Filed by Bowne Pure Compliance

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED September 30, 2007


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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 0-19711

The Spectranetics Corporation

(Exact name of Registrant as specified in its charter)


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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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.

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.

As of November 7, 2007 there were 31,406,024 outstanding shares of Common Stock.

TABLE OF CONTENTS


Part I—FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II—OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Items 2-5. Not applicable
	Item 6. Exhibits
SIGNATURES
Exhibit 31.1(a)
Exhibit 31.1(b)
Exhibit 32.1(a)
Exhibit 32.1(b)

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements

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


	September 30,			December 31,
	2007			2006
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	22,447		$	9,999
Investment securities available for sale		20,864			38,015
Trade accounts receivable, net of allowances of $504 and $367, respectively		14,245			11,185
Inventories, net		6,971			5,067
Deferred income taxes, net		914			49
Prepaid expenses and other current assets		1,723			1,440

Total current assets		67,164			65,755
Property, plant and equipment, net of accumulated depreciation of $12,975 and $12,250, respectively		21,353			16,176
Long-term investment securities available for sale		10,522			8,453
Long-term deferred income taxes, net		5,191			709
Goodwill, net		308			308
Other assets		341			93

Total Assets	$	104,879		$	91,494


Liabilities and Shareholders’ Equity:
Current liabilities:
Accounts payable and accrued liabilities	$	11,382		$	11,219
Deferred revenue		2,596			1,984

Total current liabilities		13,978			13,203
Other long-term liabilities		190			3

Total Liabilities		14,168			13,206


Commitments and Contingencies

Shareholders’ Equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued		—			—
Common stock, $.001 par value; authorized 60,000,000 shares; issued and outstanding 31,396,895 and 30,853,948 shares, respectively		31			31
Additional paid-in capital		156,799			152,011
Accumulated other comprehensive income		381			64
Accumulated deficit		(66,500	)		(73,818	)

Total Shareholders’ Equity		90,711			78,288

Total Liabilities and Shareholders’ Equity	$	104,879		$	91,494

See accompanying unaudited notes to condensed consolidated financial statements.

Page 2

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Revenue	$	21,226		$	16,194		$	58,964		$	45,808
Cost of revenue		5,455			4,263			15,203			12,118

Gross margin		15,771			11,931			43,761			33,690

Gross margin %		74	%		74	%		74	%		74	%
Operating expenses:
Selling, general and administrative		13,068			10,105			35,942			28,568
Research, development and other technology		2,509			2,445			7,792			6,416

Total operating expenses		15,577			12,550			43,734			34,984

Operating income (loss)		194			(619	)		27			(1,294	)
Other income (expense):
Interest income		657			662			2,023			1,250
Other, net		(7	)		(11	)		(24	)		(27	)

Total other income		650			651			1,999			1,223

Income (loss) before income taxes		844			32			2,026			(71	)
Income tax (expense) benefit		(613	)		(197	)		5,292			(424	)

Net income (loss)	$	231		$	(165	)	$	7,318		$	(495	)

Other comprehensive income (loss):
Foreign currency translation		174			—			232			110
Unrealized gain on investment securities		97			61			85			45

Comprehensive income (loss)	$	502		$	(104	)	$	7,635		$	(340	)

Net income (loss) per share — basic	$	0.01		$	(0.01	)	$	0.23		$	(0.02	)

Net income (loss) per share — diluted	$	0.01		$	(0.01	)	$	0.22		$	(0.02	)

Weighted average common shares outstanding:
Basic		31,336,121			30,790,918			31,163,367			28,556,994

Diluted		33,948,650			30,790,918			33,673,596			28,556,994

See accompanying unaudited notes to condensed consolidated financial statements.

Page 3

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


	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	7,318		$	(495	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Stock option compensation		2,243			1,975
Provision for obsolete inventories		244			—
Depreciation and amortization		3,517			2,055
Fair value of options granted for consulting services		—			10
Deferred income taxes		(5,347	)		424
Net change in operating assets and liabilities		(10,308	)		(10,839	)

Net cash used by operating activities		(2,333	)		(6,870	)

Cash flows from investing activities:
Proceeds from maturity and sales of investment securities		36,638			6,167
Purchases of investment securities		(21,470	)		(41,425	)
Capital expenditures		(3,052	)		(2,375	)

Net cash provided by (used in) investing activities		12,116			(37,633	)

Cash flows from financing activities:
Net proceeds from common stock issuance, including proceeds from exercise of stock options		2,545			49,519

Net cash provided by financing activities		2,545			49,519

Effect of exchange rate changes on cash		120			64

Net increase in cash and cash equivalents		12,448			5,080
Cash and cash equivalents at beginning of period		9,999			6,183

Cash and cash equivalents at end of period	$	22,447		$	11,263

Supplemental disclosures of cash flow information —
Cash paid for interest	$	—		$	387

Cash paid for taxes	$	231		$	89

See accompanying unaudited notes to condensed consolidated financial statements.

Page 4

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) 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 excimer 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.

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

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

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

(2) New Accounting Standards

In September 2006, the Financial Accounting Standards Board (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 statements.

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 pre-existing 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 the Company 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.

Page 5

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(3) Stock-Based Compensation

The Company accounts for share-based compensation in accordance with SFAS No. 123R, “Share-Based Payment,” (“SFAS 123(R)”) which was adopted January 1, 2006, utilizing the modified prospective transition method.

