
Type No:	411-BF
Electrical:	460/3
HP:	20
Tag No:	CWP 3
Make:	Aurora Pump
Model No:	84-14231-2
Type No:	411-BF
Electrical:	460/3
HP:	20
Tag No:	CWP 4
Make:	B&G
Model No:	ACC 6 7/8 BF
Serial No:	1261970
Electrical:	460/3
HP:	7.5
Tag No:	CWP 5

H-1

Make:	B&G
Model No:	ACC 6 7/8 BF
Serial No:	1261971
Electrical:	460/3
HP:	7.5
Tag No:	CWP 6
Make:	B&G
Model No:	1510 1-1/2 AB
Serial No:	1259616
Electrical:	460/3
HP:	20
Tag No:	CWP 7
Make:	B&G
Model No:	1510 1 1/2 AB
Serial No:	1259820
Electrical:	460/3
HP:	2
Tag No:	HHWP 1
Make:	B&G
Model No:	1510 4C 6 5/8 BF
Serial No:	1261969
Electrical:	460/3
HP:	7.5
Tag No:	HHWP 2
Make:	B&G
Model No:	1510 4C 6 5/8 BF
Serial No:	1261988
Electrical:	460/3
HP:	7.5
Tag No:	HHWP 3
Make:	B&G
Model No:	1510 24C 6 7/8 BF
Serial No:	1259821
Electrical:	460/3
HP:	3
Tag No:	HRWP 1
Make:	B&G
Model No:	VSC B-3/8 BF LAR
Serial No:	1237643
Electrical:	460/3
HP	15
Tag No:	HRWP 2
Make:	B&G
Model No:	VSC B-3/8 BF LAR
Serial No:	1237648
Electrical:	460/3
HP:	15

H-2

Tag No:	HHWP 4
Make:	B&G
Model No:	1510 24C 6078 BF
Serial No:	1259622
Electrical:	460/3
Tag No:	CHWP 8
Make:	B&G
Model No:	1510 2 1/2 AB7BF
Serial No:	1261506
Electrical:	460/3
HP:	5
Tag No:	CHWP 9
Make:	B&G
Model No:	1510 2 1/2 AB7BF
Serial No:	1261507
Electrical:	460/3
HP:	5
Tag No:	CHWP 12
Make:	B&G
Model No:	1510 2AC 6-3/4 4BF
Serial No:	1259628
Electrical:	460/3
Tag No:	CHWP 13
Make:	B&G
Model No:	1510 2AC 6-3/4 4BF
Serial No:	1259624
Electrical:	460/3
Tag No:	CHWP 14
Make:	B&G
Model No:	1510 2 1/2 AB 6-5/8 4BF
Serial No:	1259625
Electrical:	460/3
Tag No:	Condensate Return Pump #1
Make:	B&G
Model No:	8904840
Type No:	324 BF
Electrical:	460/3
Tag No:	Condensate Return Pump #2
Make:	B&G
Model No:	8904840
Type No:	324 BF
Electrical:	460/3
Tag No:	Preheat Pump
Make:	B&G
Model No:	1531 1 1/2 AB5-3/8 BF
Type No:	1241130
Electrical:	460/3

H-3

HP: 5

Return Air Fans

Tag No:	RAF 1
Make:	Trane
Model No:	ASV-1000/398
Serial No:	A84G12002
HP:	50
Electrical:	460/3
Tag No:	RAF 3
Make:	TCF Aerovent
Model No:	FSDA-4-100-5-1-41
Serial No:	96318982-1-1
HP:	3
Electrical:	460/3
Tag No:	RAF 6
Make:	GP Fan-New York Blower
Shop No:	Z-8834-120
Size:	363
Electrical:	460/3
Belts:	(3) BX80
Tag No:	RAF 7
Make:	GP Fan-New York Blower
Shop No:	Z-8834-120
Size:	363
Electrical:	460/3
Belts:	(3) BX80
Tag No:	RAF 8
Make:	GP Fan-New York Blower
Shop No:	Z-8834-115
Size:	333
Electrical:	460/3
Belts:	(2) BX85

Air Handling Units

Tag No:	AC-1
Make:	Trane
Type No:	FSBA-3-100-5-1-55
Serial No:	95312888-1-1
Electrical:	460/3
HP:	50
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-2
Make:	Trane
Type No:	FSBA-3-100-5-1-55

H-4

Serial No:	95312888-1-2
Electrical:	460/3
HP:	30
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-3
Make:	Trane
Type No:	38-26-1780-AP
Serial No:	SF 7020
Electrical:	460/3
HP:	40
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-4
Make:	Trane
Type No:	AAPA39BFO
Serial No:	A88J12001
Electrical:	460/3
HP:	30
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-5
Make:	Trane
Type No:	Master DL 3109-0032-27
Serial No:	K84G35000
Electrical:	460/3
HP:	15
Belts:	(2) B116
Tag No:	AC-6
Make:	Trane
Type No:	Master DL 3109-0032-33
Serial No:	K84G35001
Electrical:	460/3
HP:	30
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-7
Make:	Trane
Type No:	Master DL 3109-0032-33
Serial No:	K84G35002
Electrical:	460/3
HP:	30
Belts:	(2) CX136

H-5

Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	AC-8
Make:	Trane
Type No:	Master DL 3109-0032-33
Serial No:	K84G35003
Electrical:	460/3
HP:	30
Belts:	(2) CX136
Filters:	(4) 12x24 bag filters
	(12) 24x24 bag filters
	Auto roll poly pre filters
Tag No:	HV #1
Make:	Trane
Type No:	Unknown
Serial No:	UHV84H44306
Electrical:	460/3
Belts:	(2) A-78
Comments:	Coil and valve bad.
Coil Make:	The Wing Company
Size No:	C-60
No:	24 251
GPM:	20
Tag No:	HV #2
Make:	Trane
Type No:	Unknown
Serial No:	UHV84H44306
Electrical:	460/3
Belts:	(2) A-78
Coil Make:	The Wing Company
Size No:	C-60
No:	24 251
GPM:	20

Boiler Room

Tag No:	Boiler #1
Make:	Mohawk
Model No:	4-5-751L
Serial No:	9386
BTU:	6.3 MBH
Tag No:	Boiler #2
Make:	Mohawk
Model No:	4-5-751L
Serial No:	9387
BTU:	6.3 MBH
Tag No:	Boiler Room Unit Heater #1
Make:	Trane
Model No:	Unknown

H-6

Tag No:	Boiler Room Unit Heater #2
Make:	Trane
Model No:	Unknown

Miscellaneous Equipment

Tag No:	Chiller 1
Make:	Trane
Model No:	RTAA3404XN01A3D0BF
Serial No:	U97L06650
Electrical:	460/3
Tag No:	EF-8
Make:	Unknown
Model No:	Unknown
Electrical:	460/3
Belts:	(1) AP37
Tag No:	EF-14
Make:	New York Blower
Model No:	Z-8834-110
Size:	153
Electrical:	460/3
Belts:	(1) A40

H-7

EXHIBIT “I”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

JANITORIAL SPECIFICATIONS

Listed below are the cleaning specifications for all tenants at 9965 Federal Drive

Janitorial services are to be provided Monday through Friday in and about the premises.

General Office and Floor Areas

A.	Damp mop all stone, ceramic tile, terrazzo and other types of unwaxed flooring.
B.	Sweep all vinyl, asphalt, rubber and similar types of flooring using an approved chemically-treated cloth.
C.	Vacuum all traffic areas nightly. Sweep all private stairways and vacuum if carpeted.
D.	Hand dust and wipe clean with damp or chemically treated cloth all furniture, file cabinets, fixtures, window sills, convector enclosure tops and wash said sills and tops if necessary.
E.	Dust all telephones.
F.	Dust all chair rails, trim, etc.
G.	Remove all gum and foreign matter on sight. Spot clean resilient floor as necessary.
H.	Empty and clean all waste receptacles and remove wastepaper and water materials to a designated area.
I.	Damp dust interiors of all waste disposal receptacles.
J.	Wash clean all water fountains and water coolers
K.	Clean all glass furniture tops.
L.	Remove hand marks on elevator hatchways doors.
M.	Wipe clean all bright work
N.	Adjust venetian blinds to uniform standard.
O.	Cleaning of private toilet rooms and shower rooms and shampooing of carpets are not included in these specifications and will be provided by Landlord at Tenant’s request at Landlord’s average hourly rate.
P.	Any area designated as a vending area will be kept free from spillage and damp mopped daily.
Q.	Cleaning operations are to be scheduled so that an absolute minimum of lights are to be left on at all times. Upon completion of the cleaning, all lights must be turned off.

I-1

Periodic

A.	Hand dust all door louvers and other ventilating louvers within reach once per week.
B.	Dust all baseboards once per week.
C.	Remove finger marks from all painted surfaces near light switches, entrance doors, etc., once per week.
D.	Dust all lamp shades weekly.
E.	Dust all picture frames, charts and similar hangings quarterly which are not reached in nightly cleaning.
F.	Dust all vertical surfaces such as walls, partitions, doors and other surfaces not reached in nightly cleaning four times per year.
G.	Dust exterior of lighting fixtures quarterly.
H.	Dust all venetian blinds quarterly and wash annually.
I.	Dust quarterly all air conditioning louvers, grills, etc., not reached in nightly cleaning.
J.	Wash telephones monthly.
K.	Dust clothes closets, shelving and coat racks every two weeks.

Specific Office and Floor Areas scheduled above

“TENANT OFFICES”

Empty all trash receptacles and replace liners as necessary
Remove all collected trash to designated area
Empty and damp wipe ashtrays
Dust all furniture, fixtures, equipment and accessories
Spot clean all horizontal and vertical surfaces removing fingerprints, smudges and stains
Dust all surfaces above normal reach including sills, ledges, moldings, shelves, door frames, pictures and vents.
Dust all chair and table legs and rungs, baseboards, ledges, moldings, and other low reach areas.
Spot clean all partition glass
Vacuum all carpeted traffic lane areas
Fully vacuum all carpets from wall to wall
Using approved spotter, spot clean carpeted area
Dust all venetian blinds

“TENANT OFFICE AISLE WAYS”

Vacuum all carpeted traffic lane areas
Fully vacuum all carpets from wall to wall
Using approved spotter, spot clean carpeted area
Spot clean all walls, light switches and doors
Dust all surfaces above normal reach including sills, ledges, moldings, shelves, door frames,
pictures and vents

“TENANT CORRIDORS”

Spot clean all horizontal and vertical surfaces removing fingerprints, smudges and stains.
Clean and polish all drinking fountains, removing water marks, scale, and splashes on sides and on front.
Dust all horizontal surfaces.
Vacuum all carpeted traffic lane areas.
Fully vacuum all carpets from wall to wall.
Using approved spotter, spot clean carpeted areas.

