SPECTRANETICS CORP, 10-K, 1997-03-31

SPECTRANETICS CORP
10-K, 1997-03-31
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE YEAR ENDED DECEMBER 31, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-19711

THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 0-19711 84-0997049
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer
incorporation or organization) Identification No.)

96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(Address of principal executive offices and zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (719) 633-8333

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)

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

[ ] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

The aggregate market value of the voting stock of the Registrant, as of
February 28, 1997 computed by reference to the closing sale price of the voting
stock held by non-affiliates on such date, was approximately $68,280,000.

As of February 28, 1997, there were outstanding 18,592,677 shares of Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
not later than April 30, 1997, are incorporated by reference into Part III as
specified.

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Total Pages 53
Exhibit Index on Page 30

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TABLE OF CONTENTS

PART I....................................................................... 3

ITEM 1. BUSINESS............................................................. 3
General................................................................... 3
Interventional Cardiovascular Therapies................................... 4
Electrophysiology - Lead Extraction....................................... 6
Products.................................................................. 6
Marketing Strategy........................................................ 7
Business Units............................................................ 8
Government Regulation..................................................... 10
Competition............................................................... 12
Patents and Proprietary Rights............................................ 12
Research and Development.................................................. 13
Third-Party Reimbursement................................................. 14
Polymicro Technologies, Inc............................................... 14
Employees................................................................. 15
Risk Factors.............................................................. 15
ITEM 2. PROPERTIES........................................................... 21
Facilities................................................................ 21
ITEM 3. LEGAL PROCEEDINGS.................................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 21

PART II...................................................................... 21

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.................................................. 21
ITEM 6. SELECTED FINANCIAL DATA.............................................. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 23
Overview.................................................................. 23
Year Ended December 31, 1996 vs. Year Ended December 31, 1995............. 24
Year Ended December 31, 1995 vs. Year Ended December 31, 1994............. 24
Income Taxes.............................................................. 25
Liquidity and Capital Resources........................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................. 26

PART III..................................................................... 26

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 26
ITEM 11. EXECUTIVE COMPENSATION............................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION...S.................. 26

PART IV...................................................................... 26

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K... 26

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................... 29

EXHIBIT INDEX................................................................ 30

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PART I

The information set forth in "Business" below includes "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange
Act of 1934, as amended, and is subject to the safe harbor created by that
section. Readers are cautioned not to place undue reliance on these
forward-looking statements and to note that they speak only as of the date
hereof. Factors that realistically could cause actual results or differ
materially from those set forth in the forward-looking statements are set
forth below and include the following: market acceptance of excimer laser
angioplasty technology, technological changes resulting in product
obsolescence, the inability to obtain patents with respect to new products,
adverse state or federal legislation and regulation, availability of
third-party component products at reasonable prices, and the risk factors
listed from time to time in the Company's filings with the Securities and
Exchange Commission as well as those set forth in "Risk Factors" in this
Item 1.

ITEM 1. BUSINESS

GENERAL

The Spectranetics Corporation (the "Company") is a Delaware corporation
formed in 1984. On June 10, 1994, the Company completed a merger with
Advanced Interventional Systems, Inc. ("LAIS") in which LAIS became a
wholly-owned subsidiary of the Company. As a result of the merger with LAIS,
the Company also acquired Polymicro Technologies, Inc. ("Polymicro"), a
subsidiary of LAIS located in Phoenix, Arizona, which manufactures drawn
silica glass products. Polymicro is more fully described herein under the
section titled "Polymicro Technologies, Inc." for distinction purposes
throughout the course of this Form 10-K, the Company will be referred to as
"SPNC" in connection with its interventional cardiology business and will be
referred to as "the Company" in connection with the combined operations of
SPNC and its subsidiaries.

SPNC develops, manufactures and markets a proprietary excimer laser
system (CVX-300-Registered Trademark- laser unit and various laser energy
delivery devices) for the ablation (removal) of tissue, specifically
addressing multiple cardiovascular disorders. The CVX-300-Registered
Trademark- laser unit is currently used for the recanalization of clogged
blood vessels (angioplasty). Clinical trials are underway which investigate
the use of excimer laser technology for the removal of lead wires for heart
pacemakers and for the treatment of totally occluded arteries.

SPNC's first prototype CVX-300-Registered Trademark- laser unit was
placed at the Texas Heart Institute in Houston in 1987. The first clinical
case as an adjunct to bypass surgery was performed in 1988. The first
Investigational Device Exemption ("IDE") for percutaneous coronary laser
angioplasty was received from the United States Food & Drug Administration
("FDA") in May 1989. In February 1991, SPNC submitted a premarket approval
application ("PMA") to the FDA for its CVX-300-Registered Trademark- excimer
laser unit and its 1.4 and 1.7 millimeter diameter coronary catheters. The
FDA's panel conducted its public review in November 1991, which resulted in a
unanimous recommendation for approval of use of the CVX-300-Registered
Trademark- unit and the 1.4 and 1.7 millimeter diameter laser catheters. On
February 19, 1993, FDA completed its review of SPNC's PMA and issued an
approval for the SPNC CVX-300-Registered Trademark- excimer laser unit and
the 1.4 and 1.7 millimeter diameter laser catheters for the following six
indications for use in the treatment of coronary artery disease: saphenous
vein graft lesions, ostial lesions, long lesions, moderately calcified
stenosis, total occlusions, and lesions previously failed by balloon
dilatations. With this approval SPNC was able to expand its marketing in the
United States beyond its investigational sites.

In late 1993, the Extreme-Registered Trademark- laser catheter received
FDA approval. This over-the-wire, high-performance catheter was SPNC's first
high-performance, metal rim tip catheter. SPNC received FDA approval in
October 1994 to market its Vitesse-Trademark- C line of excimer laser
catheters. This line of catheters incorporates a concentric, fast-exchange
design for ease of access in more tortuous coronary anatomy. In November
1994, SPNC also received ISO 9001 certification from the TUV Product Service
GmbH in Munich, Germany (European equivalent to the FDA) which allowed SPNC
to market its products in the European Community within compliance of the EN
29 001/ISO 9001 and EN 46 001. In May 1995, SPNC received FDA approval to
market its Vitesse-Trademark- C and Extreme-Registered Trademark- excimer
laser catheters for use with the Dymer-Registered Trademark- 200+ laser
systems manufactured by LAIS. The

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approval of this "cross-coupler" device expanded the therapeutic range of the
Dymer-Registered Trademark- 200+ systems to include the usage of all six
excimer laser coronary indications. In July 1995, SPNC received FDA approval
to market the Vitesse-Trademark-E excimer laser catheter. This catheter is
designed to treat lesions with eccentric characteristics within the six
indications group for use in the treatment of coronary artery disease. As of
March 1997, SPNC has received CE mark registration for all of its products.
The CE (Communaute Europeene) mark indicates that a product is certified for
sale throughout the European Union and that the manufacturer of the product
complies with applicable safety and quality standards.

INTERVENTIONAL CARDIOVASCULAR THERAPIES

Atherosclerosis is the partial or total blockage of arteries due to
accumulated plaque (lesions) on the walls of arteries. Cardiovascular
disease is the leading cause of death in the United States, accounting for
approximately one million, or one-half, of all deaths annually. According to
the American Heart Association, 1,500,000 new cases of heart attacks or
angina (chest pain due to heart disease) are reported each year.

Interventional medical treatment for atherosclerosis includes bypass
surgery, a highly invasive procedure by which blood flow is redirected
through a grafted vein, and minimally invasive angioplasty procedures such as
balloon angioplasty, stent implantations, atherectomy and laser angioplasty,
which improve blood flow by reshaping or removing the obstructing plaque.
The treatment selected is based primarily on the number of lesions and lesion
characteristics found in the arteries, including length, configuration,
degree of calcification, and location in the arteries.

BYPASS SURGERY. Bypass surgery involves the grafting of a vein to
redirect blood flow around an occluded artery. Approximately 400,000
coronary bypass surgeries were performed worldwide in 1996(1). Bypass
surgery is typically performed when physicians determine that other less
invasive procedures are not likely to be effective. Of all current available
invasive treatments, bypass surgery is by far the most invasive and the most
traumatic.

PTCA. Percutaneous transluminal coronary angioplasty is a non-invasive
medical procedure used to treat coronary artery disease, or atherosclerosis,
and performed by interventional cardiologists. PTCA works by increasing the
lumen of the diseased coronary artery, thus increasing blood flow to the
heart. Balloon angioplasty dilatation catheters and stents are the principal
products used for PTCA.

PTA. Percutaneous transluminal angioplasty is also a non-invasive
medical procedure performed by interventional radiologists used to treat
peripheral (lower limb) artery diseases. PTA also works by increasing the
lumen of the diseased artery. Balloon angioplasty dilatation catheters and
stents are the principal products used for PTA.

ANGIOPLASTY TECHNIQUES

SPNC's market is divided into two segments: coronary artery lesions and
lower limb artery lesions. Both market segments are divided into a bypass
surgery section and an angioplasty section. The worldwide bypass surgery
market is estimated at more than 750,000 procedures per year while the
worldwide angioplasty market is estimated to be more than 1,000,000
procedures per year. (1)

The angioplasty sections of the coronary and peripheral market segments
are strongly dominated by balloon angioplasty. The number of balloon
angioplasty treatments has surpassed the number of bypass surgery procedures
on a worldwide basis.

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(1) Amounts were estimated by the Company based on extrapolation from
available industry data. Patient population estimates are inherently
subject to uncertainties, and the Company is unable to dermine with any
degree of certainty the number of such procedures for any indication or the
number of patients who are suitable for treatment using the various
procedures.

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The continuing problem of long term restenosis (re-occlusion of the
arteries) after interventional treatments of lesions has encouraged
scientists and medical device companies to attempt to develop supplementary
or substitutional techniques in addition to conventional balloon angioplasty.
The following angioplasty techniques require that a guidewire cross the
lesion for these procedures to be employed.

BALLOON ANGIOPLASTY. Balloon angioplasty is the most common minimally
invasive procedure for treating atherosclerosis. During the last decade
balloon angioplasty became the most common cardiovascular intervention. In
1996, there were approximately 800,000 coronary balloon angioplasty
procedures performed worldwide.(2) Balloon angioplasty involves threading a
balloon-tipped catheter over a guidewire and into an artery through a small
incision in the patient's arm or leg. When positioned at a lesion, hydraulic
pressure is used to inflate the balloon to a particular diameter. The
atherosclerosis plaque (atheroma) is pushed aside within the vessel and the
artery is widened, thereby improving blood flow.

STENTS. Intracoronary stents were approved by the FDA in 1994. It is
estimated that more than 300,000 stents were implanted in patients in 1996. (2)
The stent is a thin, slotted tube or coil which acts as scaffolding to hold
the artery open. The stent procedure involves mounting a stent on a balloon
catheter, threading the balloon and stent across the lesion, and expanding
the stent against the vessel wall by inflating the balloon. The stent
differs from other angioplasty techniques in that it is permanently
implanted.

ATHERECTOMY AND ROTOBLATION. Atherectomy is another technique used to
treat coronary artery disease. This procedure involves removing atheroma from
the coronary lesion to help widen the artery. Rotational cutters and
rotational burrs are the most common atherectomy methods. This procedure
involves threading the atherectomy catheter over a guidewire to the lesion,
cutting the atheroma from the lesion site, and completing the procedure with
a balloon or stent. One device cuts away plaque and deposits it into an
attached canister. This device has been approved for a limited set of
coronary indications. A second atherectomy device utilizes a spinning burr
to grind away plaque and has received approval in a broad set of indications.

EXCIMER LASER ABLATION. Excimer laser ablation removes plaque by
delivering excimer laser energy to the lesion through a laser catheter.
Laser ablation involves the insertion of a laser catheter into an artery
through a small incision in the patient's leg. The catheter is advanced over
a guidewire to the location of the lesion. When the tip of the catheter has
reached the lesion, the physician activates the laser beam in order to ablate
the plaque.

Excimer laser energy uses electrically excited xenon chloride molecules
to generate a pulsed 308 nanometer wavelength ultraviolet laser beam. This
laser beam breaks the molecular bonds of plaque in a process known as thermal
and photo dynamic ablation, without significant thermal damage to surrounding
tissue. In order to improve blood flow, the physician generally follows a
laser angioplasty treatment with adjunctive balloon angioplasty. The laser
catheter is designed for ease of use and utilizes all the same ancillary
equipment required for a balloon procedure. The laser catheter is typically
smaller in size than other atherectomy devices, which results in smoother,
less traumatic access to the lesion site.

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(2) Ibid, p.4
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ELECTROPHYSIOLOGY - LEAD EXTRACTION

There are approximately 300,000 heart pacemaker lead implants performed
annually worldwide.(3) SPNC has estimated that between 5 and 10 percent of
these leads may require removal at some time. It is also estimated that
approximately 10 percent of all lead implants are replacements for previously
implanted leads. Due to the difficulty of removing old leads, physicians
typically do not remove old leads unless they are life-threatening. Primary
methods available to remove implanted leads at this time include open heart
surgery and transvenous extraction with plastic sheaths. The surgery option
is costly and can be traumatic to the patient. The percutaneous sheath
method is less invasive but requires mechanical force to extract leads
heavily embedded in scar tissue. Using excessive mechanical force to extract
the lead may result in damage to the cardiovascular system and may result in
the lead disassembling during the extraction procedure.