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 to employees through September 30, 2007 generally vest over 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 September 30, 2007, there were 441,601 shares available for future issuance under these plans.

The Company also maintains an employee stock purchase plan which 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. At September 30, 2007, there were 185,509 shares available for future issuance under the employee stock purchase plan.

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 three months ended September 30, 2007 and 2006 was $859,000 and $748,000, respectively, 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 recognized under SFAS 123(R) for the nine months ended September 30, 2007 and 2006 was $2,243,000 and $1,975,000, respectively.

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 three and nine months ended September 30, 2007 and 2006, respectively, using the Black-Scholes pricing model:


	Three months ended			Three months ended			Nine months ended			Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2007			2006			2007			2006
Expected life (years)		5.91			5.04			5.30			4.97
Risk-free interest rate		4.23	%		4.59	%		4.74	%		4.82	%
Expected volatility		66.1	%		154.9	%		140.1	%		155.8	%
Expected dividend yield	None			None			None			None
Weighted average fair value	$	8.60		$	10.47		$	8.94		$	10.45

The following table summarizes stock option activity through the nine months ended September 30, 2007:


						Weighted Avg.
						Remaining		Aggregate
				Weighted Avg.		Contractual		Intrinsic
	Shares			Exercise Price		Term (in years)		Value
Outstanding at January 1, 2007		3,837,811		$	4.89
Granted		410,250			10.94
Exercised		(443,099	)		3.61
Cancelled		(65,142	)		8.10

Outstanding at September 30, 2007		3,739,820		$	5.65		5.67	$	29,298,319

Page 6

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $13.48 on September 28, 2007, 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 of September 30, 2007 was 2,686,445. The total intrinsic value of options exercised during the three months ended September 30, 2007 and 2006 was $1,704,417 and $280,370, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $3,355,326 and $2,730,925, respectively.

As of September 30, 2007 there was $7,272,859 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 2.57 years.

Taxes

A portion of the Company’s granted options qualify as incentive stock options (ISO) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Stock option grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference, until the time the option is exercised. Due to the treatment of incentive stock options for tax purposes, the Company’s effective tax rate is subject to variability.

(4) Net Income (Loss) Per Share

The Company calculates net income (loss) per share under the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). Under SFAS 128, basic earnings (loss) 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 are computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares outstanding during the period using the treasury stock method.

For the three and nine months ended September 30, 2007, 966,941 and 1,073,708 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect. For the three and nine months ended September 30, 2006, diluted net loss per share was the same as basic loss per share as potential common stock instruments were anti-dilutive, and for those periods, 2,669,561 and 2,735,653 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect. A summary of the net income (loss) per share calculation is shown below (in thousands, except per share amounts):


	Three months ended					Nine months ended
	September 30,					September 30,
	2007		2006			2007		2006
Net income (loss)	$	231	$	(165	)	$	7,318	$	(495	)

Common shares outstanding:
Historical common shares outstanding at beginning of period		31,157		30,761			30,854		26,251
Weighted average common shares issued		179		30			309		2,306

Weighted average common shares outstanding — basic		31,336		30,791			31,163		28,557
Effect of dilution — stock options		2,613		—			2,511		—

Weighted average common shares outstanding — diluted		33,949		30,791			33,674		28,557

Net income (loss) per share — basic	$	0.01	$	(0.01	)	$	0.23	$	(0.02	)

Net income (loss) per share — diluted	$	0.01	$	(0.01	)	$	0.22	$	(0.02	)

Page 7

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(5) Inventories

Inventories consist of the following (in thousands):


	September 30,			December 31,
	2007			2006
Raw materials	$	1,780		$	1,449
Work in process		3,180			1,932
Finished goods		2,445			1,928
Less inventory reserves		(434	)		(242	)

	$	6,971		$	5,067

(6) Property, Plant and Equipment

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


	September 30,			December 31,
	2007			2006
Land	$	270		$	270
Building and improvements		1,253			1,223
Manufacturing equipment and computers		9,756			9,601
Leasehold improvements		1,218			778
Equipment held for rental or loan		21,135			16,319
Furniture and fixtures		696			235
Less: accumulated depreciation and amortization		(12,975	)		(12,250	)

	$	21,353		$	16,176

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.

(7) Deferred Revenue

Deferred revenue was $2,596,000 and $1,984,000 at September 30, 2007 and December 31, 2006, 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; to deferred revenue associated with service provided to our customers during the warranty period after the sale of equipment; and to equipment revenue deferred until all revenue recognition criteria have been met, including installation of the related laser system at the customers’ premises.

(8) 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 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.

Page 8

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

U. S. Medical

Products offered by this reportable segment include an excimer laser unit (“equipment”), fiber-optic delivery devices (“disposable products”), and the service of the excimer laser unit (“service”). The Company is subject to product approvals from the FDA. At September 30, 2007, 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. 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 September 30, 2007 and 2006, cost allocations of these functions to Europe Medical have not been performed.

Manufacturing activities are performed primarily within the U.S. Medical segment. Revenue associated with intersegment product transfers to Europe Medical was $771,000 and $364,000 for the three months ended September 30, 2007 and 2006, respectively and $2,658,000 and 1,621,000 for the nine months ended September 30, 2007 and 2006, respectively. Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation.