I-2

Dust mop all hard surface floors with treated dust mop.
Mop all stains and spills, especially coffee and drink spills.
Dust interior of fire extinguisher cabinets, fire extinguishers, and clean both sides of cabinet Glass – Weekly.

“TENANT RESTROOMS”

Refill dispensers, empty trash, clean and sanitize all restroom fixtures, wipe all counters, tile walls clean mirrors, wipe chrome, spot wipe partitions, sweep and damp mop floors using a germicidal cleaner.
Dust and clean all return air vents
Wash all restroom partitions on both sides
Machine scrub all restrooms floors using germicidal detergent.
Clean both sides of all doors

“TENANT EXECUTIVE KITCHEN/LUNCH ROOMS”

Empty all trash receptacles and replace liners as necessary.
Remove all collected trash to designated area.
Empty and damp wipe ashtrays.
Dust all horizontal surfaces.
Spot clean all horizontal and vertical surfaces removing fingerprints, smudges and stains.
Clean and sanitize all sinks and wipe dry.
Damp clean and sanitize table tops.
Dust mop all hard surface floors with treated dust mop.
Mop all stains and spills, especially coffee and drink spills.

“TENANT STAIRS”

Vacuum stairs, dust railings, ledges and spot clean.

“COPY/STORAGE ROOMS/OTHER ROOMS”

Empty all trash receptacles and replace liners as necessary
Remove all collected trash to designated area
Spot clean all walls, light switches and doors
Dust mop all hard surface floors with treated dust mop
Mop all stains and spills, especially coffee and drink spills
Clean and disinfect shower stalls and doors
Clean and disinfect exercise equipment

“FREIGHT ELEVATOR LOBBIES”

Remove all collected trash to designated area
Spot clean all horizontal and vertical surfaces removing fingerprints, smudges and stains
Dust mop all hard surface floors with treated dust mop
Mop all stains and spills, especially coffee and drink spills

“STAIRWELLS”

Police stairs and pick-up litter
Dust mop stairs, dust railings, ledges and spot clean weekly
Damp mop stairs, dust railings, ledges and spot clean weekly

“JANITOR CLOSETS”

Clean and arrange all equipment in janitor closet each night and empty vacuum cleaner bags, check belts; sweep and spot mop floor

I-3

EXHIBIT “J”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

EQUIPMENT TO BE MAINTAINED BY TENANT

Description	Comments
Fedal 88HS CNC Machining Center	Purchased used $55,000
2 each Bridgeport 2-J Manual Mill
Takisawa Engine Lathe	Manual machine
Hardige Tool Room Lathe	Manual machine
Beahm Tubing Shrink Machine	Used to fabricate catheter “shafts”
Steeger Braider	Used to braid fine wire
Harland Custom Catheter
Coating/Cure Machine	New machine
Heathway Custom Double Sided Fiber Draw Tower	Phase 2, has yet to be built
Custom Built Single Sided Fiber Draw Tower	May or may not be installed
2 each 30 HP Sullair Screw Air Compressors	Complete with refrigerated after cooler and redundant filter systems (phase 2 installation)
1 each 10 HP Sullair Screw Air Compressor	Complete with refrigerated after cooler and redundant filter systems (phase 1 installation)
1 ETO 70 cu. Ft. sterilizer
1 preconditioning chamber

EXHIBIT “K”
to Agreement of Lease by and between
9965 FEDERAL DRIVE, LLC, Landlord
and THE SPECTRANETICS CORPORATION, Tenant

AGREEMENT OF PURCHASE AND SALE

     THIS AGREEMENT OF PURCHASE AND SALE (the Agreement”) is made this ___day of ___, 200___(the “Effective Date”) by and between 9965 FEDERAL DRIVE, LLC, a Colorado limited partnership (“Seller”) and THE SPECTRANETICS CORPORATION a ___ corporation (“Buyer”).

W I T N E S S E T H:

     Seller is the owner of the Property (hereinafter defined). Seller desires to sell the Property to the Buyer and Buyer desires to buy the Property from Seller pursuant to the terms and conditions of this Agreement.

     NOW, THEREFORE, for good and valuable consideration, the sufficiency of which hereby is acknowledged, Seller and Buyer agree as follows:

Article I.
Property; Purchase and Sale

     Seller hereby agrees to sell, and Buyer hereby agrees to buy, all of Seller’s right, title and interest in the following property: (a) that parcel of real property (the “Land”), located in El Paso County, Colorado more particularly described on Exhibit “A” attached to this Agreement; (b) the buildings and other improvements located on the Land, being an office building located at and known as 9965 Federal Drive, Colorado Springs (collectively, the “Improvements”); (the Land and Improvements, are referred to herein, collectively, as the “Real Property”); and (c) all fixtures, equipment, and other personal property in Seller’s possession (both tangible and intangible, including, without limitation, to the extent assignable, all promotional material, plans, drawings, surveys, warranties, trade names, logos, service marks, licenses, permits and authorizations used or usable only in connection with the Real Property and no other property of Seller or its affiliates, and any service and maintenance agreements used or usable only with the Real Property and no other property of Seller or its affiliates) owned by Seller and contained in or related to the Improvements, excluding, however, only those proprietary materials of Seller or Corporate Office Properties Trust or any of its affiliates or subsidiaries (the “Personal Property”) (collectively, the Real Property and the Personal Property are sometimes referred to herein as the “Property”).

Article II.
Purchase Price and Deposits

     2.1 Purchase Price and Deposits. The purchase price which the Buyer agrees to pay and the Seller agrees to accept for the Seller’s interest in the Property shall be the sum of [insert purchase price as set forth in Landlord’s Offer Notice in accordance with Section 57 of the Lease] ($___) (hereinafter referred to as the “Purchase Price”), subject to adjustment as provided in Article V hereof, payable as follows:

     (a) An earnest money deposit of [insert Initial Deposit as set forth in Landlord’s Offer Notice in accordance with Section 57 of the Lease] ($___), in cash

K-1

(together with accrued interest, the “Deposit”) to be deposited with Land Title Guarantee Company (the “Escrow Agent”) within three (3) days of the execution hereof by both parties, such amount to be held in escrow and deposited in an interest-bearing account.

     (b) The balance of the Purchase Price shall be paid at time of Closing by Federal wire transfer, with the transfer of funds to Seller to be completed not later than 2:00 p.m. Eastern Standard Time on the day of the Closing.

     The Deposit shall be paid to Seller at the Closing as a credit against the Purchase Price. Buyer shall provide the Escrow Agent with its tax identification number, and all interest shall be for Buyer’s account for tax purposes.

     2.2 Escrow Agent.

     (a) This Agreement shall be delivered to the Escrow Agent immediately after both parties have executed it. The Escrow Agent shall retain one copy of this Agreement and immediately deliver two copies hereof to each of Buyer and Seller.

     (b) The Escrow Agent shall deliver the Deposit held hereunder to Seller concurrent with Closing in part payment of the Purchase Price or the Seller or Buyer at such other time, as either Seller or Buyer becomes entitled to the Deposit as provided in this Agreement.

Article III.
Failure to Close

     3.1 Buyer’s Default. If Seller has complied with all of the covenants and conditions contained in this Agreement and is ready, willing and able to convey its interest in the Property in accordance with this Agreement and Buyer fails to consummate this Agreement and take title, then the parties hereto recognize and agree that the damages that Seller will sustain as a result thereof will be substantial, but difficult if not impossible to ascertain. Therefore, the parties agree that, in the event of Buyer’s default, Seller shall, as its sole remedy, be entitled to retain the Deposit as liquidated damages, and not a penalty, and neither party shall have any further rights or obligations with respect to the other under this Agreement, except for the Surviving Covenants.

     3.2 Seller’s Default. In the event that Buyer has complied with all of the covenants and conditions contained herein and is ready, willing and able to take title to the Property in accordance with this Agreement, Buyer’s sole and exclusive remedy with respect to any default of Seller under this Agreement shall be to terminate this Agreement by written notice to Seller, in which event, the Deposit shall be returned to Buyer. Buyer hereby waives any right to recover from Seller any damages of any nature whatsoever, including actual or consequential damages, due to, arising out of, or relating to any default by Seller of any of its obligations under this Agreement.

Article IV.
Closing and Transfer of Title

     4.1 Closing. The parties hereto agree to conduct a closing of this sale (the “Closing”) on or before 5:00 p.m. on the date that is forty-five (45) days following the Effective Date (the “Closing Date”) by the escrow method with Escrow Agent, or at such earlier time or other place as may be agreed upon by the parties hereto.

K-2

     4.2 Closing Procedure. At Closing, Seller shall execute and deliver or cause to be delivered

     (a) a Deed in the form attached hereto as Exhibit “B”, proper for recording, conveying Seller’s interest in the Real Property to Buyer, subject, however, to (i) covenants, restrictions and matters of record, (ii) matters that would be shown by an accurate survey, (iii) matters otherwise known to Buyer, (iv) taxes not yet due and payable, and (vi) any encumbrances created or permitted by the terms of this Agreement or the existing lease from Seller to Buyer of the Real Property (the “Existing Lease”);

     (b) a Bill of Sale and General Assignment in the form attached hereto as Exhibit “C”, dated as of the date of Closing conveying to Buyer any and all Personal Property;

     (c) an Assignment of Contracts in the form attached hereto as Exhibit “D”, dated the Closing Date, assigning all of Seller’s right, title and interest in and to all service and maintenance contracts relating to the Property which are in force and effect as of the Closing Date, if any;

     (d) an affidavit that Seller is not a “foreign person” in the form attached as Exhibit “E”; and

     (e) to the extent in the possession of Seller and not already delivered to Buyer, maintenance records, equipment manuals and plans and specifications for the Improvements; and

     4.3 Buyer’s Performance. At the Closing, Buyer will cause the Purchase Price to be delivered to the Escrow Agent, will execute and deliver the Bill of Sale and such other documents as the Escrow Agent may reasonable require.

