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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED

June 30, 2010

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)

9965 Federal Drive

Colorado Springs, Colorado 80921

(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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

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

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

As of August 4, 2010 there were 33,119,035 outstanding shares of Common Stock.

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Part I—FINANCIAL INFORMATION

Item 1.       Financial Statements

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — GENERAL

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

The Company develops, manufactures, markets and distributes single-use medical devices used in minimally invasive procedures within the cardiovascular system.  The Company’s products are sold in 40 countries throughout the world and are used to treat arterial blockages in the heart and legs as well as the removal of problematic pacemaker and defibrillator leads.  Approximately 60% of the Company’s disposable product revenue is from products used in connection with its proprietary excimer laser system, the CVX-300®. As of June 30, 2010, over 900 Spectranetics excimer laser systems were placed in hospitals worldwide.  The Company’s single-use laser catheters contain up to 250 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 uniform ablation. The Company believes that its 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.

The Company’s Vascular Intervention business unit includes a range of peripheral and cardiac laser catheters for ablation of occluded arteries above and below the knee and within coronary arteries. The Company also markets aspiration and thrombectomy catheters for the removal of thrombus and support catheters to facilitate crossing of coronary and peripheral arterial blockages.  The Company’s Lead Management business unit includes excimer laser sheaths and cardiac lead management accessories for the removal of problematic pacemaker and defibrillator cardiac leads.

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP). 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 the Company’s investments in auction rate securities; the carrying amount of property and equipment, intangible assets and goodwill; valuation allowances and reserves for receivables, inventories and deferred income tax assets; stock-based compensation; and loss contingencies, including those related to litigation. 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 Annual Report on Form 10-K for the year ended December 31, 2009. 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 and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.  Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 — NEW ACCOUNTING STANDARDS

In October 2009, an update was made to ASC 605, Revenue Recognition — Multiple Deliverable Revenue Arrangements. This update establishes a selling price hierarchy for determining the selling price of a deliverable. It also replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the Fair Value Measurements and Disclosures guidance, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. This update is effective for the Company beginning

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

January 1, 2011, and can be applied prospectively or retrospectively. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company’s consolidated financial position and results of operations when it becomes effective in 2011.

In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the Level 3 reconciliation disclosures that are effective for interim and annual periods beginning after December 15, 2010. Adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

NOTE 3 — INVESTMENT SECURITIES

Investment securities consisted of the following (in thousands):

The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for financial instruments effective January 1, 2008. The framework requires the valuation of investments using a three tiered approach in the valuation of investments. Fair value measurement must be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

The following table represents the fair value measurement of the Company’s investments using each of the valuation approaches as applied to each class of security (in thousands):

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s investments in certificates of deposit are stated at cost as their carrying value approximates fair value because of their short maturities.

The underlying assets of the auction rate securities (ARS) the Company holds are student loans, of which over 95% are guaranteed by the U.S. government under the Federal Family Education Loan Program (FFELP).  At June 30, 2010, the Company held $7.5 million (par value) of principal invested in ARS, $4.8 million of which have AAA credit ratings with both Moody’s and Fitch bond rating services, and $2.7 million of which have A3 credit ratings with Moody’s and AAA credit ratings with Fitch.  ARS are collateralized long-term debt instruments that historically have provided liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined intervals, typically every 7, 28, 35 or 49 days. Beginning in February 2008, auctions failed for the Company’s holdings because sell orders exceeded buy orders. The funds associated with these failed auctions will not be accessible until the issuer calls the security, a successful auction occurs, a buyer is found outside of the auction process, or the security matures. This has resulted in an illiquid asset for the Company, even though the Company continues to earn interest on these securities according to their stated terms. Although the Company has sold three of its ARS positions in recent months, there is no assurance that it will find buyers for the remaining securities at an acceptable price. Because of this lack of liquidity, the balance of the Company’s auction rate securities continues to be classified as a long-term asset at June 30, 2010.

In March 2010, the Company sold one of its ARS positions at 90% of par for cash proceeds of $2.7 million.  The proceeds were equal to the carrying value of this security at the time of sale; accordingly, no gain or loss was recorded within our financial statements during the six months ended June 30, 2010.