Europe Medical

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenue:
Equipment	$	1,628		$	1,393		$	3,553		$	3,742
Disposable products		15,772			11,770			44,699			33,436
Service		1,870			1,628			5,600			4,731
Other, net of provision for sales returns		(137	)		(87	)		(430	)		(204	)

Subtotal — U.S. Medical		19,133			14,704			53,422			41,705

Equipment		378			319			606			757
Disposable products		1,480			951			4,335			2,805
Service		184			142			511			418
Other, net of provision for sales returns		51			78			90			123

Subtotal — Europe Medical		2,093			1,490			5,542			4,103

Total revenue	$	21,226		$	16,194		$	58,964		$	45,808


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007		2006
Segment net income (loss):
U.S. Medical	$	(20	)	$	(220	)	$	6,190	$	(848	)
Europe Medical		251			55			1,128		353

Total net income (loss)	$	231		$	(165	)	$	7,318	$	(495	)

Page 9

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	September 30,		December 31,
	2007		2006
Segment assets:
U.S. Medical	$	98,766	$	88,192
Europe Medical		6,113		3,302


Total assets	$	104,879	$	91,494

(9) Income Taxes

The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”), 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 required to the extent it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income, and tax planning strategies in making this assessment.

During the quarter ended June 30, 2007, the Company performed its quarterly assessment of its net deferred tax assets. After considering a number of factors, including (1) the Company’s pretax income for the year-to-date period, (2) the expectation of generating pre-tax income for the full year of 2007 and beyond, which is primarily due to the recently-announced FDA approval of our TURBO-Booster product, and (3) the impact of a proposed settlement with Dutch tax authorities which neared completion in the second quarter, which has enabled the Company to forecast with a higher degree of likelihood the availability and utilization of net operating loss carryforwards related to the Company’s Netherlands subsidiary, the Company concluded that an adjustment to the valuation allowance recorded against its deferred tax asset was necessary in accordance with SFAS 109. Accordingly, the Company recorded a non-cash tax benefit in the second quarter of 2007 of $6.6 million to decrease the valuation allowance against its deferred tax assets. It has been recorded within income tax (expense) benefit in the accompanying consolidated statement of income for the nine months ended September 30, 2007. The Company updated its assessment of its net deferred tax assets at September 30, 2007, with no further adjustment recorded.

In addition, for the three and nine months ended September 30, 2007, the Company recorded an income tax provision of $613,000 and $1,308,000, respectively, against its pretax book income of $844,000 and $2,026,000, respectively. A portion of the Company’s granted stock options qualify as incentive stock options (ISO) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Due to the treatment of incentive stock options for tax purposes, the Company’s effective tax rate is subject to variability.

Any significant increase or reduction in estimated forecasted future taxable income may require the company to record additional adjustments to the valuation allowance against the remaining deferred tax assets. Any increase or decrease in the valuation allowance would result in additional or lower income tax expense in such period and could have a significant impact on that period’s earnings.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The adoption of FIN 48 did not have a material effect on the Company’s financial position or operating results.

Page 10

THE SPECTRANETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(10) Related Party Transactions

During the three and nine months ended September 30, 2007, the Company paid $46,500 and $79,500, respectively, to a member of its board of directors under an agreement whereby the director agreed to provide training services to outside physicians on behalf of the Company.

During the quarter ended March 31, 2007, the Company purchased a U.S. patent from a member of its board of directors for a purchase price of $150,000.

(11) Commitments and Contingencies

Rentrop

In January 2004, Dr. Peter Rentrop filed a complaint for patent infringement against Spectranetics in the United States District Court for the Southern District of New York (the “New York Court”). After various legal proceedings and an attempt at mediation, the case was returned to the New York Court for trial, which began in late November 2006. In December 2006, the trial was concluded and the jury returned a verdict in favor of Dr. Rentrop, awarding him a total of $650,000. In September 2007, the judge ruled on several post-trial motions and accepted the verdict. Spectranetics currently plans to exhaust all of its appeal options. However, in light of the jury verdict, Spectranetics has accrued $946,000 in expenses related to the verdict (the $650,000 awarded, and an additional $296,000 for royalties subsequent to the effective date of the jury award and through September 30, 2007), which are included in accrued liabilities on the Company’s consolidated balance sheet at September 30, 2007. Of this amount, $690,000 had been previously accrued in the year ended 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 September 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 $330,000, and such amount is included in accrued liabilities at September 30, 2007. 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, 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.

Page 11

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. For a description of such risks and uncertainties, which could cause the actual results, performance or achievements of the Company to be materially different from any anticipated results, performance or achievements, please see the risk factors included in our Form 10-K for the year ended December 31, 2006. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of certain risks and factors that may affect our business. This analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K, filed on March 16, 2007. Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.

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 implantable cardiac defibrillators, or ICDs, which are electronic devices that regulate the heartbeat.

Although 90% of our revenue was derived in the United States for the three months ended September 30, 2007, we also have regulatory approval to market our products in two key international markets. In Europe, we have the required approvals to market our products for the same indications that are approved in the United States. We have also received approval to market certain coronary atherectomy products in Japan, and are seeking additional approvals there for our newer coronary, peripheral and lead removal products. Our distributor, DVx Japan, is assisting us in pursuing reimbursement approval in Japan. We do not expect significant revenue increases in Japan unless and until reimbursement is received.

Our goal is to become a leading provider of innovative, minimally invasive solutions for the treatment of cardiovascular disease. To achieve this objective, we will focus our efforts on further penetration of the peripheral market. We will do so through continuing expansion of our field sales force, expanded clinical research, and increased product development efforts. We believe these costs are necessary to establish our laser technology within the large, underserved peripheral market and provide a platform for sustainable revenue growth in future years. As a result of the increased expenses, we may not maintain profitability. Although we believe that net losses, if any, would be temporary as we build our peripheral business, there are no assurances to that effect.

