**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 
| **ý**                                       | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                             |       |                                                                                          |
| **For the  Fiscal Quarter Ended March 31, 2005** |
|                                             |       |                                                                                          |
| **o**                                            | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from            to              .**

 

**Commissionfile number:  0-27596**

 

**CONCEPTUS, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **94-3170244**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1021Howard Avenue**

**SanCarlos, CA  94070**

(Address ofprincipal executive offices)

 

Registrant’stelephone number, including area code:  **(650) 628-4700**

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days.

 

Yes ý                                                                                                                                                                                                                                                                                                                                                                                                             Noo

 

Indicate by checkmarkwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes  ý          No  o

 

As of April 30, 2005,25,690,411 shares of the registrant’s Common Stock were outstanding.

 

 

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CONCEPTUS, INC.

 

FORM 10-Q for theQuarter Ended March 31, 2005

 

INDEX

 
| Part I.        | Financial Information                                                                                          |   |
|----------------|----------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                           |   |
| Item  1.       | Condensed  Consolidated Financial Statements (unaudited)                                                       |   |
|           |                                                                                                           |   |
|           | a) Condensed  Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                           |   |
|           |                                                                                                           |   |
|           | b)  Condensed Consolidated Statements of Operations for the three month periods  ended March 31, 2005 and 2004 |   |
|           |                                                                                                           |   |
|           | c)  Condensed Consolidated Statements of Cash Flows for the three month periods  ended March 31, 2005 and 2004 |   |
|           |                                                                                                           |   |
|           | d)  Notes to Condensed Consolidated Financial Statements                                                       |   |
|           |                                                                                                           |   |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |   |
|           |                                                                                                           |   |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                    |   |
|           |                                                                                                           |   |
| Item 4.        | Controls and Procedures                                                                                        |   |
|           |                                                                                                           |   |
| Part II.       | Other Information                                                                                              |   |
|           |                                                                                                           |   |
| Item 1.        | Legal Proceedings                                                                                              |   |
|           |                                                                                                           |   |
| Item  2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   |   |
|           |                                                                                                           |   |
| Item 3.        | Defaults upon  Senior Securities                                                                               |   |
|           |                                                                                                           |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                           |   |
|           |                                                                                                           |   |
| Item 5.        | Other Information                                                                                              |   |
|           |                                                                                                           |   |
| Item 6.        | Exhibits                                                                                                       |   |
|           |                                                                                                           |   |
| Signature      |                                                                                                           |   |
|           |                                                                                                           |   |
| Certifications |                                                                                                           |

 

2

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**PART I:FINANCIAL INFORMATION**

 

**ITEM 1. Condensed Consolidated Financial Statements**

 

**Conceptus, Inc.**

 

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

(Inthousands)

 
| ** **                                                                                                 | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
|                                                                                                       |       |               |       |                  |       |
| **Assets**                                                                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                            |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                 |       | $                  | 1,751      |                  | $          | 2,002 |   |
| Short-term  investments                                                                                    |       | 22,500             |       | 30,200                |       |
| Restricted cash                                                                                            |       | 69                 |       | 69                    |       |
| Accounts  receivable, net                                                                                  |       | 2,102              |       | 2,067                 |       |
| Inventories, net                                                                                           |       | 2,950              |       | 2,022                 |       |
| Other current  assets                                                                                      |       | 1,410              |       | 937                   |       |
|                                                                                                       |       |               |       |                  |       |
| Total current  assets                                                                                      |       | 30,782             |       | 37,297                |       |
|                                                                                                       |       |               |       |                  |       |
| Property and  equipment, net                                                                               |       | 1,355              |       | 1,322                 |       |
| Intangible  assets, net                                                                                    |       | 1,700              |       | 1,750                 |       |
| Other assets                                                                                               |       | 1,752              |       | 1,808                 |       |
|                                                                                                       |       |               |       |                  |       |
| **Total  assets**                                                                                          | ** ** | **$**              | **35,589** | ** **            | **$**      | **42,177** | ** ** |
|                                                                                                       |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                      |       |               |       |                  |       |
| Accounts payable                                                                                           |       | $                  | 1,841      |                  | $          | 2,713 |   |
| Accrued  compensation                                                                                      |       | 1,794              |       | 1,347                 |       |
| Other accrued  liabilities                                                                                 |       | 948                |       | 1,072                 |       |
| Total current  liabilities                                                                                 |       | 4,583              |       | 5,132                 |       |
|                                                                                                       |       |               |       |                  |       |
| Other long-term  liabilities                                                                               |       | 29                 |       | 51                    |       |
|                                                                                                       |       |               |       |                  |       |
| Total  liabilities                                                                                         |       | 4,612              |       | 5,183                 |       |
|                                                                                                       |       |               |       |                  |       |
| Contingencies  (Note 11)                                                                                   |       | —             |       | —                |       |
|                                                                                                       |       |               |       |                  |       |
| Stockholders’  equity:                                                                                |       |               |       |                  |       |
| Common stock and  additional paid-in capital                                                               |       | 222,111            |       | 221,960               |       |
| Deferred  stock-based compensation                                                                         |       | (1,436             | )          | (1,637                | )          |
| Accumulated  deficit                                                                                       |       | (189,698           | )          | (183,329              | )          |
| Treasury Stock,  74,000 and 72,000 shares, at cost, at  March 31, 2005 and December 31, 2004, respectively |       | —             |       | —                |       |
|                                                                                                       |       |               |       |                  |       |
| Total  stockholders’ equity                                                                           |       | 30,977             |       | 36,994                |       |
|                                                                                                       |       |               |       |                  |       |
| **Total  liabilities and stockholders’ equity**                                                       | ** ** | **$**              | **35,589** | ** **            | **$**      | **42,177** | ** ** |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements*

 

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**Conceptus,Inc.**

 

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

(In thousands, except pershare amounts)

 
| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                                             |       |                              |       |   |   |
| Net sales                                                                        |       | $                                 | 3,871      |   | $ | 2,381 |   |
|                                                                             |       |                              |       |   |   |
| Cost of goods  sold                                                              |       | 1,727                             |       | 2,120 |   |
|                                                                             |       |                              |       |   |   |
| Gross profit                                                                     |       | 2,144                             |       | 261 |   |
|                                                                             |       |                              |       |   |   |
| Operating  expenses:                                                             |       |                              |       |   |   |
| Research and  development                                                        |       | 966                               |       | 1,299 |   |
| Selling, general  and administrative                                             |       | 7,737                             |       | 6,124 |   |
|                                                                             |       |                              |       |   |   |
| Total operating  expenses                                                        |       | 8,703                             |       | 7,423 |   |
|                                                                             |       |                              |       |   |   |
| Operating loss                                                                   |       | (6,559                            | )          | (7,162 | ) |
|                                                                             |       |                              |       |   |   |
| Interest and  other income                                                       |       | 190                               |       | 34 |   |
|                                                                             |       |                              |       |   |   |
| Net loss                                                                         |       | $                                 | (6,369     | ) | $ | (7,128 | ) |
|                                                                             |       |                              |       |   |   |
| Basic and  diluted net loss per share                                            |       | $                                 | (0.25      | ) | $ | (0.31 | ) |
|                                                                             |       |                              |       |   |   |
| Weighted-average  shares used in computing basic and diluted  net loss per share |       | 25,687                            |       | 23,099 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

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**Conceptus,Inc.**

 

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

(Inthousands)

