Summary of SPECTRANETICS CORP

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, 2007 and in this Form 10-Q under Part II, Item 1A. 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 17, 2008. 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 86% of our revenue was derived in the United States for the three months ended September 30, 2008, 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.

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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, and a full launch was completed in the fourth quarter of 2007.
In May 2008, we completed the acquisition of the endovascular business of Kensey Nash Corporation ("KNC"). Pursuant to an Asset Purchase Agreement among us and KNC, we purchased from KNC all of the assets related to KNC's QuickCat, ThromCat and SafeCross product lines for $10 million in cash. Under the terms of the Agreement, we will pay KNC an additional $6 million once cumulative sales of the acquired products reach $20 million, and up to $8 million upon the achievement of certain FDA approvals related to the acquired products. We simultaneously entered into a Manufacturing and License Agreement pursuant to which KNC will manufacture for the Company the endovascular products acquired by the Company under the Asset Purchase Agreement, and the Company will purchase such products exclusively from KNC for specified time periods ranging from six months for QuickCat to three years for ThromCat and SafeCross. Revenue from these products subsequent to the acquisition date will be included in our reported vascular intervention disposable products revenue. Additionally, the Company and KNC also entered into a Development and Regulatory Services Agreement pursuant to which KNC will conduct work to develop, on behalf of the Company, certain next-generation SafeCross and ThromCat products at KNC's expense. The Company will own all intellectual property resulting from this development work. If clinical studies are required to obtain regulatory approval from the FDA for those next-generation products, the costs will be shared equally by the Company and KNC. KNC additionally will be responsible, at its own expense, for regulatory filings with the FDA that are required to obtain regulatory approval from the FDA for the next-generation products.
On September 4, 2008, the Company was jointly served by the FDA and the ICE with a search warrant issued by the United States District Court, District of Colorado. The search warrant requested information and correspondence relating to: (i) the promotion, use, testing, marketing and sales regarding certain of the company's products for the treatment of in-stent restenosis, payments made to medical personnel and an identified institution for this application,
(ii) the promotion, use, testing, experimentation, delivery, marketing and sales of catheter guidewires and balloon catheters manufactured by certain third parties outside of the United States, (iii) two post-market studies completed during the period from 2002 to 2005 and payments to medical personnel in connection with those studies and (iv) compensation packages for certain of the company's personnel. The Company is cooperating with the appropriate authorities regarding this matter. See Part II, Item 1A, "Legal Proceedings" and Note 12, "Commitments and Contingencies" for a discussion of this and other legal proceedings in which the Company is involved. As announced on September 15, 2008, the SALVAGE trial, a prospective, multicenter trial to evaluate the safety and performance of Spectranetics' laser and certain other products for the treatment of in-stent restenosis (ISR) within nitinol stents implanted in the superficial femoral artery (SFA), was temporarily suspended by VIVA Physicians, Inc. At that date, 25 of the planned 100 patients with ISR in the SFA had been enrolled. VIVA elected to temporarily suspend enrollment in the study after being contacted by the FDA about a potential safety concern relating to the laser device. On September 11, 2008, Spectranetics submitted to the FDA a report entitled "Nitinol Ablation / Fatigue Testing Results" that indicates stents subjected to extensive fatigue testing following laser interaction had no fatigue-related failures. The testing that was the basis of this report began in December 2007 following development of a testing protocol reviewed by and agreed upon with FDA. The FDA did not have this report at the time they contacted VIVA regarding their potential concern. The Company is working with the FDA to provide all information associated with laser interaction with stents. There can be no assurance as to when, if at all, the SALVAGE trial will be resumed. On October 22, 2008, the Company announced that its Board of Directors has appointed Emile J. Geisenheimer, the Company's Chairman, to the additional roles of President and Chief Executive Officer. Mr. Geisenheimer's appointment followed the resignation of John G. Schulte as President and Chief Executive Officer and as a director of the Company.

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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.

                                                              2007                                       2008
(000's, except per share and unit sale amounts)     3rd Qtr         4th Qtr          1st Qtr          2nd Qtr            3rd Qtr
Laser Revenue:
Equipment sales                                    $    1,185      $    1,296       $      674       $    1,164         $    1,408
Rental fees                                               821             836              985            1,044              1,015

Total laser revenue                                     2,006           2,132            1,659            2,208              2,423

Disposable Products Revenue:
Vascular intervention revenue                          12,110          12,701           13,733           14,845             14,433
Lead management revenue                                 5,143           6,899            6,356            7,352              7,652

Total disposable products revenue                      17,253          19,600           20,089           22,197             22,085

Service and other revenue                               1,967           2,178            2,083            2,293              2,328

Total revenue                                          21,226          23,910           23,831           26,698             26,836


Pre-tax income (loss)*                             $      844      $      628       $     (685 )     $   (3,455 )(1)    $      615