Article V.
Title Contingency; Service Contracts

     5.1 Title Contingency. As of the Effective Date, Seller shall provided Buyer a copy of its most recent title policy along with the most recent survey Seller has in its possession (the “Original Title Report”). Within fifteen (15) days following the Effective Date, Buyer shall provide Seller with an updated title report, including all accompanying documents (the “Title Report”) and Buyer’s objections thereto, such objections stating all of Buyer’s objections with specificity and being limited to matters that (1) did not appear on the Original Title Report or (2) would render title to the Real Property unmerchantable. This contingency shall be deemed satisfied or waived if such written notice of objection is not received by Seller on or before the time required in the preceding sentence. If Buyer requests extended coverage, such coverage shall be at the sole cost and expense of the Buyer and not the Seller, and satisfaction thereof shall not delay Closing. Upon receipt of such notice, Seller may, but shall not be obligated to, cure such objections. If Seller cures such objections within fifteen (15) days, or, if such objections are such that they cannot be cured within fifteen (15) days but Seller has commenced curing such objections and thereafter diligently proceeds to perfect such cure, then this Agreement shall continue in full force and effect and the Closing Date shall be adjusted accordingly. If Seller is unable or chooses not to cure such objections by the Closing Date, then Buyer may either accept title as may be given as aforesaid without reduction or abatement in purchase price or terminate this Agreement, in which case Seller shall instruct the Escrow Agent to return the Deposit to Buyer, and neither party shall have any further obligations hereunder except for the Surviving Covenants.

     5.2 Termination of Service Contracts. Seller shall terminate, effective as of Closing, at no charge to Buyer, all service contracts in effect as of the Effective Date that are rejected pursuant to written notice delivered by Buyer to Seller within fifteen (15) days following the

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Effective Date. Failure to notify Seller in a timely manner shall be deemed acceptance of the Service Contracts.

Article VI.
Loss due to Casualty or Condemnation

     6.1 Loss due to Condemnation. In the event of a condemnation occurring after the Effective Date and prior to the Closing Date, if all or a Substantial Portion of the Real Property is taken, either party may, upon written notice to the other party given within ten (10) days of receipt of notice of such event, cancel this Agreement, in which event Seller shall instruct the Escrow Agent to return the Deposit to Buyer, this Agreement shall terminate and neither party shall have any rights or obligations hereunder except for the Surviving Covenants. In the event that neither party elects to terminate, or if the condemnation affects less than a Substantial Portion or does not affect the building or parking area, then this Agreement shall remain in full force and effect, and Seller shall be entitled to all monies received or collected by reason of such condemnation prior to closing. In such event, the transaction hereby contemplated shall close in accordance with the terms and conditions of this Agreement except that there will be an abatement of the Purchase Price equal to the amount of the net proceeds, less costs and attorney’s fees, which are received by Seller by reason of such condemnation prior to the Closing Date. If the condemnation proceeding shall not have been concluded prior to the Closing Date, then there shall be no abatement of the Purchase Price and Seller shall assign any interest it has in the pending award to Buyer. For purposes of this Section 7.1, a “Substantial Portion” shall mean a condemnation of any portion of (i) the building or (ii) the parking lot which materially affects the number of parking spaces or ingress/egress from the parking lot.

     6.2 Loss due to Casualty. In the event of Substantial Loss or Damage to the Improvements by fire or other casualty (not resulting from negligent act of Buyer) which fire or casualty shall have occurred after the date of this Agreement, either party may, upon written notice to the other party given within ten (10) days of receipt of notice of such event, cancel this Agreement in which event Seller shall instruct the Escrow Agent to return the Deposit to Buyer and this Agreement shall terminate and neither party shall have any rights or obligations hereunder except for the Surviving Covenants. In the event that neither party elects to terminate, or if the casualty results in less than Substantial Loss or Damage, then this Agreement shall remain in full force and effect and Seller shall be entitled to all insurance proceeds received or collected by reason of such damage or loss, whereupon the transaction hereby contemplated shall close in accordance with the terms and conditions of this Agreement except that there will be an abatement of the Purchase Price equal to the amount of the net proceeds (including reductions for costs and attorney’s fees) which are received by Seller as a result of such damage or loss, provided that such abatement will be reduced by the amount expended by Seller in accordance with Article VIII hereof for restoration or preservation of the Property following the casualty. Alternatively, Buyer may, in its discretion, have Seller repair or replace the damaged Property, and there shall be no abatement of the Purchase Price in such case. However, Buyer shall not be entitled to require Seller to effect repair or replacement unless the loss is entirely covered by insurance (except for any applicable deductible) and the time necessary to complete the repair or replacement is estimated not to extend beyond the Outside Closing Date. For purposes of this Section 7.2, “Substantial Loss or Damage” shall mean loss or damage, the cost for repair of which equals ten percent (10%) or more of the Purchase Price.

Article VII.
Maintenance of the Property

     Between the Effective Date and the Closing Date, Seller and Buyer shall maintain the Property as required by the terms of the Existing Lease. During the period prior to the Closing Date and after the Effective Date, Seller shall not enter into any new contract for the operation of the Property without Buyer’s consent unless the same may be cancelled on the Closing Date

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without cost to Buyer. Any such proposed contract shall be reviewed and approved or rejected within five (5) business days after receipt thereof by Buyer. Failure to approve or reject such proposed contract within such period shall be deemed approval.

Article VIII.
1. Conditions Precedent to Closing

     8.1 Buyer’s Conditions. Buyer shall not be obligated to close under this Agreement unless each of the following conditions shall be satisfied or waived by Buyer prior to the Closing Date (except in the case of the 9.1(a) which shall be satisfied or waived prior to the end of the Feasibility Period):

          (a) Accuracy of Representations. The representations and warranties made by Seller in this Agreement shall be true and correct in all material respects as of the Closing Date; and

          (b) No Default. Seller shall not be in default hereunder and shall have complied in all material respects with its obligations under this Agreement.

     8.2 Seller’s Conditions. Seller shall not be obligated to close under this Agreement unless each of the following conditions shall be satisfied or waived by Seller prior to the Closing Date:

          (a) Accuracy of Representations. The representations and warranties made by Buyer in this Agreement shall be true and correct in all material respects as of the Closing Date; and

          (b) No Default. Buyer shall not be in default hereunder and shall have complied in all material respects with its obligations under this Agreement.

Article IX.
Broker

     Buyer and Seller represent to each other that they have dealt with no agent or broker who in any way has participated as a procuring cause of the sale of the Property other than ___ (“Seller’s Broker”) and ___ (“Buyer’s Broker”). Buyer and Seller each agree to defend, indemnify and hold harmless the other for any and all judgments, costs of suit, attorneys’ fees, and other reasonable expenses which the other may incur by reason of any action or claim against the other on the basis of the acts of the indemnifying party arising out of this Agreement or any subsequent sale of the Property to Buyer. Seller shall pay Seller’s Broker pursuant to the terms of a separate written agreement by and between Seller and Seller’s Broker. Buyer shall pay Buyer’s Broker pursuant to the terms of a separate written agreement by and between Buyer and Buyer’s Broker. The provisions of this Article IX shall survive the Closing and any termination of this Agreement.

Article X.
Representations and Warranties

     10.1 Limitations on Representations and Warranties. Buyer hereby agrees and acknowledges that, except as set forth in Section 10.2 below, neither Seller nor any agent, attorney, employee or representative of Seller has made any representation whatsoever regarding the subject matter of this sale, or any part thereof, including (without limiting the generality of the foregoing) representations as to the physical nature or condition of the Property or the

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capabilities thereof, and that Buyer, in executing, delivering and/or performing this Agreement, does not rely upon any statement and/or information to whomever made or given, directly or indirectly, orally or in writing, by any individual, firm or corporation. Buyer agrees to take the Real Property, Improvements and the Personal Property “as is,” as of the date hereof, reasonable wear and tear, and minor damage caused by the removal of any personal property or fixtures not included in this sale, excepted. EXCEPT AS SET FORTH IN SECTION 10.2 BELOW, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE PHYSICAL CONDITION OF THE PROPERTY OR THE SUITABILITY THEREOF FOR ANY PURPOSE FOR WHICH BUYER MAY DESIRE TO USE IT. SELLER HEREBY EXPRESSLY DISCLAIMS ANY WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE AND ANY OTHER WARRANTIES OR REPRESENTATIONS AS TO THE PHYSICAL CONDITION OF THE PROPERTY. BUYER, BY ACCEPTANCE OF THE DEED, AGREES THAT IT HAS INSPECTED THE PROPERTY AND ACCEPTS SAME “AS IS” AND “WITH ALL FAULTS”.

     10.2 Representations and Warranties. Seller makes the following representations and warranties and agrees that Buyer’s obligations under this Agreement are conditioned upon the truth and accuracy of such representations and warranties, both as of this date and as of the Closing Date:

     (a) Seller has the power and authority to enter into this Agreement and convey Seller’s interest in the Property to Buyer.

     (b) To Seller’s knowledge, Seller has received no written notice of any existing or pending litigation, administrative proceeding, violation of law or condemnation or sale in lieu thereof, that would materially affect any portion of the Real Property, except as noted on Exhibit “F” attached hereto, and except for routine collection matters and bankruptcy claims of Seller.

     (c) There are no attachments or executions affecting the Property, general assignments for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy, pending or, to Seller’s knowledge, threatened against Seller.

     (d) No approvals or consents by third parties or to Seller’s knowledge, governmental authorities are required in order for Seller to consummate the transactions contemplated hereby.

     (e) Seller is not a foreign person within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986.

     10.3 Seller’s Knowledge. Whenever the term “to Seller’s knowledge” is used in this Agreement or in any representations and warranties given to Buyer at Closing, such knowledge shall be the actual knowledge of Roger A. Waesche, Jr. (the “Key Personnel”). Seller shall have no duty to conduct any further inquiry in making any such representations and warranties, and no knowledge of any other person shall be imputed to the Key Personnel.

     10.4 Buyer’s Warranties. Buyer represents and warrants to Seller that:

     (a) Buyer has the power and authority to enter into this Agreement and to purchase the Property;

     (b) No approvals or consents by third parties or, to the best of Buyer’s knowledge, by governmental authorities are required in order for Buyer to consummate the transactions contemplated hereby.