SPNC has designed a laser-assisted pacing-lead removal device, or laser
sheath, to extract the implanted lead with minimal force. The laser sheath
uses excimer laser energy to cut through the scar tissue surrounding the lead
to facilitate removal. The device is basically a large lumen, fiber-optic
catheter, sized to fit over the implanted lead. The laser sheath is threaded
over the lead, advanced down the lead, and the laser is activated to ablate
through scar tissue at binding sites until the lead is free. The device uses
100 micron fiber technology for efficient ablation, patented fiber stranding
design for durability and flexibility, and metal rim tip design. SPNC
conducted a prospective, randomized clinical trial to support its PMA for
lead extraction, which was filed with the FDA in November 1996. SPNC was
granted expedited review status by the FDA in December 1996 and is awaiting
final review by the FDA. In March 1997, SPNC received an EC Design
Examination Certificate for its lead extraction products which will allow
SPNC to market these products in Europe with the CE mark.

PRODUCTS

CVX-300-Registered Trademark- LASER UNIT. The CVX-300-Registered
Trademark- laser unit is a proprietary excimer laser designed specifically
for use in cardiovascular applications. When coupled with SPNC's laser
devices, the system generates and delivers 308 nanometer wavelength
ultraviolet light pulses to a lesion in order to ablate plaque. The current
list price of the CVX-300-Registered Trademark- is $195,000. SPNC also
offers various financing options which include leasing and rental programs.
Clinical results from the first 2,000 coronary procedures using the laser
system achieved approximately 90 percent clinical success rate. A clinical
success is defined as a reduction in the size of the lesion to less than 50
percent of the diameter of the artery without heart attack, death, or the
need for emergency bypass surgery during hospitalization. SPNC believes that
the CVX-300-Registered Trademark- unit offers the following characteristics:

REDUCED PROCEDURE TIME. Patient outcome audits, which compared
excimer laser procedures to balloon angioplasty and rotational
atherectomy, reveal the excimer laser method shortens procedure times
and reduces radiation exposure from fluoroscopic imaging used during the
procedure to the patient, thereby improving lab efficiency.

EASE OF USE. During a laser procedure, it may be necessary to
adjust laser energy output. The CVX-300-Registered Trademark- laser
unit is computer-controlled, which allows the physician to change energy
levels without interrupting the treatment to remove the catheter from
the patient for recalibration. This feature also enables the physician
to begin the procedure with the minimum level of energy required and, if
necessary, to adjust the energy level easily during the procedure.

SMALL SIZE. Space in cardiac catheterization labs is usually
limited. In addition, many hospitals have multiple catheterization labs.
As a result of a number of proprietary and patented laser and catheter
design features, the CVX-300-Registered Trademark- laser unit typically
requires five minutes for set up. This combination of features allows
the CVX-300-Registered Trademark- laser unit to be transported easily
between laboratories within the hospital as needed.

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(3) Ibid, p. 4

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DISPOSABLE LASER DEVICES. As an integral part of the excimer laser
system, SPNC has developed a broad selection of proprietary laser devices
designed to meet physician needs and multiple indications for use.

Early laser catheters contained only a few large optical fibers to
transmit the laser energy. These early devices were stiff, had difficulty
accessing arterial anatomy, and suffered from poor ablation characteristics.
Current innovative laser catheter designs contain hundreds of very small in
diameter and flexible fibers that can access more difficult coronary anatomy.
The smaller fiber also produces a better laser energy distribution at the
tip of the catheter for improved ablation.

Laser catheters are designed to have several advantages over other
atherectomy devices. These catheters, which SPNC produces in sizes ranging
from 1.4 to 2.0 millimeters in diameter, consist of concentric or eccentric
bundles of optical fibers mounted within a thin plastic extrusion. Fibers
are coupled to the laser using a patented intelligent connector design. This
design requires no adjustments by the physician. This connector provides
information about the device being used to the CVX-300-Registered Trademark-
laser unit computer, which controls the calibration cycle. During 1992, SPNC
acquired exclusive rights to a lubricious coating, which in certain catheter
lines reduces friction and enhances trackability and control of the device.
The catheter's combination of trackability, flexibility and ablation
characteristics enables the physician to access difficult-to-treat lesions.

SPNC's laser catheter product line includes the Extreme-Registered
Trademark- catheter, Vitesse-TM- C fast-exchange catheter and the Vitesse-TM-
E catheter. The refined construction of these catheters is designed to
provide improved trackability, reachability and improved tactile feedback.
These improvements are aimed at providing uniform and precise ablation of
plaque and more accurate catheter placement.

EXTREME-Registered Trademark- LASER CATHETER. In October 1993, the FDA
market-released the Extreme-Registered Trademark- laser catheter, which was
SPNC's first high performance coronary laser catheter. It is an
over-the-wire ("OTW") catheter which has enhanced flexibility and ablation at
lower energy settings, resulting in improved performance. Other catheter
features include the patented metal rim tip designed for visualization and
alignment and a proprietary lubricious coating for easier access. The
Extreme-Registered Trademark- laser catheter is available in 2.0mm tip
diameters.

VITESSE-TM- C LASER CATHETER. The Vitesse-TM- C laser catheter, FDA
market-released in October 1994, is a rapid-exchange, concentric version of
the Extreme-Registered Trademark- catheter. Utilizing patented design
technology, the Vitesse-TM- C can be threaded onto and exchanged over a
guidewire more conveniently than other OTW models. It is also compatible
with a wide range of guidewires. The performance features seek to provide
quicker procedures, ease of use, less radiation exposure to the patient and
lab staff, and requires only a single operator. This catheter is available
in 1.4mm, 1.7mm, and 2.0mm tip diameters.

VITESSE-TM- E LASER CATHETER. The Vitesse-TM- E eccentric laser
catheter is SPNC's first directional coronary laser catheter. FDA
market-released in July 1995, this catheter utilizes an eccentric fiber
array at the tip that can be positioned by the operator to selectively ablate
plaque. Many coronary lesions are eccentric in nature, and this catheter tip
design is particularly suited for this indication. The Vitesse-TM- E
catheter is available in 1.7mm tip diameter.

MARKETING STRATEGY

In an effort to increase utilization and acceptance of excimer laser
cardiovascular technology, SPNC focuses its marketing on expanding the
application of excimer laser technology into other synergistic markets. SPNC
has initially identified the following potential areas for expansion:

LEAD EXTRACTIONS. A pacing lead, which is an electrical conductor, is
placed in or on the surface of a patient's heart where a pacemaker is
implanted. Once the lead is implanted in a patient, a number of clinical
situations can arise that require the removal of the lead, which may include
infection, product recall or product failure. Cardiac leads have been
removed utilizing a number of techniques including simple traction,
countertraction, and snaring. A controlled, randomized, clinical trial
consisting of 318 patients conducted at 20 sites was commenced in November
1995 to determine the safety and efficacy of the Spectranetics Laser
Sheath-TM-

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in the extraction of pacing leads or implantable cardioverter defibrillator
(ICD) leads. In December 1996, the Company was granted expedited PMA review
by the FDA for the laser sheath product. There can be no assurances,
however, that SPNC's PMA application for this device will be approved.

CHRONIC TOTAL OCCLUSIONS. Total occlusion of one of the arteries is a
common finding in angiographical diagnosis and typically cannot be treated
with interventional techniques due to the difficulty in placing a wire across
the lesion. Historically, chronic total occlusions of coronary arteries
could only be treated with bypass surgery since there were no effective
angioplasty techniques suitable for treating chronic total occlusions. SPNC
has developed a laser guidewire, the Prima-Registered Trademark-, which
allows laser energy to be used to assist in crossing total occlusions which
have been resistant to traditional mechanical guidewires. In November 1994,
the training phase of a 200-patient randomized study began in the United
States following SPNC's IDE approval from the FDA for the Prima-Registered
Trademark- laser guidewire. Fourteen U.S. sites are currently conducting
clinical procedures in this program. In March 1997, SPNC requested the FDA
to modify the study to a self-controlled study with patient selection,
limited to patients who have previously failed attempts to be treated with
conventional guidewires. The wire is shaped, steered and advanced similarly
to a conventional coronary guidewire with an additional benefit of laser
energy to assist in crossing the total occlusion. If the trial is successful,
SPNC intends to file a PMA application for this device. European randomized
trials using this device are continuing at 18 medical centers with 320
patients. There can be no assurances, however, that the clinical trials of
the Prima-Registered Trademark- laser guidewire will result in favorable
success rates or, if the trials are successful, that SPNC's PMA application
for this device will be approved.

RESTENOSED STENTS. Since Johnson & Johnson began general distribution
of the Palmaz Schatz stent in 1994, its acceptance as a valuable treatment
option is clearly reflected in its widespread use. It is estimated that
more than 300,000 stents were deployed in 1996.(4) However, between 20 and
30 percent of the stents, particularly long stents, may develop blockages due
to restenosis or plaque buildup, which can lead to partial or total occlusion
of the arteries. SPNC laser catheters are currently being studied for use in
debulking stents which have restenosed. A retrospective trial examining laser
treatment of stent restenosis involving 160 patients was completed in March
1997. The study examined the clinical outcome after six months' of diffuse
restenosis in lesions greater than 70 percent occluded and longer than 5mm in
length. In Europe, a surveillance registry has been maintained recording the
clinical results of stent patients who have been treated with the laser.
SPNC intends to use the data from these two studies to support a submission
to the FDA requesting a labeling change to add stent restenosis as an
indication for laser angioplasty.

PERIPHERAL VASCULAR DISEASE. The prevalent treatment option for total
occlusions in the upper leg is bypass surgery, with amputation being required
for critical limb ischemia (occluded arteries) below the knee. Approximately
100,000 upper bypass surgeries and 75,000 amputations were performed in
1996.(4) Laser catheters are being evaluated as an alternative treatment to
both bypass surgery and amputation. A European controlled, randomized,
multicenter trial was commenced in November 1996 with 360 patients at 6
investigational sites comparing excimer laser angioplasty with conventional
guidewire, a special "step-by-step" excimer laser angioplasty technique, and
balloon angioplasty. The study compares three different PTA treatments of
chronic total occlusions longer than 10 centimeters in the superficial
femoral arteries. SPNC is planning to expand this trial to include two U.S.
centers during 1997. A study examining laser treatment in critical limb
eschemia in patients not amenable to bypass surgery is expected to commence
in 1997.

BUSINESS UNITS

SPNC DOMESTIC. There are over 1,000 interventional cardiac
catheterization laboratories in hospitals in the United States. SPNC's
United States sales efforts focus on the major cardiac catheterization labs,
including teaching institutions which perform the majority of interventional
procedures. SPNC's United States sales and marketing team consists of sales
representatives, product managers, cardiology clinical specialists and
medical equipment service engineers.

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(4) Ibid, p. 4

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SPNC has developed a customer training program which utilizes major
cardiology centers around the United States. After initial customer
training, SPNC's field clinical specialists provide routine on-site customer
support, including reviewing clinical results, training new hospital
personnel and updating customers on new catheters and techniques.

SPNC's service engineers are responsible for installation of each laser
and participate in the training program at each site. SPNC provides a
one-year warranty which includes parts, service and replacement gas. SPNC
offers extended service to its customers pursuant to an annual service
contract or on a fee-for-service basis.

SPNC INTERNATIONAL. In 1993, SPNC began marketing and selling its
products internationally through Spectranetics International, B.V., a wholly
owned subsidiary ("Spectranetics International"), as well as through
distributors. Currently, SPNC has distributors in the following regions:
Europe, South America, the Middle East and Asia.

In Europe, there are 250,000 balloon angioplasty procedures performed in
approximately 450 interventional cardiac catheterization laboratories. Heart
disease is also treated by over 250,000 coronary bypass procedures.(5)

Foreign sales may be subject to certain risks, including export/import
licenses, tariffs, other trade regulations and foreign medical regulations.
Tariff and trade policies, domestic and foreign tax and economic policies,
exchange rate fluctuations and international monetary conditions have not
significantly affected SPNC's business to date. See "Risk Factors - Exposure
from International Operations."

Revenues for Spectranetics International B.V. in 1996, 1995 and 1994,
respectively, were $4,567,000, $4,263,000 and $2,183,000; and identifiable
assets of Spectranetics International B.V. were approximately $2,660,000,
$2,274,000 and $1,870,000 at December 31, 1996, 1995 and 1994, respectively.
Operating losses from foreign operations were approximately $404,000,
$637,000 and $2,368,000 for the corresponding periods.

In addition, through its United States operations, SPNC sold excimer
laser units to customers in Hong Kong, Korea, Canada, and Thailand, resulting
in revenue from lasers and catheters of approximately $961,000, $248,000 and
$708,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

SPNC CUSTOM PRODUCTS. As a specialized technological division within
the Company, SPNC Custom Products has established a marketing focus that is
directed toward product-specific problem solving. The business development
efforts of SPNC Custom Products are directed toward establishing
relationships with medical product manufacturers in areas other than excimer
laser application. The Company is evaluating opportunities for
diversification of revenue growth as well as the expansion of the technology
base at SPNC in medical product fields such as electrophysiology.

POLYMICRO TECHNOLOGIES, INC. Polymicro operates as an independent
subsidiary of the Company. Its markets are independent of the Company's core
business. Polymicro's business and marketing is described under the section
entitled "Polymicro Technologies, Inc." on page 14.

- ---------------------
(5) Ibid, p. 4

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GOVERNMENT REGULATION

In the United States, all medical devices are subject to FDA regulation
under the Medical Device Amendments of the Federal Food, Drug and Cosmetics
Act ("FFDCA") and are classified into one of three categories. The
CVX-300-Registered Trademark- laser unit and related devices are designated
as Class III devices. Class III devices are devices that are represented to
be life-sustaining or life-supporting, or that present potential unreasonable
risk of illness or injury. Class III devices are subject to the most
rigorous FDA approval process.