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

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

Page 13

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

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 third quarter of 2006. In October 2006, we received FDA clearance to market our TURBO Elite™ 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 transition to this product line substantially complete as of the end of the first quarter of 2007.

In July 2007, we received clearance from the FDA to market our TURBO-Booster™ product for the treatment of arterial stenoses and occlusions in the leg. The TURBO-Booster functions as a guiding catheter facilitating directed ablation of blockages in the main arteries at or above the knee. The TURBO-Booster combined with Turbo elite™ laser catheters allows for removal of large amounts of plaque material within the superficial femoral artery (SFA) and popliteal artery. This approval represented a broader indication for use as compared to current labeling of the existing peripheral laser catheters. We began a limited market launch of the TURBO-Booster product in the third quarter of 2007.

As to product development, one of our initiatives will be to incorporate visualization technology into our devices. We terminated our contract with Bioscan Technologies, Ltd in the second quarter of 2007 after the initial phase had been completed, as feasibility of combining our fiber-optic laser catheters with the optical imaging technology of Bioscan was not proven; however, we plan to continue to pursue other visualization projects. In addition, a significant portion of our research and development expenses in 2007 are being devoted to developing technology enhancements to our laser system.

Page 14

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

Results of Operations

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


	2006						2007
	3rd Qtr			4th Qtr			1st Qtr			2nd Qtr			3rd Qtr
(000’s, except per share and unit sale amounts)
Laser Revenue:
Equipment sales	$	1,076		$	819		$	402		$	381		$	1,185
Rental fees		636			558			661			709			821

Total laser revenue		1,712			1,377			1,063			1,090			2,006

Disposable Products Revenue:
Atherectomy revenue		6,450			7,405			7,654			9,485			9,167
Support catheter revenue		1,895			2,230			2,470			3,042			2,943
Lead removal revenue		4,376			4,767			4,302			4,829			5,143

Total disposable products revenue		12,721			14,402			14,426			17,356			17,253

Service and other revenue		1,761			1,903			1,876			1,927			1,967

Total revenue		16,194			17,682			17,365			20,373			21,226


Pre-tax income (loss)	$	32	*	$	(1,211)	*	$	165	*	$	1,017	*	$	844	*

Net income (loss)	$	(165)	*	$	(952)	*	$	(65)	*	$	7,152	*	$	231	*
Net income (loss) per share:
Basic	$	(0.01	)	$	(0.03	)	$	(0.00	)	$	0.23		$	0.01
Diluted	$	(0.01	)	$	(0.03	)	$	(0.00	)	$	0.21		$	0.01

Net cash (used in) provided by operating activities	$	(445	)	$	197		$	(3,799	)	$	1,667		$	(201	)
Total cash and investment securities (current and non-current)	$	57,296		$	56,467		$	52,833		$	53,472		$	53,833

Laser sales summary:
Laser sales from inventory		4			7			3			2			3
Laser sales from evaluation/rental units		4			0			0			1			4

Total laser sales		8			7			3			3			7


*		Includes stock-based compensation expense (pre-tax) of $748, $688, $669, $714 and $859, respectively.

Worldwide Installed Base Summary:


	2006						2007
	3rd Qtr			4th Qtr			1st Qtr			2nd Qtr			3rd Qtr
Laser sales from inventory		4			7			3			2			3
Rental placements		33			30			32			38			25
Evaluation placements		3			5			5			5			4

Laser placements during quarter		40			42			40			45			32
Buy-backs/returns during quarter		(3	)		(4	)		(6	)		(9	)		(12	)

Net laser placements during quarter		37			38			34			36			20

Total lasers placed at end of quarter		585			623			657			693			713

Page 15

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

Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006

Revenue for the third quarter of 2007 was $21,226,000, an increase of 31% as compared to $16,194,000 during the third quarter of 2006. This increase is mainly attributable to a 36% increase in disposable products revenue, which consists of single-use catheter products; a 17% increase in laser equipment revenue, which consists of laser sales and rentals; and a 12% increase in service and other revenue.

We separate our disposable products revenue into three separate categories – atherectomy, support catheters and lead removal. For the three months ended September 30, 2007, our atherectomy revenue totaled $9,167,000 (53% of our disposable products revenue), our support catheter revenue totaled $2,943,000 (17% of our disposable revenue) and our lead removal revenue totaled $5,143,000 (30% of our disposable products revenue). For the three months ended September 30, 2006, our atherectomy revenue totaled $6,450,000 (51% of our disposable products revenue), our support catheter revenue totaled $1,895,000 (15% of our disposable products revenue) and our lead removal revenue totaled $4,376,000 (34% of our disposable products revenue).

Atherectomy revenue, which includes products used in both the peripheral and coronary vascular systems, grew 43% in the third quarter of 2007 as compared with the third quarter of 2006. Atherectomy revenue growth was primarily due to unit volume increases from the continued market penetration of our peripheral laser atherectomy product lines and the limited market release of our TURBO-Booster product targeted at treating arterial blockages above the knee. From the end of the third quarter of 2006 to the end of the third quarter of 2007, our installed laser base has increased from 585 to 713 lasers worldwide, an increase of 22%. Also since the year-ago quarter, in October 2006 we received FDA clearance to market our TURBO Elite™ 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 transition to this product line substantially complete as of the end of the first quarter of 2007. Atherectomy revenue growth from current levels will depend on our ability to increase market acceptance of our CLiRpath product line to treat below-the-knee arterial blockages, our ability to further penetrate the treatment of above-the-knee arterial blockages following the third quarter 2007 launch of our TURBO-Booster product and our ability to continue to increase the worldwide installed base of lasers, and future success of our ongoing clinical research and product development within the coronary and peripheral atherectomy markets.