As of June 30, 2010, the unrealized loss on our auction rate securities was approximately $0.8 million, reducing the par value of the securities of $7.5 million to their fair value of $6.7 million, or approximately 90% of par. The unrealized loss was recorded in earnings in the fourth quarter of 2009 as an other-than-temporary impairment, and the reduction in fair value was deemed necessary due to the impact on the valuation of these securities of the global financial crisis and the continued failure of auctions of these securities since February 2008.  No further reduction of fair value was deemed to have occurred in the first six months of 2010.

The fair value of the Company’s ARS at June 30, 2010 is based on a pricing model prepared by an independent consultant and is classified as a Level 3 pricing category. The Company utilized a discounted cash flow model to estimate the current fair market value for each of the securities it owns as there was no significant recent activity in the secondary markets in these types of securities. This model used unique inputs for each security including discount rate, interest rate currently being paid and estimated date to liquidation. The discount rates ranged from 3.3% to 8.4%.  In order to calculate the discount rate, the Company estimated the expected yield on an average high grade municipal bond.  In the Company’s view, high grade municipal bonds are the most closely comparable security to the ARS contained in its portfolio because they have similar credit quality and are government-backed, as is the substantial portion of the Company’s ARS portfolio (through the FFELP program). The Company utilized forecasts for the 3-month LIBOR based on the forecasted data from “Wolters Kluwer - Blue Chip Financial Forecasts,” then estimated the spread between the 3-month LIBOR and a high-grade municipal bond to be 200 basis points, based on current and historical market data. Because the Company is currently unable to withdraw from the securities, it also added a 100 basis points illiquidity premium to the discount rate.  For one of the securities, which has a credit rating from Moody’s of A3, the Company also included a 200 basis point premium to reflect the security’s lower credit rating.

The estimated liquidation dates used in the valuation analysis were 3 years from December 31, 2009.  At December 31, 2009, the Company also performed a sensitivity analysis in the valuation of its ARS using an estimated date to liquidation of plus or minus one year and a discount rate of plus or minus 50 basis points.  The sensitivity analysis with these parameters calculated a valuation ranging from 86% to 96% of par.  The Company believes that its current valuation of $6.7 million is a reasonable measure of fair value of the securities.

To date, the Company has collected all interest payable on outstanding ARS when due and expects to continue to do so in the future.  Since 2008, the Company has also received, at par, partial redemptions totaling $1.5 million

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of two of the issues it continues to hold, of which $250,000 and $150,000 was redeemed in the first and second quarters of 2010, respectively.  While the auction failures limit the Company’s ability to liquidate these investments, management believes that the ARS illiquidity will have no significant impact on its ability to fund ongoing operations. If uncertainties in the credit and capital markets continue, if these markets deteriorate further or if there are any further rating downgrades on any investments in the Company’s ARS portfolio, the market value of the Company’s investment portfolio may decline further. This could negatively affect the Company’s financial position, results of operations and liquidity.

For those financial instruments with significant Level 3 inputs, the following table summarizes the activity for the period (in thousands):

All realized gains or losses related to financial instruments whose fair value is determined based on Level 3 inputs are included in other income. As of June 30, 2010, the Company had no unrealized losses on investment securities that were deemed to be temporarily impaired.

At June 30, 2010 and December 31, 2009 the Company’s total unrealized losses on investment securities totaled $0.8 million and $1.1 million, respectively.

NOTE 4 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

Trade accounts receivable—allowance for doubtful accounts and sales returns

The Company’s allowance for doubtful accounts and sales returns decreased from $948,000 at December 31, 2009 to $652,000 at June 30, 2010.  The significant decrease was due primarily to the write-off of previously reserved receivables for customers in bankruptcy proceedings.

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Inventories

Inventories consisted of the following (in thousands):

The increase in the inventory reserve from December 31, 2009 to June 30, 2010 was primarily due to a $120,000 reserve for inventory related to the Company’s QuickCat™ product which was subject to a voluntary recall in June 2010.  Additional provisions for excess inventory were also recorded for specific raw materials and finished goods based on the Company’s quarterly analysis of quantities on hand to recent sales activity.