Premarket approval of a Class III device generally requires the
completion of three major steps. The first step involves the granting of an
IDE by FDA which permits the proposed product to be used in controlled human
clinical trials. Upon completion of a sufficient number of clinical cases to
determine the safety and effectiveness of the proposed product for specific
indications, a PMA is then prepared and submitted to FDA for review. The PMA
application must contain the results of the clinical trials, the results of
all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of
the methods, facilities, and controls used to manufacture the device. In
addition, the submission must include the proposed labeling and promotional
literature. If the FDA determines that the PMA application is sufficiently
complete to permit a substantive review, the FDA will accept the application
for filing.

Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA, which represents the third major step in premarket
approval of a Class III device. An FDA review of a PMA application generally
takes one to two years from the date the PMA application is accepted for
filing, but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically a panel of clinicians, will
likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. FDA
is not bound by the recommendations of the advisory panel. Toward the end of
the PMA review process, the FDA will generally conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance
with applicable Good Manufacturing Practice ("GMP") requirements, which are
outlined under FDA's Quality System regulation. If the FDA's evaluations of
both the PMA application and the manufacturing facilities are favorable, the
FDA will either issue an approval letter or an approvable letter, which
usually contains a number of conditions that must be met in order to secure
final approval of the PMA. When and if those conditions have been fulfilled
to the satisfaction of the FDA, the agency will issue a PMA approval letter,
authorizing commercial marketing of the device for certain indications. If
the FDA's evaluations of the PMA application or manufacturing facilities are
not favorable, the FDA will deny approval of the PMA application or issue a
"not approvable" letter. The FDA may also determine that additional clinical
trials are necessary, in which case PMA approval may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.

Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission
of the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered in the original PMA.

SPNC received its initial IDE to perform excimer laser percutaneous
coronary angioplasty in May 1989. In February 1991, SPNC submitted its PMA
application, which was accepted for filing by FDA in June 1991. On November
26, 1991, the Company's PMA was reviewed by a public advisory panel, and SPNC
received a recommendation for approval of the CVX-300-Registered
Trademark- laser unit and two sizes of its soft-rim catheters. As part of the
approval process, SPNC was inspected in October 1991 by FDA to verify its
compliance with GMP requirements. The final step in the approval process, the
issuance of a letter by FDA approving the application, occurred on February
19, 1993.

In October 1993, SPNC received approval for a PMA supplement for its new
Extreme-Registered Trademark- catheters. In October 1994, the FDA approved
the Company's PMA supplement for its Vitesse-TM--C family of catheters. In

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<PAGE>

1995, SPNC received PMA supplement approval for a new inner catheter tubing,
its Vitesse-TM- E catheter, an upgraded CVX-300-Registered Trademark- system
software, and the cross-coupling of SPNC catheters on former LAIS
Dymer-Registered Trademark- 200+ laser systems. There can be no assurance
that FDA will approve the Company's current or future PMA supplements on a
timely basis or at all. The absence of such approvals could have a material
adverse impact on SPNC's ability to generate future revenues.

Any products manufactured or distributed by the Company pursuant to FDA
approvals are subject to pervasive and continuing regulation by the FDA.
Device manufacturers are required to register their establishments and list
their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be
manufactured in accordance with GMP requirements, which impose certain
process, procedure and documentation requirements upon the Company with
respect to product development, manufacturing and quality assurance
activities. FDA recently revised its GMP requirements. The new GMP
requirements, which are outlined under the FDA's Quality System regulation,
are more extensive than previous requirements. There can be no assurance
that the Company will be able to attain or maintain compliance with GMP
requirements.

In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to
suggest that one of its devices may have caused or contributed to death or
serious injury, or where one of its devices malfunctions and, if the
malfunction were to recur, the device would be likely to cause or contribute
to death or serious injury. There can be no assurance that the FDA would
agree with the Company's determinations as to whether particular incidents
meet the threshold for MDR reporting.

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

Noncompliance with requirements under the FFDCA or the regulations
thereunder can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket approval, withdrawal
of marketing approvals, and criminal prosecution. The FDA also has authority
to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.

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

SPNC is subject to certain federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. To date, compliance with such environmental regulations has not had
a material effect on SPNC's capital expenditures or competitive position.
See Risk Factors - "Costs and Uncertainty of Regulatory Compliance."

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<PAGE>

COMPETITION

Methods for the treatment of cardiovascular disease are numerous and are
expected to increase in number. Almost all of SPNC's competitors have
substantially greater financial, manufacturing, marketing and technical
resources than SPNC. Consequently, SPNC expects intense competition in the
marketplace. Although market competition includes manufacturers of balloon
angioplasty devices and stents, direct competition for SPNC comes from
manufacturers of atherectomy devices. Balloon angioplasty is currently the
most common therapy for the treatment of atherosclerosis. Guidant
Corporation, Boston Scientific Corporation and Johnson & Johnson
Interventional Systems are the leading balloon angioplasty manufacturers.
With the approval of stents in 1994, SPNC anticipates that stent utilization
will continue to grow as the second most prevalent angioplasty treatment of
choice for atherosclerosis. Johnson & Johnson Interventional Systems is the
leading stent provider in the United States at this time. Manufacturers of
atherectomy devices directly compete in the marketplace with laser
angioplasty. Manufacturers of atherectomy devices include Devices for
Vascular Intervention, Inc. (a subsidiary of Guidant Corporation),
Interventional Technologies, Inc. and Heart Technology, Inc. (a subsidiary of
Boston Scientific Corporation). There is an excimer laser company in
Germany, Medolas, which has performed excimer laser angioplasty in Europe.
United States Surgical Corporation recently acquired an 80 percent interest
in Medolas.

SPNC believes that the primary competitive factors in the interventional
cardiovascular market are: the ability to treat safely and effectively a
variety of lesions; the impact of managed care practices and procedure costs;
ease of use; and research and development capabilities. See "Risk Factors
- -Intense Competition."

PATENTS AND PROPRIETARY RIGHTS

SPNC holds 30 issued United States patents and 2 European patents, and
has 4 United States patent applications pending and 11 foreign patent
applications pending. There can be no assurance that any patents currently
applied for by SPNC will be granted or that any patents held by SPNC will be
valid or sufficiently broad to protect SPNC's technology or to provide it
with any competitive advantage. SPNC also relies on trade secrets and
unpatented know-how to protect its proprietary technology, and SPNC may be
vulnerable to competitors who attempt to copy SPNC's products or to gain
access to its trade secrets and know-how.

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

SPNC is aware of certain patents covering basic areas of laser
technology which may be infringed by SPNC's products. SPNC has signed two
non-exclusive, royalty-bearing license agreements for patents covering basic
areas of laser technology. In addition, SPNC acquired an exclusive,
royalty-bearing license for a proprietary catheter coating.

Additional licenses held by SPNC include an exclusive license to patents
covering laser-assisted lead removal and an exclusive license relating to
certain aspects of excimer laser technology used by SPNC in its products.

Litigation, which could result in substantial cost to and diversion of
effort by SPNC, may be necessary to enforce patents issued to SPNC, to
protect trade secrets or know-how owned by SPNC or to determine the scope and
validity of the proprietary rights of others.

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<PAGE>

Should it be determined that SPNC must obtain licenses to such patents,
certain patents or proprietary technology, there can be no assurance that any
such licenses would be available on favorable terms or at all, or that SPNC
would be able to develop or otherwise obtain alternative technology. The
failure of SPNC to obtain necessary licenses would have a material adverse
effect on SPNC's ability to manufacture and sell its products. In addition,
the costs associated with lawsuits and obtaining such licenses could have a
significant negative effect on SPNC's cash resources and working capital.
See "Risk Factors - Uncertainty Related to Patents and Proprietary Rights."

RESEARCH AND DEVELOPMENT

From inception through 1988, SPNC's primary emphasis in research and
development was on the CVX-300-Registered Trademark- laser unit. Since 1988,
SPNC's research and development efforts have focused on refinement of the
CVX-300-Registered Trademark- laser unit and laser device technology. SPNC
is also exploring additional applications for the CVX-300-Registered
Trademark- laser unit and is developing advanced laser devices designed to
facilitate greater use in existing applications.

Substantially all of SPNC's research and development activities are
performed by SPNC's team of research scientists, engineers and technicians.
Research and development expense totaled approximately $1,684,000,
$1,371,000, and $1,419,000 in 1996, 1995, and 1994, respectively. In 1994,
SPNC also expensed $4,391,000 as purchased in-process research and
development which related to the merger with LAIS.

MANUFACTURING

SPNC assembles and tests its entire product line and has vertically
integrated a number of processes in an effort to provide increased quality
and reliability of the components used in the production process. Many of
the processes are proprietary and were developed by SPNC. SPNC believes that
its level of manufacturing integration allows it to control costs, quality
and process advancements, to accelerate new product development cycle time
and to provide greater design flexibility.

Raw materials, components and subassemblies used in SPNC's products are
purchased from outside suppliers and are generally readily available from
multiple sources. The glass rods used in the fabrication of optical fibers,
however, are currently available from a single source, which holds worldwide
patent rights on this material. Any interruption in the supply of these
glass rods could have a material adverse impact on SPNC's ability to
manufacture its catheters. Although SPNC anticipates that it will continue
to receive an adequate supply of glass rods, it has taken steps to mitigate
the effect of an interruption in supply by accumulating additional inventory
of glass rods and finished optical fibers. See "Risk Factors - Dependence on
Suppliers and Distributors."

SPNC's manufacturing facilities are subject to periodic inspections by
regulatory authorities, including GMP compliance inspections by the FDA.
SPNC has undergone three inspections by FDA for GMP compliance since 1991.
Each inspection resulted in a limited number of noted deficiencies, to which
SPNC believes it has provided adequate responses.

In November 1994, SPNC announced that TUV Product Service GmbH certified
that SPNC meets the requirements of ISO 9001. This certification
demonstrates compliance with EN 29 001/ISO 9001 and EN 46 001 for its
products in the European Community ("EC").

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THIRD-PARTY REIMBURSEMENT

SPNC's CVX-300-Registered Trademark- laser unit and related fiber-optic
laser devices are generally procured by hospitals, which then bill various
third-party payors for the health care services provided to their patients.
These payors include Medicare, Medicaid and private insurance payors. The
Medicare Program reimburses hospitals based on a predetermined amount per
discharge for inpatient hospital services identified by the diagnosis-related
group ("DRG") into which each case is classified. Medicare payment will not be
made for medical and hospital services that are related to the use of a
noncovered device (E.G., an experimental device).

At present, many of SPNC's customers are obtaining reimbursement under
the same DRG as for complex balloon angioplasty based on the advice of the
Health Care Financing Administration, Office of Coverage and Eligibility
Policy, and SPNC expects that its customers will continue to do so in the
near term. Medicare payments of physicians' surgical fees are based on a fee
schedule based on a resource-based relative value scale that rates the value
of physicians' work for a particular service in relation to the value of work
for other services. The basic coronary angioplasty third-party reimbursement
for hospital and physician charges ranges from approximately $8,000 to
$14,000. This amount is generally adequate to cover the cost of a laser
angioplasty procedure. Actual charges may be significantly higher and vary
depending on the complexity of the procedure.

Capital costs for medical equipment purchased or leased by hospitals are
currently reimbursed separately from DRG payments. SPNC expects lower
Medicare reimbursement rates in 1997 as compared to previous years. Such
reductions could have an adverse impact on reimbursements to hospitals for
the capital cost of the CVX-300-Registered Trademark- laser unit and,
consequently, the ability of SPNC to sell its laser unit. While SPNC
believes that a laser angioplasty procedure offers a less costly alternative
for the treatment of certain types of heart disease, there can be no
assurances that the procedure will be viewed as cost effective under changing
reimbursement guidelines or other health care payment systems. See "Risk
Factors - Limitations on Third-Party Reimbursement."

POLYMICRO TECHNOLOGIES, INC.

Polymicro, located in Phoenix, Arizona, is a manufacturer of drawn silica
glass products. Polymicro revenues in 1996 totaled $7,017,000. Polymicro was
acquired on June 10, 1994 as part of the merger with LAIS.

POLYMICRO'S BUSINESS. Polymicro is engaged in the manufacture and
distribution of silica glass capillary tubing, optical fibers, precision
fused silica pieces, assemblies, and cables. Polymicro's products are
marketed to a number of industries in the domestic and international markets,
including separations, medical, process control, defense, aerospace, and
other special applications. Many products are custom-designed to meet
specific user needs. The development of new products and processes are funded
internally as well as through joint efforts with government and commercial
sectors. SPNC acquires fiber optics for its laser catheters from Polymicro.

Competition in Polymicro's marketplace is based on service, quality and
price. There are many companies competing in this market, some of which have
greater financial resources than Polymicro. Competitors include SpecTran
Corporation, CeramOptec GmbH, Fiberguide Industries Inc., and Galileo
Electro-Optics Corp.

POLYMICRO'S PRODUCTS

CAPILLARY TUBING. Capillary tubings are made with high purity, synthetic-
fused silica coated with polyimide plastics. Key features of the tubing are
chemical inertness, high flexibility, high strength, and the ability to
withstand high temperatures and pressures. The tubing is manufactured to tight
dimensional tolerances. Polymicro supplies various sizes and configurations of
capillary tubing used in analytical instruments. Tubing for gas chromatography
columns is supplied with three internal diameters: 250, 320, and 530 micrometers
("mm"). Tubing sizes for fluid extraction and capillary electrophoresis range
from 50mm to 200mm inner diameters. Tubing can also be used to form flow
restrictors for liquid and gas chromatography, sizes range from 10mm to 50mm
inner diameters.

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<PAGE>

OPTICAL FIBER. Optical fibers are hair-thin strands, usually made of a
glass "core" to transmit light energy and a bonded cladding on the central
"core" made of either glass or plastic material. Polymicro manufactures both
glass and plastic clad step-index, multimode silica core optical fibers, that
are sold in nontelephony markets. The core sizes range from 40mm to 1000mm
in diameter. These fibers are further coated with materials such as
polyimide, acrylate, silicones or aluminum in single or multiple layers to
preserve surface quality and inherent strength of the glass.