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities**                                     | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net loss                                                                      |       | $                                 | (6,369     | ) | $ | (7,128 | ) |
| Adjustments to  reconcile net loss to net cash used in  operating activities: |       |                              |       |   |   |
| Depreciation and  amortization                                                |       | 287                               |       | 331 |   |
| Stock  compensation expense                                                   |       | 260                               |       | 215 |   |
| Allowance for  doubtful accounts                                              |       | 12                                |       | (6 | ) |
| Provision for  inventories                                                    |       | (24                               | )          | 742 |   |
| Retirement of  fixed assets                                                   |       | 2                                 |       | — |   |
| Changes in  operating assets and liabilities:                                 |       |                              |       |   |   |
| Accounts  receivable                                                          |       | (47                               | )          | 7 |   |
| Inventories                                                                   |       | (904                              | )          | 21 |   |
| Other current  assets                                                         |       | (473                              | )          | (716 | ) |
| Other assets                                                                  |       | 56                                |       | 129 |   |
| Accounts payable                                                              |       | (872                              | )          | (808 | ) |
| Accrued  compensation                                                         |       | 344                               |       | — |   |
| Other accrued  liabilities                                                    |       | (42                               | )          | (44 | ) |
| Other long term  liabilities                                                  |       | (22                               | )          | (20 | ) |
| Net cash used in  operating activities                                        |       | (7,792                            | )          | (7,277 | ) |
|                                                                          |       |                              |       |   |   |
| **Cash  flows from investing activities**                                     | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Purchase of  investments                                                      |       | (5,700                            | )          | (23,884 | ) |
| Maturities of  investments                                                    |       | 13,400                            |       | 7,900 |   |
| Capital  expenditures                                                         |       | (272                              | )          | (108 | ) |
| Net cash  provided by (used in) investing activities                          |       | 7,428                             |       | (16,092 | ) |
|                                                                          |       |                              |       |   |   |
| **Cash  flows from financing activities**                                     | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Issuance of  common stock from company stock plans                            |       | 113                               |       | 785 |   |
| Issuance of  common stock from equity financings, net                         |       | —                            |       | 23,939 |   |
| Net cash  provided by financing activities                                    |       | 113                               |       | 24,724 |   |
|                                                                          |       |                              |       |   |   |
| Effect of  exchange rate changes on cash                                      |       | —                            |       | 17 |   |
|                                                                          |       |                              |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | (251                              | )          | 1,372 |   |
| Cash and cash  equivalents at beginning of period                             |       | 2,002                             |       | 5,844 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                 | 1,751      |   | $ | 7,216 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

5

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**Conceptus, Inc.**

 

***NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS***

***(Unaudited)***

 

**1.****                                      Basisof Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the instructions to Form 10-Q and Article10-01 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,considered necessary for a fair statement have been included.

 

The condensed consolidated balance sheet at December31, 2004 has been derived from the audited consolidated financial statements atthat date but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States of America forcomplete financial statements. This financial data should be reviewed inconjunction with the audited consolidated financial statements and relatednotes included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004.  The results ofoperations for the three months ended March 31, 2005 may not necessarily beindicative of the operating results for the full 2005 fiscal year or any otherfuture interim periods.

 

**2.****                                      Organization,Ownership and Business**

 

In December 2004, theCompany decided to close down its direct operations in Australia on January 31,2005 and sell its product through a third party distributor.  As a result, costs related to the closurewere recorded in 2004 as selling, general and administrative expense and includedapproximately $22,000 for impaired fixed assets and $183,000 of terminationbenefits for the five employees, which were completely paid out on January 31,2005.  All fixed assets were disposed ofby the end of March 2005.

 

**3.****                                     ****Summary of SignificantAccounting Policies**

 

TheCompany’s significant accounting policies are disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2004 that was filed withthe Securities and Exchange Commission on March 31, 2005. The Company’s significantaccounting policies have not materially changed since December 31, 2004.

 

**4.**                                      **Investments**

 

The Company accounts forits marketable securities in accordance with SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities.”  Such investments are classified as “available-for-sale”and are reported at fair value in the Company’s consolidated balance sheets.

 

At March 31, 2005 andDecember 31, 2004, the amortized cost basis of the available-for-saleinvestments represents the fair value of the investments due to their shortmaturities.  Gross realized gains andlosses from the sale of securities classified as available-for-sale were notmaterial for the periods ended March 31, 2005 and 2004.

 

Auction rate securitieshave been classified as short-term investments on the accompanying consolidatedbalance sheets.  Auction rate securitiesare variable rate bonds tied to short-term interest rates with maturities onthe face of the securities in excess of ninety days.  Auction rate securities have interest rateresets through a modified Dutch auction, at pre-determined short-termintervals, usually every seven, twenty-eight or thirty-five days.  They trade at par and are callable at par onany interest payment date at the option of the issuer.  Interest paid during a given period is basedupon the interest rate determined during the prior auction.

 

Although these securitiesare issued and rated as long-term bonds, they are priced and traded asshort-term instruments because of the liquidity provided through the interestrate reset.  The Company had historically

 

6

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classified these instruments as cash equivalents if the period betweeninterest rate resets was ninety days or less, which was based on the ability toeither liquidate the holdings or roll the investment over to the next resetperiod.

 

Based upon the Company’sre-evaluation of these securities in connection with the preparation of itsDecember 31, 2004 financial statements, the Company has reclassified itsauction rate securities, previously classified as cash equivalents, asshort-term investments on its consolidated balance sheets.  The resulting impact of this reclassificationon the statements of cash flows for the three month period ended March 31, 2004was to increase purchases of investments by $6,450,000 and increase sales ofinvestments by $7,900,000.

 

**5.****                                      Inventories,net**

 

Inventories are stated atthe lower of cost or market.  Cost isbased on actual costs computed on a first-in, first-out basis.  The components of inventories consist of thefollowing (in thousands):

 

| ** **      | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| Raw materials   |       | $                  | 169        |                  | $          | 250 |   |
| Work-in-process |       | 2,260              |       | 1,073                 |       |
| Finished goods  |       | 521                |       | 699                   |       |
| Total           |       | $                  | 2,950      |                  | $          | 2,022 |   |

 

**6.****                                      Warranty**

 

The Company offerswarranties on its product and records a liability for the estimated futurecosts associated with warranty claims, which is based upon historicalexperience and the Company’s estimate of the level of future costs.  Warrantycosts are reflected in the statement of operations as a cost of goodssold.  A reconciliation of the changes inthe Company’s warranty liability for the three months ended March 31, 2005 and2004 follows (in thousands):

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Warranty accrual  at the beginning of the period  |       | $                                | 68         |   | $ | 99 |   |
| Accruals for  warranties issued during the period |       | 25                               |       | 81 |   |
| Settlements made  in kind during the period       |       | (36                              | )          | (58 | ) |
| Warranty accrual  at the end of the period        |       | $                                | 57         |   | $ | 122 |   |

 

**7.****                                      Stock-basedcompensation**

 

As permitted by SFAS No.123, “Accounting for Stock-Based Compensation,” (SFAS No. 123), as amended bySFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure – an amendment of FASB Statement No. 123,” the Company accounts foremployee stock-based compensation in accordance with Accounting PrinciplesBoard Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” andrelated interpretations in accounting for its stock-based compensation plans.

 

The Company granted312,020 shares of restricted stock to its employees and directors during 2004,of which 74,000 shares have been repurchased to date by the Company inaccordance with the provisions of the grants (2,000 shares repurchased in theMarch 2005 quarter).   The shares ofrestricted stock had a purchase price of $0.003 per share and the Company’srepurchase right with respect to such shares lapses either in equalinstallments over three years or at the end of the three years, depending onthe terms on the respective shares. Certain of the grants include acceleration of vesting based upon theCompany’s achievement of performance goals.  The Company is amortizing the net total deferred restricted stockexpense of $2.2 million, calculated based on the fair value of the stock on thedate of the grants, less the purchase price of the repurchased shares, over thevesting term of three years on a straight-line basis.   Of the total deferred restricted stockexpense of $2.2 million, $0.4 million relates to research and development and$1.8 million relates to selling, general and administrative activities.   Stock

 

7

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compensation expense relating to employees was $183,000 and $80,000 forthe three months ended March 31, 2005 and 2004, respectively.

 

The following tableprovides a reconciliation of net loss to pro forma net loss as if the fairvalue method, pursuant to SFAS No. 123, had been applied to all employee awards(in thousands, except per share data):

 

| ** **                                                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                                                                                            |       |                             |       |   |   |
| Net loss, as  reported                                                                                          |       | $                                | (6,369     | ) | $ | (7,128 | ) |
| Add: stock-based  employee compensation expense                                                                 |       |                             |       |   |   |
| Included in  reported net loss                                                                                  |       | 183                              |       | 80 |   |
| Less: Total stock-based  employee compensation expense determined under fair value based method for  all awards |       | (1,344                           | )          | (2,652 | ) |
| Pro forma net  loss                                                                                             |       | $                                | (7,530     | ) | $ | (9,700 | ) |
|                                                                                                            |       |                             |       |   |   |
| Basic and  diluted net loss per share                                                                           |       |                             |       |   |   |
|                                                                                                            |       |                             |       |   |   |
| As reported                                                                                                     |       | $                                | (0.25      | ) | $ | (0.31 | ) |
| Pro forma                                                                                                       |       | $                                | (0.29      | ) | $ | (0.42 | ) |
|                                                                                                                 |            |                                  |            |  |  |  |  |  |

 

To comply with pro forma reporting requirements ofSFAS No. 123, compensation cost is also estimated for the fair value of theCompany’s Employee Stock Purchase Plan (ESPP) rights, which are included in thepro forma totals above.