Support catheter revenue grew 55% for the three months ended September 30, 2007 as compared to the year-ago quarter. These 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.

Lead removal revenue grew to $5,143,000, an increase of 18% for the three-month period ended September 30, 2007, as compared with the same three-month period in 2006. We continue to believe our lead removal revenue is increasing primarily as a result of the increase in the use of implantable cardioverter defibrillators (ICD), devices that regulate heart rhythm. When an ICD is implanted, it often replaces a pacemaker. In these cases, the old pacemaker leads are likely to be removed to avoid potential electrical interference with the new ICD leads. Growth in the implantable defibrillator market may accelerate, depending on the establishment of referral patients to electrophysiologists for this expanded patient pool and the additional reimbursement recently established for the hospitals and electrophysiologists for these patients. Generally, growth in the implantable defibrillator market contributes to growth in our lead removal business. We estimate that 95% of replaced pacemaker or defibrillator leads are capped and left in the body. During the third quarter of 2007, we completed our 2007 plans for the establishment of a dedicated lead removal sales organization to increase awareness of potential complications associated with leaving abandoned or non-functioning leads in the body, in addition to other market development activities.

Laser equipment revenue was $2,006,000 and $1,712,000 for the three months ended September 30, 2007 and 2006, respectively. Laser sales revenue, which is included in laser equipment revenue, increased slightly to $1,185,000 during the three month period ended September 30, 2007 from $1,076,000 during the three month period ended September 30, 2006. We sold seven laser units (three as outright sales from inventory, and four as conversions from evaluation or rental units) during the third quarter of 2007 and eight laser units (four as outright sales from inventory and four sale conversions from evaluation units) during the same quarter in 2006. Rental revenue increased 29% during the three-month period ended September 30, 2007, from $636,000 in the third quarter of 2006 to $821,000 in the third quarter of 2007. This increase is due primarily to the increase in our installed rental base of laser systems.

Page 16

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

Our worldwide installed base of laser systems increased by 20 during the quarter ended September 30, 2007, compared with an increase of 37 laser systems during the same quarter last year. This brings our worldwide installed base of laser systems to 713 (563 in the U.S.) at September 30, 2007. During the third quarter of 2007, we placed 32 new lasers and recorded 12 lasers as returned as we increased our focus on redeploying under-utilized laser systems that are company-owned and placed at hospitals under one of the Company’s placement programs.

Service and other revenue increased to $1,967,000 for the third quarter of 2007 as compared to $1,761,000 the third quarter of 2006. The 12% increase was due primarily to the increased installed base of laser units.

Gross margin for the third quarter of 2007 was 74%, unchanged from the year-ago period.

Operating expenses of $15,577,000 in the third quarter of 2007 increased 24% from $12,550,000 in the third quarter of 2006. This increase is mainly due to a 29% increase in selling, general and administrative (S,G&A) expenses, to $13,068,000 for the three months ended September 30, 2007 from $10,105,000 in the prior year period. The increase in S,G&A expenses is primarily due to:

•

Marketing and selling expenses increased approximately $2,650,000 in the quarter compared with last year’s quarter primarily as a result of the following:

•

Increased personnel-related costs of approximately $1,100,000 associated with the staffing of 33 additional employees within our U.S. field sales and marketing organizations as of the end of the third quarter of 2007 as compared with the third quarter of 2006. These costs include salaries and related taxes, recruiting, and travel costs.

•

Increased commissions of approximately $700,000, which is mainly due to the increase in revenues and additional employees.

•

Increased costs of approximately $470,000 associated with increased volume of marketing communications, Company-sponsored educational summits for physicians, sales meetings and conventions expense, in support of the increase in sales in general, and the introduction of the TURBO-Booster product in particular.

•

Increased expenses of approximately $200,000 related to higher corporate facilities and telecommunications allocations as well as sales and marketing-related materials expense.

•

Approximately $150,000 in increased sales-related costs for our international operations, primarily due to the addition of two additional sales employees and a new general manager in our Netherlands subsidiary since a year ago.

•

General and administrative expenses increased approximately $300,000 in the third quarter of 2007 compared with the same period of the prior year, primarily the result of increased personnel-related costs associated with increased staffing compared to a year ago.

Research, development and other technology expenses of $2,509,000 for the third quarter of 2007 represent an increase of 3% from $2,445,000 in the third quarter of 2006. Costs included within research, development and other technology expenses are research and development costs, clinical studies costs, regulatory compliance expenses and royalty costs associated with various license agreements with third-party licensors. Increased regulatory-related expenses of approximately $250,000 due to increased regulatory submission costs and consulting costs were offset by reduced research and development outside services expense. In the prior year third quarter, we incurred approximately $200,000 of expenses related to the Bioscan optical imaging technology feasibility project. That project was terminated in the second quarter of 2007.

Interest income of $657,000 in the third quarter of 2007 did not change significantly from interest income of $662,000 for the third quarter of 2006. Our investment securities portfolio consists primarily of government or government agency securities and certificates of deposit with maturities less than two years.