CABLES, ASSEMBLIES. Polymicro pursues value added applications in the
medical, process control, aerospace, and industrial markets. Each product is
xdesigned and built to meet the customer's requirements and specifications. The
assemblies involve a variety of custom and standard terminations and jacketing
materials in conjunction with Polymicro fibers and precision pieces.

PRECISION PIECES. Precision pieces are products made from rigid capillary
tubing or rod which is cut and machined into useful configurations. Precision
pieces generally range from 1mm to 4mm in diameter and in length from 1mm to
25mm. These rods and tubing are assembled into configurations designed by the
customer.

PRODUCT LIABILITY AND INSURANCE

The Company's business entails the risk of product liability claims. The
Company maintains product liability insurance in the amount of $5,000,000 per
occurrence with an annual aggregate maximum of $5,000,000. There can be no
assurance, however, that product liability claims will not exceed such insurance
coverage limits or that such insurance coverage limits will continue to be
available on acceptable terms, or at all. See "Risk Factors - Product Liability
and Sufficiency of Insurance Coverage."

EMPLOYEES

As of March 1, 1997, the Company had 154 employees, including 6 in research
and development, 52 in manufacturing and 47 in marketing, sales and
administration, as well as 49 at Polymicro. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company believes that its relationship with its
employees is good.

RISK FACTORS

The stockholders of the Company are, and will continue to be, subject
to the following risks.

CONTINUED LOSSES. The Company has incurred net losses since
inception in June 1984. The Company anticipates that net losses will
continue in the foreseeable future. There can be no assurance that
the Company will be able to achieve increased sales or profitability.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. Results of operations for
the Company have varied and may continue to fluctuate significantly from
quarter to quarter and will depend upon numerous factors, including timing of
regulatory approvals, market acceptance of products and new product
introductions, implementation of health care reforms, changes in product mix
between laser units and catheters, ability to manufacture products
efficiently and competition from other technologies.

LACK OF LIQUIDITY. While the Company believes that it has sufficient
cash liquidity to execute its plans through 1997, in order for cash flow from
operating activities to be sufficient to sustain the Company's operations
over the long term, the Company must achieve increases in sales and maintain
control over expenses. There can be no assurance that such increases in
sales or control in expenses will occur or that they will be sufficient to
maintain adequate cash to continue operations.

NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN ADDITIONAL
FINANCING. The Company may require additional financing in the future. Such
financing, if required, may not be available on satisfactory terms,

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<PAGE>

or at all. If the Company is unable to obtain sufficient funding from other
sources on terms and prices acceptable to the Company, the Company's ability
to make capital expenditures, compete effectively and withstand the effects
of adverse market and economic conditions may be significantly impaired. If
the Company is able to obtain debt financing, there can be no assurance that
the Company will have sufficient cash flow from operating activities to meet
its debt service requirements. Therefore, the Company may be required to
meet its debt service requirements from other sources, such as the sale of
additional equity and debt securities and the sale of selected assets. To
the extent the Company finances its future operations through the issuance of
equity securities, existing stockholders may suffer dilution in net tangible
book value per share.

LIMITED OPERATING HISTORY; LIMITED MANUFACTURING EXPERIENCE. SPNC has a
limited history of operations. SPNC received PMA approval from the FDA for
its CVX-300-Registered Trademark- laser unit in 1993. Accordingly, SPNC does
not have substantial experience in manufacturing, marketing or selling its
products in commercial quantities. SPNC may encounter difficulties in
scaling up production of laser units and catheters and hiring and training
additional qualified manufacturing personnel. The occurrence of difficulties
as SPNC increases production volumes could lead to quarterly fluctuations in
operating results and have a material adverse effect on SPNC's business,
financial condition and results of operations.

UNCERTAIN MARKET ACCEPTANCE. Excimer laser angioplasty technology is a
relatively new procedure which competes with more established therapies,
including balloon angioplasty, stent implantation and bypass surgery, and
other evolving technologies, such as atherectomy and non-excimer laser
technologies. The cost of the CVX-300-Registered Trademark- laser system is
significantly greater than the cost of therapeutic capital equipment required
with balloon angioplasty, stent implantation and atherectomy procedures, and
the cost of SPNC's catheters is greater than the cost of balloon angioplasty
catheters. In addition, because excimer laser procedures are often followed
by balloon angioplasty, the cost of an excimer laser angioplasty can be
significantly greater than balloon angioplasty alone. Market acceptance of
the laser angioplasty system also will depend, in part, on SPNC's ability to
establish with the medical community the clinical efficacy of excimer laser
angioplasty.

As a result of such factors, there can be no assurance that the
marketplace will be receptive to SPNC's laser angioplasty systems or that
excimer laser angioplasty will be accepted over competing therapies. Failure
of SPNC's products to achieve market acceptance would have a material adverse
effect on SPNC's business, financial condition and results of operations.

DEPENDENCE ON SINGLE PRODUCT LINE. SPNC is not currently developing
products that are only used in conjunction with the CVX-300-Registered
Trademark- laser unit. Consequently, SPNC is dependent on the successful
development and commercialization of the CVX-300-Registered Trademark- laser
unit. Unfavorable clinical trial results, failure to obtain regulatory
approvals in a timely manner, or at all, or failure to gain widespread market
acceptance could have a material adverse effect on SPNC's business and
financial condition, and cessation of business could occur.

INTENSE COMPETITION. Methods for the treatment of cardiovascular
disease are numerous and are expected to increase in number. Almost all of
SPNC's competitors have substantially greater financial, manufacturing,
marketing and technical resources than SPNC. SPNC expects intense
competition to continue in the marketplace. Market competition includes
manufacturers of balloon angioplasty devices and stents, and direct
competition for SPNC comes from manufacturers of atherectomy devices.
Balloon angioplasty is currently the most common therapy for the treatment of
atherosclerosis. Guidant Corporation, Boston Scientific Corporation and
Johnson & Johnson Interventional Systems are the leading balloon angioplasty
manufacturers. With the approval of stents in 1994, SPNC anticipates that
stent utilization will continue to grow as the second most prevalent
angioplasty treatment of choice for atherosclerosis. Johnson & Johnson
Interventional Systems is the leading stent provider in the United States at
this time. Manufacturers of atherectomy devices include Devices for Vascular
Intervention, Inc. (a subsidiary of Guidant Corporation), Interventional
Technologies, Inc. and Heart Technology, Inc. (a subsidiary of Boston
Scientific Corporation). There is an excimer laser company in Germany,
Medolas, which has performed excimer laser angioplasty in Europe. United
States Surgical Corporation recently acquired an 80 percent interest in
Medolas.

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There can be no assurance that SPNC current and future competitors will
not develop technologies and products that are more effective in treating
cardiovascular disease than SPNC's current products or future products, and
that SPNC technologies and products would not be rendered obsolete by such
developments.

UNCERTAINTY OF IMPACT OF HEALTH CARE REFORM. The federal government and
certain states have already implemented or are considering legislation to
effect health care reforms. In addition, other legislative and industry
groups are studying various health care issues. The ultimate timing or
effect of any such health care reforms on SPNC cannot be predicted and no
assurance can be given that any such reforms will not have a material adverse
effect on SPNC revenues and earnings. Short-term cost containment
initiatives may vary substantially from long-term reforms and may impact SPNC
differently.

LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The CVX-300-Registered
Trademark- laser unit is generally purchased by hospitals, which then bill
various third-party payors, such as government programs and private insurance
plans, for the health care services provided to their patients. Unlike
balloon angioplasty and atherectomy, laser angioplasty requires the purchase
of expensive capital equipment. The FDA has required that the label for the
CVX-300-Registered Trademark- laser unit indicate that adjunctive balloon
angioplasty was performed in the majority of the procedures submitted to the
FDA in SPNC's application for PMA. This will require the purchase of both a
laser catheter and a balloon catheter. Payors may deny reimbursement for
procedures they believe to be duplicative. Payors may also deny
reimbursement if they determine that a device used in a procedure was
experimental, was used for a non-approved indication or was not used in
accordance with established pay protocols regarding cost effective treatment
methods. There can be no assurance that laser angioplasty using the
CVX-300-Registered Trademark- laser unit will be considered cost effective by
third-party payors, that reimbursement will be available or, if available,
that payors' reimbursement policies will not adversely affect SPNC's ability
to sell its products on a profitable basis. There are increasing pressures
from many payor sources to control health care costs. In addition, there are
increasing pressures from public and private payors to limit increases in
reimbursement rates for medical devices. The market for SPNC's products and
the levels of revenues and profitability could also be adversely affected by
changes in governmental and private third-party payors' policies or by recent
federal legislation that reduces reimbursements under the capital cost
pass-through system for the Medicare program.

COSTS AND UNCERTAINTY OF REGULATORY COMPLIANCE. SPNC's products and
manufacturing activities are subject to vigorous regulation by the FDA and
comparable state and foreign agencies. The process of complying with these
regulations can be costly and time consuming. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or adoption of new regulations could prevent SPNC from obtaining,
or affect the timing of, future regulatory approval. SPNC has filed PMA
supplements. There can be no assurance that the FDA will approve SPNC's
current or future PMA supplements on a timely basis or at all. The absence
of such approvals could have a material adverse effect on SPNC's ability to
generate future revenues.

Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
As of March 1997, SPNC has received CE mark registration for all of its
products. There are no assurances that SPNC will be able to obtain CE mark
for its products in the future. In addition, significant costs and requests
for additional information may be encountered by SPNC in its efforts to
obtain regulatory approvals. Any such events could substantially delay or
preclude SPNC from marketing its products internationally.

TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE. Market
acceptance and sales of SPNC products also could be adversely affected by
technological changes. The health care industry is characterized by rapid
technological progress. New developments are expected to continue at an
accelerated pace in both industry

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and academia. Many companies, some of which have substantially greater
resources than SPNC, are engaged in research and development with respect to
methods of treatment and prevention of coronary artery disease. These
include pharmaceutical approaches as well as development of new or improved
angioplasty, atherectomy or other devices. SPNC products could be rendered
obsolete as a result of future innovations in the treatment of coronary
artery disease.

UNCERTAINTY RELATED TO PATENTS AND PROPRIETARY RIGHTS. SPNC holds
patents, has licenses to use patents and has patent applications pending.
There can be no assurance that any patents currently applied for by SPNC will
be granted or that any patents held by SPNC will be valid or sufficiently
broad to protect SPNC technology or to provide it with any competitive
advantage or will not be challenged or circumvented by competitors.
Termination of the licenses granted to SPNC would have a material adverse
effect on its business, financial condition and results of operations.

SPNC is aware of other patents issued to and patent applications filed
by individuals, partnerships, companies, universities and research
institutions relating to laser and fiber-optic technologies, which, if valid
and enforceable, may be infringed by SPNC. SPNC has received notice from
other parties regarding the existence of certain patents involving the use of
lasers in the body. Although SPNC has not been sued by these parties, there
can be no assurance that they will not be sued or that they would prevail in
any such action. Should SPNC determine that it is necessary to obtain a
license to such patents or proprietary technology, there can be no assurance
that any such license would be available on favorable terms, or at all, or
that it would be able to develop or otherwise obtain alternative technology.

Litigation concerning patents and proprietary rights could result in
substantial cost to and diversion of effort by SPNC. Adverse findings in any
proceeding could subject SPNC to significant liability to third parties,
require SPNC to seek licenses from third parties and adversely affect the
ability of SPNC to manufacture and sell its products.

SPNC also relies on trade secrets and unpatented know-how to protect its
proprietary technology, and may be vulnerable to competitors who attempt to
copy its products or to gain access to its trade secrets and know-how.

DEPENDENCE ON SUPPLIERS AND DISTRIBUTORS. The glass rods used by SPNC
in the fabrication of optical fibers incorporated into catheters are
currently available from a single source which holds worldwide patent rights
on this material. Any interruption in the supply of such glass rods could
have a material adverse effect on SPNC's ability to manufacture catheters.

PRODUCT LIABILITY AND SUFFICIENCY OF INSURANCE COVERAGE. The
manufacture and sale of the Company's products entail the risk of product
liability claims. A successful claim brought against the Company could have
a material adverse effect on the Company. The Company maintains product
liability insurance with coverage of $5,000,000, and an aggregate maximum of
$5,000,000. There can be no assurance that the coverage limits of the
Company's insurance policies will be adequate or that such insurance will be
available in the future on acceptable terms, if at all.

DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon a limited
number of key management and technical personnel, and the future success of
the Company will depend in part upon its ability to attract and retain highly
qualified personnel. The Company will compete for such personnel with other
companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in hiring or retaining qualified personnel. Loss of key personnel or
inability to hire or retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of
operations.

POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE.
The Company's future success will depend to a significant extent on the
ability of its management personnel to operate effectively, both
independently and as a group. In this regard, a number of members of the
Company's senior management team have only recently joined the Company.
Moreover, certain members of such management team have limited or no

Page 18
<PAGE>

experience as a senior executive of a public corporation. There can be no
assurance that the management team will operate together effectively. To
compete successfully against current and future competitors, complete
clinical trials in progress, prepare additional products for clinical trials
and develop future products, the Company believes that it must continue to
expand its operations, particularly in the areas of research and development,
sales and marketing, training, and manufacturing. If the Company were to
experience significant growth in the future, such growth would likely result
in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively,
the Company must continue to implement and improve information systems,
procedures and controls, and to expand, train, motivate and manage its
workforce. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's operational,
financial and management systems or to expand, train, motivate or manage
employees could materially and adversely affect the Company's business,
financial condition and results of operations.

ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Each of the
following charter provisions may have anti-takeover effects and may have a
negative impact on the rights of the Company's stockholders and the value of
the Company's Common Stock:

STAGGERED BOARD OF DIRECTORS. The Company has a staggered board
of directors in which directors are elected for staggered three-year
terms. This prevents stockholders from electing all directors at each
annual meeting and may have the effect of delaying or deferring a
change in control of the Company.

PREFERRED STOCK ISSUANCE. Up to five million shares of the
Company's preferred stock may be issued in the future by the Company
without further stockholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of the
Company's Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock could have
the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company.

DELAWARE CORPORATION CODE SECTION 203. Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder,
unless certain conditions are met. Section 203 has a negative impact
on the ability of certain stockholders to effect business combinations
with the Company.

Page 19

<PAGE>

INABILITY OF STOCKHOLDERS TO CALL SPECIAL MEETING. The Company's
Certificate and Bylaws provide that special meetings of stockholders may
be called only by the Board of Directors or a committee of the Board of
Directors duly designated and authorized to call special meetings in a
resolution of the Board of Directors or as may otherwise be specifically
provided in the Company's Certificate. This provision may limit the
ability of the Company's stockholders to take actions not supported by
the Board of Directors.

AMENDMENT OR REPEAL OF BYLAWS. The Company's Bylaws may be
adopted, amended or repealed by the Board of Directors or by the
affirmative vote of a majority of the outstanding shares of the
Company's Common Stock entitled to vote. The ability of the Board of
Directors to amend the Bylaws to increase the number of directors may
make it more difficult for the stockholders to change control of the
Board of Directors.

POTENTIAL VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. In addition, the
market price of the shares of the Company's Common Stock, similar to other
health care companies, has been, and is likely to continue to be, highly
volatile. Factors such as fluctuations in operating results, announcements
of technological innovations or new products by the Company or its
competitors, governmental regulation, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by
the Company or others and general market conditions may have a significant
effect on the market price of the the Company's Common Stock.

EXPOSURE FROM INTERNATIONAL OPERATIONS. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or other
trade regulations could have a material adverse effect on the Company's
ability to market its products internationally and therefore on its business,
financial condition and results of operations. The Company's business is
also expected to subject it and its representatives, agents and distributors
to laws and regulations of the foreign jurisdictions in which they operate or
the Company's products are sold. The Company may depend on foreign
distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an
adverse effect on the Company's business, financial condition and results of
operations. In addition, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do
the laws of the United States.

As the Company expands its international operations, its sales and
expenses denominated in foreign currencies will expand and that trend is
expected to continue. Thus, certain sales and expenses have been, and are
expected to be, subject to the effect of foreign currency fluctuations. As
the Company expands its international operations, its net foreign currency
denominated sales and expenses will be subject to the effect of foreign
currency fluctuations. Further, any significant changes in the political,
regulatory or economic environment where the Company conducts international
operations may have a material impact on revenues and profits.

LACK OF DIVIDENDS. The Company has not declared or paid any dividends
with respect to the Company's Common Stock. It is not anticipated that the
Company will pay any dividends in the foreseeable future. In addition, there
may be restrictions under state law on the ability of the Company to declare
dividends.

ITEM 2. PROPERTIES

FACILITIES

SPNC leases a total of approximately 37,000 square feet in three
buildings in Colorado Springs, Colorado. These facilities contain
approximately 15,000 square feet of manufacturing space and approximately
22,000 square feet devoted to marketing, research and administrative
activities. SPNC renewed the building lease through December 1997 and
believes that these facilities are adequate to meet its requirements through
1997.

Spectranetics International B.V. leases 4,890 square feet in Nieuwegein,
The Netherlands. The facility houses SPNC's operations for the marketing and
distribution of products to Europe.

Polymicro leases approximately 30,000 square feet in Phoenix, Arizona,
and has options for an additional 20,000 square feet at such location. The
facility is leased through 1998, with two five-year renewal options.
Management believes that the facility will be adequate to meet Polymicro's
current and reasonably foreseeable future requirements through the initial
five-year lease term.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Company's Common Stock is traded on the over-the-counter market
under The Nasdaq National Market Symbol "SPNC". The table below sets forth
the high and low sales prices for the Company's Common Stock as reported on
The Nasdaq National Market for each calendar quarter in 1995 and 1996. These
over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent the
sales prices in actual transactions.

HIGH LOW
------ -----
YEAR ENDED DECEMBER 31, 1995
1st Quarter $3.000 1.125
2nd Quarter 2.750 1.688
3rd Quarter 4.125 2.125
4th Quarter 3.500 2.188
YEAR ENDED DECEMBER 31, 1996
1st Quarter $3.625 2.375
2nd Quarter 7.688 2.688
3rd Quarter 6.500 3.875
4th Quarter 5.813 3.375
YEAR ENDED DECEMBER 31, 1997
1st Quarter (through
February 28) $5.563 $3.688

The Company has not paid cash dividends on its Common Stock in the past
and does not expect to do so in the foreseeable future. The payment of
dividends in the future will be at the discretion of the Board of Directors

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<PAGE>

and will be dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.

The closing sales price of the Company's Common Stock on February 28,
1997 was $3.688. On February 28, 1997, the Company had approximately 854
shareholders of record.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical consolidated financial data of the
Company as of and for each of the years in the five-year period ended
December 31, 1996, are derived from the Company's consolidated financial
statements. The information set forth below should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K and the
Consolidated Financial Statements and Notes thereto. The selected historical
consolidated financial data presented below as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996,
has been derived from the Company's audited financial statements also
included elsewhere herein. The selected historical consolidated financial
data presented below as of December 31, 1994, 1993 and 1992 and for the years
ended December 31, 1993 and 1992 are derived from, and are qualified by
reference to, audited financial statements of the Company not included herein.

(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Years Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (for the period):
Revenues.............................. $20,679 $17,282 $ 11,413 $ 8,074 $ 3,915
Cost of revenue....................... 10,418 9,502 7,756 7,878 5,789
Marketing and sales................... 6,291 5,338 5,697 5,558 4,308
General and administrative............ 4,022 3,870 3,425 4,003 3,299
Research and development.............. 1,684 1,371 1,419 3,647 6,511
Purchased research and development.... -- -- 4,391 -- --
------- ------- -------- -------- --------
Operating loss........................ (1,736) (2,799) (11,275) (13,012) (15,992)
Other income, net..................... 369 580 547 462 1,038
------- ------- -------- -------- --------
Net loss.............................. $(1,367) $(2,219) $(10,728) $(12,550) $ 14,954)
------- ------- -------- -------- --------
------- ------- -------- -------- --------
Loss per share........................ $ (.07) $ (0.12) $ (0.74) $ (1.28) $ (1.57)
Weighted average common shares
outstanding......................... 18,430 18,331 14,564 9,837 9,551

December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA (at end of period):
Working capital....................... $ 8,787 $ 8,301 $ 8,433 $ 13,112 $ 25,242
Cash, cash equivalents,
and securities...................... 7,150 7,047 8,165 11,644 23,424
Equipment, net........................ 3,486 3,952 5,025 2,510 2,569
Total assets.......................... 23,039 25,013 28,893 19,755 31,508
Long-term debt including capital
lease obligations................... 491 725 1,729 760 118
Shareholders' equity.................. 18,510 19,747 21,870 15,944 27,844
Book value per common share
outstanding.......................... $ 1.00 $ 1.08 $ 1.20 $ 1.61 $ 2.86
</TABLE>
Page 22
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes
"forward-looking statements" within the meaning of Section 21E of the
Securities and Exchange Act of 1934, as amended, and is subject to the safe
harbor created by that section. Readers are cautioned not to place undue
reliance on these forward-looking statements and to note that they speak only
as of the date hereof. Factors that realistically could cause actual results
to differ materially from those set forth in the forward-looking statements
are set forth below and include the following: market acceptance of excimer
laser angioplasty technology, technological changes resulting in product
obsolescence, the inability to obtain patents with respect to new products,
adverse state or federal legislation and regulation, availability of third
party component products at reasonable prices, and the other risk factors
listed from time to time in the Company's filings with the Securities and
Exchange Commission as well as those set forth in "Risk Factors" under Item 1.

On June 10, 1994, the Company completed a merger with Advanced
Interventional Systems, Inc. ("LAIS") in which LAIS became a wholly-owned
subsidiary of the Company. As a result of the merger with LAIS, the Company
also acquired Polymicro Technologies, Inc. ("Polymicro"), a subsidiary of
LAIS. Polymicro, now a wholly-owned subsidiary of the Company, continues to
operate its facility in Phoenix, Arizona.

SPNC has been engaged in the research and development of products to
treat cardiovascular disease since 1984. In 1990, SPNC commenced sales of
its CVX-300-Registered Trademark- laser unit and fiber-optic catheters to
approved clinical investigational sites in the United States and to European
medical centers. On February 19, 1993, SPNC received approval of its PMA and
shortly thereafter began selling its CVX-300-Registered Trademark- laser unit
and certain fiber-optic catheters in the U.S. market.

Historically, SPNC's revenues and results of operations have fluctuated
depending on several factors, including FDA regulation of the number of
approved clinical sites and the number of patients treated, the revenue mix
between laser units and catheters, the costs incurred in expanding
manufacturing capacity, SPNC's ability to improve production yields resulting
from modifications in the manufacturing process, the expenses incurred in
developing sales, expenses of marketing and customer service, and the
expenses related to product development and clinical trials.

SPNC expects that future revenues and results of operations will
fluctuate depending on the factors listed above as well as the market
acceptance of SPNC's products, the timing of new product introductions, the
level of research and development activity, the increase in sales and
marketing expenses, the implementation of health care reform, and
competition. In addition, the price of each CVX-300-Registered Trademark-
;laser unit is significant and, therefore, a relatively small change in unit
volume may cause a significant fluctuation in revenues.

SPNC believes that uncertainties in the structure of health care
delivery and payment systems have had, and may continue to have, an adverse
effect on revenues. While SPNC believes that the laser angioplasty procedure
offers a less costly alternative for the treatment of certain types of heart
disease, there can be no assurance that hospitals will be willing to make the
expenditures for new capital equipment. Furthermore, alternatives to laser
angioplasty exist and the industry is subject to technological change,
including the introduction of new competing therapies. Therefore, the future
demand for laser angioplasty products is uncertain. If SPNC is unable to
increase revenues from the sale of lasers and catheters, it is likely that it
will be unable to achieve break-even operations from its interventional
cardiology business.

Polymicro is a manufacturer of drawn silica glass products. Polymicro
revenues for 1996 totaled $7,017,000.

As of December 31, 1996, the Company did not have any material backlog
of product orders for its SPNC or Polymicro businesses.

Page 23

<PAGE>

YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995

Revenue for the year ended December 31, 1996 was $20,679,000, an
increase of 20% over 1995 revenues of $17,282,000. The increase is primarily
due to sales of the Company's laser sheath and total occlusion catheters for
use in ongoing clinical trials, combined with increased sales of FDA
market-released catheters. Sales from SPNC International B.V. represented
22% of total sales in 1996 as compared to 25% in 1995. The functional
currency of SPNC International B.V. is the Dutch Guilder. All revenue and
expense accounts are translated to U.S. Dollars in the consolidated financial
statements using average exchange rates during the year. Fluctuation in the
Dutch Guilder currency rate during the year ended December 31, 1996 as
compared to the year ended December 31, 1995 caused a decrease in revenues of
$302,000, or 2%.

Cost of revenues in 1996 was 50% of revenues in 1996 as compared to 55%
in 1995. The resulting improvement in gross margins is primarily due to
economies of scale achieved as a result of increased manufacturing volumes,
primarily in the area of catheter manufacturing.

Marketing and sales expense in 1996 of $6,291,000 was up 18% over
$5,338,000 in 1995. Increased expense was primarily due to commissions on
product sales and personnel expenses associated with the Company's efforts to
further the market acceptance of its products. Research and development
expense increased by $313,000 to $1,684,000 in 1996 over $1,371,000 during
1995. This increase was due primarily to increased expense associated with
clinical trials for pacing lead removal and total occlusion devices. General
and administrative expense in 1996 increased 4% from $3,870,000 in 1995 to
$4,022,000 in 1996. Increased administrative cost was due to increased
corporate activity. Fluctuation in the Dutch Guilder currency rate during the
year ended December 31, 1996 as compared to the year ended December 31, 1995
caused a decrease in total operating expenses of $167,000, or 2%.

Interest income decreased $118,000, or 27%, from 1995 as a result of
lower investment yields combined with a decrease in the average balance of
investment securities held during the respective periods.

Other income decreased $114,000, or 54%, from 1995. Other income in
1995 of $212,000 consisted primarily of adjustments made to the estimated
value of assets and liabilities received in the merger with LAIS. No
significant adjustments of this nature were recorded in 1996.

Net loss for 1996 was $1,367,000, or $0.07 per share, compared with a
loss of $2,219,000, or $0.12 per share, in 1995.

YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994

Revenue for the year ended December 31, 1995 was $17,282,000, up 51%
from $11,413,000 for 1994. Revenue increases for 1995 over 1994 were due
primarily to the inclusion of revenues from Polymicro Technologies, Inc.
Revenues from Polymicro were first included in the Company's consolidated
revenues in September 1994. Polymicro's revenues accounted for 40% of the
Company's revenue in 1995 versus only 18% in 1994. 1995 revenues from
catheter sales increased 42% over 1994, while laser system sales decreased
13% from 1994. These revenue trends reflect the Company's increased focus on
improving the utilization of the installed base of laser systems.

Cost of revenues in 1995 was 55% of revenues versus 68% in 1994. The
continued improvement in cost of revenue is due to manufacturing efficiencies
arising from the increased production volumes of catheters.