 

Stock-based compensation arrangements to non-employeesare accounted for in accordance with SFAS No. 123 and Emerging Issues TaskForce Issue (EITF) No. 96-18, “Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services,” which requires that these equity instruments are recordedat their fair value on the measurement date. The measurement of stock-based compensation is subject to periodicadjustment as the underlying equity instruments vest.  Stock-based compensation expense relating tonon-employees was $77,000 and $135,000 for the three months ended March 31,2005 and 2004, respectively.

 

**8.****                                      Computationof Net Loss Per Share**

 

Basic net loss per shareexcludes any potential dilutive effects of options, common stock shares subjectto repurchase, warrants and convertible securities.  Diluted net loss per share includes theimpact of potentially dilutive securities. However, due to the Company’s net loss position, basic and diluted netloss per share are equivalent and are computed using the weighted averagenumber of common shares outstanding.

 

The following outstandingoptions and restricted stock shares, which could potentially dilute basic netloss per share in the future were excluded from the computation of diluted netloss per share, as their effect would have been antidilutive (in thousands):

 

 
| ** **          | ** ** | **As of March 31,** | ** ** |
|---------------------|------------|---------------------|------------|
| ** **          | ** ** | **2005**            | ** ** | **2004** | ** ** |
| Outstanding options |       | 3,600               |       | 4,084 |   |
| Restricted stock    |       | 238                 |       | 237 |   |
| Total               |       | 3,838               |       | 4,321 |   |

 

**9.****                                      ComprehensiveLoss**

 

Comprehensive income(loss) generally represents all changes in stockholders’ equity except thoseresulting from investments or contributions by stockholders.  The Company’s unrealized gains onavailable-for-sale securities, and cumulative translation adjustment, if material,represent the components of comprehensive loss that are excluded

 

8

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from the net loss.  Thesecomponents are not significant, individually or in aggregate, for the periodsended March 31, 2005 and 2004.

 

**10.****                              ****Stockholder’sEquity**

 

In March 2005, theCompany repurchased 2,000 shares of restricted common stock at par value inaccordance with the terms of a restricted stock agreement.  These shares are recorded as treasury stock,and with the 72,000 shares repurchased in fiscal 2004, the Company now holds atotal of 74,000 shares of treasury stock, valued at a cost basis of $222.

 

On February 25, 2004, theCompany completed a private placement of approximately 3,000,000 shares ofcommon stock at $8.50 per share.  The netproceeds to the Company, after fees and other offering costs totaling$1,600,000, were approximately $23,900,000.

 

**11**.                               **Contingencies**

 

From time to time the Company is involved in legalproceedings arising in the ordinary course of business.  The Company believes there is no litigationpending that could have, individually or in the aggregate, a material adverseeffect on its financial position, result of operations or cash flows.

 

**12.****                               RecentAccounting Pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued (“SFAS”) No. 123 (R), “Share-Based Payments” (revised2004).   The provisions of SFAS 123(R) will require theCompany to measure all stock-based compensation awards using a fair valuemethod and record such expense in the consolidated financial statements,including grants of employee stock options.  In addition, the adoption of SFAS 123(R) will require additionalaccounting related to the income tax effects and additional disclosureregarding the cash flow effects resulting from share-based paymentarrangements.   SFAS 123(R) is effectivefor all public companies for annual periods beginning after June 15, 2005.   The Company will adopt SFAS 123 (R)effective January 1, 2006.  The Companyhas not yet determined whether the adoption of FAS 123(R) will result inamounts that are similar to the current pro forma disclosures under SFAS123.  The Company is evaluating therequirements for FAS 123(R) and expects the adoption to have a significantadverse impact on the statement of operations and net loss per share.

 

9

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

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andrelated notes thereto.  This discussioncontains forward-looking statements, including references to 2005 revenues andother forecasted items, that involve risks and uncertainties such as limitedoperating and sales history; the uncertainty of market acceptance of ourproduct; dependence on obtaining and maintaining reimbursement; effectivenessand safety of our product over the long-term; our ability to obtain andmaintain the necessary governmental clearances or approvals to market ourproduct; our ability to develop and maintain proprietary aspects of ourtechnology; our ability to manage our expansion; our limited history ofmanufacturing our product; our dependence on single source suppliers, thirdparty manufacturers and co-marketers; intense competition in the medical deviceindustry; the inherent risk of exposure to product liability claims and productrecalls and other factors referenced in this Form 10-Q.  Our actual results could differ materiallyfrom those expressed or implied in these forward-looking statements as a resultof various factors, including those discussed in “Risk Factors” and elsewherein this Form 10-Q.*

* *

**OVERVIEW**

 

Wedevelop, manufacture and market Essure®, an innovative andproprietary non-incisional permanent birth control device for women that wasapproved for marketing in the United States in November 2002 by the UnitedStates Food and Drug Administration, or FDA.  Essure is a soft andflexible micro-insert delivered into a woman’s fallopian tubes designed toprovide permanent birth control by causing a benign tissue in-growth thatblocks the fallopian tubes.  A successfully placed Essure micro-insertprohibits the egg from traveling through the fallopian tubes and thereforeprevents fertilization.

 

*The Essure Procedure*

 

TheEssure placement procedure is typically performed as an outpatient procedureand is intended to be a less invasive and a less costly alternative to tuballigation, the leading form of birth control in the United States andworldwide.  Laparoscopic tubal ligation and tubal ligation by laparotomytypically involve abdominal incisions and/or punctures, general or regionalanesthesia, four to ten days of normal recovery time and the risks associatedwith an incisional procedure.  The Essure placement procedure does notrequire cutting or penetrating the abdomen, which lowers the likelihood ofpost-operative pain due to the incisions/punctures, and is typically performedin an outpatient setting without general or regional anesthesia.  In thePivotal trial of Essure, the total procedure time averaged 35 minutes, with anaverage of 13 minutes of hysteroscopic time to place the Essuremicro-insert.  A patient is typically discharged approximately 45 minutesafter the Essure placement procedure.  No overnight hospital stay isrequired.  Furthermore, Essure is effective without drugs orhormones.  There is a three-month waiting period after the procedure duringwhich the woman must use another form of birth control while tissue in-growthoccurs.  At 90 days following the procedure, the patient completes afollow-up examination called a hysterosalpingogram (HSG), which can determinewhether the device was placed successfully and whether the fallopian tubes areoccluded.

 

Webelieve that Essure is also an attractive alternative to tubal ligation forphysicians, hospitals and payors.  Essure is a less invasive permanentbirth control option for physicians to offer to their patients; hospitals areable to utilize their facilities more cost effectively with the Essureplacement procedure compared with tubal ligation, and payors are able toexperience cost reductions resulting from the elimination of overhead andprocedural costs related to anesthesia and post-operative hospital staysassociated with tubal ligations.  We also believe Essure is a viablealternative to other temporary methods of birth control being used when thereis no intention of having children in the future.  In addition, payors mayalso benefit from the reduction of unplanned pregnancies associated withnon-permanent methods of birth control used by patients who have chosen toavoid the drawbacks of traditional permanent birth control methods but who mayelect to use Essure.

 

Publishedreports estimate that 700,000 tubal ligation procedures are performed each yearin the United States and 13 million procedures worldwide.  We intend totap into this market and establish the Essure procedure as the standard of carefor permanent birth control.

 

Essureis currently being marketed in multiple countries.  In November 2002 wereceived approval from the FDA to market Essure in the United States.  In2001, we were given approval to affix the CE Mark to Essure,

 

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indicating that Essure is certified for salethroughout the European Union, subject to compliance with local regulationssuch as registration with health ministries and/or particular requirementsregarding labeling or distribution.  In 1999, Essure was listed withAustralia’s Therapeutic Goods Administration, which allows us tomarket and sell Essure inAustralia.  In December 2004, we made the decision to terminateour direct subsidiary operations in Australia and convert to an independentdistributor.  This decision was largely a cost reduction measure in lieuof the small size of the Australian market and our inability to manage a directoperation to a cash-flow positive position.  We have entered into a distributionagreement and the transition was completed in January 2005.  In Canada, we received clearance from Health Canada tomarket Essure in Canada in November 2001.  We now have distributors in Australia, Canada, New Zealand and France,which covers Europe, Middle East, Africa, Mexico, Central America and SouthAmerica.