     (c) To Buyer’s knowledge, Buyer has received no written notice of any existing or pending litigation, administrative proceeding, violation of law or condemnation or sale in lieu

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thereof, that would materially affect any portion of the Real Property, except as noted on Exhibit “F” attached hereto.

     (d) There are no attachments or executions affecting the Property, general assignments for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy, pending or, to Buyer’s knowledge, threatened against Buyer.

     (e) Buyer is currently in compliance with and shall at all times prior to Closing remain in compliance with the regulations of the Office of Foreign Assets Control of the Department of the Treasure (“OFAC”) (including those named in OFAC’s Specially Designated and Blocked Persons list) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action and is not and will not engage in any dealings or transactions or be otherwise associated with such persons or entities.

     10.5 Survival. All representations and warranties contained in Section 10.2 and 10.4 shall not be Surviving Covenants, as defined in Section 15.13, but shall survive the Closing of this transaction only for the period of one (1) year from the Closing Date (and only as to the status of facts as they exist as of the Closing, it being understood that Seller makes no representations or warranties which would apply to changes or other matters occurring after the Closing) and no action on such representations and warranties may be commenced after the expiration of such one (1) year period.

Article XI.
Liability of Seller

     Neither Seller nor any partner of Seller nor any independent property manager which Seller has hired to manage the Property shall, by entering into this Agreement, become liable for any costs or expenses incurred by Buyer subsequent to the Closing Date, including any labor performed on, or materials furnished to, the Real Property, or for any leasing commissions or other fees or commissions due for renewals or extensions of existing leases or otherwise, or for compliance with any laws, requirements or regulations of, or taxes, assessments or other charges thereafter due to, any governmental authority, or for any other charges or expenses whatsoever pertaining to the Property or to the ownership, title, possession, use, or occupancy of the Property, (including, without limitation, any costs of compliance with presently-existing and future environmental laws, any environmental remediation costs, and any costs of, or awards of damages for, damage to the environment, to natural resources, or to any third party, it being the intent of this Agreement, as between Buyer and Seller, to shift all such liability to Buyer, except for any liability of Seller under the provisions of Article X hereof), and Buyer hereby agrees to defend, indemnify and hold Seller, Seller’s partners and/or shareholders and any independent property manager hired by Seller, harmless from any such liability for such costs and expenses incurred by Seller subsequent to the date of Closing.

     Except for the representations and warranties contained in Sections 10.2 and 10.4 (the limit of which is set forth in Section 10.5), and except for the Surviving Covenants, by proceeding to Closing with respect to the Property, Buyer shall be deemed to have (i) acknowledged that all conditions precedent to the performance of each party’s obligations under this Agreement have been satisfied and (ii) except as set forth in any of the documents provided in connection with Closing, waived any claims with respect to any matters known to Buyer as of the Closing Date.

Article XII.
Assignment

     This Agreement may not be assigned or transferred by Buyer to any entity other than an affiliate without prior written consent of Seller. Buyer shall notify Seller of an assignment to any

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affiliate of Buyer. No assignment shall relieve Buyer of any of its obligations under this Agreement.

Article XIII.
Notices

All notices hereunder or required by law shall be sent via United States Mail, postage prepaid, certified mail, return receipt requested, or via any nationally recognized commercial overnight carrier with provisions for receipt by fax with confirmation of delivery addressed to the parties hereto at their respective addresses set forth below or as they have theretofore specified by written notice delivered in accordance herewith:

BUYER:	THE SPECTRANETICS CORPORATION
	Attn:
with a copy to:
SELLER:	9965 FEDERAL DRIVE, LLC
	c/o Corporate Office Properties Trust
	6711 Columbia Gateway Drive, Suite 300
	Columbia, Maryland 21046
	Attn: Roger A. Waesche, Jr.
	Fax: 443-285-7650
	Email: roger.waesche@copt.com
with a copy to:	9965 FEDERAL DRIVE, LLC
	c/o Corporate Office Properties Trust
	6711 Columbia Gateway Drive, Suite 300
	Columbia, Maryland 21046
	Attn: Stephanie L. Shack, Esquiare
	Fax: 443-285-7652
	Email: stephanie.shack@copt.com

Delivery will be deemed complete upon actual receipt or refusal to accept delivery.

Article XIV.
Expenses

     Seller shall pay its own attorney’s fees and expenses, one-half of any transfer taxes and recordation stamp taxes, and one-half of the Escrow Agent’s escrow fee. All other costs and expenses related to the transaction or this Agreement, including but not limited to recording charges, survey costs, title insurance costs, Buyer’s attorneys’ fees and expenses, one-half of any transfer taxes and recordation stamp taxes, one-half of the Escrow Agent’s escrow fee, any other taxes, and any extra matters requested with respect to the Title Report shall be paid by Buyer.

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Article XV.
Miscellaneous

     15.1 Successors and Assigns. All of the terms and conditions of this Agreement are hereby made binding upon the executors, heirs, administrators, successors and permitted assigns of both parties hereto.

     15.2 Gender. Words of any gender used in this Agreement shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise.

     15.3 Captions. The captions in this Agreement are inserted only for the purpose of convenient reference and in no way define, limit or prescribe the scope or intent of this Agreement or any part hereof.

     15.4 Construction. No provision of this Agreement shall be construed by any Court or other judicial authority against any party hereto by reason of such party’s being deemed to have drafted or structured such provisions.

     15.5 Entire Agreement. This Agreement constitutes the entire contract between the parties hereto and there are no other oral or written promises, conditions, representations, understandings or terms of any kind as conditions or inducements to the execution hereof and none have been relied upon by either party.

     15.6 Recording. The parties agree that this Agreement shall not be recorded. If Buyer causes this Agreement or any notice or memorandum thereof to be recorded, this Agreement shall be null and void at the option of the Seller.

     15.7 No Continuance. Buyer acknowledges that there shall be no assignment, transfer or continuance of any of Seller’s insurance coverage or of the property management contract.

     15.8 Time of Essence. Time is of the essence in this transaction. If any of the dates contemplated herein as deadlines or expiration dates should fall on a Saturday, Sunday or national holiday, such deadline or expiration date shall be deemed to fall upon the next business day.

     15.9 Original Document. This Agreement may be executed by both parties in counterparts in which event each shall be deemed an original.

     15.10 Governing Law. This Agreement shall be construed, and the rights and obligations of Seller and Buyer hereunder, shall be determined in accordance with the laws of the State of Colorado.

     15.11 Acceptance of Offer. This Agreement constitutes Seller’s offer to sell to Buyer on the terms set forth herein and must be accepted by Buyer by signing five originals hereof and delivering them to the Escrow Agent as set forth in Article II hereof. If Buyer has not so accepted this Agreement, then this Agreement and the offer represented hereby shall automatically be revoked and shall be of no further force or effect.

     15.12 Confidentiality. Buyer and Seller agree that all documents and information concerning the Property delivered to or obtained by Buyer, the subject matter of this Agreement, and all negotiations will remain confidential. Buyer and Seller will disclose such information only to those parties required to know it, including, without limitation, employees of either of the parties, consultants and attorneys engaged by either of the parties, and prospective tenants or prospective and existing investors and lenders. Buyer shall use care and effort to avoid

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disrupting the relationship between Seller and its tenants and to avoid unnecessarily alarming existing tenants with respect to Buyer’s possible plans for the Property.

     15.13 Surviving Covenants. Notwithstanding any provisions hereof to the contrary, the provisions of Articles IX, XI and XIV, and Sections 15.12, 15.14 and 15.15 (collectively, the “Surviving Covenants”) shall survive the Closing and any termination of this Agreement.

     15.14 Waiver of Jury Trial. THE PARTIES HERETO SHALL, AND THEY HEREBY DO, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE RELATIONSHIP OF SELLER AND BUYER, OR ANY CLAIM FOR INJURY OR DAMAGE IN CONNECTION WITH THIS AGREEMENT OR THE PROPERTY.

     15.15 Attorney’s Fees. In the event of any litigation arising out of this Agreement, the prevailing party shall be entitled to receive all costs and expenses incurred in connection therewith, including but not limited to, reasonable attorney’s fees, expert’s fees, and in-house counsel expenses.

     15.16 Secondary Contracts. Buyer acknowledges and agrees that Seller shall be entitled to continue to negotiate with other parties for the sale of the Property, and may enter into secondary letters of intent or secondary contracts provided such documents contain clauses that would invalidate such secondary letters of intent or contracts if the transaction contemplated by this Agreement is consummated.

     15.17 Tax Deferred Exchange. Either party may treat the transactions contemplated by this Agreement as a tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Code (the “Exchange Transaction”). At the request of either party (the “Requesting Party”), the other party (the “Non-Requesting Party”) shall cooperate with the Requesting Party to effect the Exchange Transaction. To implement such Exchange Transaction, the Requesting Party may, upon written notice to the Non-Requesting Party, assign the Requesting Party’s rights, but not its obligations, under this Agreement to a third party designated by the Requesting Party to act as a qualified intermediary (as such phrase is defined in applicable Internal Revenue Service regulations), and the Non-Requesting Party agrees to perform its obligations under this Agreement as to any such qualified intermediary. Notwithstanding the foregoing, the Non-Requesting Party shall not be required, solely for the purpose of the Non-Requesting Party’s cooperation related to the Requesting Party’s Exchange Transaction, to incur any other cost, expense, obligation or liability whatsoever. The Requesting Party shall in all events be responsible for all incremental costs and expenses related to the Exchange Transaction, and shall fully indemnify, defend and hold the Non-Requesting Party harmless from and against any and all liability, claims, damages, expenses (including reasonable attorneys’ fees), proceedings and causes of actions of any kind or nature whatsoever actually incurred by the Non-Requesting Party and solely attributable to such Exchange Transaction. The provisions of the immediately preceding sentence shall survive Closing. In no event whatsoever shall the Closing be delayed because of any delay relating to the Exchange Transaction.

     15.19 Exhibits. The following Exhibits are hereby incorporated into this Agreement by reference as if set forth fully herein:

|

     Exhibit “A” Real Property

     Exhibit “B” Form of Deed

     Exhibit “C” Bill of Sale

     Exhibit “D” Assignment of Contracts

     Exhibit “E” FIRPTA

     Exhibit “F” Exceptions

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[SIGNATURE PAGES FOLLOW]

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EXECUTED BY BUYER this                      day of                                         , 200__.