Marketing and sales expense in 1995 of $5,338,000 was down 6% from 1994
expenditures of $5,697,000. The Company was able to reduce expenses in
Europe by changing its distribution strategy from a direct sales force to a
distributor network. The European organization was staffed with 13
employees, down from 20 in the beginning of 1994. The European operation
focused on the support of the distributor network by providing clinical and
service support. Expenses related to Polymicro Technologies, Inc. are
included beginning in September 1994.

Page 24

<PAGE>

General and administrative expenses of $3,870,000 in 1995 were up 13%
over 1994 due primarily to the inclusion of 12 months of expenses from
Polymicro in 1995 versus only 4 months in 1994.

Research and development expenses of $1,371,000 were comparable to 1994
expenses of $1,419,000. Research and development expenses include the cost
associated with conducting clinical trials to support regulatory requirements
and the development of new catheters and applications for the excimer laser.

Interest income in 1995 was 22% up over 1994 due to increased investment
yields. Other income of $212,000 in 1995 consists primarily of adjustments
to the estimated value of assets and liabilities received in the merger with
LAIS determined subsequent to June 1995.

Net loss for 1995 was $2,219,000, or $0.12 per share, compared with a loss of
$10,728,000, or $0.74 per share in 1994. Of the $0.74 per share loss for
1994, $0.30 was attributable to purchased research and development acquired
in the merger with LAIS.

INCOME TAXES

At December 31, 1996, the Company has net operating loss carryforwards
(NOL's) for federal income tax purposes of approximately $89,069,000 which
are available to offset future federal taxable income, if any, and expire at
varying dates through 2011. The losses generated by The Spectranetics
Corporation and a portion of the losses generated by LAIS prior to the merger
cannot be used to offset future taxable income of Polymicro due to the
separate return limitation year (SRLY) rule. Additionally, the annual use of
these net operating loss and alternative minimum tax carryforwards is limited
under Section 382 of the Internal Revenue Code of 1986, due to a change in
control which resulted from the issuance of shares upon completion of the
Company's initial public offering on January 28, 1992. The losses generated
by the group subsequent to the merger are not subject to limitation by the
SRLY rules or Section 382. No benefit for the NOL's has been recognized by
the Company for the years ended December 31, 1996, 1995 and 1994, due to
uncertainty as to their recoverability.

The Company also has research and development tax credit carryforwards
at December 31, 1996 for federal income tax purposes of approximately
$3,145,000 which are available to reduce future federal income taxes, if any,
and expire at varying dates through 2011. The annual use of portions of the
research and development credit carryforwards is also limited under Section
382.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had cash, cash equivalents and
securities of $7,150,000 which represents an increase in 1996 of $103,000
primarily due to $524,000 of net cash provided by operating activities offset
by capital expenditures of $458,000. In 1996, the Company continued its
programs to reduce operating expenses and cash requirements. Management
believes that the Company's liquidity and capitalization as of December 31,
1996 is sufficient to meet its operating and capital requirements through
1997.

Cash, cash equivalents and securities at December 31, 1995 totaled
$7,047,000. The Company consumed $1,118,000 of its cash, cash equivalents
and investment securities in 1995 versus $5,456,000 in 1994 after adjusting
for the receipt of $1,977,000 from the merger with LAIS in 1994.

Due to the slower than anticipated acceptance of its products in 1996,
1995 and 1994, SPNC placed a number of systems on rental, loan and
fee-per-procedure programs. At December 31, 1996, 1995 and 1994,
approximately $1,473,000, $1,549,000, and $1,364,000, respectively, of laser
units were capitalized as equipment held for rental or loan and are being
depreciated over one to three years. This equipment was transferred from
SPNC's inventory at cost. SPNC expects that it will continue to offer
rental, loan and fee-per-procedure programs for the foreseeable future.

Page 25

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to Financial Statements and the Financial Statement
Schedule appearing on page 29.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to
the information set forth under the caption "Proposal 1 -- Election of
Director" and "Executive Officers of the Company" of the registrant's
definitive Proxy Statement to be used in connection with its 1997 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 30, 1997.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to
the information set forth under the caption "Executive Compensation" of the
registrant's definitive Proxy Statement to be used in connection with its
1997 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior to April 30, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to
the information set forth under the caption "Principal Security Holders" of
the registrant's definitive Proxy Statement to be used in connection with its
1997 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior to April 30, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to
the information set forth under the caption "Certain Transactions" of the
registrant's definitive Proxy Statement to be used in connection with its
1997 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior to April 30, 1997.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) FINANCIAL STATEMENTS

(1) The financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Independent Auditor's
Report are filed as part of this Report (see page 29).

(2) Financial Statement Schedule

The financial statement schedule contained in the accompanying Index
to Consolidated Financial Statements covered by the Independent Auditors' Report
are filed as part of this Report (see page 29).

Page 26

<PAGE>

(3) Exhibits

The exhibits contained in the Index to Exhibits are filed as part of this
Report (see page 30).

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the fourth quarter of 1996.

Page 27
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Colorado Springs, State of Colorado, on this 27th day of March, 1997.

THE SPECTRANETICS CORPORATION

By: /s/ Joseph A. Largey
-------------------------------
Joseph A. Largey, President and
Chief Executive Officer

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

Signature Title Date
--------- ----- ----

/s/ Joseph A. Largey President and Chief March 27, 1997
- --------------------------- Executive Officer,
Joseph A. Largey Director (Principal
Executive Officer)

/s/ James P. McCluskey Vice President, Finance March 27, 1997
- --------------------------- (Principal Financial and
James P. McCluskey Accounting Officer)

/s/ Emile J. Geisenheimer Director and Chairman March 27, 1997
- --------------------------- of the Board of Directors
Emile J. Geisenheimer

- --------------------------- Director March 27, 1997
Cornelius C. Bond, Jr.

/s/ E. Wyatt Cannady Director March 27, 1997
- ---------------------------
E. Wyatt Cannady

/s/ Gary R. Bang Director March 27, 1997
- ---------------------------
Gary R. Bang

/s/ James A. Lent Director March 27, 1997
- ---------------------------
James A. Lent

/s/ Joseph M. Ruggio, MD Director March 27, 1997
- ---------------------------
Joseph M. Ruggio, MD

- --------------------------- Director March 27, 1997
John G. Schulte

Page 28

<PAGE>

THE SPECTRANETICS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
INDEX TO FINANCIAL STATEMENTS: ----
Independent Auditors' Report . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets, December 31,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations, Years Ended
December 31, 1996, 1995, and 1994. . . . . . . . . . . . F-3
Consolidated Statements of Shareholders' Equity, Years
Ended December 31, 1996, 1995, and 1994. . . . . . . . . F-4
Consolidated Statements of Cash Flows, Years Ended
December 31, 1996, 1995, and 1994. . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . F-6

FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report on Financial Statement
Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-20
Schedule II - Valuation and Qualifying Accounts, Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . F-21

All other schedules are omitted because they are not applicable or
because the required information is included in the consolidated
financial statements or the notes thereto.

Page 29
<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE SPECTRANETICS CORPORATION:

We have audited the accompanying consolidated balance sheets of The
Spectranetics Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Spectranetics
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Denver, Colorado
January 31, 1997

F-1

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>

ASSETS 1996 1995
- ------ ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,860 3,115
Securities, held-to-maturity, at amortized cost 4,290 3,932
Trade accounts receivable, less allowance of $45 and $49 3,651 2,860
Inventories (note 2) 1,628 1,918
Prepaid expenses and other 355 522
Sublease receivable 41 495
------- ------
Total current assets 12,825 12,842

Equipment and leasehold improvements, at cost (note 7):
Manufacturing equipment and computers 5,687 5,320
Leasehold improvements 2,306 2,274
Equipment held for rental or loan 1,473 1,549
Furniture and fixtures 158 152
------- ------
9,624 9,295
Less accumulated depreciation and amortization (6,138) (5,343)
------- ------
Net equipment and leasehold improvements 3,486 3,952
Goodwill and other intangible assets, net (note 3) 6,346 7,795
Other assets 382 424
------- ------
$23,039 25,013
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,110 1,063
Accrued liabilities (note 4) 2,201 2,647
Deferred revenue (note 5) 569 648
Current portion of note payable (note 10) 75 71
Current portion of capital lease obligations (note 7) 83 112
-------- ------
Total current liabilities 4,038 4,541

Capital lease obligations, net of current portion (note 7) 20 98
Note payable, net of current portion (note 10) 445 520
Other liabilities 26 107
-------- ------
Total liabilities 4,529 5,266

Shareholders' equity (note 6):
Preferred stock, $.001 par value. Authorized 5,000,000 shares;
none issued - -
Common stock, $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 18,531,867 and 18,356,764 shares 19 18
Additional paid-in capital 83,402 83,139
Cumulative foreign currency translation adjustment (16) 118
Accumulated deficit (64,895) (63,528)
-------- ------
Total shareholders' equity 18,510 19,747
-------- ------
Commitments (note 14)
-------- ------

$ 23,039 25,013
-------- ------
-------- ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Revenue:
Trade $19,062 15,544 8,993
Related party (note 8) - - 845
Service 1,617 1,738 1,575
------- ------ ------
20,679 17,282 11,413
------- ------ ------
Costs and operating expenses:
Cost of revenue:
Trade 9,288 8,300 5,835
Related party (note 8) - - 694
Service 1,130 1,202 1,227
------- ------ ------
10,418 9,502 7,756
------- ------ ------
Gross margin 10,261 7,780 3,657
------- ------ ------
Operating expenses:
Marketing and sales 6,291 5,338 5,697
General and administrative 4,022 3,870 3,425
Research and development 1,684 1,371 1,419
Purchased in-process research and
development (note 12) - - 4,391
------- ------ ------
Total operating expenses 11,997 10,579 14,932
------- ------ ------
Operating loss (1,736) (2,799) (11,275)

Other income (expense):
Interest income 315 433 355
Interest expense (44) (65) (95)
Net income of subsidiary held for sale (note 12) - - 275
Other, net 98 212 12
------- ------ ------
369 580 547
------- ------ ------

Net loss $(1,367) (2,219) (10,728)
------- ------ ------
------- ------ ------
Loss per share $(.07) (.12) (.74)
------- ------ ------
------- ------ ------
Weighted average common shares outstanding 18,430,276 18,330,537 14,564,205
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
<TABLE>
Common stock
----------------------------- Foreign
Additional currency Accu- Total
paid-in trans- mulated shareholders'
Shares Amount capital lation deficit equity
------ ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
JANUARY 1, 1994
9,892,450 $ 10 66,621 (106) (50,581) 15,944
Issuance of common stock for net
assets of Advanced Interventional
Systems, Inc., net of merger costs
of $597 (note 12) 8,156,385 8 16,128 - - 16,136
Exercise of stock options 173,919 - 164 - - 164
Shares purchased under employee
stock purchase plan 59,025 - 67 - - 67
Foreign currency translation
adjustment - - - 179 - 179
Amortization of deferred
compensation expense - - 108 - - 108
Net loss - - - - (10,728) (10,728)
---------- ---- ------ ---- -------- ------

BALANCES AT
DECEMBER 31, 1994 18,281,779 18 83,088 73 (61,309) 21,870

Exercise of stock options 14,029 - 21 - - 21
Shares purchased under employee
stock purchase plan 60,956 - 30 - - 30
Foreign currency translation
adjustment - - - 45 - 45
Net loss - - - - (2,219) (2,219)
---------- ---- ------ ---- -------- ------

BALANCES AT
DECEMBER 31, 1995 18,356,764 18 83,139 118 (63,528) 19,747

Exercise of stock options 147,852 1 206 - - 207
Shares purchased under employee
stock purchase plan 27,251 - 57 - - 57
Foreign currency translation
adjustment - - - (134) - (134)
Net loss - - - - (1,367) (1,367)
---------- ---- ------ ---- -------- ------

BALANCES AT
DECEMBER 31, 1996 18,531,867 $ 19 83,402 (16) (64,895) 18,510
---------- ---- ------ ---- -------- ------
---------- ---- ------ ---- -------- ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE>
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,367) (2,219) (10,728)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 2,728 2,956 2,783
Amortization of deferred compensation expense - - 108
Purchased in-process research and development - - 4,391
Changes in operating assets and liabilities, net of effects
of merger in 1994:
Trade accounts receivable (880) (437) (1,555)
Inventories (124) 86 1,028
Prepaid expenses and other 611 (59) (2)
Other assets 34 448 164
Accounts payable and accrued liabilities (390) (1,498) (1,570)
Deferred revenue (86) (158) (130)
------- ------ -------
Net cash provided (used) by operating activities 526 (881) (5,511)
------- ------ -------

Cash flows from investing activities:
Capital expenditures (458) (78) (101)
Purchase and sale of securities held-to-maturity, net (358) 561 4,969
------- ------ -------
Net cash provided (used) by investing activities (816) 483 4,868
------- ------ -------
Cash flows from financing activities:
Proceeds from sale of common stock, net 264 51 231
Principal payments on obligations under capital leases (108) (159) (168)
Principal payments on notes payable (71) (67) (211)
Cash acquired in merger, net of issuance costs of $597 - - 1,977
Decrease in deferred merger and offering costs - - 125
------- ------ -------
Net cash provided (used) by financing activities 85 (175) 1,954
------- ------ -------
Effect of exchange rate changes on cash (50) 16 179
------- ------ -------
Net (decrease) increase in cash and cash equivalents (255) (557) 1,490

Cash and cash equivalents at beginning of year 3,115 3,672 2,182
------- ------ -------
Cash and cash equivalents at end of year $ 2,860 3,115 3,672
------- ------ -------
------- ------ -------
Supplemental disclosures of cash flow information -
cash paid during the year for interest $ 46 69 110
------- ------ -------
------- ------ -------
Supplemental disclosure of noncash investing and financing activities:
Net transfer from inventory to equipment held for
rental or loan $ 382 353 1,029
------- ------ -------
------- ------ -------
Capital lease obligations $ - - 22
------- ------ -------
------- ------ -------
Net noncash assets acquired $ - - 14,159
------- ------ -------
------- ------ -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
The Spectranetics Corporation, a Delaware corporation, and its wholly owned
subsidiaries (collectively the "Company"), including Spectranetics
International B.V. and Polymicro Technologies, Inc. ("Polymicro"). All
intercompany balances and transactions have been eliminated in
consolidation. The Company designs, manufactures and markets laser
interventional cardiology products for the medical industry and drawn
silica glass products primarily for the medical and separations markets.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash
equivalents of approximately $677,000 and $2,064,000 at December 31,
1996 and 1995, respectively, consist primarily of certificates of
deposit, government-backed securities, money market accounts, commercial
paper, and repurchase agreements stated at cost, which approximates
market.