 

InJuly 2004, we announced that the FDA had approved labeling changes allowingconcomitant use of Essure with Johnson & Johnson’s GYNECARE THERMACHOICEUterine Balloon Therapy system.   As a condition of FDA approval, Conceptus and GYNECARE agreed to providethe FDA with investigational data from a prospective study of 50 women toassess whether the THERMACHOICE endometrial ablation procedure causesintrauterine scarring and/or adhesions that could prevent or interfere with aneffective HSG at three-months post-Essure placement.  In addition, thestudy will assess tubal occlusion three months after concomitantEssure/THERMACHOICE procedures.  A final report should be submitted to theFDA within three months of completion of the study.  Information providedin this report will be used to assess the effectiveness of concomitantEssure/THERMACHOICE procedures.

 

*Effectiveness of Essure*

 

Basedon clinical trial data filed with the FDA in November 2003, Essure has beendemonstrated to be 99.80% effective at three years of follow-up.   Asof January 2005, we have accumulated sufficient patient follow-up data from thePhase II and Pivotal clinical trials to file a PMA supplement with the FDA for afour and five year effectiveness claim consistent with the three year claim.

 

*Penetration*

 

Doctorsare required to be preceptored for between 3 and 5 cases by a certified trainerbefore they can perform procedures independently.  As of March 31, 2005,Conceptus has trained or is in the process of training 1,849 physicians in theUnited States on the Essure procedure.  This represents an increase of 168physicians over the number of physicians at December 31, 2004 and an increaseof 880 physicians over the number of physicians at March 31, 2004.  Thelevel of sales for Essure, particularly in this early period of adoption, ishighly dependent on the number of physicians trained to perform the procedure.

 

*Reimbursement of Essure*

 

Marketacceptance of Essure also depends in part upon the availability ofreimbursement within prevailing healthcare payment systems.  We believethat physician advocacy of our product will be required to continue to obtainreimbursement.  As of March 31, 2005, we received positive reimbursementdecisions for Essure from private insurers covering a total of 154 millioncovered lives, which represents 73% of all the insured, non-Medicare populationof the United States.  We intend to continue our effort to educate payorsof the cost-effectiveness of our product, and to establish further programs tohelp physicians to navigate reimbursement issues.

 

Inearly November 2004, the Centers for Medicare and Medicaid Services (“CMS”)released the Final Rule for the 2005 Physician Fee schedule.  For the EssureCPT code, the CMS has provided for a national physician payment of $2,198.34for procedures performed in the office and $458.94 for physician payment whenthe procedure is performed in the hospital.  This compares to a CPT codephysician payment of $361.16 for a laparascopic tubal ligation, the currentstandard of care for permanent female sterilization.  In addition, the CMSreleased the Final Rule for the 2005 OPPS, which assigns hospitaloutpatient reimbursement amounts.  The Essure CPT code was assigned a 2005payment level of $2,260.37, which is consistent with payments by CMS tohospitals when they perform a laparoscopic tubal ligation, normally performedin a higher cost hospital operating room.  We believe these values arevery favorable for the Essure procedure and will help in establishing increasedutilization of the device amongst doctors.   We expect that the newcode, once the process to establish it at all private payors that have given a

 

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favorable coverage decision is complete, willsignificantly ease the burden on a physician’s office in obtainingreimbursement for Essure, and accelerate the coverage of Essure by privateinsurance companies and Medicaid.  This process is not automatic followingreceipt of the new CPT code, however, and we anticipate continuing to focus onreimbursement issues for sometime in the future both to secure our code andpayment schedule into the payors’ databases, as well as to help the physiciannegotiate a favorable contract for payment off that schedule.

 

Inmid-August 2004, the Australian Department of Health, Medical Services AdvisoryCommittee (MSAC) division recommended against public funding for the Essureprocedure, citing insufficient evidence for safety, effectiveness and costeffectiveness.  The overall market for female sterilization in Australiais very small and we believe that our market penetration will remain limited bythe MSAC decision until such time as we are able to submit sufficient long-termdata to obtain public funding.

 

*Adoption of Essure*

 

Essureis a novel product in the contraception market, which is dominated byprocedures that are well established among physicians and patients and areroutinely taught to new physicians.  As a result, we believe thatrecommendations and endorsements by physicians will be essential for marketacceptance of our product.  Physicians are traditionally slow to adopt newproducts and treatment practices, partly because of perceived liability risks. Our biggest challenge is to speed up the adoption process to make the Essureprocedure the standard of care for permanent birth control.  The followingdiscussion summarizes our program in the United States to increase adoption ofthe Essure procedure.

 

First,we have developed a field based tactical reimbursement group aimed at educatingthe physician and office staff regarding payor procedures following a declinedclaim, including appeals and petitioning procedures.  Typically a newlycovered product will go through a period where claims are either inadvertentlydeclined or are paid at the incorrect amount.  In either instance, thephysician is reluctant to perform additional procedures until payment has beensecured for earlier cases, causing a decline in utilization.  Our tacticalreimbursement focus is intended to give the physician and his/her staff thetools to ensure that claims will ultimately be paid and thereby encourages thephysician to continue performing the Essure procedure despite reimbursementissues.  This tactical reimbursement group is generally targeting specificaccounts with the aim of eventually meeting with all of our accounts so as toprovide them with the knowledge of how to file and follow up on claims on apayor by payor basis.

 

Second,we are expanding our sales territories and channels of distribution so as toincrease our call frequency on physicians. Already in 2005 we have added 8 sales positions and are expecting to addanother 12 before the end of the year. Also, we have engaged regional distributors of women’s gynecologyproducts to market and sell Essure. Among other responsibilities, our sales representatives are attemptingto increase utilization of the Essure procedure in the office environment.

 

Third,we have entered into certain strategic partnerships in the past.  The agreements we have entered into includethe co-promotion agreement with GYNECARE Worldwide Division of Ethicon, Inc, a Johnson& Johnson company., and with Olympus America, Inc., a manufacturer ofhysteroscopy equipment.  We intend forthese agreements to provide us with the ability to increase awareness, gainmarket presence and credibility, accelerate our ability to train doctors, aswell as expand our market opportunity by driving adoption among a group of physiciansnot previously targeted by our marketing programs.   The success ofthese joint marketing campaigns will depend upon the effectiveness of our salesforce training programs, market demand for Essure in conjunction with theproducts marketed by the strategic partner and the efforts and commitment ofthe strategic partner to the program.    We cannot be certainhow successful these programs will be, if at all.

 

Fourth,we are attempting to increase patient awareness, so as to increase the numberof women that will ask for information about the Essure procedure.  In late July 2004 we announced that weinitiated an extensive direct to consumer advertising campaign in the Chicago,Illinois metropolitan area which commenced in August 2004 and ran for 6 months.The campaign involved radio, direct mail and print media (magazine)advertisements aimed at increasing consumer awareness.  In February 2005, the radio portion of thecampaign was extended through the end of 2005.  Depending on the successof this marketing effort, we will be evaluating additional major metropolitanmarkets in which to conduct a similar advertising campaign in 2005.  This program was partially responsible for the increase in selling, general andadministration expense during the last half of 2004.  Applying this program to additional marketswill therefore result in further increases in our expenses.

 

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Wehave experienced significant operating losses since inception and, as of March 31,2005, had an accumulated deficit of $189.7 million.  We expect ouroperating losses to continue into at least the calendar year 2006 as wecontinue to expend substantial resources in the selling and marketing of Essurein the United States.  Due to the unpredictable nature of theseactivities, we do not know whether we will achieve or sustain profitability inthe future.   We will continue to be in anet loss position until sufficient revenues can be generated to offsetexpenses.   In February 2004, we completeda private placement of common stock to generate enough cash to help fund ouroperations.  In the future, dependingupon a variety of factors, we will likely need to raise additional fundsthrough bank facilities, debt or equity offerings or other sources of capital.

 

**Results of Operations - ThreeMonths Ended March 31, 2005 and 2004**

 

*Net Sales*

 

Net sales were $3.9 millionfor the three months ended March 31, 2005 as compared to $2.4 millionfor the three months ended March 31, 2004. The increase of $1.5 million, or 63%, in net sales is the result of thecontinued commercialization of Essure worldwide.  While we raised prices in the U.S. in January2005 by 17%, our worldwide average selling price decreased from $763 for theyear in 2004 to $730 for the first quarter of 2005, due to the significantlevel of sales to our European distributor, which has a lower selling price.