Net income (loss)*                                 $      231 *    $      (89 )*    $     (405 )*    $   (2,640 )*      $      183 *
Net income (loss) per share:
Basic                                              $     0.01      $     0.00       $    (0.01 )     $    (0.08 )       $     0.01
Diluted                                            $     0.01      $     0.00       $    (0.01 )     $    (0.08 )       $     0.01

Net cash (used in) provided by operating
activities                                         $     (200 )    $    2,082       $   (1,272 )     $    1,988         $    2,742
Total cash and investment securities (current
and non-current, including restricted
investment)                                        $   53,833      $   54,387       $   53,388       $   44,469         $   44,595

Laser sales summary:
Laser sales from inventory                                  3               5                3                6                 10
Laser sales from evaluation/rental units                    4               4                1                2                  1

Total laser sales                                           7               9                4                8                 11

* Includes stock-based compensation of $860, $937, $773, $746 and $754, respectively.

(1) Results for the second quarter of 2008 included a $3,849 in-process research and development charge described in Note 4 - "Business Combinations" of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

Worldwide Installed Base Summary:

                                                   2007                     2008
                                               Q3        Q4        Q1        Q2        Q3
      Laser sales from inventory                  3         5         3         6        10
      Rental placements                          25        25        27        32        23
      Evaluation placements                       4         8         -         4         5

      Laser placements during quarter            32        38        30        42        38
      Buy-backs/returns during quarter          (12 )      (8 )      (6 )      (9 )     (13 )

      Net laser placements during quarter        20        30        24        33        25

      Total lasers placed at end of quarter     713       743       767       800       825

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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Cont'd)
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
Revenue for the third quarter of 2008 was $26,836,000, an increase of 26% as compared to $21,226,000 during the third quarter of 2007. This increase is mainly attributable to a 28% increase in disposable products revenue, which consists of single-use catheter products, and a 21% increase in equipment revenue.
We separate our disposable products revenue into two separate categories - vascular intervention and lead removal. For the three months ended September 30, 2008, our vascular intervention revenue totaled $14,433,000 (65% of our disposable products revenue) and our lead removal revenue totaled $7,652,000 (35% of our disposable products revenue). For the three months ended September 30, 2007, our vascular intervention revenue totaled $12,110,000 (70% of our disposable products revenue) and our lead removal revenue totaled $5,143,000 (30% of our disposable products revenue). Vascular intervention revenue, which includes products used in both the peripheral and coronary vascular systems, grew 19% in the third quarter of 2008 as compared with the third quarter of 2007. Vascular intervention revenue growth was primarily due to unit volume increases in our Quick-Cross® support catheter. To an approximately equal extent, the increase was due to post-acquisition date revenue from the endovascular product lines acquired from Kensey Nash Corporation on May 30, 2008. From the end of the third quarter of 2007 to the end of the third quarter of 2008, our installed laser base has increased from 713 to 825 lasers worldwide, an increase of 16%. Vascular intervention revenue growth from current levels will depend on a number of factors, including (1) our ability to increase market acceptance of our TURBO elite, TURBO Booster® and QuickCross product lines; (2) our ability to continue to increase the worldwide installed base of lasers, (3) our ability to increase market acceptance of the endovascular products acquired from Kensey Nash; and (4) the future success of our ongoing clinical research and product development within the peripheral and coronary atherectomy markets.
Lead removal revenue of $7,652,000 for the three-month period ended September 30, 2008 grew 49% as compared with the same three-month period in 2007. 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. 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. While removal of infected pacing and defibrillation leads is widely accepted, the predominant practice in this market is to cap non-functional leads and leave them in the body rather than to remove them. When an ICD or CRT-D device is implanted, it often replaces a pacemaker. In these cases, the old ventricular pacing lead may be removed to minimize the potential for venous obstruction when the new ICD leads and any additional pacing leads are implanted. We believe along with many top physicians that removal of non-functional leads in many cases, especially in relatively younger patients, serves to avoid future complicating scenarios that may occur over the course of the patient's life with their implanted leads. Additionally, a large manufacturer of pacemakers and defibrillators and the related leads announced a recall in 2007 of 235,000 leads in the United States marketed under the Fidelis brand, due to a failure rate of these leads that was higher than that of other similar leads. Although physicians are not currently recommending the removal of all these Fidelis leads, except in certain limited circumstances, we expect a portion of these leads to be removed. We have initiated programs to educate clinicians on the management of lead complications, but there are no assurances that these programs will be successful or will change the current standard of care.
Laser equipment revenue was $2,423,000 and $2,006,000 for the three months ended September 30, 2008 and 2007, respectively. Laser sales revenue, which is included in laser equipment revenue, increased to $1,408,000 during the three month period ended September 30, 2008 from $1,185,000 during the three month period ended September 30, 2007. We sold eleven laser units (ten outright sales from inventory and one conversion from a rental unit) during the third quarter of 2008 and seven laser units (three outright sales from inventory and four conversions from evaluation or rental units) during the same quarter in 2007. Rental revenue increased 24% during the three-month period ended September 30, 2008, from $821,000 in the third quarter of 2007 to $1,015,000 in the third quarter of 2008. 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 25 during the quarter ended September 30, 2008, compared with an increase of 20 laser systems during the same quarter last year. This brings our worldwide installed base of laser systems to 825 (657 in the U.S.) at September 30, 2008.
Service and other revenue increased to $2,328,000 for the third quarter of 2008 as compared to $1,967,000 in the third quarter of 2007. The 18% increase was due primarily to the increased installed base of laser units.
Gross margin for the third quarter of 2008 was 72%, as compared with 74% in the third quarter of 2007. The gross margin decline was due to (1) higher facilities and quality assurance costs as compared with the year-ago quarter, and
(2) increased mix of lower-margin laser and laser service revenues as compared with the year-ago quarter.