Property and Equipment

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

Deferred Revenue

Deferred revenue was $2.3 million and $2.4 million at June 30, 2010 and December 31, 2009, respectively. These amounts primarily relate to payments in advance for various product maintenance contracts in which revenue is initially deferred and recognized over the life of the contract, which is generally one year, and to deferred revenue associated with service provided to the Company’s customers during the warranty period after the sale of equipment.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 — STOCK-BASED COMPENSATION

The Company maintains stock option plans which provide for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units and stock appreciation rights. The plans provide that incentive stock options be granted with exercise prices not less than the fair market value at the date of grant. Options granted through June 30, 2010 generally vest over three to four years and expire ten years from the date of grant. Options granted to the Board of Directors generally vest over three years from date of grant and expire ten years from the date of grant. Restricted stock awards granted to the Board of Directors generally vest over one year. Restricted stock units granted to certain officers of the Company generally vest over four years. At June 30, 2010, there were 972,868 shares available for future issuance under these plans.  The Company’s policy is to issue new shares upon the exercise of stock options and the vesting of restricted stock units.

Following a comprehensive review of the Company’s compensation programs, the compensation committee of the Board of Directors initiated an annual equity grant program with the primary goal of employee retention.  Pursuant to this annual equity grant program, on June 1, 2010, the compensation committee approved the issuance of options to purchase 602,875 shares of common stock and 60,000 restricted stock units to certain of the Company’s officers and employees.

Valuation and Expense Information

Stock-based compensation expense recognized for the three months ended June 30, 2010 and 2009 was $591,000 and $692,000, respectively, and for the six months ended June 30, 2010 and 2009 was $1.2 million and $1.4 million, respectively.  This expense consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards vested during the period, (2) restricted stock awards issued to certain of the Company’s directors in 2009 and 2010, and (3) restricted stock units issued to certain of the Company’s officers in the second quarter of 2010. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation cost for these awards on a straight-line basis over the service period.  Cash received from the exercise of options and, for the 2009 period, for the purchase of shares through the employee stock purchase plan was $56,000 and $830,000 for the six months ended June 30, 2010 and 2009, respectively.

For all options which are not subject to a market condition, 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 provisions 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 the 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 in effect at the time of grant. During the three months ended June 30, 2010 and 2009, 652,875 and 17,500 options, respectively, were granted and valued using the Black-Scholes pricing model, and during the six months ended June 30, 2010 and 2009, 672,875 and 65,500 options, respectively, were granted and valued using the Black-Scholes pricing model.  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 six months ended June 30, 2010 and 2009, respectively, using the Black-Scholes pricing model:

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes stock option activity during the six months ended June 30, 2010:

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $5.18 on June 30, 2010, 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 June 30, 2010 was approximately 0.9 million.  The total intrinsic value of options exercised during the six months ended June 30, 2010 and 2009 was $0.1 million and $0.7 million, respectively.

The following table summarizes restricted stock award activity during the six months ended June 30, 2010:

The following table summarizes restricted stock unit activity during the six months ended June 30, 2010:

As of June 30, 2010 there was $5.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option and restricted stock plans. This cost is based on an assumed future forfeiture rate of approximately 12.89% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 3 years.

Employee Stock Purchase Plan

In June 2010, shareholders approved the Spectranetics Corporation 2010 Employee Stock Purchase Plan (ESPP).  The ESPP provides for the sale of up to 300,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP will be restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period, starting July 1, 2010, and the ultimate purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period.  This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes.

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 — NET INCOME (LOSS) PER SHARE

Basic income (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 income (loss) per share is computed in a manner consistent with that of basic income (loss) per share while giving effect to all potentially dilutive common shares outstanding during the period, which include the assumed exercise of stock options and the assumed vesting of restricted stock units using the treasury stock method.