ATTEST:	BUYER:
	THE SPECTRANETICS CORPORATION
	By:		(SEAL)
		Name:
		Title:

EXECUTED BY SELLER this                      day of                                         , 200__.

ATTEST:	SELLER:
	9965 FEDERAL DRIVE, LLC
	By:		(SEAL)
		Roger A. Waesche, Jr.
		Executive Vice President

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Receipt of original copies of this Agreement executed by Seller and Buyer is acknowledged this ___ day of ___, 200___.

ESCROW AGENT:
LAND TITLE GUARANTEE COMPANY
By:		(SEAL)
	Name:
	Title:

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EXHIBIT A

REAL PROPERTY

[TO BE ATTACHED]

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EXHIBIT B

[Form of Deed]
SPECIAL WARRANTY DEED

                         , a                     , (“Grantor”) whose street address is ___, in the City of                     , in the State of ___, for the consideration of Ten and no/100s Dollars ($10.00), in hand paid, hereby sells and conveys to ___, a ___, (“Grantee”) whose street address is ___, in the City of ___, in the State of ___, the following real property in the County of ___and the State of Colorado, more particularly described on Exhibit A attached hereto and incorporated herein by this reference, with all of its appurtenances, and warrants the title against all persons claiming under it, subject to the Permitted Exceptions listed on Exhibit B attached hereto and incorporated herein by this reference.

     Signed this ___day of ___, 20___.

GRANTOR:
	,
a
By:
Name:
Title:

STATE OF	)
	) SS:
COUNTY OF	)

     On ___, 20___, before me the undersigned, a Notary Public in and for said State, personally appeared ___, as ___ of ___, a ___, personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that she/he executed the same in her/his authorized capacity, and that by her/his signature on the instrument, the entity upon behalf of which the person acted, executed the instrument.

WITNESS my hand and official seal.

Signature:

Name (typed or printed):

Commission Expires:

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EXHIBIT A — to Deed

Legal Description

The real property with a street address of 9965 Federal Drive., Colorado Springs, Colorado, more particularly described as follows:

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EXHIBIT B — to Deed

Permitted Exceptions

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EXHIBIT C

BILL OF SALE AND GENERAL ASSIGNMENT

STATE OF	)
	)
COUNTY OF	)

     Concurrently with the execution and delivery hereof, INSERT ASSIGNOR (“Assignor”), a ___ is conveying to INSERT ASSIGNEE, a ___(“Assignee”), by Deed, that certain tract of land together with the improvements thereon (the “Property”) lying and being situated in [___] County, ___ and being more particularly described in Exhibit “A”, attached hereto and made a part hereof.

     It is the desire of Assignor to hereby assign, transfer, setover and deliver to Assignee all furnishings, fixtures, fittings, appliances, apparatus, equipment, machinery and other items of personal property, if any, affixed or attached to, or placed or situated upon, the Property, except those not owned by Assignor, and any and all other incidental rights and appurtenances relating thereto, all as more fully described below (such properties being collectively called the “Assigned Properties”).

     NOW, THEREFORE, in consideration of other good and valuable consideration in hand paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER to Assignee, its successors and assigns, all of the Assigned Properties, without warranty (whether statutory, express or implied), including, without limitation the following:

     1. All furnishings, fittings, equipment, appliances, apparatus, machinery fixtures and all other personal property of every kind and character (both tangible and intangible), if any, owned by Assignor and located in or on the Property;

     2. All of Assignor’s interest in and to all use, occupancy, building and operating permits, licenses and approvals, if any, issued from time to time with respect to the Property or the Assigned Properties;

     3. All of Assignor’s interest in and to all existing and assignable guaranties and warranties (express or implied), if any, issued in connection with the construction, alteration and repair of the Property and/or the purchase, installation and the repair of the Assigned Properties;

     4. All rights which Assignor may have to use any names commonly used in connection with the Property, if any.

     5. All rights, which Assignor may have, if any, in and to any tenant data, telephone numbers and listings, all master keys and keys to common areas, all good will, if any, and any and all other rights, privileges and appurtenances owned by Assignor and related to or used in connection with the existing business operation of the Property.

     ASSIGNOR MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE PHYSICAL CONDITION OF THE PROPERTY OR THE ASSIGNED PROPERTIES OR THE SUITABILITY THEREOF FOR ANY PURPOSE THAT ASSIGNEE MAY DESIRE TO USE IT. ASSIGNOR HEREBY EXPRESSLY DISCLAIMS ANY WARRANTIES AS TO MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE AND ANY

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OTHER WARRANTIES OR REPRESENTATIONS AS TO THE PHYSICAL CONDITION OF THE ASSIGNED PROPERTIES. ASSIGNEE ACKNOWLEDGES AND AGREES THAT IT HAS INSPECTED THE ASSIGNED PROPERTIES AND ACCEPTS SAME IN THEIR PRESENT CONDITION, “AS IS” AND “WITH ALL FAULTS.”

     Assignee, on behalf of itself and its successors and assigns, hereby agrees to assume and perform all liabilities and obligations accruing under any of the agreements, warranties or other items assigned hereunder, except for any liabilities having accrued prior to the date hereof.

     This document may be executed in any number of counterparts, each of which may be executed by any one or more of the parties hereto, but all of which shall constitute one instrument, and shall be binding and effective when all parties hereto have executed at least one counterpart.

     IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment to be executed as of the ___day of ___, 200___.

ASSIGNOR:
INSERT ASSIGNOR
By:		(SEAL)
	Roger A. Waesche, Jr.
	Executive Vice President
ASSIGNEE:
INSERT ASSIGNEE
By:		(SEAL)
	Name:
	Title:

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EXHIBIT D

ASSIGNMENT AND ASSUMPTION OF CONTRACTS

STATE OF	)
	)
COUNTY OF	)

     This agreement is executed as of the ___day of ___, 200___, by INSERT SELLER., a ___(“Seller”), and ___(“Buyer”).

     Buyer is this day purchasing from Seller and Seller is conveying to Buyer the real property described on Exhibit “A” attached hereto and made a part hereof together with all improvements thereon and appurtenances thereto (herein called the “Property”). In connection with its ownership and management of the Property, Seller has entered into the maintenance and service contracts in effect on the date hereof, and listed and described on Exhibit “B” attached hereto and made a part hereof (the “Contracts”). Seller desires to transfer and assign to Buyer all of Seller’s right, title and interest in and to the Contracts.

     NOW, THEREFORE in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby transfers and assigns to Buyer, without warranty, all right, title and interest of Seller in and to the Contracts.

     Buyer hereby assumes all liabilities and obligations of the Seller under the Contracts arising from and after the date hereof.

     It is specifically agreed that Seller does not hereby transfer or assign to Buyer and Buyer does not hereby assume liability for, any contracts other than as set forth on Exhibit “B”.

     This document may be executed in any number of counterparts, each of which may be executed by any one or more of the parties hereto, but all of which shall constitute one instrument, and shall be binding and effective when all parties hereto have executed at least one counterpart.

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     The terms and provisions of this agreement shall be binding upon and inure to the benefit of the respective parties hereto and their respective successors and assigns.

     EXECUTED as of the day and year first written above.

SELLER:
INSERT SELLER
By:		(SEAL)
	Roger A. Waesche, Jr.
	Executive Vice President
BUYER:
INSERT BUYER
By:		(SEAL)
	Name:
	Title:

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EXHIBIT E

FIRPTA CERTIFICATE

STATE OF	)
	) (insert date)
COUNTY OF	)

     I, (proper name of Seller’s officer), as (office held) of (Seller), being duly authorized to make this affidavit on behalf of (Seller) and being duly sworn, do depose and say, that:

     1. (Seller’s) taxpayer identification number is ___.

     2. (Seller) is not a “foreign person” within the meaning of Section 1445(f)(3), of the Internal Revenue Code of 1954 (the “Code”), as amended; and (Buyer) is not required, pursuant to Section 1445 of the Code, to withhold ten percent (10%) of the amount realized by Seller on the disposition of the Property to (Buyer).

     3. I understand that I am making this Affidavit under penalty or perjury pursuant to the requirements of Section 1445 of the Code.

(Seller)

By:

SWORN TO and subscribed before me this ___day of ___, 200___.

K-22

EXHIBIT F

EXCEPTIONS

K-23

EX-10.41

exv10w41

EX-10.42

Exhibit 10.42

Patent Purchase Agreement

          This Patent Purchase Agreement (“Agreement”) is entered into by and between The Spectranetics Corporation, a Delaware Corporation with an office at 96 Talamine Court, Colorado Springs, Colorado, 80907-5186 (“Purchaser”), and Joseph M. Ruggio, an individual with a residence at 27632 Fargo Rd., Laguna Hills, California 92653-7808 (“Seller”).

R E C I T A L S

          Whereas, Seller owns certain United States Letters Patents and/or applications for United States Letters Patents and/or related foreign patents and applications;

          Whereas, Seller wishes to sell to Purchaser all right, title and interest in the Patents (as defined below) and the causes of action to sue for infringement thereof and other enforcement rights as set forth in this Agreement;

          Whereas, Purchaser wishes to purchase from Seller all right, title and interest in the Patents and the causes of action to sue for infringement thereof and other enforcement rights, free and clear of any restrictions on transfer, liens, claims, and encumbrances as set forth in this Agreement.

          NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements, and upon the terms set forth herein, the parties hereby agree as follows:

A G R E E M E N T

1. Definitions.

1.1.	“Patents” means those patents and applications listed in the attached Exhibit A, and all reissues, reexaminations, extensions, continuations, continuations in part, continuing prosecution applications, and divisions of such patents and applications; and foreign counterparts to any of the foregoing including without limitation utility models.
1.2.	“Effective Date” means the last date of execution below.
1.3.	“Assignment Agreement” means the Assignment Agreement attached as Exhibit B.
1.4.	“Sales Price” means the actual revenue received by Purchaser from (a) the sale of a product that practices one or more of the inventions claimed in the Patents, after accounting for discounts, returns, refunds, allowances, write offs, write downs, and bad debt and/or (b) practicing one or more of the inventions claimed in the Patents. Among

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	other things, the parties intend that “Sales Price” includes any and all types of revenue related to the Patents, whether based on sales of apparatus or devices covered by the Patents, licensing of methods covered by the Patents, practicing one or more of the inventions claimed in the Patents, and/or any combination of the foregoing or other revenue derived from the Patents.
1.5.	“Sale of the Patents” means any future transfer of ownership or control of the Patents or any portion of the rights thereof, other than those things covered by the Sales Price as defined above. By way of example and not by way of limitation, a “sale of the patents” would occur if Purchaser at some time in the future sells the Patents or some portion thereof to a third party.