 

We expect net sales to increase on a quarterly basisduring fiscal 2005 and have put in place sales, marketing and reimbursementprograms to help us to reach our revenue goal. However, as we have noted elsewhere in this Form 10-Q, our expectedrevenue growth is dependant on market acceptance of Essure and third partyreimbursement for the device, which involves factors that are outside of ourcontrol.

 

For the three months ended March 31, 2005, net salesto one distributor accounted for 14% of our total consolidated net sales.  Accounts receivable from one distributoraccounted for 25% of our total accounts receivables outstanding as of March 31,2005.  For the three months ended March31, 2004, net sales to one distributor accounted for 14% of our totalconsolidated net sales.  Accountsreceivable from one distributor accounted for 19% of our total accountsreceivables outstanding as of March 31, 2004.

 

Net product sales by geographic region as a percentageof net sales in tabular form is as follows:

 

| ** **                | ** ** | **March 31,** | ** ** |
|---------------------------|------------|---------------|------------|
| ** **                | ** ** | **2005**      | ** ** | **2004** | ** ** |
| Net Sales (in  thousands) |       | $             | 3,871      |   | $ | 2,381 |   |
| United States of  America |       | 83            | %          | 81 | % |
| Europe                    |       | 14            | %          | 14 | % |
| Other                     |       | 3             | %          | 5 | % |
|                           |            |               |            |  |  |  |  |

 

Net sales are attributed to each region based on theshipping location of the external customers.

 

As of March 31, 2005, wehave a total of 1,849 doctors that have either completed or are in the processof completing preceptorship.  This representsan increase of 880 doctors over the number of doctors at March 31, 2004.  Our accomplishment in obtaining the number ofphysicians trained is very important because it not only provides us with astrong referral base within major metropolitan areas we have targeted, but itwill also create the leverage to help us gain additional reimbursementcoverage.  We understand that a strongbase of trained physicians does not necessarily correlate to an increase in revenueproportionately.

 

We are working closelywith private payers and physicians across the U.S. to implement the CPT codeinto their systems and establish payment schedules.  This is important in order for physicians tobe able to utilize the benefits of the CPT code in filing claims electronicallyrather than manually.  It is expectedthat electronic filing will result in fewer claim denials or incorrect paymentsand increase the physician’s confidence in the procedure.

 

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In January 2005, we announced our expected net salesfor 2005 to be approximately $17.0 million to $18.0 million, which representsmore than 45% growth from 2004.  Thisincrease in revenues includes the effect of the 17% price increase we announcedin January 2005 for customers in the United States.   We expect net sales from the United Stateswill continue to be the major contributor of our global net sales.   We have established three primary goals toachieve our revenue growth.   We expectto complete the implementation of the new CPT code, increase sales coverage andphysician utilization of the Essure procedure and work with our strategicpartners.  We believe our revenue growthin 2005 will be significantly influenced by how successful we are in achievingthose objectives.

 

*Gross Profit*

 

Cost of goods sold forthe three months ended March 31, 2005 was $1.7 million as compared to $2.1million for the three months ended March 31, 2004.  The decrease of $0.4 million, or 19%, isprimarily due to the cost reductions achieved through higher production volumesand the outsourcing of production.  Grossprofit margin improved from 11% to 55%, quarter-over-quarter, which is theresult of our outsourcing effort and increased volume.  During 2004, we transitioned ourmanufacturing activities to a third party manufacturer.  This outsourcing effort decreased ourproduction costs and increased gross profit. In April 2004, we received FDA approval for the process at the thirdparty manufacturer.  Although we expectlower production costs and the price increase in the United States to improveour gross profit in 2005, our anticipated gross profits will fluctuate incorrelation to revenue growth and channel mix.

 

*Operating Expenses*

 

Research and development expenses, which includesexpenditures related to product development, clinical research and regulatoryaffairs, decreased to $1.0 million for the three months ended March 31, 2005from $1.3 million for the three months ended March 31, 2004.  The decrease of $0.3 million, or 26%, wasprimarily due to completion of activities pertaining to the PMA applicationprocess and completion of certain research and development projects.  Research and development costs in 2005 areexpected to be slightly higher than 2004 levels as we complete our Pivotal andPhase II clinical trials and continue to invest in product development of new andalternative product designs.

 

Selling, general and administrative spending for thethree months ended March 31, 2005 was $7.7 million as compared to $6.1 millionfor the three months ended March 31, 2004. The increase of $1.6 million, or 26%, resulted from an increase of $0.4million related to consulting expenses for the direct to consumer marketingcampaign, an increase of $0.2 million to set up a strategic sales effort tofocus on reimbursement and utilization and an increase of $1.0 million inconsulting and audit expenses for Sarbanes-Oxley compliance.  For 2005, we expect to have limitedinternational expenditures since we completed the divestiture of our Frenchsubsidiary in January 2004 and the closure of our direct operations inAustralia in January 2005.   We recordedexpenses of approximately $205,000 in December 2004 related to the closing downof our Australia operations, which included $183,000 of severance costs and$22,000 for impairment of fixed assets.  All severance costs were completely paid out at end of January 2005 andthe disposal of fixed assets was completed by the end of March 2005.

 

Netinterest and other income increased by $156,000, to $190,000 for the threemonths ended March 31, 2005, from $34,000 for the three months ended March 31,2004.  The increase was a result of thehigher interest rates and the sale of our former French subsidiary in 2004 at anet loss.

 

*RestrictedStock*

 

In March 2005, theCompany repurchased 2,000 shares of restricted common stock at par value inaccordance with the terms of a restricted stock agreement.  These shares are recorded as treasury stock,and with the 72,000 shares repurchased in fiscal 2004, the Company now holds atotal of 74,000 shares of treasury stock.

 

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**Liquidity and Capital Resources**

 

We have experiencedsignificant operating losses since inception. As of March 31, 2005 we had an accumulated deficit of $189.7million.  We have financed our operationssince inception primarily through equity financings.   In February 2004 we completed a privateplacement of approximately 3.0 million shares of common stock at $8.50 pershare.  Our net proceeds from the privateplacement were approximately $23.9 million, after deducting offering costs andcommissions.  The proceeds are being usedto fund operations to help us reach profitability.  Once we reach profitability, we expect tofinance our operation through cash received from sales of our product.  In the future, depending upon a variety offactors, we will likely need to raise additional funds through bank facilities,debt or equity offerings or other sources of capital.

 

As of March 31, 2005, wehad cash, cash equivalents, restricted cash and short-term investments of $24.3million, compared with $32.3 million at December 31, 2004.  The decrease of $8.0 million is primarily dueto $7.8 million of cash used in operating activities and $0.3 million used forcapital expenditures, partially offset by $0.1 million from the issuance ofcommon stock.

 

*OperatingActivities*

 

Net cash used in operating activities was $7.8 millionin the three months ended March 31, 2005, primarily as a result of our net lossof $6.4 million adjusted for non-cash related items of $0.5 million relating todepreciation and amortization and stock compensation expense.  Other major items that contributed to netcash used in operating activities were related to an increase in inventories of$0.9 million, an increase in other current assets of $0.5 million and adecrease in accounts payable of $0.9 million, offset by an increase in accruedcompensation of $0.3 million.  We expectcash usage in operating activities to decrease sequentially from quarter toquarter as we expect moderate revenue growth on a quarterly basis.

 

The changes in accounts receivable were minimalbecause we did not experience a material fluctuation in revenues andcollections activities.  As of March 31,2005, our worldwide days sales outstanding was 53 days, which was unchangedfrom December 31, 2004.  We have creditpolicies that help us to monitor our collection activities and reduce ourcredit loss exposure.  We continue toimprove and modify those policies as our business evolves.   Our goal is to consistently improve our dayssales outstanding.  We may not be able tomaintain our current ratio or we may experience less than satisfactoryperformance in collection due to factors outside of our control such as changesin economic climates.

 

The $0.9 million increase in inventories was due to abuild up in work in process and finished goods inventory levels to supportforecasted sales.  We expect inventorylevels to increase further in the second quarter of 2005.

 

Net cash used in operating activities for the threemonths ended March 31, 2004 was $7.3 million, primarily as a result of our netloss of $7.1 million, adjusted for non-cash related items of $1.3 millionrelating to depreciation and amortization, stock compensation expenses,provision for bad debt allowance and inventories.  Other major items that contributed to netcash used in operating activities were related to an increase in other currentassets of $0.7 million primarily from prepaid insurance premiums and pay downof accounts payable and other liabilities of $0.9 million, offset by changes inother assets such as accounts receivable, inventories and other non-currentassets of $0.1 million.