Diluted net loss per share is the same as basic net loss per share for the six months ended June 30, 2010 and for the three and six months ended June 30, 2009, as shares issuable upon the exercise of stock options were anti-dilutive as a result of the net losses incurred for those periods.  As a result, all of the stock options outstanding to purchase 3.7 million and 4.0 million weighted average shares at June 30, 2010 and 2009, respectively, were excluded from the diluted net loss per share calculation for those periods because their inclusion would have been anti-dilutive.

For the three months ended June 30, 2010, stock options to purchase 1.5 million weighted average shares were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

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

NOTE 7 — COMPREHENSIVE LOSS

Comprehensive loss includes foreign currency translation gains and losses and unrealized gains and losses on the Company’s investment securities that are classified as available for sale securities. The difference between net income (loss) and comprehensive loss for each of these periods is as follows (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Total accumulated other comprehensive loss and its components were as follows (in thousands):

NOTE 8 — SEGMENT REPORTING

The Company operates in one distinct line of business consisting of developing, manufacturing, marketing and distributing a proprietary excimer laser system and disposable products for the treatment of certain coronary and vascular conditions.

Within this line of business, the Company has identified two reportable segments, which were identified on a geographic basis: (1) U.S. Medical and (2) International Medical. U.S. Medical and International Medical offer the same products and services but operate in different geographic regions, have different distribution networks and different regulatory environments. Within U.S. Medical, the Company aggregates its two business units, Vascular Intervention and Lead Management, based on their similar economic, operational and regulatory characteristics, consistent with the authoritative guidance on segment reporting.

Additional information regarding each reportable segment is shown below.

U. S. Medical

Products offered by this reportable segment include fiber-optic delivery devices and other non-fiber-optic products (disposables), an excimer laser system (equipment), and the service of the excimer laser system (service). The Company is subject to product approvals from the Food and Drug Administration (FDA). At June 30, 2010, FDA-approved products were used in multiple vascular procedures, including coronary and peripheral atherectomy, aspiration and thrombectomy and 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 and Canada.

U.S. Medical is also corporate headquarters for the Company. All manufacturing, research and development as well as corporate administrative functions are performed within this reportable segment. As of June 30, 2010 and 2009, cost allocations of these functions to International Medical have not been performed, since International Medical operates primarily as a distributor of Spectranetics products.

Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $1.1 million and $1.3 million for the three months ended June 30, 2010 and 2009, respectively, and $1.9 million and $2.9 million for the six months ended June 30, 2010 and 2009, respectively.  Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation.

International Medical

The International Medical segment headquarters is located in the Netherlands, and serves Europe as well as the Middle East, Latin America (including Puerto Rico), Japan and the Pacific Rim. Products offered by this reportable segment are substantially the same as those offered by U.S. Medical.  The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions.

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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):

In the first six months of 2010 and 2009, no individual customer represented 10% or more of consolidated revenue.  There were no individual countries, other than the United States, that represented at least 10% of consolidated revenue in the first six months of 2010 or 2009.

NOTE 9 — INCOME TAXES

Under ASC 740-270, Income Taxes—Interim Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate.  The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

The Company currently expects its effective tax rate for 2010 to be higher than statutory rates, as it expects non-deductible items to increase the effective tax rate.  Furthermore, the Company has determined that any deferred tax benefits arising from its pretax loss for the six months ended June 30, 2010 should be offset by an additional valuation allowance based on the Company’s analysis of the realizability of its deferred tax asset.  This determination

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

was based primarily on the Company’s forecast of available taxable income in future years.  Therefore, for the six months ended June 30, 2010, the Company recorded no tax benefit (net of the valuation allowance adjustment) related to its loss before taxes of $0.8 million. The Company recorded income tax expense of $33,000 and $67,000 for the three and six months ended June 30, 2010, respectively, comprised of state and foreign income taxes payable. Based on the Company’s analysis, the Company expects that it is more likely than not that it will realize the deferred tax asset, net of valuation allowance, recorded on the balance sheet as of June 30, 2010.