2. Assignment and Transfer of Patents.

2.1.

Patent Assignment. Seller hereby sells, assigns, transfers and conveys to Purchaser all right, title and interest it has in and to the Patents and all inventions and discoveries described therein, including without limitation, all rights of Seller under the Assignment Agreement, and all rights of Seller to collect royalties under such Patents.

2.2.

Assignment of Causes of Action. Seller hereby sells, assigns, transfers and conveys to Purchaser all right, title and interest it has in and to all causes of action and enforcement rights, whether currently pending, filed, or otherwise, for the Patents and all inventions and discoveries described therein, including without limitation all rights to pursue damages, injunctive relief and other remedies for past, current and/or future infringement of the Patents.

3. Specific Duties.

3.1.

Delivery. Within three (3) business days following the Effective Date, Seller shall deliver to Purchaser an executed original of the Assignment Agreement, and a list of prosecution counsel. Within ten (10) business days of the Effective Date, Seller shall deliver to Purchaser all files and original documents owned or controlled by Seller relating to the Patents including all prosecution files for pending patent applications included in the Patents, and its own files relating to the issued Patents.

3.2.

Payment.

3.2.1.	Purchaser shall pay to Seller one hundred and fifty thousand U.S. dollars (US$ 150,000.00) within three (3) business days following the Effective Date.
3.2.2.	For as long as the Patents remain in force, from sales of Purchaser’s own products that practice one or more of the inventions claimed in the Patents, Purchaser shall

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pay to Seller two percent (2.0 %) of the Sales Price received by Purchaser. The royalties paid pursuant to this section 3.2.2 do not apply to Sale of the Patents pursuant to section 3.2.4 or to any settlement with any third parties pursuant to section 3.2.3. Further, the parties agree that royalty provisions pursuant to this section 3.2.2 do not apply when other payments are received by Seller for the same activity or product as required by any other provision in this agreement.

3.2.3.

As indicated elsewhere herein, the parties anticipate that Purchaser may pursue third parties for infringement of the Patents. If that occurs, the parties understand that recoveries from any such efforts may result in any of a wide range of currently unknowable outcomes, including a net loss to Purchaser (if the costs of Purchaser’s efforts exceed any such recoveries) to amounts potentially totaling millions of dollars. For any such payments and/or for any other consideration from third parties in connection with the Patents (other than a Sale of the Patents, as discussed in 3.2.4 below), and regardless of whether those payments constitute (a) royalties for, or Purchaser’s damages from, sales of third party products that practice one or more of the inventions claimed in the Patents, (b) settlement of claims regarding the Patents, and/or (c) any other bases, the parties agree to allocate any such payments/recoveries as set forth in this section 3.2.3.

3.2.3.1.	the first one hundred and fifty thousand U.S. dollars (US$ 150,000.00) shall belong to Purchaser;
3.2.3.2.	from any amounts exceeding $150,000, Purchaser shall retain an amount equal to all attorneys’ fees, costs (but not including Consulting fees paid to Seller for Seller’s time), and other expenses incurred by Purchaser in the collection of such royalties or damages (hereinafter, “Purchaser’s Costs”). In the event that Purchaser pursues more than one infringer, the distribution of any recoveries pursuant to this section shall be calculated and made at the time the payment/recovery is received;
3.2.3.3.	from any amounts exceeding that $150,000 plus the foregoing Purchaser’s Costs, Purchaser shall next pay to Seller one hundred thousand U.S. dollars (US$ 100,000.00);
3.2.3.4.	from any amounts exceeding that $150,000 plus the foregoing Purchaser’s Costs plus the foregoing $100,000 to Seller, Purchaser shall pay to Seller thirty-five percent (35% percent) and shall retain 65%.
3.2.3.5.	The parties intend that the allocations described here will apply to the cumulative totals of any such payments and/or consideration received, with the exception of Section 3.2.3.2 above. In other words, if Purchaser pursues

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	multiple third parties and receives multiple recoveries, the entire amounts recovered will be allocated under the foregoing formula, rather than the formula being separately and repeatedly applied to each such recovery. By way of example, if Purchaser Costs to pursue an Infringer A are $50,000, and a settlement payment is received from Infringer A in the amount of $275,000, that payment would be allocated as follows:
3.2.3.5.1.	The first $150,000 of that payment would go to Purchaser.
3.2.3.5.2.	Because Purchaser’s Costs are $50,000, the next $50,000 would go to Purchaser (to repay those Costs).
3.2.3.5.3.	The remaining $75,000 would be paid to Seller, as an incomplete payment of the $100,000 that is next due in the distribution formula in Section 3.2.3.3 above.

3.2.3.6. If, following the foregoing hypothetical payment by Infringer A, a further settlement is reached with Infringer B in the amount of $300,000 at a cost to Purchaser of $75,000, that further payment would be allocated as follows:

3.2.3.6.1.	First, the Purchaser’s Costs amount (in this “Infringer B” hypothetical, the amount is $75,000) would be paid to Purchaser under Section 3.2.3.2, from that “Infringer B” recovery of $300,000.
3.2.3.6.2.	Next, the remaining $25,000 due to Seller under Section 3.2.3.3 would be paid to Seller (resulting in the total $100,000 having then been paid to Seller under that section); and
3.2.3.6.3.	The remaining $200,000 (of the “Infringer B” $300,000 payment) would be divided 35% ($70,000) to Seller and 65% ($130,000) to Purchaser.

3.2.3.7. Any further payments/recoveries (after the hypothetical Infringers A and B above) similarly would be distributed first to Purchaser in the amount of Purchaser’s Costs associated with any such further infringer/etc., then pursuant to the 35/65 distribution described above.

3.2.4. If Purchaser makes a Sale of the Patents or otherwise transfers ownership or control of same (or any portion or portions thereof) to a third party, Purchaser shall pay to Seller the following amount: for any consideration received from that Sale, ten per cent (10%) of any amount (cash or cash value) in excess of $250,000. If Purchaser makes a series of such sales or transfers of a portion or

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portions of the Patents or rights thereunder, the total cumulative consideration received by Purchaser from all such sales or transfers shall be used to calculate any payment due to Seller hereunder.

3.3. Accounting/Reporting to Seller.

3.3.1.	Timing of Payments. For any and all payments pursuant to Section 3.2.2 through 3.2.4 above, Purchaser will forward such payments to Seller within thirty (30) days after the calendar quarter within which the Sales Price is received by Purchaser.
3.3.2.	Reports. For any and all payments pursuant to Section 3.2.2 through 3.2.4 above, along with such payments to Seller, Purchaser will forward a report summarizing the basis for the payment(s) and calculation thereof, including details sufficient for Seller to reasonably confirm the gross numbers (units/dollars/etc.) upon which the payments are based and other totals reflected in the report, the appropriateness of any deductions therein, and other relevant information. If the parties have any concerns about the form and/or content of any such report, they will contact each other directly and make all reasonable efforts to address and resolve those concerns.
3.3.3.	Audit. Seller shall have the right no more than one (1) time each calendar year, upon fourteen (14) days advance notice in writing, at any time during normal business hours, to audit the records of Purchaser and its sublicensees by having an employee, agent, or independent auditor examine and make copies of any portion of the books and records of Purchaser and sublicensees of Purchaser relating to this Agreement. Such records shall be kept available by Purchaser and sublicensees of Purchaser for at least three (3) years after expiration of the calendar year in which they are made. In the event that such examination reveals an under-payment of royalties due Seller of an amount greater than ten percent (10%) of the payments made, then Purchaser or sublicensees of Purchaser, as the case may be, shall pay Seller within thirty (30) days of the completion of the audit, the amount due plus the cost of such audit plus interest on the deficiency for the term of non-payment at the then current prime rate. Otherwise, the cost of the audit shall be borne by Seller, but the deficiency shall be paid to Seller within thirty (30) days of the completion of the audit. Any royalty overpayment shall be refunded to Purchaser within thirty (30) days of the completion of the audit.

3.4. Further Cooperation.

3.4.1. Generally. Both before and after the Effective Date, at the reasonable request of Purchaser, Seller shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting

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	completely the consummation of the transactions contemplated hereby, including without limitation execution, acknowledgment and recordation of other such papers, and using best efforts to obtain the same from the other parties, as necessary or desirable for fully perfecting and conveying unto Purchaser the benefit of the transactions contemplated hereby. Among other things, these activities shall include the efforts by Seller to correct the claim language of the Patents, as described in Section 3.5 below.
3.4.2.	Involving Third Parties. For actions undertaken in connection with third parties relating to the Patents and/or this Agreement (see, for example, Sections 3.2.3 above and/or 5.2.4. below, and/or regarding actual or potential litigation with third parties regarding the Patents), Seller shall reasonably cooperate with Purchaser in Purchaser’s efforts concerning those third parties. That cooperation by Seller shall include up to eight (8) hours of Seller’s time in any given calendar month, at no cost to Purchaser. For any time in any given month in excess of those eight (8) hours, Purchaser agrees to pay Seller as a consultant, at a rate of not less than $350/hour. Purchaser shall pay and/or reimburse Seller promptly for any expenses associated with Seller’s assistance/cooperation (including by way of example and not by way of limitation, legal expenses, travel expenses, copying/mailing expenses, etc.). Any time spent by Seller in attending hearings or depositions (including Seller being deposed) shall count toward Seller’s “hours” under this Section 3.4.2. However, Seller agrees that this compensation to Seller shall not apply to Seller’s activities pursuant to Section 3.5 below, and specifically that no compensation shall be provided for Seller’s time and efforts in correction of the patent claim language pursuant to Section 3.5 (i.e., time spent involving the Certificate of Correction or a Reissue proceeding contemplated by Section 3.5 herein).
3.4.3.	Payment/Reimbursement for Seller’s Further Cooperation. For activities in connection with Sections 3.2.3 and/or 3.4.2 above and/or 5.2.4 below or any other claims for reimbursement, Seller shall submit to Purchaser reasonable documentation regarding such expenses, and within thirty (30) days of receipt of same, Purchaser shall pay to Seller the amounts reflected therein. If the parties have any concerns about the form and/or content of any such submission, they will contact each other directly and make all reasonable efforts to address and resolve those concerns.