Pre-tax income in the third quarter of 2007 was $844,000, compared with pre-tax income of $32,000 in the third quarter of 2006. Given the Company’s significant historical net operating losses which are available to offset future taxable income, any income tax expense or benefit is a non-cash item. As a result, management believes that pre-tax income or loss is the most appropriate measure of its operating performance.

For the three months ended September 30, 2007, we recorded income tax expense of $613,000 against our pretax income of $844,000. A portion of the Company’s granted stock options qualify as incentive stock options (ISO) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Due to the treatment of incentive stock options for tax purposes, our effective tax rate is higher than the statutory rate.

Page 17

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

We recorded net income for the three months ended September 30, 2007 of $231,000, or $0.01 per fully diluted share, compared with a net loss of ($165,000) or ($0.01) per fully diluted share, in the same quarter last year. The increase in net income is attributable primarily to the increase in revenue for the third quarter of 2007 as compared to the year-ago quarter.

The functional currency of Spectranetics International B.V. is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of operations using weighted average exchange rates during the period. Fluctuation in euro currency rates during the three months ended September 30, 2007, as compared with the three months ended September 30, 2006, caused an increase in consolidated revenue of $102,000 and an increase in consolidated operating expenses of $128,000.

Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006

Revenue for the first nine months of 2007 was $58,964,000, an increase of 29% as compared to $45,808,000 during the first nine months of 2006. This increase is mainly attributable to a 35% increase in disposable products revenue, which consists of single-use catheter products, and a 14% increase in service and other revenue.

We separate our disposable products revenue into three separate categories – atherectomy, support catheters and lead removal. For the nine months ended September 30, 2007, our atherectomy revenue totaled $26,315,000 (54% of our disposable products revenue), our support catheter revenue totaled $8,446,000 (17% of our disposable revenue) and our lead removal revenue totaled $14,274,000 (29% of our disposable products revenue). For the nine months ended September 30, 2006, our atherectomy revenue totaled $18,465,000 (51% of our disposable products revenue), our support catheter revenue totaled $5,308,000 (15% of our disposable product revenue) and our lead removal revenue totaled $12,468,000 (34% of our disposable products revenue).

Atherectomy revenue, which includes products used in both the peripheral and coronary vascular systems, grew 42% in the first nine months of 2007 as compared with the first nine months of 2006. Atherectomy revenue growth was primarily due to unit volume increases from the continued penetration of our peripheral laser atherectomy product lines and the limited market release of our TURBO-Booster product targeted at treating arterial blockages above the knee. From the end of the third quarter of 2006 to the end of the third quarter of 2007, our installed laser base has increased from 585 to 713 lasers worldwide, an increase of 22%. Also, in October 2006, we received FDA clearance to market our TURBO Elite™ 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 transition to this product line substantially complete as of the end of the first quarter of 2007. Approximately 25% of the atherectomy revenue growth compared with the prior year was due to unit price increases related to the transition to newer products. Atherectomy revenue growth from current levels will depend on our ability to increase market acceptance of our CLiRpath product line to treat below-the-knee arterial blockages, our ability to further penetrate the treatment of above-the-knee arterial blockages following the July launch of our TURBO-Booster product and our ability to continue to increase the worldwide installed base of lasers, and future success of our ongoing clinical research and product development within the coronary and peripheral atherectomy markets.

Support catheter revenue grew 59% for the nine months ended September 30, 2007 as compared to the year-ago quarter. These 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

Lead removal revenue grew 14% for the nine-month period ended September 30, 2007, as compared with the same nine-month period in 2006. We continue to believe our lead removal revenue is increasing primarily as a result of the increase in the use of implantable cardioverter defibrillators (ICD), devices that regulate heart rhythm. The current standard of care in this market is to cap leads and leave them in the body rather than lead removal. We estimate that 95% of replaced pacemaker or defibrillator leads are capped and left in the body. We have established a dedicated lead removal sales organization to increase awareness of potential complications associated with leaving abandoned or non-functioning leads in the body, in addition to other market development activities.

Page 18

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

Laser equipment revenue was $4,159,000 and $4,499,000 for the nine months ended September 30, 2007 and 2006, respectively. Laser sales revenue, which is included in laser equipment revenue, decreased to $1,968,000 during the nine-month period ended September 30, 2007 from $2,700,000 during the nine-month period ended September 30, 2006. We sold 13 laser units (eight as outright sales from inventory, and five sales conversions from a rental and evaluation units) during the first nine months of 2007 and 20 laser units (seven as an outright sale from inventory and 13 sale conversions from rental and evaluation units) during the same period in 2006. Rental revenue increased 22% during the nine-month period ended September 30, 2007, from $1,799,000 in the first nine months of 2006 to $2,191,000 in the first nine months of 2007. This increase is due primarily to the increase in our installed rental base of laser systems.

Our worldwide installed base of laser systems increased by 90 during the nine months ended September 30, 2007, compared with an increase of 91 laser systems during the first nine months of last year. This brings our worldwide installed base of laser systems to 713 (563 in the U.S.) at September 30, 2007.

Service and other revenue increased to $5,771,000 for the first nine months of 2007 as compared to $5,068,000 the first nine months of 2006. The 15% increase was due primarily to the increased installed base of laser units.

Gross margin for the first nine months of 2007 was 74%, unchanged compared to the first nine months of 2006.