NOTE 10 — RELATED PARTY TRANSACTIONS

During the three and six months ended June 30, 2010, the Company paid $22,000 and $55,000, respectively, to a director of the Company under an agreement whereby the director provides training services to outside physicians on behalf of the Company.  During the three and six months ended June 30, 2010, the Company also paid $25,000 and $51,000, respectively, to a director of the Company for royalties based on the sale of the Company’s products that use inventions claimed by a patent purchased from the director in 2007.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements and judgments, where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below. It is not possible to predict the outcome for the legal proceedings discussed below, and the costs associated with such proceedings could have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows of a future period.

The Company is generally obligated to indemnify its present and former directors, officers and employees against certain losses and to advance their reasonable legal defense expenses including in connection with the government investigation, unless certain conditions apply. The Company is advancing expenses pursuant to its indemnification obligations unless it determines that they are inapplicable or otherwise covered by insurance. The Company maintains insurance for claims of this nature which does not apply in all such circumstances, may be denied or may not be adequate to cover the legal costs or any settlement or judgment in connection with those proceedings. Spectranetics’ extended involvement in these actions could result in substantial costs and divert management’s attention and resources from operating its business. Additionally, the Company cannot provide assurance that these or other lawsuits will be successfully dismissed or settled or that any settlement, dismissal or other disposition or its obligation to indemnify and advance the expenses of its present and former directors, officers, employees and agents will be covered by its insurance or, if covered, will be within the limits of its insurance. An adverse outcome in these matters or a prolonged uninsured expense and indemnification obligation could have a material adverse impact on the Company.

Federal Investigation

On December 29, 2009, the Company announced that it had reached a resolution with the United States Department of Justice (DOJ) and the Office of Inspector General (OIG) of the United States Department of Health and Human Services regarding a federal investigation which had commenced on September 4, 2008.

As part of the resolution, in December 2009 the Company entered into a Non-Prosecution Agreement with the DOJ, a civil Settlement Agreement with the DOJ and the OIG, and a five-year Corporate Integrity Agreement with the OIG.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no criminal charges against the Company.  As part of the Settlement Agreement, the Company also expressly denied the contentions of the United States, except those specifically included in the Non-Prosecution Agreement, and there was no admission of wrongdoing by the Company.  The Company remains fully eligible to participate in all federal healthcare programs.

During the six months ended June 30, 2010 and 2009, the Company incurred legal and other costs related to the federal investigation of $0.3 million and $2.4 million, respectively.  In the second quarter of 2010, the Company received a payment from its insurance carrier of $0.2 million which reimbursed the Company for certain legal fees incurred by the Company which had previously been expensed due to uncertainties regarding whether insurance would cover them.  This resulted in a net credit of $60,000 in investigation costs for the second quarter of 2010.

Securities Class Actions

Several securities class action lawsuits were filed against the company and certain of its executives in 2008.  In 2009, these cases were consolidated into one case styled as In re Spectranetics Corporation Securities Litigation, Case No. 08-2049 in the United States District Court for the District of Colorado, and a group of investors identified as the Spectranetics Investor Group was appointed lead plantiff.

On August 4, 2009, the Spectranetics Investor Group filed its consolidated class action complaint, naming the Company, John Schulte, Guy Childs, Jonathan McGuire, Emile Geisenheimer, and Craig Walker as defendants.  The consolidated complaint asserts claims under the Securities Exchange Act of 1934 alleging that the defendants either failed to disclose, made false and misleading statements, and/or participated in a common plan, scheme and unlawful course of conduct involving, among other things, improper marketing, promoting and testing its products and the products of third parties for unapproved uses; payments to medical personnel in connection with these uses; withholding data from the FDA; the lack of effective regulatory compliance controls and adequate internal and financial controls; and materially inflating the Company’s financial results as a result of this conduct.  Lead Plaintiff seeks class certification, compensatory damages, legal fees and such other relief as the court may deem proper.  The defendants moved to dismiss the consolidated class action complaint on September 18, 2009.  Various motions were subsequently filed opposing and supporting the dismissal and the Court has not yet ruled on these motions.