3.5. Correction of Patent Claim Language. The obligations of Seller under this Agreement include, but are not limited to, taking all actions reasonably necessary to correct the Patents’ claim language to the form substantially as shown in Exhibit D hereto. In that regard, Seller initially caused Exhibit C to be filed with the U.S. Patent and Trademark Office on or about September 27, 2006. Prior to any action by the U.S. Patent and Trademark Office with regard to that September 2006 filing, both parties agreed to a

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substitute correction to the patent claim language, as shown in Exhibit D, which Seller caused to be filed on or about January 27, 2007, and the parties are awaiting action by the Patent and Trademark Office on that filing. Subject to the further conditions described in this section, Seller may accomplish this claim language correction in any suitable manner. Purchaser agrees to reasonably cooperate in Seller’s efforts in that regard, including but not limited to (a) timely filing with Assignment Branch of the Patent and Trademark Office some evidence of the assignment of Patent Rights hereunder, (b) timely advising Seller of any developments or lack thereof related to that January 26, 2007 filing, and/or (c) joining Seller in any such further or different filing with the U.S. Patent and Trademark Office (if necessary and if Seller elects to undertake any such further or different filing). To the extent that Seller independently receives from the U.S. Patent and Trademark Office notice of any such developments, Seller will timely advise Purchaser of same. In any case, notwithstanding the transfer of patent rights described herein, Purchaser expressly authorizes Seller and Seller’s agents and attorneys to act on behalf of Purchaser in pursuing such corrections to the claim language. The parties further agree that Seller shall control and bear the costs of any further prosecution with the U.S. Patent Office to correct the claim language as contemplated in this paragraph, including attorney fees and Patent Office costs. Further, any further filings made with the U.S. Patent Office (beyond the attached Exhibit D, which has already been filed) must be approved by both parties before any such filing are made. If within eighteen (18) months of the Effective Date, the claim language has not been corrected in the U.S. Patent and Trademark Office to at least substantially the form as shown in Exhibit D, the parties shall confer as to possible further actions to take to obtain such correction. Absent an agreement as to any such further action, Purchaser shall have the right, at its sole election, to rescind this Agreement, including returning the Patents to Seller and recouping the initial $150,000 payment made pursuant to this section 3 of the Agreement, less Seller’s attorneys fees associated with negotiating this agreement (up to a maximum of $15,000). The parties acknowledge that, despite Seller’s best efforts, the conclusion of Seller’s efforts to correct the patent claim language may be delayed due to circumstances outside of Seller’s control. Upon reasonable proof by Seller of (1) Seller’s due diligence in pursuing the patent claim correction and (2) delay beyond the 18-month “deadline” due to circumstances beyond Seller’s control, Purchaser will agree to a reasonable extension of that deadline to permit completion of those efforts by Seller.

3.5.1.	The parties agree that correction of the patent claims via the Certificate of Correction attached as Exhibit D (or some substantially equivalent Certificate of Correction filing) will satisfy Seller’s duty to correct the patent claim language, and that Purchaser shall not thereafter have the option to rescind this Agreement.
3.5.2.	If Seller is NOT able to accomplish the correction of the patent claims via the

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Certificate of Correction procedure, and if Purchaser has not yet asserted the patent against any third party, Purchaser shall have the option to rescind the agreement, transfer title to the patent back to Seller, and receive from Seller its initial payment of $150,000, less Seller’s attorneys fees associated with negotiating this Agreement (up to a maximum of $15,000).

3.5.2.1.	Once Purchaser has asserted the patent against any third party, any and all of Purchaser’s options to rescind this Agreement shall expire, and Purchaser thereafter shall have no claim under any circumstances for return from Seller of the initial payment of $150,000.
3.5.2.2.	In connection with Purchaser’s foregoing option to rescind, the parties agree that time is of the essence regarding the following related actions. Seller agrees to provide timely notice to Purchaser of any “final” rejection by the PTO of the Certificate of Correction (including any appeal that Seller may elect to file) or other decision by Seller to abandon Seller’s efforts to obtain a Certificate of Correction. Following that notice, Purchaser will have ten (10) business days within which to exercise its foregoing option, by advising Seller in writing that Purchaser has elected to exercise that option and rescind this agreement. The parties agree that the ten-day deadline is reasonable and necessary to provide Seller a reasonable opportunity to decide whether to proceed with any further efforts to correct the patent claim language (including by appeal of any “final” rejection by the PTO of the Certificate of Correction efforts, applying to reissue the patent with “corrected” claim language, or other action).
3.5.2.3.	If following such notice from Seller, Purchaser does NOT exercise its option and rescind this Agreement, Seller agrees to proceed with a related Reissue application if so requested by Purchaser (at Seller’s expense), but Purchaser shall not thereafter have the option to rescind this Agreement. In that regard (whether Purchaser requests such a Reissue filing), the parties agree that the patent claims (whether in their “uncorrected” form or reissued form) may be of some value (possibly significant), including possibly covering certain third party methods and apparatus.

3.6. Maintenance of Patent Rights. Purchaser shall have the duty to attend to and pay any and all remaining maintenance fees, annuities, or similar payments to keep alive the Patents for the maximum extent permitted by law. Purchaser acknowledges that its agreement to maintain the Patent Rights is an important consideration in this Agreement, and that any failure to do so will foreseeably result in damages to Seller, including but not limited to damages related to Sections 3.2.2 and 3.2.3 above.

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4. Representations and Warranties By Seller. Seller hereby represents and warrants to Purchaser as follows:

4.1.	Authority. Seller has the right and authority to enter into this Agreement and to carry out its obligations hereunder.
4.2.	Title and Contest. Seller has good and marketable title to the Patents, including without limitation all rights, title, and interest in the Patents to sue for infringement thereof. The Patents are free and clear of all liens, mortgages, security interests or other encumbrances, and restrictions on transfer. There are no actions, suits, investigations, claims or proceedings threatened, pending or in progress relating in any way to the Patents, except as expressly contemplated by subsections 3.2.3 and 3.5 above. There are no existing contracts, agreements, options, commitments, proposals, bids, offers, or rights with, to, or in any person to acquire any of the Patents.
4.3.	Existing Licenses. No rights or licenses have been granted under the Patents.
4.4.	Restrictions on Rights. Seller is not aware of any basis upon which Purchaser will be subject to any covenant not to sue or similar restrictions on its enforcement or enjoyment of the Patents as a result of the transaction contemplated in this Agreement, or any prior transaction related to the Patents.
4.5.	Conduct. None of Seller or its representatives has engaged in any conduct, or omitted to perform any necessary act, the result of which would invalidate any of the Patents or hinder their enforcement.
4.6.	Enforcement. Seller has (a) not put a third party on notice of actual or potential infringement of any of the Patents (b) nor considered enforcement action(s) with respect to any of the Patents, other than the ones discussed with Purchaser.
4.7.	Patent Office Proceedings. None of the Patents have been or are currently involved in any reexamination, reissue, interference proceeding, or any similar proceeding and that no such proceedings are pending or threatened, except as expressly contemplated by subsection 3.5 above.
4.8.	Related Assets. There are no other patents issued and/or applications pending for or on behalf of Seller which include (or will include) claims such that practice of any of the claims of the Patents conveyed in this Agreement would reasonably require a license under any claim of such other patents.
4.9.	Fees. All maintenance fees, annuities, and the like due on the Patents have been timely paid through the Effective Date.

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4.10. Validity and Enforceability. The Patents have never been found invalid or unenforceable for any reason in any administrative, arbitration, judicial or other proceeding, and Seller has not received any notice or information of any kind from any source suggesting that the Patents may be invalid or unenforceable.

5. Representations and Warranties By Purchaser. Purchaser hereby represents and warrants to Seller as follows:

5.1.	Authority. Purchaser has the right and authority to enter into this Agreement and to carry out its obligations hereunder.
5.2.	Conduct. None of Purchaser or its representatives has engaged in any conduct, or omitted to perform any necessary act, the result of which would invalidate any of the Patents or hinder their enforcement.
5.3.	Enforcement. Purchaser has (a) not put a third party on notice of actual or potential infringement of any of the Patents (b) nor considered enforcement action(s) with respect to any of the Patents, other than the ones discussed with Seller.
5.4.	Patent Office Proceedings. Purchaser is not aware of any of the Patents having been or currently being involved in any reexamination, reissue, interference proceeding, or any similar proceeding, and is not aware of any no such proceedings are pending or threatened, except as expressly contemplated by subsection 3.5 above.
5.5.	Related Assets. Purchaser is not aware of any other patents issued and/or applications pending for or on behalf of Purchaser or any third party which include (or will include) claims such that practice of any of the claims of the Patents conveyed in this Agreement would reasonably require a license under any claim of such other patents.

6. Miscellaneous

6.1. Limitation on Consequential Damages. EXCEPT IN THE EVENT OF FRAUD BY SELLER OR BREACH OF SELLER’S WARRANTIES IN SECTION 4, AND EXCEPT AS PROVIDED IN SECTION 5.2 BELOW, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR LOSS OF PROFITS, OR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE PARTIES ACKNOWLEDGE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES WERE AN ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER THIS AGREEMENT.

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6.2. Limitation of Liability.