 

*Investing Activities*

 

Net cash provided by investing activities for the threemonths ended March 31, 2005 was $7.4 million, from sales of short-terminvestments of $13.4 million, partially offset by purchases of investments of$5.7 million and capital expenditures of $0.3 million.  Net cash used in investing activities for thethree months ended March 31, 2004 was $16.1 million from the purchase ofinvestments of $23.9 million and capital expenditures of $0.1 million,partially offset by sales of investments of $7.9 million.

 

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*Financing Activities*

 

Net cash provided by financing activities for thethree months ended March 31, 2005 was $0.1 million from the exercise of stockoptions.  Net cash provided by financingactivities was $24.7 million for the three months ended March 31, 2004,primarily from the issuance of our common stock in a private placementcompleted in February 2004.  Our netproceeds from the issuance of approximately 3.0 million shares of our commonstock at $8.50 per share in the private placement were approximately $23.9million, after deducting offering costs and commissions totaling $1.6million.  We also received $0.8 millionfrom the exercises of stock options in the first quarter of 2004.

 

We expect to havenegative cash flows from operations into at least 2006 and we estimate that ourexisting capital resources will be sufficient to meet our cash requirements forat least the next 12 months.  Thesuccessful achievement of our business objectives may require additional financingand therefore, we may in the future seek to raise additional funds through bankfacilities, debt or equity offerings or other sources of capital. Anyadditional equity financing may be dilutive to stockholders, and debtfinancing, if available, may involve restrictive covenants.  Additional funding may not be available whenneeded or on terms acceptable to us. If we are unable to obtain additionalcapital, we may be required to delay, reduce the scope of or eliminate oursales and marketing activities.  Ourfuture liquidity and capital requirements will depend upon many factors,including, among others:

 

•                                          Resourcesdevoted to establish sales, marketing and distribution capabilities;

•                                          Therate of product adoption by doctors and patients; and

•                                          Theinsurance payor community’s acceptance of and reimbursement for the Essure procedure.

 

**Recent Accounting Pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued (“SFAS”) No. 123 (R), “Share-Based Payments” (revised2004).   The provisions of SFAS 123(R) will require usto measure all stock-based compensation awards using a fair value method andrecord such expense in the consolidated financial statements, including grantsof employee stock options.   In addition,the adoption of SFAS 123(R) will require additional accounting related to theincome tax effects and additional disclosure regarding the cash flow effectsresulting from share-based payment arrangements.   SFAS 123(R) is effective for all publiccompanies for annual periods beginning after June 15, 2005.   We will adopt SFAS 123 (R) effective January1, 2006.  We have not yet determinedwhether the adoption of FAS 123(R) will result in amounts that are similar tothe current pro forma disclosures under SFAS 123.  We are evaluating the requirements for FAS123(R) and expect the adoption to have a significant adverse impact on ourstatement of operations and net loss per share.

 

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**Risk Factors**

 

*Inaddition to the other information in this Form 10-Q, the following factorsshould be considered carefully in evaluating Conceptus and our business.  This Form 10-Q contains forward-lookingstatements that involve risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofcertain factors, including those set forth below and elsewhere in this Form10-Q..*

 

***We have a limited history of operation withEssure and have incurred significant operating losses since inception.  Weexpect to incur significant operating losses for the foreseeable future and wemay never achieve or maintain profitability.***

 

Wehave a limited history of operation with Essure and have incurred significantoperating losses since our inception in 1992, including operating losses of$6.6 million for the three months ended March 31, 2005, $26.6 million in fiscal2004, $40.2 million in fiscal 2003, and $33.1 million in fiscal 2002. We expectto continue to incur significant operating expenses and net losses as wecontinue sales and marketing efforts in the United States.  Our net losseswill continue until sufficient revenues can be generated to offset theseexpenses. We may not be able to generate these revenues, and we may neverachieve profitability. Our failure to achieve and sustain profitability wouldnegatively impact the market price of our common stock.

 

***We are presently a one-product company andif our product fails to gain market acceptance, our business will suffer.***

 

We areattempting to introduce a novel product into the contraception market, which isdominated by procedures that are well established among physicians and patientsand are routinely taught to new physicians. As a result, we believe thatrecommendations and endorsements by physicians will be essential for marketacceptance of our product.  We do not know whether physicians and patientswill accept our product or whether we will be able to obtain theirrecommendations or endorsements in sufficient amounts to be profitable. We believe that physicians will not use a product unless they determine, basedon clinical data and other factors, that it is an attractive alternative toother means of contraception and that it offers clinical utility in acost-effective manner. Physicians are traditionally slow to adopt new productsand treatment practices, partly because of perceived liability risks.   We are dependent on Essure, which iscurrently our only commercial product.  If Essure does not achieve significant market acceptance amongphysicians, patients and healthcare payors, even if reimbursement levels aresufficient and necessary United States and international regulatory approvalsare maintained, we may never achieve significant revenues or profitability.

 

***Our future liquidity and capitalrequirements are uncertain.***

 

As wecommercialize Essure on a wide-scale basis, we may require additional financingand therefore may in the future seek to raise additional funds through bankfacilities, debt or equity offerings or other sources of capital. Anyadditional equity financing may be dilutive to stockholders, and debtfinancing, if available, may involve restrictive covenants. Additional fundingmay not be available when needed or on terms acceptable to us. If we are unableto obtain additional capital, we may be required to delay, reduce the scope ofor eliminate our selling and marketing activities.  We expect to havenegative cash flows from operations into at least calendar 2006. Our futureliquidity and capital requirements will depend upon many factors, including,among others:

 

•                  the rate of product adoption by doctorsand patients;

•                  obtaining government and third-partyreimbursement for Essure;

•                  the resources devoted to increasingmanufacturing capacity to meet commercial demands;

•                  our ability to reduce our cost of sales;

•                  the resources devoted to developing andconducting sales and marketing and distribution programs; and

•                  the progress and cost of productdevelopment programs.

 

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***If the effectiveness and safety of ourproduct are not supported by long-term data, we may not achieve marketacceptance and we could be subject to liability.***

 

ThePivotal trial of Essure was designed to support a PMA application and to havefive years of post-market follow-up.  In addition, patients in the PhaseII study will be followed to five years. The long-term results of using Essurewill not be available for several years. If long-term studies or clinicalexperience indicate that Essure is less effective or less safe than our currentdata suggest, we may not achieve or sustain market acceptance and/or we couldbe subject to significant liability.

 

***Our Co-Promotion Agreement with GYNECAREmay not be successful***

 

On October 30, 2003, weannounced the signing of an exclusive U.S. co-promotion agreement with GYNECAREfor marketing Essure in the United States in combination with the GYNECARETHERMACHOICE Uterine Balloon Therapy endometrial ablation system. With the FDA’sapproval of marketing and labeling claims regarding compatibility of the Essureprocedure and the THERMACHOICE device in July 2004, marketing hascommenced.   However, the success of the joint marketing campaignwill depend upon the effectiveness of our GYNECARE sales team trainingprograms, market demand for Essure in conjunction with the THERMACHOICEtreatment, the efforts and commitment of GYNECARE to this new program and theresults of the required 50 patient post-approval clinical study.   This agreement includes certain performanceclauses that if not met, could lead to the termination of the agreement byConceptus in July 2005.

 

***We have limited sales and marketingexperience and minimal distribution capabilities, and if we are unable todevelop our sales and marketing capabilities or be successful in our co-marketingagreement with GYNECARE, we may be unsuccessful in commercializing Essure.***

 

Inorder to market, sell and distribute Essure, we will need to maintain andcontinue to develop a sales force and marketing group with relevant experienceand to develop the relationship with GYNECARE for co-marketing the Essuredevice to the endometrial ablation market.  Developing a marketing andsales force is expensive and time consuming and can impact the effectiveness ofour product launch.  If we fail to establish adequate marketing and salescapabilities, we may be unable to commercialize Essure successfully. Furthermore, certain factors in our relationship with GYNECARE are outside ofour control, such as the number of sales persons, their compensation and the numberof products they are selling, which could adversely impact the revenues andmarket development we expect from this co-marketing agreement.   This agreement includes certain performanceclauses that if not met, could lead to the termination of the agreement byConceptus in July 2005.