Operating expenses of $43,734,000 in the first nine months of 2007 increased 25% from $34,984,000 in the first nine months of 2006. This increase is mainly due to a 26% increase in selling, general and administrative expenses relative to the same period in 2006, and a 21% increase in research, development and other technology expenses relative to the same period of a year ago.

Selling, general and administrative expenses increased 26% to $35,942,000 for the nine months ended September 30, 2007 from $28,568,000 in the prior year period. The increase is primarily due to:

•

Marketing and selling expenses increased approximately $6,800,000 for the first nine months of 2007 as compared with the same period of the prior year, primarily as a result of the following:

•

Increased personnel-related costs of approximately $2,600,000 associated with the staffing of 33 additional employees within our U.S. field sales and marketing organizations as of the end of the third quarter of 2007 as compared with the third quarter of 2006. These costs include salaries and related taxes, recruiting, and travel costs.

•

Increased commissions of approximately $2,200,000, which is mainly due to the increase in revenues and additional employees.

•

Approximately $800,000 in increased sales-related costs for our international operations, primarily due to the addition of two additional sales employees and the hiring of a general manager in our Netherlands subsidiary since a year ago as well as an increase in sales support activities.

•

Increased expenses of approximately $800,000 related to (1) the Company’s annual global sales meeting which takes place in the first quarter of each year, due to the increase in sales and marketing employees and a longer duration for the meeting, as well as additional sales meetings held during the year and (2) additional potential customer training expense.

•

Increased expenses of approximately $400,000 related to higher corporate facilities and telecommunications allocations as well as sales and marketing-related materials expense.

•

General and administrative expenses increased approximately $600,000 in the first nine months of 2007 compared with the same period of the prior year, primarily the result of increased personnel-related costs associated with increased staffing compared to a year ago.

In addition, approximately $100,000 of the increase in sales, general and administrative expense relates to an increase in stock compensation expense included in selling, general and administrative expenses in the first nine months of 2007 as compared to the year-ago period, due to the grant of additional options to new employees.

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

Research, development and other technology expenses of $7,792,000 for the first nine months of 2007 represent an increase of 21% from $6,416,000 in the first nine months of 2006. The increase is primarily due to:

•

Increased regulatory-related expenses of approximately $500,000 due to increased regulatory submission costs and consulting costs.

•

Increased personnel-related costs (including recruiting and travel) of approximately $340,000 due primarily to the hiring of additional engineering and clinical studies employees since the year-ago period.

•

Increased research and development outside services expense of approximately $275,000 which primarily includes increased fees paid to outside vendors assisting us with technology enhancements to our laser system.

•

Increased royalty expense of approximately $160,000 due to increased sales of products incorporating licensed technology.

•

Approximately $100,000 of increased depreciation and amortization expense due to additional investments in research and development assets, including software, since the prior year.

Interest income increased to $2,023,000 in the first nine months of 2007 from $1,250,000 for the first nine months of 2006. 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.

Pre-tax income for the first nine months of 2007 was $2,026,000, compared with a pre-tax loss of ($71,000) for the same period of 2006. Given the Company’s significant historical net operating losses which are available to offset future taxable income, any income tax expense or benefit is a non-cash item. As a result, management believes that pre-tax income or loss is the most appropriate measure of its operating performance.

For the nine months ended September 30, 2007, we recorded a net income tax benefit of $5,292,000 against our pretax income of $2,026,000. Included in the net tax benefit for the first nine months of 2007 is a non-cash tax benefit of $6,600,000 related to a reduction in the valuation allowance against our deferred tax asset. This adjustment was made in the second quarter of 2007 as a result of our quarterly assessment of our deferred tax asset as required by SFAS 109, and the reasons for the adjustment are discussed in more detail in Note 9, “Income Taxes,” to our accompanying condensed consolidated financial statements. In addition to the valuation allowance adjustment, for the nine months ended September 30, 2007, we recorded an income tax provision of $1,308,000 against out pretax income for the period. A portion of the Company’s granted stock options qualify as incentive stock options (ISO) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Due to the treatment of incentive stock options for tax purposes our effective tax rate is subject to variability.

We recorded net income for the nine months ended September 30, 2007 of $7,318,000, or $0.22 per fully diluted share, compared with a net loss of ($495,000), or ($0.02) per fully diluted share, in the same period last year. The change in net income is attributable primarily to the deferred tax asset valuation allowance adjustment discussed above, as well as the increase in revenue for the first nine months of 2007 as compared to the year-ago period.

The functional currency of Spectranetics International B.V. is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of operations using weighted average exchange rates during the period. Fluctuation in euro currency rates during the nine months ended September 30, 2007, as compared with the nine months ended September 30, 2006, caused a increase in consolidated revenue of $348,000 and an increase in consolidated operating expenses of $296,000.

Liquidity and Capital Resources

Cash, cash equivalents, and current and long-term investments in marketable securities as of September 30, 2007 were $53,833,000, a decrease of $2,634,000 from $56,467,000 at December 31, 2006. Cash used by operating activities of $2,333,000 for the nine months ended September 30, 2007 consisted primarily of the following:

•

Increase in equipment held for rental or loan of $4,816,000 as a result of expanding placement activity of our laser systems through evaluation, “cap-free,” or rental programs.

Page 20

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

•

An increase in trade accounts receivable of $2,448,000 (net of an increase in deferred revenue), due to the increase in sales for the nine months ended September 30, 2007 as compared to the final nine months of 2006.