6.2.1.	PURCHASER’S TOTAL FINANCIAL LIABILITY TO SELLER UNDER THIS AGREEMENT SHALL BE: (a) THE PAYMENT OF FUNDS AS REQUIRED PURSUANT TO SECTION 3; and (b) STIPULATED/ESTIMATED/FIXED CONSEQUENTIAL DAMAGES TO SELLER IN THE AMOUNT OF A FURTHER $150,000 (IN ADDITION TO THE $150,000 PAID CONTEMPORANEOUSLY WITH SIGNING THIS AGREEMENT, IF FOR ANY REASON PURCHASER FAILS TO MAINTAIN THE PATENT RIGHTS AS REQUIRED PURSUANT TO SECTION 3.
6.2.2.	SELLER’S TOTAL LIABILITY OF ANY KIND TO PURCHASER UNDER THIS AGREEMENT SHALL BE POSSIBLE REPAYMENT TO PURCHASER OF JUST THE INITIAL $150,000 PAYMENT PREVIOUSLY PAID BY PURCHASER TO SELLER, AS FURTHER EXPLAINED IN SECTION 3.2.1 ABOVE. AS EXPLAINED IN THAT SECTION 3, THIS POTENTIAL LIABILITY OF SELLER TO REPAY THAT INITIAL $150,000 PAYMENT IS EXTINGUISHED FOREVER IF THE PATENT CLAIM LANGUAGE IS TIMELY CORRECTED IN THE U.S. PATENT AND TRADEMARK OFFICE (AS DESCRIBED IN OTHER PORTIONS OF THIS AGREEMENT), EITHER WITHIN 18 MONTHS OF THE EFFECTIVE DATE OF THIS AGREEMENT OR WITHIN SUCH FURTHER TIME AS THE PARTIES MAY AGREE. EVEN WITHOUT SUCH CORRECTION OF THE PATENT CLAIM LANGUAGE, PURCHASER MAY, AT ITS SOLE DISCRETION, ELECT TO AFFIRM THIS AGREEMENT AND RETAIN THE PATENT RIGHTS AND THE CORRESPONDING DUTIES TO PAY SELLER (thereby waiving its rights to rescind this Agreement, return the Patents to Seller, and recoup any payments made pursuant to Section 3 of this Agreement). WITHIN A REASONABLE TIME (NOT TO EXCEED 60 DAYS) OF RECEIVING WRITTEN NOTICE FROM SELLER OF SELLER’S FAILURE TO CORRECT THE PATENT CLAIM LANGUAGE, PURCHASER SHALL CONFIRM IN WRITING TO SELLER PURCHASER’S DECISION AS TO WHETHER TO WAIVE OR EXERCISE THOSE RIGHTS (to rescind this Agreement, return the Patents to Seller, and recoup any payments).
6.2.3.	SELLER’S LIABILITY UNDER THIS AGREEMENT SHALL NOT BE AFFECTED BY (a) PURCHASER’S DECISIONS AS TO WHETHER TO PURSUE THIRD PARTIES UNDER THE PATENT RIGHTS and/or (b) PURCHASER’S SUCCESS (OR LACK THEREOF) IN ANY SUCH EFFORT TO PURSUE THIRD PARTIES UNDER THE PATENT RIGHTS.
6.2.4.	AS TO LIABILITY TO THIRD PARTIES OR FOR REASONABLE COSTS AND EXPENSES OF ANY AND ALL KINDS ASSOCIATED WITH PURSUING

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ANY SUCH THIRD PARTIES, PURCHASER HEREBY AGREES TO INDEMNIFY AND HOLD HARMLESS SELLER. THE PARTIES AGREE THAT SUCH REASONABLE COSTS AND EXPENSES INCLUDE, BY WAY OF EXAMPLE AND NOT BY WAY OF LIMITATION, ANY AND ALL EXPENSES REASONABLY RELATED TO ASSISTING PURCHASER IN POTENTIAL AND/OR ACTUAL ASSERTION AND/OR DEFENSE OF THE PATENT RIGHTS (SUCH AS PREPARING DECLARATION(S) OR BEING DEPOSED, FOR EXAMPLE), AND ANY ACTUAL REASONABLE ATTORNEY FEES ASSOCIATED WITH SELLER’S EFFORTS IN THAT REGARD.

6.2.4.1. The foregoing duty to indemnify and hold harmless Seller as to any third parties that Purchaser may pursue will continue regardless of any transfer back to Seller of title to the patent and/or any related “repayment” by Seller to Purchaser of all or part of the initial payment. In other words, should Purchaser elect to pursue any third party PRIOR to the Certificate of Correction/Reissue PTO matter being resolved, Purchaser’s duty to indemnify and hold harmless Seller as to third parties would exist and continue regardless of the SUBSEQUENT outcome of the Certificate of Correction/Reissue PTO matter.

6.2.5. THE PARTIES ACKNOWLEDGE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES WERE AN ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER THIS AGREEMENT.

6.3.

Confidentiality of Terms. The parties hereto shall keep the terms and existence of this Agreement and the identities of the parties hereto confidential and shall not now or hereafter divulge any of this information to any third party except: (a) with the prior written consent of the other party; (b) as otherwise may be required by law or legal process, including in confidence to legal and financial advisors in their capacity of advising a party in such matters; (c) during the course of litigation, so long as the disclosure of such terms and conditions are restricted in the same manner as is the confidential information of other litigating parties; or (d) in confidence to its legal counsel, accountants, banks and financing sources and their advisors solely in connection with complying with financing transactions; provided that, in (b) through (d) above the disclosing party shall use all legitimate and legal means available to minimize the disclosure to third parties, including without limitation seeking a confidential treatment request or protective order whenever appropriate or available.

6.4.

Governing Law. Any claim arising under or relating to this Agreement shall be governed by the internal substantive laws of the State of Colorado without regard to principles of conflict of laws.

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6.5.	Entire Agreement. The terms and conditions of this Agreement, including its Exhibits, constitute the entire agreement between the parties with respect to the subject matter hereof, and merges and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions. These terms and conditions will prevail notwithstanding any different or conflicting terms and conditions which may appear on any purchase order, acknowledgment or other writing not expressly incorporated into this Agreement. This Agreement may be executed in two (2) or more counterparts, all of which, taken together, shall be regarded as one and the same instrument. Failure by either party to enforce any term of this Agreement shall not be deemed a waiver of future enforcement of that or any other term in this Agreement.
6.6.	Notices. All notices required or permitted to be given hereunder shall be in writing, shall make reference to this Agreement, and shall be delivered by hand, or dispatched by prepaid courier or by registered or certified mail, postage prepaid, to the addresses set forth above.
6.7.	Assignment. The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the parties and their successors, assigns and other legal representatives. Among other things, the payment duties in section 3.2 above shall be binding upon any person or entity to whom Seller may license and/or transfer any of the rights herein acquired by the Seller.

In witness whereof, the parties have executed this Agreement as of the Effective Date:

Seller		Purchaser
/s/ Joseph M. Ruggio		By:	/s/ John G. Schulte
Name: Joseph M. Ruggio		Name:	John G. Schulte
Date:	2/6/07	Title:	CEO
		Date:	2/20/07

Page 13

Exhibit A

Patent Rights Assigned

Patent or Application No.	Country		Filing Date	Title; Inventor(s)
5,476,450		U.S.	January 5, 1994	Apparatus and Method for Aspirating Intravascular, Pulmonary and Cardiac Obstructions; Joseph M. Ruggio

Page 14

Exhibit B

Assignment Agreement

     This ASSIGNMENT is made by Joseph M. Ruggio, an individual with a residence at 27632 Fargo Rd., Laguna Hills, California 92653-7808, (hereinafter “ASSIGNOR”) to The Spectranetics Corporation, a Delaware corporation, having a business address at 96 Talamine Court, Colorado Springs, Colorado 80907, (hereinafter “ASSIGNEE”).

     WHEREAS, ASSIGNOR is the owner of record of a certain patent which issued from the United States Patent and Trademark Office, specifically United States Patent No. 5,476,450 “Patent”); and

     WHEREAS, ASSIGNOR wishes to assign, and ASSIGNEE wishes to acquire, the Patent;

     NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, ASSIGNOR hereby grants, transfers, assigns and conveys unto ASSIGNEE, the entire right, title and interest in and to the Patent.

     IN WITNESS WHEREOF, ASSIGNOR has caused this Patent Assignment to be executed as of the date below written.

ASSIGNOR: Joseph M. Ruggio

Date:

Page 15

Exhibit C

Certificate of Correction
(attached copy as filed with the U.S. Patent and Trademark Office on or about September 27, 2006)

Page 16

Exhibit D

Certificate of Correction
(attached copy as filed with the U.S. Patent and Trademark Office on or about January 26, 2007)

Page 17

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
The Spectranetics Corporation:

We hereby consent to the incorporation by reference in the registration statements (Nos. 33-46725, 33-52718, 33-88088, 33-85198, 33-99406, 333-08489, 333-50464, 333-57015, and 333-117074) on Form S-8 and (Nos. 333-06971 and 333-133784) on Form S-3 of The Spectranetics Corporation and subsidiary (collectively, the Company) of our report dated March 16, 2007 on the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the years then ended, and on management’s assessment that the Company and subsidiary maintained effective internal control over financial reporting as of December 31, 2006 which report appears in the Company’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006.

/s/ Ehrhardt Keefe Steiner & Hottman PC

March 16, 2007
Denver, Colorado

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors
The Spectranetics Corporation:

We consent to the incorporation by reference in the registration statements (Nos. 33-46725, 33-52718, 33-88088, 33-85198, 33-99406, 333-08489, 333-50464, 333-57015, 333-117074 and 333-140022) on Form S-8 and (Nos. 333-06971 and 333-133784) on Form S-3 of The Spectranetics Corporation and subsidiary (collectively, the Company) of our report dated March 30, 2005, with respect to the consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2004, which report appears in the December 31, 2006 annual report on Form 10-K of the Company.

Our report refers to the adoption of Emerging Issues Task Force Abstract No. 00-21, Revenue Arrangements with Multiple Deliverables.

/s/ KPMG LLP

Denver, Colorado
March 16, 2007

EX-31.1(A)

Exhibit 31(a)

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John G. Schulte, certify that:

1.	I have reviewed this annual report on Form 10-K of The Spectranetics Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	/s/ John G. Schulte
	John G. Schulte
	Chief Executive Officer

EX-31.1(B)

Exhibit 31(b)

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Guy A. Childs, certify that:

1.	I have reviewed this annual report on Form 10-K of The Spectranetics Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	/s/ Guy A. Childs
	Guy A. Childs
	Chief Financial Officer

EX-32.1(A)

Exhibit 32.1(a)

Certification of Chief Executive Officer

     Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of The Spectranetics Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

     (i) the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 16, 2007	/s/ John G. Schulte
	John G. Schulte
	President, Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.1(B)

Exhibit 32.1(b)

Certification of Chief Financial Officer

     Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of The Spectranetics Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

     (i) the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 16, 2007	/s/ Guy A. Childs
	Guy A. Childs
	Vice President, Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.