 

***Our direct-to-consumer advertising campaignmay not be successful***

 

InAugust 2004, we launched a six-month advertising campaign in the Chicago,Illinois metropolitan area involving radio, direct mail, and print media (magazine). Such advertising programs aimed at increasing consumer awareness for ourproduct are expensive and may have limited success, if any.  Suchcampaigns require consumers to make contact with an Essure physician, ofteninvolving a referral from their primary care physician and then to be providedinformation regarding birth control options by the physician, be pre-authorizedfor insurance reimbursement and then be scheduled for the procedure.  Manyof these steps are not within our control, and the program may not result inrevenue generation commensurate with its costs.

 

***We depend on our contract manufacturer tosupply our commercial product requirements and we may experience disruption insupply if they are not in compliance with FDA and other health authorityregulations.***

 

InApril 2004, we received FDA approval to begin manufacturing the Essure productat Accellent, formerly named Venusa, our third-party subcontractor located inMexico.  We transitioned almost all of our internal manufacturing operationsto Accellent by the end of 2004 to manufacture the components and assemble ourproduct.  If Accellent does not complywith FDA and other health authority regulations or encounters manufacturingdifficulties, this could negatively impact sales of Essure.

 

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***Government or third party reimbursement forEssure may not be available or may be inadequate, which would limit our futureproduct revenues and delay or prevent our profitability.***

 

Marketacceptance of Essure in the United States and in international markets willdepend in part upon the availability of reimbursement within prevailinghealthcare payment systems. Reimbursement systems in international markets varysignificantly by country and sometimes by region, and reimbursement approvalsmust be obtained on a country-by-country basis. Many international markets havegovernment-managed health care systems that determine reimbursement for newdevices and procedures. In most markets, there are private insurance systems aswell as government-managed systems. Regardless of the type of reimbursementsystem, we believe that physician advocacy of our product will be required toobtain reimbursement. Availability and extent of continued reimbursement willdepend, at least in part, on the clinical and cost effectiveness of ourproduct. We do not know whether reimbursement for our product will continue tobe available in the United States or in international markets under eithergovernment or private reimbursement systems, or whether physicians will supportand advocate reimbursement for use of our product for all indications intendedby us.   We may be unable to obtain ormaintain reimbursement in any country within a particular time frame, for aparticular amount, or at all, which would limit our future product revenues anddelay or prevent our profitability.

 

***We may not maintain regulatory approvalsfor Essure, our only product, which would delay or prevent us from generatingproduct revenues, and would harm our business and force us to curtail or ceaseoperations.***

 

Numerousgovernment authorities, both in the United States and internationally, regulatethe manufacture and sale of medical devices, including Essure.  In theUnited States, the principal regulatory authorities are the FDA andcorresponding state agencies, such as the California Department of HealthServices. The process of obtaining and maintaining required regulatoryclearances is lengthy, expensive and uncertain.

 

Wehave received FDA approval to market Essure in the United States.  If welose that approval or fail to comply with existing or future regulatoryrequirements, it would delay or prevent us from generating further productrevenues.

 

Salesof medical devices outside of the United States are subject to internationalregulatory requirements that vary widely from country to country. The timerequired to obtain clearance required by foreign countries may be longer orshorter than that required for FDA clearance, and requirements for licensing maydiffer significantly from FDA requirements. Many countries in which wecurrently market or intend to market Essure either do not currently regulatemedical devices or have minimal registration requirements; however, thesecountries may develop more extensive regulations in the future, which coulddelay or prevent us from marketing Essure in these countries.

 

TheFDA and certain foreign regulatory authorities impose numerous requirementswith which medical device manufacturers must comply in order to maintainregulatory approvals. FDA enforcement policy strictly prohibits the promotionof approved medical devices for uses other than those for which the device isspecifically approved by the FDA. We will be required to adhere to applicableFDA regulations, such as the Quality System Regulation, and similar regulationsin other countries, which include testing, control and documentationrequirements. Ongoing compliance with the Quality System Regulation and otherapplicable regulatory requirements will be monitored through periodicinspections by federal and state agencies, including the FDA and the CaliforniaDepartment of Health Services, and by comparable agencies in other countries.If we fail to comply with applicable regulatory requirements, we may be subjectto, among other things, warning letters, fines, injunctions, civil penalties,recall or seizure of products, total or partial suspension of production,refusal of the government to grant pre-market clearance or pre-market approvalfor devices, withdrawal of approvals and criminal prosecution, any of whichcould negatively impact our business.

 

***Our intellectual property rights may notprovide meaningful commercial protection for our product, which could enablethird parties to use our technology, or very similar technology, and couldimpair our ability to compete in the market.***

 

Werely on patent, copyright, trade secret and trademark laws to limit the abilityof others to compete with us using the same or similar technology in the UnitedStates and other countries. However, as described below, these laws afford onlylimited protection and may not adequately protect our rights to the extentnecessary to sustain any

 

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competitive advantage we may have. The laws of someforeign countries do not protect proprietary rights to the same extent as thelaws of the United States, and many companies have encountered significantproblems in protecting their proprietary rights abroad. These problems can becaused by the absence of rules and methods for defending intellectual propertyrights.

 

Wewill be able to protect our technology from unauthorized use by third partiesonly to the extent that they are covered by valid and enforceable patents orare effectively maintained as trade secrets. The patent positions ofcompanies developing medical devices,including our patent position, generally are uncertain and involve complexlegal and factual questions concerning the enforceability of such patentsagainst alleged infringement. Recent judicial decisions have established newcase law and a reinterpretation of previous patent case law, and consequentlywe cannot assure you that historical legal standards surrounding the questionsof infringement and validity will be applied in future cases. In addition,legislation may be pending in Congress that, if enacted in its present form,may limit the ability of medical device manufacturers in the future to obtainpatents on surgical and medical procedures that are not performed by, or as apart of, devices or compositions that are themselves patentable. Our ability toprotect our proprietary methods and procedures may be compromised by theenactment of this legislation or any other limitation or reduction in thepatentability of medical and surgical methods and procedures. Changes in eitherthe patent laws or in interpretations of patent laws in the United States andother countries may therefore diminish the value of our intellectual property.

 

Weown, or control through licenses, a variety of issued patents and pendingpatent applications. However, the patents on which we rely may be challengedand invalidated, and our patent applications may not result in issued patents.Moreover, our patents and patent applications may not be sufficiently broad toprevent others from practicing our technologies or from developing competingproducts. We also face the risk that others may independently develop similaror alternative technologies or design around our patented technologies.

 

Wehave taken security measures to protect our proprietary information, especiallyproprietary information that is not covered by patents or patent applications.These measures, however, may not provide adequate protection of our tradesecrets or other proprietary information. We seek to protect our proprietaryinformation by entering into confidentiality agreements with employees,collaborators and consultants. Nevertheless, employees, collaborators orconsultants could still disclose our proprietary information and we may not beable to protect our trade secrets in a meaningful way. If we lose any employeeswe may not be able to prevent the unauthorized disclosure or use of ourtechnical knowledge or other trade secrets by those former employees despitethe existence of a nondisclosure and confidentiality agreement and othercontractual restrictions designed/intended to protect our proprietarytechnology. In addition, others may independently develop substantiallyequivalent proprietary information or techniques or otherwise gain access toour trade secrets.

 

Ourability to compete effectively will depend substantially on our ability todevelop and maintain proprietary aspects of our technology. Our issued patents,any future patents that may be issued as a result of our United States orforeign patent applications, or the patents under which we have license rightsmay not offer any degree of protection against competitive products. Anypatents that may be issued or licensed to us or any of our patent applicationscould be challenged, invalidated or circumvented in the future.

 

***If we cannot operate our business withoutinfringing third-party intellectual property rights, our prospects will suffer.***

 

Oursuccess will depend in part on our ability to operate without infringing ormisappropriating the proprietary rights of others. We may be exposed to futurelitigation by third parties based on claims that our product infringes theintellectual property rights of others. There are numerous issued patents inthe medical device industry and, as described in the next risk factor, thevalidity and breadth of medical device patents involve complex legal andfactual questions for which important legal principles remain unresolved. Ourcompetitors may assert that our product and the methods we employ may becovered by United States or foreign patents held by them. In addition, becausepatent applications can take many years to issue, there may be currentlypending patent applications of which we are unaware that may later result in issuedpatents that our product may infringe. There could also be existing patents ofwhich we are unaware that our product may inadvertently infringe. If we lose apatent infringement lawsuit, we could be prevented from selling our productunless we can obtain a license to use technology or ideas covered by thatpatent or are able to redesign the product to avoid infringement. A license maynot be available to us on terms acceptable to us, or at all, and we may not beable to redesign our product to avoid

 

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any infringement. If we are not successful inobtaining a license or redesigning our product, we may be unable to sell ourproduct and our business would suffer.