Stockholder Derivative Action

Several stockholder derivative actions were filed in 2008 and 2009 against Emile Geisenheimer, David Blackburn, Guy Childs, R. John Fletcher, Martin Hart, Joseph Ruggio, John Schulte and Craig Walker (the “Individual Defendants”), and the Company as a nominal defendant in the United States District Court for the District of Colorado and the District Court of El Paso County, Colorado.  These actions were ultimately consolidated into one action styled as Kopp v. Geisenheimer, Case No. 08-2102 in the United States District Court for the District of Colorado.  The lawsuits allege that the Individual Defendants breached their fiduciary duties, grossly mismanaged the Company, wasted corporate assets, abused their control and were unjustly enriched, as indicated by, among other things, the FDA and ICE investigation; the Company’s stock price decline following disclosure of such investigation; the Company’s receipt of an inquiry from the Securities and Exchange Commission; and the suit against the Company by its former Director of Marketing alleging the Company marketed, promoted and tested its products for unapproved uses.  Plaintiff seeks damages, equitable and/or injunctive relief, restitution and disgorgement of profits, costs and disbursements of the action, and other relief deemed proper.

Settlement

On June 22, 2010, the Company announced that it had agreed in principle to settle both the securities class action litigation and the stockholder derivative case. Under the proposed class action settlement, the claims against Spectranetics and its officers and directors will be dismissed with prejudice and released in exchange for a cash payment of $8.5 million to be funded by Spectranetics’ insurers. The proposed settlement remains subject to the satisfaction of various conditions, including negotiation and execution of a final stipulation of settlement, and approval by the U.S. District Court for the District of Colorado following notice to members of the class. Terms for

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

distribution of the settlement fund to class members, less fees awarded by the court to class counsel, and other terms of the settlement will be disclosed in a notice to be sent to class members after preliminary court approval.

Under the proposed derivative settlement, plaintiffs (on their own behalf and derivatively on behalf of Spectranetics) will dismiss the stockholder derivative case with prejudice and release their claims in exchange for formalizing certain corporate governance procedures and payment of attorneys fees of $350,000. As with the class action settlement, the proposed settlement will be funded by Spectranetics’ insurers and remains subject to the satisfaction of various conditions, including negotiation and execution of a final stipulation of settlement and approval by the U.S. District Court for the District of Colorado.

The Company and the individual defendants have steadfastly maintained that the claims raised in the class action litigation and stockholder derivative case were without merit, and have vigorously contested those claims. As part of the settlements, the Company and the individual defendants continue to deny any liability or wrongdoing under the securities laws.

Vagle v. The Spectranetics Corporation

On May 28, 2010, three Spectranetics stockholders filed an individual lawsuit in the United States District Court for the District of Colorado (Vagle et al. v. The Spectranetics Corp. et al.) asserting various federal and state claims arising out of the same facts alleged in the securities class action against Spectranetics and certain of its current and former officers and directors. Two of the three stockholders who brought this case had previously moved unsuccessfully to be appointed as lead plaintiff in the securities class action where they claimed a loss of $1.27 million.  Plaintiffs seek compensatory damages, expenses, treble damages, punitive damages, and such other relief as the court deems proper.  Spectranetics intends to defend this lawsuit vigorously.

SEC Inquiry

On September 24, 2008, the Company received a request from the Denver office of the Securities and Exchange Commission for the voluntary production of certain documents. The Company complied with the request.

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. The lower court’s judgment was rendered on April 3, 2002. In June 2004, the Court of Appeal of Amsterdam affirmed the lower court’s opinion that an exclusive distributor agreement for the Italian market was entered into between the parties for the three-year period ending December 31, 2001, and that Cardiomedica may exercise its right to compensation from Spectranetics B.V. 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 referred the case back to the lower court for determination of the loss of profits. Cardiomedica had asserted lost profits of approximately 1.3 million 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. On July 1, 2009, the Court issued a ruling in favor of Cardiomedica for an amount equal to $0.6 million, which includes a judgment for lost profits, interest thereon, and certain costs assessed by the Court related to the proceedings.  Such amount was paid in July 2009.

On September 14, 2009, Cardiomedica appealed the ruling of the District Court, seeking additional damages of 1.4 million euros, consistent with its initial claim for damages at the outset of the lawsuit.  The Company intends to vigorously defend itself against this appeal.