SECURITIES

Securities at December 31, 1996 and 1995, consist of U.S. Treasury notes
and mortgage-backed securities, and are accounted for under the
provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
Company's debt securities are classified as held-to-maturity securities
and are recorded at amortized cost, which approximates fair value.
Substantially all held-to-maturity securities have maturities of one
year or less.

INVENTORIES

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

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are recorded at cost. Equipment
owned under capital leases is recorded at the present value of minimum
lease payments at the inception of the lease.

F-6

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- --------------------------------------------------------------------------------

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets of 3 to 7 years for furniture and
fixtures and manufacturing equipment and computers. Equipment held for
rental or loan is being depreciated using the straight-line method over
3 to 5 years. Equipment owned under capital leases and leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are being amortized using the
straight-line method over periods ranging from 3 to 13 years.

IMPAIRMENT OF ASSETS

Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121). Under
SFAS 121, the carrying value of goodwill and other long-lived assets is
reviewed annually for impairment. Events that may indicate a need to
assess recoverability include significant changes in business
conditions, continuing losses, or a forecasted inability to achieve at
least break-even operating results over an extended period. The Company
generally evaluates the recoverability of goodwill and other long-lived
assets based upon undiscounted cash flow projections. Should an
impairment in value be indicated, the carrying value of the asset is
adjusted accordingly.

FINANCIAL INSTRUMENTS

At December 31, 1996 and 1995, the carrying value of financial
instruments estimates the fair market value.

REVENUE RECOGNITION

Revenue from the sale of the Company's products is generally recognized
when the products are shipped to the customer. Revenue from product
maintenance contracts and equipment rentals are deferred and recognized
ratably over the contract period.

WARRANTIES

The Company provides for the cost of estimated future warranty repairs
when the products are shipped to the customer.

F-7

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- --------------------------------------------------------------------------------

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK COMPENSATION PLANS

The Company accounts for its stock compensation plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings (loss) per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-values-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures required by SFAS No. 123.

RESEARCH AND DEVELOPMENT

Expenditures for research and development are expensed when incurred.
As a result of the merger completed in 1994 (see note 12), the Company
acquired in-process research and development in the amount of $4,391,000
which was expensed during the year ended December 31, 1994. In-process
research and development is defined as those research and development
efforts that, as of the acquisition date, had not yet generated
commercializable products and, accordingly, the ultimate technological
feasibility of the research and development cannot be determined.

LOSS PER SHARE

Loss per share is based on the weighted average number of common shares
outstanding. Common equivalent shares relating to stock options and
warrants are excluded from the computation as their effect is
anti-dilutive.

FOREIGN CURRENCY TRANSLATION

The Company's primary functional currency is the U.S. dollar. Certain
transactions of the Company and its subsidiaries are consummated in
currencies other than the U.S. dollar. Gains and losses from these
transactions are included in the consolidated statements of operations
as they occur.

Spectranetics International B.V. uses its local currency (Dutch guilder)
as the functional currency. Accordingly, net assets are translated at
year-end exchange rates while income and expense accounts are translated
at average exchange rates during the year. Adjustments resulting from
these translations are reflected in shareholders' equity as cumulative
foreign currency translation adjustment.

F-8

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- --------------------------------------------------------------------------------

INCOME TAXES

The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES, which requires
the use of the asset and liability method of accounting for deferred
income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. 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.

(2) INVENTORIES

Inventories consist of the following as of December 31:

1996 1995
------ -----
(In thousands)

Raw materials $ 469 532
Work in process 516 543
Finished goods 643 843
------ -----
$1,628 1,918
------ -----
------ -----

(3) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets and related amortization periods
are as follows as of December 31:

Amortization
1996 1995 period
------- ------ ------
(In thousands)

Goodwill $ 6,417 6,417 8 years
Patents 2,488 2,488 10-13 years
Customer list 908 908 3 years
Sales and clinical staffs 346 346 3 years
------- ------
10,159 10,159
Less accumulated amortization (3,813) (2,364)
------- ------
$ 6,346 7,795
------- ------
------- ------

F-9

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- --------------------------------------------------------------------------------

The Company acquired a significant portion of the intangibles during
1994 as a result of the merger discussed in note 12.

(4) ACCRUED LIABILITIES

Accrued liabilities consist of the following as of December 31:

1996 1995
------ -----
(In thousands)
Accrued payroll and related expenses $ 831 617
Accrued warranty expense 241 148
Accrued royalty expense 116 97
Other accrued expenses 1,013 1,041
Current portion of lease payable (note 7) - 744
------ -----
$2,201 2,647
------ -----
------ -----

(5) DEFERRED REVENUE

The Company has various product maintenance contracts. Deferred revenue
related to such contracts was approximately $534,000 and $606,000 at
December 31, 1996 and 1995, respectively. Additional deferred revenue
of approximately $35,000 and $42,000 at December 31, 1996 and 1995,
respectively, relates to sales contracts that require the Company to
reacquire the product if the customer is not completely satisfied.
Revenue will be recognized upon the expiration of the buyback
provisions, if unexercised.

(6) STOCK COMPENSATION AND EMPLOYEE BENEFIT PLANS

At December 31, 1996 and 1995, the Company had two stock-based
compensation plans which are described below.

STOCK OPTION PLANS

The Company maintains stock option plans which provide for the grant of
incentive stock options, nonqualified stock options and stock
appreciation rights. The Board of Directors determines the option price
and term. 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 December 31, 1996 vest over one to five
years and expire after six to ten years from the date of grant. Options
granted to the Board of Directors vest immediately or over three years
from date of grant. At December 31, 1996, there were 2,777,148 shares
available for future issuance under the plans.

F-10

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

(6) STOCK COMPENSATION AND EMPLOYEE BENEFIT PLANS (CONTINUED)

The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.02 per share and $1.78 per share, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1996 - expected dividend yield of
0.0%, risk-free interest rate of 6.21%, expected volatility of 114%, and an
expected life of 6.75 years; 1995 - expected dividend yield of 0.0%,
risk-free interest rate of 5.37%, expected volatility of 120%, and an
expected life of 6.75 years.

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, because the Company grants options at or above base fair value
at the date of grant, no compensation cost has been recognized for stock
option grants in the accompanying consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options and stock purchase plan shares under SFAS
No. 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts shown below:

1996 1995
-------- -------
Net loss As reported $(1,367) (2,219)
Pro forma (2,497) (2,660)

Loss per share As reported $ (0.07) (0.12)
Pro forma (0.14) (0.15)

Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
option vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.

The following is a summary of option activity during the three-year period
ended December 31, 1996:

<TABLE>

Shares Weighted average
under option exercise price
------------ ----------------
<S> <C> <C>
Options outstanding at January 1, 1994 791,501 $ 3.79
Assumed in connection with LAIS merger 425,171 4.20
Granted 945,500 1.13
Exercised (173,919) .95
Canceled (922,320) 3.78
---------
Options outstanding at December 31, 1994 1,065,933 $ 1.88
Granted 647,000 1.97
Exercised (14,029) 1.43
Canceled (40,489) 2.51
---------

(Continued)

F-11
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- ------------------------------------------------------------------------------

(6) STOCK COMPENSATION AND EMPLOYEE BENEFIT PLANS (CONTINUED)

Options outstanding at December 31, 1995 1,658,415 $ 1.90
Granted 575,450 4.73
Exercised (148,916) 1.42
Canceled (132,749) 2.52
---------
Options outstanding at December 31, 1996 1,952,200 $ 2.73
---------
---------
</TABLE>

At December 31, 1996, the weighted-average remaining contractual life of
outstanding options was 8.1 years.

At December 31, 1996, 865,548 options were exercisable at a weighted-average
exercise price of $2.73 per share.

The Company recognized compensation expense with respect to stock options
issued during 1991. The amount of compensation expense was based on the
amount by which the estimated fair market value of the common stock issuable
upon exercise of such options exceeded the aggregate exercise price of such
options. Such compensation expense was amortized during the periods in which
the options vest using an accelerated method. The Company recognized
$108,000 of compensation expense during the year ended December 31, 1994,
which represented the total compensation expense to be recognized for the
1991 options.

STOCK PURCHASE PLAN

In September 1992, the Company adopted an employee stock purchase plan which
currently provides for the sale of up to 350,000 shares of common stock. The
plan provides eligible employees of the Company the opportunity to acquire
the common stock of the Company in accordance with Section 423 of the
Internal Revenue Code of 1986. Shares issued under the plan totaled 27,251
and 60,956 in 1996 and 1995, respectively.

Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions: 1996 - expected dividend yield of
0.0%; risk-free interest rate 5.48%, expected volatility of 92%, and an
expected life of 6 months; 1995 - expected dividend yield 0.0%; risk-free
interest rate 5.15%, expected volatility of 179%, and an expected life of
6 months. The weighted average fair value of those purchase rights granted
in 1996 and 1995 was $2.85 and $1.53.

401(k) PLAN

The Company maintains a salary reduction savings plan under section 401(k)
of the Internal Revenue Code which the Company administers for participating
employees' contributions. All full-time employees are covered under the
plan after meeting minimum service requirements. The Company has made no
contributions to the plan.

F-12
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

(7) LEASES

The Company leases certain equipment under capital leases, and office space,
furniture, and equipment under noncancelable operating leases with initial
terms that expire at various dates through 1999.

Included in manufacturing equipment and computers are the following amounts
applicable to capital leases as of December 31:

1996 1995
------ -----
(In thousands)

Manufacturing equipment and computers $1,084 1,084
Less accumulated amortization (918) (826)
------ -----
$ 166 258
------ -----
------ -----

Amortization of assets held under capital leases is included in depreciation
expense.

The present value of future minimum capital lease payments, and future
minimum lease payments under noncancelable operating leases as of December
31, 1996 are as follows:

Capital Operating
leases leases
------- ---------
(In thousands)

Years ending December 31:
1997 $ 93 632
1998 14 317
1999 - 17
----- ---
Total minimum lease payments 107 966
---
---
Less amounts representing interest (4)
-----
Present value of net minimum lease payments 103
Less current portion of capital lease obligations (83)
-----
Capital lease obligations, noncurrent $ 20
-----
-----

Rent expense under operating leases totaled approximately $591,000,
$571,000 and $408,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.

F-13
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

(8) RELATED PARTY TRANSACTIONS

During 1990, the Company entered into an exclusive distribution agreement
with Medtronic, Inc. (Medtronic), a shareholder of the Company, for sales
of the Company's products in Europe, Africa and the Middle East. The
distribution agreement terminated effective April 30, 1993 by agreement
between Medtronic and the Company. The Company paid Medtronic $1,500,000
in connection with the termination of the distributor agreement in 1993.
Of this amount, $904,000 was expensed in 1992 and in 1993. The remainder
of the amount paid to Medtronic was assigned to certain assets received in
connection with the termination, as follows: approximately $216,000 to
inventory and service parts and approximately $380,000 to equipment held
for rental or loan, which the Company depreciated through May 1, 1994.

Related party revenue and related party cost of revenue for the year ended
December 31, 1994, is a result of sales of laser units to Advanced
Interventional Systems, Inc. ("LAIS") prior to the merger discussed in
note 12. These sales were entered into pursuant to an agreement whereby
LAIS personnel secured sales orders from third-party customers for the
Company's products in exchange for a commission and the Company sold the
products to LAIS. Under the agreement, the Company incurred sales
commission expense of approximately $38,000 during the year ended
December 31, 1994.

(9) INCOME TAXES

At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $89.1 million which are
available to offset future federal taxable income, if any, and expire at
varying dates through 2011. The annual use of the net operating loss
carryforwards is limited under Section 382 of the Internal Revenue Code of
1986. The cumulative annual Section 382 limitation was approximately $52.3
million at December 31, 1996. The minimum amount of net operating loss
carryforwards that will expire as a result of being limited under Section
382 is estimated to be $24.7 million.

The Company also has research and development tax credit carryforwards at
December 31, 1996 for federal income tax purposes of approximately
$3,145,000 which are available to reduce future federal income taxes, if
any, and expire at varying dates through 2011. The annual use of portions
of the research and development credit carryforwards is also limited under
Section 382.

F-14
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

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

1996 1995
-------- -------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 33,062 32,731
Research and development tax credit
carryforwards 3,145 3,123
Royalty reserve, due to accrual for financial
reporting purposes 43 36
Warranty reserve, due to accrual for financial
reporting purposes 46 31
Inventories, principally due to accrual for
obsolescence for financial reporting purposes,
net of additional costs inventoried for tax
purposes 659 1,078
Equipment, primarily due to differences in cost
basis and depreciation methods 563 610
Deferred revenue, due to deferral for financial
reporting purposes 176 196
Other 13 129
-------- -------
Total gross deferred tax assets 37,707 37,934
Less valuation allowance (37,707) (37,934)
-------- -------
Net deferred tax assets $ - -
-------- -------
-------- -------

The Company has recorded a valuation allowance to fully reserve for the
gross deferred tax asset at December 31, 1996, due to the uncertainty of
realization. The net change in the valuation allowance includes the effect
of state income taxes, permanent differences expensed for book purposes but
not deductible for tax purposes, and the valuation allowance established
regarding the Company's net operating loss carryforward.