•

Increased inventories of $1,904,000 which were 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 offset by the following sources for the nine months ended September 30, 2007:

•

Net income of $7,318,000 for the nine months ended September 30, 2007 less the non-cash income tax benefit of $5,347,000, plus non-cash expenses of $5,904,000, which primarily consist of depreciation and amortization of $3,517,000; stock compensation expense of $2,243,000; and provisions for obsolete inventory of $244,000.

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


	September 30, 2007	December 31, 2006
Days Sales Outstanding	60	57
Inventory Turns	3.9	3.8

For the nine months ended September 30, 2007, cash provided by investing activities was $12,116,000, primarily due to the net of $36,638,000 of proceeds from the maturity of investment securities and $21,470,000 of new investment purchases, partially offset by capital expenditures of $3,052,000. Capital expenditures during the first nine months of 2007 were primarily related to the expansion of our manufacturing capacity, as well as expenditures for furniture and leasehold improvements related to our move to a new facility, which began early in the second quarter of 2007.

Cash provided by financing activities for the nine month period ended September 30, 2007 was $2,545,000, comprised entirely of proceeds from the sale of common stock to employees and former employees as a result of exercises of stock options and stock issuances under our employee stock purchase plan. At September 30, 2007, there were no debt or capital lease obligations.

At September 30, 2007, and December 31, 2006, we had placed a number of laser systems on rental, “Cap-free,” and loan programs. A total of $21,135,000 and $16,319,000 was recorded as equipment held for rental or loan at September 30, 2007 and December 31, 2006, respectively, and is being depreciated over three to five years, depending on whether the laser system is new or remanufactured. Costs to maintain the equipment are expensed as incurred.

We currently offer three laser system placement programs 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. As of September 30, 2007, 185 laser units were in place under the Cap-free program.

	(2)		Evergreen rental programs – 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. 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. As of September 30, 2007, 101 laser units were in place under the Evergreen and straight monthly rental programs.

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

(3)

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. As of September 30, 2007, 93 laser units were in place under the evaluation program. These laser systems contribute to revenue immediately through the sales of disposable products to customers that have acquired a laser system under an evaluation program. We expect the number of future evaluation laser placements to diminish since the Cap-free rental program has become our primary laser placement program since its introduction in June 2005.

We believe our liquidity and capital resources are sufficient to meet our operating and capital requirements through at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Our critical accounting policies and estimates are included in our Annual Report on Form 10-K, filed with the SEC on March 16, 2007.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. Our exposure to market rate risk for changes in interest rates relate primarily to our investment portfolio. We attempt to place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We maintain an investment portfolio of various issuers, types and maturities, which consist of both fixed and variable rate financial instruments. Marketable securities are classified as available-for-sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component in stockholders’ equity, net of applicable taxes. At any time, sharp changes in interest rates can affect the value of our investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. Since our investment securities have maturities that are generally less than one year and 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 September 30, 2007, the unrealized gain on our investment securities was approximately $28,000.

As of September 30, 2007, we had cash and cash equivalents of $22.4 million, and current and long-term investment securities of $31.4 million. Overall average duration to maturity for all cash and marketable securities is less than one year with 67% of the portfolio under one year and the remaining 33% between one and two years. At September 30, 2007, 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 revenue and net income. Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses. For the nine months ended September 30, 2007, approximately $348,000 of increased revenue and $296,000 of increased operating expenses were the result of exchange rate fluctuations of the U.S. dollar in relation to the euro. Accordingly, the net impact of exchange rate fluctuations on consolidated net income for the nine months ended September 30, 2007 was an increase in net income of $52,000.

Item 4. Controls and Procedures

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

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2007. 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.

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

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Part II—OTHER INFORMATION

Item 1. Legal Proceedings

Rentrop

In January 2004, Dr. Peter Rentrop filed a complaint for patent infringement against us in the United States District Court for the Southern District of New York (the “New York Court”). After various legal proceedings and an attempt at mediation, the case was returned to the New York Court for trial, which began in late November 2006. In December 2006, the trial was concluded and the jury returned a verdict in favor of Dr. Rentrop, awarding him a total of $650,000. In September 2007, the judge ruled on several post-trial motions and accepted the verdict. We currently plan to exhaust all of our appeal options. However, in light of the jury verdict, we have accrued $946,000 in expenses related to the verdict (the $650,000 awarded, and an additional $296,000 for royalties subsequent to the effective date of the jury award and through September 30, 2007), which are included in accrued liabilities on our consolidated balance sheet at September 30, 2007. Of this amount, $690,000 had been previously accrued in the year ended 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 September 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 $330,000, and such amount is included in accrued liabilities at September 30, 2007. 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 us 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 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.

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 Spectranetics as a defendant in its 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.

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Other

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

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of the Company’s 2006 Annual Report on Form 10-K.

Items 2-5. Not applicable

Item 6. Exhibits

	10.46		The Third Amendment to The Spectranetics Corporation 2006 Incentive Award Plan (incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-8 filed on August 14, 2007).

	*10.47*		Form of Stock Option Grant Notice and Stock Option Agreement for Independent Directors (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-8 filed on August 14, 2007).

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

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

	32.1(a)		Section 1350 Certification.

	32.1(b)		Section 1350 Certification

SIGNATURES

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


	The Spectranetics Corporation (Registrant)

November 8, 2007		/s/ John G. Schulte

		John G. Schulte
		President and Chief Executive Officer

November 8, 2007		/s/ Guy A. Childs

		Guy A. Childs
		Vice President Finance, Chief Financial Officer

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