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THE SPECTRANETICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Kenneth Fox

The Company and its Dutch subsidiary are defendants in a lawsuit brought in the District Court of Utrecht, the Netherlands (“the Dutch District 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 earlier 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. The Company has made all such payments. The United States District Court has also twice 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 the Company’s costs and expenses. Mr. Fox has not yet complied with the United States District Court’s contempt orders. In August 2006, the Dutch District Court ruled that it does not have jurisdiction over The Spectranetics Corporation (U.S. corporation) and that proceedings would move forward on the basis of jurisdiction over Spectranetics B.V. only, which the Company believed significantly narrowed the scope of the claim. Mr. Fox appealed the Dutch District Court’s jurisdiction decision.  In April 2008, the Dutch Court of Appeal in Amsterdam ruled that the Dutch District Court does have jurisdiction over Spectranetics U.S., and the Court of Appeal referred the matter back to the Dutch District Court for further proceedings and decision involving both companies.

On August 19, 2009, Dr. Fox filed his final statement of rejoinder in the Dutch trial court. The pleadings before the Dutch Court at the trial stage are now complete.  On February 1, 2010, a hearing on the pleadings was held before a panel of three judges.

On June 9, 2010, the Dutch Court issued its ruling, followed by a decision that dismissed Dr. Fox’s claims against both The Spectranetics Corporation and Spectranetics B.V.  The Court also awarded the Company a nominal amount as attorney’s fees.  Dr. Fox has 90 days to appeal the decision of the Court.

The Company intends to vigorously defend against Dr. Fox’s claims should Dr. Fox appeal.

Other

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

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

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 Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 15, 2010.  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 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 2009 Form 10-K.  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. Our products are sold in 40 countries throughout the world and are used to treat arterial blockages in the heart and legs as well as the removal of problematic pacemaker and defibrillator leads. Approximately 60% of our disposable product revenue is from products used in connection with our proprietary excimer laser system, the CVX-300®.  Our single-use laser catheters contain up to 250 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.

Our Vascular Intervention business unit includes a range of peripheral and cardiac laser catheters for ablation of occluded arteries above and below the knee and within coronary arteries. We also market aspiration and thrombectomy catheters for the removal of thrombus and support catheters to facilitate crossing of coronary and peripheral arterial blockages. Our Lead Management business unit includes excimer laser sheaths and cardiac lead management accessories for the removal of problematic pacemaker and defibrillator cardiac leads.

Recent Developments

New product introductions

In January 2010, we received clearance from the FDA to market the redesigned Turbo-Tandem™, a single-use, disposable device indicated for atherectomy of infrainguinal (leg) arteries. The Turbo-Tandem system is comprised of two integrated devices, a 7French laser guide catheter integrated with a 2.0 mm equivalent laser catheter. The Turbo-Tandem is designed to create larger lumens to perform atherectomy and ablation of plaque in arterial lesions above the knee, primarily within the superficial femoral and popliteal arteries, restoring blood flow to the lower extremities. The angled ramp at the tip of the guide catheter allows the physician circumferential guidance and positioning of the laser catheter within the vessel, and push-button control greatly simplifies use of the Turbo-Tandem for repeated passes through the vessel. In the third quarter of 2009, we initiated a limited market release of the first version of the Turbo-Tandem which was cleared by the FDA in July 2009.  Based on physician feedback during the limited market release, we decided to make certain changes to the design of the product before the full commercial launch.  We commenced the commercial launch of the redesigned Turbo-Tandem throughout the United States in March 2010 and achieved $2.4 million in sales of this product during the first half of 2010.