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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Cont'd)
Operating expenses of $18,903,000 in the third quarter of 2008 increased 21% from $15,577,000 in the third quarter of 2007. This increase is mainly due to a 19% increase in selling, general and administrative expenses relative to the same period in 2007, and a 33% increase in research, development and other technology expenses relative to the same period of a year ago.
Selling, general and administrative expenses increased 19% to $15,557,000 for the three months ended September 30, 2008 from $13,068,000 in the prior year period. The increase is primarily due to:
• Marketing and selling expenses increased approximately $1,510,000 in the quarter compared with last year's quarter primarily as a result of the following:

• Increased personnel-related costs of approximately $870,000 associated with the staffing of 16 additional employees within our U.S. field sales and marketing organizations in the third quarter of 2008 as compared with the third quarter of 2007. These costs include salaries and related taxes, recruiting, and travel costs.

• Increased commissions of approximately $270,000, which is mainly due to the increase in revenues and additional employees.

• Approximately $500,000 in increased sales-related costs for our international operations, of which approximately $300,000 was related to sales and marketing activities for the acquired Kensey Nash products in Europe.

• The above increase were slightly offset by a $100,000 decrease in expenses related to convention attendance and physician training expense due to slightly decreased spending on physician training regional summits and decreased convention attendance as compared to the prior year.

• General and administrative expenses increased approximately $980,000 in the third quarter of 2008 compared with the same period of the prior year, primarily the result of the following:

• Increased legal expenses of approximately $460,000 compared to the prior-year quarter, due primarily to legal and related costs associated with the federal investigation discussed in Note 12, "Commitments and Contingencies" to the condensed consolidated financial statements included in this report, as well as additional consulting expenses of approximately $175,000 due to various projects related to the needs of our expanding workforce and information technology infrastructure.

• Increased personnel-related costs of approximately $300,000 associated with the staffing of 5 additional employees in our general and administrative departments as of the end of the third quarter of 2008 as compared with the third quarter of 2007. These costs include salaries and related taxes, benefits, stock compensation expense, recruiting, and travel costs.

Research, development and other technology expenses of $3,346,000 for the third quarter of 2008 represent an increase of 33% from $2,509,000 in the third quarter of 2007. Costs included within research, development and other technology expenses are research and development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. The increase is primarily due to:
• Increased personnel-related costs of approximately $300,000 associated with the staffing of 6 additional employees in our R&D and Clinical Studies departments as of the end of the third quarter of 2008 as compared with the third quarter of 2007. These costs include salaries and related taxes, benefits, stock compensation expense, recruiting, and travel costs.

• Increased clinical studies and regulatory expenses of approximately $180,000 related to a number of clinical studies being conducted by us that are in various stages of completion, as well as activities related to regulatory compliance.

• Increased prototype materials and technical consulting expenses of approximately $240,000 due to increased R&D project activity for both laser systems and disposables.

• Increased royalty expenses of approximately $100,000 due to higher sales of products incorporating technology that we license.

Interest income decreased to $307,000 in the third quarter of 2008 from $657,000 for the third quarter of 2007. The decrease in interest income in 2008 is due primarily to a lower investment portfolio balance, primarily as a result of the $10,000,000 paid to KNC in the second quarter of 2008 for the endovascular product line acquisition. Lower interest rates on our invested balances also contributed to the decline in interest income.

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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Cont'd)
For the three months ended September 30, 2008, we recorded income tax expense of $432,000 against our pretax book income of $615,000. Due to the treatment of incentive stock options for tax purposes, the Company's effective tax rate is subject to variability. 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. We recorded a net income for the three months ended September 30, 2008 of $183,000, compared with a net income of $231,000 in the same quarter last year. The functional currency of Spectranetics International B.V. and Spectranetics Deutschland GmbH 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, 2008, as compared with the three months ended . . .