(10) NOTE PAYABLE

During 1993, the Company issued a note payable in the amount of $1,050,000
to obtain certain patent rights. The note is for a ten-year period with
annual payments of $105,000 due on May 1st. The note was non-interest
bearing and was discounted to $827,000, using a discount rate of 5.75%.
Annual maturities for each of the next five years and thereafter are as
follows (in thousands):

F-15
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

1997 $ 75
1998 79
1999 84
2000 89
2001 94
Thereafter 99
----
$520
----
----

(11) CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Financial Accounting
Standards Board's Statement No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS
WITH CONCENTRATION OF CREDIT RISK, consist primarily of cash equivalents,
securities and accounts receivable with the Company's various customers.

The Company's cash equivalents and securities consist of financial
instruments issued by various institutions and government entities. The
Company's investment policy is designed to limit the Company's exposure to
concentrations of credit risk.

The Company's accounts receivable are due from a variety of health care
organizations and distributors throughout the United States and Europe. No
single customer represented more than 10% of sales or accounts receivable
for any period. The Company provides for uncollectible amounts upon
recognition of revenue and when specific credit problems arise.
Management's estimates for uncollectible amounts have been adequate during
historical periods, and management believes that all significant credit
risks have been identified at December 31, 1996.

The glass rods used in the fabrication of optical fibers are currently
available from a single source, which holds worldwide patent rights on this
material. Any interruption in supply of these glass rods could have a
material adverse impact on the Company's ability to manufacture its
catheters. Although the Company anticipates that it will continue to
receive an adequate supply of glass rods, it has taken actions to mitigate
the effect of an interruption in supply by accumulating additional
inventory of glass rods and finished optical fibers.

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

F-16
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- -------------------------------------------------------------------------------

(12) MERGER

On June 10, 1994, the Company completed its merger with LAIS, an excimer
laser angioplasty company pursuant to an amended plan of reorganization.
The Company issued 8,156,385 shares of common stock to the shareholders
of LAIS, and LAIS became a wholly owned subsidiary of the Company. At
the time of the merger, it was the Company's intention to sell Polymicro
Technologies, Inc. ("Polymicro"), a subsidiary of LAIS which manufacturers
drawn silica glass products for the medical device and gas chromatography
and separations markets. The Company had recorded an investment in
Polymicro at its estimated net realizable value, and subsequently decided
on September 1, 1994, to retain its ownership of Polymicro. Net income of
Polymicro while it was a subsidiary held for sale has been recorded as
other income and identified separately in the statement of operations.

The merger was accounted for using the purchase method of accounting.
Accordingly, the results of operations of LAIS from June 10, 1994 are
included in the accompanying consolidated financial statements and the
purchase was allocated to assets acquired and liabilities assumed based
on their estimated fair market value at the date of acquisition.
Additionally, purchased in-process research and development costs totaling
$4,391,000 were charged to operations in 1994.

(13) SEGMENT AND GEOGRAPHIC REPORTING

As a result of the merger with LAIS during 1994, as discussed in note 12,
the Company operates in two industry segments: development, manufacturing,
marketing and service of excimer laser angioplasty systems; and
development, manufacturing and marketing of drawn silica glass products
for the medial device and gas chromatography and separations markets.
Operations related to the excimer laser angioplasty systems represents
the sale and service of laser units and a disposable fiber optic catheter
that are used in the treatment of atherosclerosis in the coronary arteries.
Operations related to the drawn silica glass products represents the sale
of silica glass capillary tubing, optic fibers, precision fused silica
pieces, and assemblies and cables. The following table presents financial
information by segment (in thousands).

Year ended
December 31
--------------------
1996 1995
------- ------
Revenue:
Excimer laser angioplasty systems $13,662 10,384
Drawn silica glass products 7,017 6,898
------- ------
Total revenues $20,679 17,282
------- ------
------- ------
Operating income (loss):
Excimer laser angioplasty systems $(2,247) (3,140)
Drawn silica glass products 511 341
------- ------
Total operating loss $(1,736) (2,799)
------- ------
------- ------

(Continued)

F-17
<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- ------------------------------------------------------------------------------

(13) SEGMENT AND GEOGRAPHIC REPORTING (CONTINUED)

Year ended
December 31
-----------------
1996 1995
------- ------
Depreciation and amortization:
Excimer laser angioplasty systems $ 1,470 1,647
Drawn silica glass products 1,258 1,309
------- ------
Total depreciation and amortization $ 2,728 2,956
------- ------
------- ------
Identifiable assets:
Excimer laser angioplasty systems $10,580 13,413
Drawn silica glass products 12,459 11,600
------- ------
Total identifiable assets $23,039 25,013
------- ------
------- ------
Capital expenditures:
Excimer laser angioplasty systems $ 225 50
Drawn silica glass products 233 28
------- ------
Total capital expenditures $ 458 78
------- ------
------- ------

Revenue by geographic areas is as follows:

Year ended December 31
----------------------------
1996 1995 1994
-------- ------ ------
Domestic $ 16,871 15,080 9,610
Foreign 6,198 5,227 3,387
Eliminations (2,390) (3,025) (1,584)
-------- ------ ------
Total $ 20,679 17,282 11,413
-------- ------ ------
-------- ------ ------

Operating loss by geographic areas is as follows:

Year ended December 31
-----------------------------
1996 1995 1994
-------- ------ -------
Domestic $ (351) (1,382) (7,883)
Foreign (1,411) (1,423) (3,617)
Eliminations 26 6 225
-------- ------ -------
Total $(1,736) (2,799) (11,275)
-------- ------ -------
-------- ------ -------

F-18

<PAGE>

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

- ------------------------------------------------------------------------------

Identifiable assets by geographic areas are as follows:

December 31
----------------------
1996 1995
------- ------
Domestic $20,599 22,485
Foreign 2,660 2,792
Eliminations (220) (264)
------- ------
Total $23,039 25,013
------- ------
------- ------

(14) ROYALTY COMMITMENTS

The Company is obligated under various licensing and royalty agreements
which require the Company to pay royalties based on a percentage of net
sales of certain products, subject to maximum amounts for certain
agreements. Under one agreement, the Company is required to pay a
minimum royalty of $20,500 per quarter in 1996, and quarterly amounts
adjusted for changes in the consumer price index thereafter through 2010.
The agreements generally expire at various dates concurrent with the
expiration dates of the respective patents. Royalty expense under these
agreements amounted to $645,000, $481,000 and $463,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.

F-19
<PAGE>

INDEPENDENT AUDITORS' REPORT
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE SPECTRANETICS CORPORATION:

Under date of January 31, 1997, we reported on the consolidated balance sheets
of The Spectranetics Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the Company's annual report on Form 10-K for
the year 1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement Schedule II (Valuation and Qualifying Accounts). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.

In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG PEAT MARWICK LLP

Denver, Colorado
January 31, 1997

F-20
<PAGE>

SCHEDULE II

THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

- ------------------------------------------------------------------------------

<TABLE>
Balance at Additions Additions Deductions Balance
beginning charged charged to from at end
Description of year to expense other accounts allowance of year
----------- ---------- ---------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Accrued warranty liability $311 113 158 (1) 278 304
Accrued royalty liability 417 463 402 (1) 634 648
Allowance for bad debts
and sales returns 60 183 - 62 181
Year ended December 31, 1995:
Accrued warranty liability 304 141 - 297 148
Accrued royalty liability 648 481 - 1,032 97
Allowance for bad debts
and sales returns 181 21 233 (2) 317 118
Year ended December 31, 1996:
Accrued warranty liability 148 404 - 345 207
Accrued royalty liability 97 242 - 223 116
Allowance for bad debts
and sales returns 118 50 169 (2) 288 49
</TABLE>

(1) Represents amounts recorded in connection with the LAIS merger.

(2) Represents a provision for sales returns recorded as a reduction of
revenue.

See accompanying independent auditors' report.

F-21

<PAGE>

THE SPECTRANETICS CORPORATION

EXHIBIT INDEX

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization between
The Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated
January 24, 1994. (1)

2.1(a) Amendment to Agreement and Plan of
Reorganization between The Spectranetics
Corporation and Advanced Interventional
Systems, Inc., dated May 17, 1994. (2)

2.2 Certificate of Ownership and Merger of
Advanced Interventional Systems, Inc. Into The
Spectranetics Corporation, dated December 27,
1995. (13)

3.1 Restated Certificate of Incorporation. (1)

3.1(a) Certificate of Amendment to Restated
Certificate of Incorporation. (12)

3.2 Bylaws of the Company. (3)

4.1 Form of Common Stock Certificate of the
Company. (4)

10.1 Lease covering a portion of the Company's
facilities between the Company and Dwane and
Donna Basse dated November 10, 1994. (12)

10.2 Lease covering a portion of the Company's
facilities between the Company and American
Investment Management dated February 17, 1995.
(12)

10.3 Lease covering a portion of the Company's
facilities between the Company and Full Circle
Partnership III dated September 11, 1985. (3)

10.4(a) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 15, 1992. (7)

10.4(b) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 16, 1993. (1)

10.4(c) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated October 3, 1994. (12)

10.5 1991 Stock Option Plan, as amended. (11)

10.6 1990 Incentive Stock Option Plan. (6)

10.7 1989 Incentive Stock Option Plan and First
Amendment thereto. (6)

10.8 Nonemployee Director Stock Option Plan. (8)

10.8(a) Stock Option Plan for Outside Directors. (10)

10.9 Employee Stock Purchase Plan (as amended). (9)

10.10 License Agreement with Patlex Corporation,
dated January 1, 1992 (confidential treatment
has been sought for portions of this
agreement.) (7)

<PAGE>

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------------------------------------------------------------

10.11 License Agreement with Pillco Limited
Partnership, dated February 1, 1993
(confidential treatment has been granted for
portions of this agreement). (7)

10.12 Vascular Laser Angioplasty Catheter License
Agreement with Bio-Metric Systems, Inc., dated
April 7, 1992 (confidential treatment has been
granted for portions of this agreement.) (6)

10.13 Exclusive License Agreement between the United
States of America and James B. Laudenslager
and Thomas J. Pacala dated March 25, 1985; and
Exclusive License Agreement between the United
States of America and LAIS dated April 29,
1990. (5)

21.1 Subsidiaries of the Company.

23.1 Consent of Independent Auditors.

27.1 Financial Data Schedule.

1 Incorporated by reference to the Company's 1993 Annual Report on Form 10-K
filed on March 31, 1994.
2 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-4 filed May 18, 1994
(File No. 33-79106).
3 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-1, filed December 5, 1991 (File No.
33-44367).
4 Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 2 to the Registration Statement, filed January 24, 1992
(File No. 33-44367).
5 Incorporated by reference to exhibits previously filed by LAIS with its
Registration Statement on Form S-1 filed August 30, 1991
(File No. 33-42457).
6 Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 1 to the Registration Statement on Form S-1, filed
January 10, 1992 (File No. 33-44367).
7 Incorporated by reference to exhibits previously filed by the Company with
its Annual Report for 1992 on Form 10-K filed March 31, 1993.
8 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed April 1, 1992
(File No. 33-46725).
9 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed December 30, 1994 (File
No. 33-88088).
10 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed November 16, 1995
(File No.33-99406).
11 Incorporated by reference to exhibits previously filed by the Company with
IRS Registration Statement on Form S-8 filed October 6, 1994
(File No. 33-85198).
12 Incorporated by reference to exhibits previously filed by the Company with
its 1994 Annual Report on Form 10-K filed on March 31, 1995.
13 Incorporated by reference to the Company's 1995 Annual Report on Form 10-K
filed on April 29, 1996.

<PAGE>

EXHIBIT 21.1

<PAGE>

THE SPECTRANETICS CORPORATION
SUBSIDIARIES

SPECTRANETICS INTERNATIONAL B.V.
Established January 1993
Incorporated June 1993 in
Nieuwegein, The Netherlands

POLYMICRO TECHNOLOGIES, INC.
California Corporation
Acquired in Merger Acquisition June 10, 1994

<PAGE>

EXHIBIT 23.1

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS
THE SPECTRANETICS CORPORATION:

We consent to incorporation by reference in the registration statements
Nos. 33-46725, 33-52718, 33-88088, 33-85198, 33-99406, and 333-08489 on
Form S-8 and 333-06971 on Form S-3 of The Spectranetics Corporation of our
reports dated January 31, 1997, relating to the consolidated balance sheets
of The Spectranetics Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related consolidated financial statement schedule,
which reports appear in the December 31, 1996 annual report on Form 10-K of
The Spectranetics Corporation.

/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP

Denver, Colorado
March 21, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SPECTRANETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF OPERATIONS AS FOUND ON PAGES F-2 AND F-3 OF THE COMPANY'S FORM
10-K FORM 10-K FOR THE PERIODS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,860
<SECURITIES> 4,290
<RECEIVABLES> 3,651
<ALLOWANCES> 0
<INVENTORY> 1,628
<CURRENT-ASSETS> 12,825
<PP&E> 9,624
<DEPRECIATION> 6,138
<TOTAL-ASSETS> 23,039
<CURRENT-LIABILITIES> 4,038
<BONDS> 465
0
0
<COMMON> 19
<OTHER-SE> 18,491
<TOTAL-LIABILITY-AND-EQUITY> 23,039
<SALES> 20,679
<TOTAL-REVENUES> 20,679
<CGS> 10,418
<TOTAL-COSTS> 10,418
<OTHER-EXPENSES> 11,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (1,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,367)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)

</TABLE>