Pending clinical indications

In September 2009, we filed a 510(k) pre-market notification application with the FDA seeking clearance to use certain of our commercially available peripheral atherectomy products to treat in-stent restenosis (ISR) in nitinol

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stents above the knee. ISR is caused by the re-growth of tissue within the stent, known as neointimal hyperplasia, which can lead to blockages in the affected leg artery. The 510(k) application makes reference to the results of bench testing associated with the interaction of laser and nitinol stents. These tests show that stents subjected to extensive testing following laser interaction had no fatigue-related failures. The submission also includes reference to clinical data supporting the safety and efficacy of excimer laser treatment in coronary artery ISR and an analysis of interim data from the peripheral artery ISR study, PATENT, which is ongoing in Germany.  In response to our submission, we received questions from the FDA.  On April 30, 2010, we submitted a pre-IDE (investigational device exemption) submission to the FDA seeking clarification to a number of the questions received from the FDA. After further discussion with the FDA, we decided not to pursue use of the PATENT study data and instead announced on June 10, 2010 the initiation of a multi-center, randomized trial of ISR (ISR RCT) in the United States. At the same time, our 510(k) application referenced above was withdrawn, due to the time required for us to collect the additional data requested by the FDA. The ISR RCT study will compare laser ablation followed by adjunctive balloon angioplasty with balloon angioplasty alone, using our Turbo-Tandem and Turbo Elite® laser ablation devices. On July 14, 2010, we submitted a Pre-IDE package to the FDA that outlines our plans for conducting this ISR RCT study and followed that submission on July 16, 2010 with a Pre-IDE for a planned ISR animal study.  A meeting has been requested with the FDA to discuss both of these study proposals. A decision whether to continue enrollments in the PATENT clinical trial, which was originally designed as a feasibility trial, will be made once the FDA has completed its review of our pre-IDE submission for the ISR RCT study. Until then, enrollments will continue in PATENT, which currently has 67 patients enrolled in five centers in Germany. We intend to pursue publication of the data from the PATENT trial. There can be no assurances that we will receive clearance from the FDA for the treatment of ISR.

We also plan to support a pilot study evaluating the use of laser ablation followed by a paclitaxel-coated angioplasty balloon (PTX PTA) compared with the use of PTX PTA alone in the treatment of in-stent lesions in above-the-knee arteries. This pilot study, Photoablation Followed by a Paclitaxel-Coated Balloon to Inhibit Restenosis in Instent Femoro-popliteal Obstructions (PHOTOPAC), is not intended to be used to gain an indication in the U.S. for the use of PTX PTA with laser, but to determine whether the use of laser with PTX PTA provides a benefit over PTX PTA alone and to provide data for potential future studies. The planned enrollment for the PHOTOPAC trial is 50 patients, which will be followed for up to one year following the procedure. Our support of the PHOTOPAC trial will be in the form of an unrestricted research grant and will be conducted at up to four sites in Germany. We expect this trial to commence in the fourth quarter of 2010.

QuickCat™ Recall

On July 1, 2010, we initiated a voluntary recall of specific lots of our QuickCat thrombus extraction catheter. The FDA was informed of this action and communication to various Competent Authorities (regulatory bodies outside of the United States) has occurred. While we received and confirmed customer complaints on this issue, no adverse events were reported to us. The occurrence of this issue was very low and could result in a blocked guidewire lumen that restricts the loading of the thrombus extraction catheter onto the guidewire prior to insertion of the catheter into the patient. A manufacturing process improvement to correct the issue was implemented and product was available for shipment in June 2010. We plan to replace all affected units and production volumes were increased so that, as of the date of this filing, we have substantially completed all product replacements. As of June 30, 2010, we estimated costs related to this recall of approximately $300,000, which was recorded within cost of products sold during the quarter ended June 30, 2010.

Reimbursement in Japan

On July 20, 2010, we announced that the Ministry of Health, Labor and Welfare in Japan has approved product reimbursement to hospitals for the Spectranetics Laser Sheath (SLS® II), which is used for the removal of problematic pacemaker and defibrillator cardiac leads. Through our distribution partner, DVx Inc., the initial phase of the product launch will commence immediately and focus on establishing a limited number of lead extraction training centers.  The SLS II is our first product to have both regulatory and reimbursement approval in Japan.

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Results of Operations

Financial Results by Geographical Segment

Our two reporting segments consist of United States Medical, which includes the United States and Canada, and International Medical, which includes Europe, the Middle East, Asia Pacific, Latin America and Puerto Rico. United States Medical also includes all costs for our corporate headquarters, research and development, and corporate administrative functions. The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions. As of June 30, 2010 and 2009, cost allocations of these functions to International Medical have not been performed.