 

***We have been, and may in the future, be a partyto patent litigation, which could be expensive and divert our management’sattention.***

 

Themedical device industry has been characterized by extensive litigationregarding patents and other intellectual property rights, and companies in theindustry have used intellectual property litigation to gain a competitiveadvantage. We may become a party to patent infringement claims and litigationor interference proceedings declared by the United States Patent and TrademarkOffice (PTO), to determine the priority of inventions. The defense andprosecution of these matters are both costly and time consuming. We may need tocommence proceedings against others to enforce our patents, to protect ourtrade secrets or know-how or to determine the enforceability, scope andvalidity of the proprietary rights of others. These proceedings would result insubstantial expense to us and significant diversion of effort by our technicaland management personnel.

 

Athird party, Ovion, Inc., brought to our attention a patent and certain claimsfrom a pending patent application owned by it.  Ovion indicated itbelieves that the claims of its patent and application cover Essure and itsuse. On October 23, 2003, we entered into a settlement agreement with Ovionpursuant to which we received a sole, worldwide license to Ovion’s patentrights relative to the Essure system, and Ovion may not grant any additionalsuch licenses to other parties.  The settlement agreement provided for thepayment of a royalty to Ovion that will be equal to 3.25% of the cumulative netsales of Essure in excess of $75.0 million for a period of no longer than tenyears.  In addition, the settlement agreement provided for a cash paymentof $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and alicense fee of $2.0 million payable in our common stock in equal installmentsin the first and second quarters of 2004.  Ovion was not granted anyrights to our intellectual property pursuant to the settlement agreement. The settlement agreement was approved by the U.S. District Court for theNorthern District of California on November 6, 2003.

 

Althoughwe have reached a settlement agreement with Ovion, we still believe that someor all of Ovion’s claims should be included within our own patents and we haverequested that the PTO declare an interference.  An interference is aproceeding within the PTO to determine which party was the first to invent, andwhich party is thereby entitled to ownership of, the claims. We believe that wefiled our patent applications for Essure before Ovion filed the applicationthat issued as its patent, and that we are entitled to any patentable claimsnow appearing in their patent that cover our product. We do not know whetherthe PTO will declare an interference, whether we invented our product prior toOvion’s date of invention, or whether we will prevail in an interferenceproceeding if it is declared by the PTO.  If the PTO declares aninterference in our favor and we are found to have priority of invention, wemay avoid having to pay Ovion future royalties on the sales of our product.

 

Anadverse determination in new litigation or interference proceedings to which weare or may become a party could subject us to significant liabilities to thirdparties or require us to seek licenses from third parties. Although patent andintellectual property disputes in the medical device area have often beensettled through licensing or similar arrangements, costs associated with sucharrangements may be substantial and could include ongoing royalties. We may beunable to obtain necessary licenses on satisfactory terms, if at all. Adversedeterminations in a judicial or administrative proceeding or failure to obtainnecessary licenses could prevent us from manufacturing and selling Essure.

 

One ofthe patents included in our license from Target Therapeutics, a division ofBoston Scientific Corporation, has been the subject of reexaminationproceedings in the PTO and an infringement lawsuit by Target Therapeutics.   We are not a party to this lawsuit.  The patent is directed to variable stiffnesscatheters for use with guidewires, as might be used in our future products.Although the PTO reaffirmed the patent with amended claims and the lawsuit wassettled, the patent could be challenged or invalidated in the future. If thispatent is invalidated, our ability to prevent others from using thisproprietary technology would be compromised.

 

***If we fail to manage any expansion, ourbusiness could be impaired.***

 

We mayin the future acquire one or more technologies, products or companies thatcomplement our business. We may not be able to effectively integrate these intoour business and any such acquisition could bring

 

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additional risks, exposures and challenges to ourcompany.   If we fail to manage anyacquisition, our business could be impaired.

 

***Our third-party manufacturer and we willdepend upon third party and single source suppliers for raw materials andfinished goods and we do not have forward contracts with many of thesesuppliers.***

 

We andour third party manufacturer purchase both raw materials used in our productand finished goods from various suppliers, and we rely on a single source forone component of our product, the polyester fiber. We do not have formal supplycontracts with several key vendors and, accordingly, these firms may notcontinue to supply us or our third party manufacturer with raw materials orfinished goods in sufficient quantities, or at all. Delays associated with anyfuture raw materials or finished goods shortages could impair our sales ofEssure, particularly as our third-party manufacturer scales up itsmanufacturing activities in support of United States and internationalcommercial sales of Essure.

 

***Health care reform may limit our return onour product.***

 

Thelevels of revenue and profitability of medical device companies may be affectedby the efforts of government and third party payors to contain or reduce thecosts of health care through various means. In the United States, there havebeen, and we expect that there will continue to be, a number of federal, stateand private proposals to control health care costs. These proposals may containmeasures intended to control public and private spending on health care as wellas to provide universal public access to the health care system. If enacted,these proposals may result in a substantial restructuring of the health caredelivery system. Significant changes in the United States health care systemare likely to have a substantial impact over time on the manner in which weconduct our business and could have a material adverse effect on our business,financial condition and results of operations.

 

***We may be exposed to product liabilityclaims, and we have only limited insurance coverage.***

 

Themanufacture and sale of medical products involve an inherent risk of exposureto product liability claims and product recalls.   We currently maintain product liabilityinsurance with coverage limits of $10.0 million per occurrence and an annualaggregate maximum of $10.0 million, which we believe is comparable to thatmaintained by other companies of similar size serving similar markets. However,we cannot assure you that product liability claims in connection with clinicaltrials or commercial sales of Essure will not exceed such insurance coveragelimits or that such insurance will continue to be available on commerciallyreasonable terms, or at all. Insurance is expensive and in the future may notbe available on acceptable terms, if at all. A successful product liabilityclaim or series of claims brought against us in excess of our insurancecoverage, or a recall of our product, could cause our stock price to fall.

 

***We may not be able to attract and retainadditional key management, sales and marketing and technical personnel or wemay lose existing key management, sales and marketing or technical personnel,which may delay our development and marketing efforts.***

 

Wedepend on a number of key management, sales and marketing and technicalpersonnel. The loss of the services of one or more key employees could delaythe achievement of our development and marketing objectives. Our success willalso depend on our ability to attract and retain additional highly qualifiedmanagement, sales and marketing and technical personnel to meet our growthgoals. We face intense competition for qualified personnel, many of whom areoften subject to competing employment offers, and we do not know whether wewill be able to attract and retain such personnel.

 

***We face intense competition, and if we areunable to compete effectively, demand for Essure may be reduced.***

 

Themedical device industry is highly competitive and is characterized by rapid andsignificant technological change. The length of time required for productdevelopment and regulatory approval plays an important role in a company’scompetitive position. As we commercialize Essure, we expect to compete with:

 

•                  other methods of permanent contraception,in particular tubal ligation;

 

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•                  other methods of non-permanentcontraception, including devices such as intrauterine devices, or IUDs, vaginalrings, condoms and prescription drugs such as the birth control pill,injectable and implantable contraceptives and patches; and

•                  other companies that may developpermanent contraception devices that are similar to or otherwise compete withEssure.

 

We areaware of a company that is in the clinical stages of development fornon-incisional permanent contraception devices, and other companies may developproducts that could compete with Essure.  Competitive factors may renderEssure obsolete or noncompetitive or reduce demand for Essure.

 

***Our future quarterly results may fluctuate.***

 

Ourfuture revenues and results of operations may fluctuate significantly fromquarter to quarter and will depend upon, among other factors:

 

•                  the rate at which new physicians aretrained;

•                  actions relating to reimbursementmatters;

•                  the rate at which we establish UnitedStates and international distributors or marketing partners and the degree oftheir success;

•                  the extent to which Essure gains marketacceptance;

•                  the timing and size of distributorpurchases; and

•                  introduction of competitive products.

 

***Changes in stock option accounting rulesmay adversely impact our reported operating results prepared in accordance withgenerally accepted accounting principles, our stock price and ourcompetitiveness in the employee marketplace.***

 

Technologycompanies like ours have a history of using broad based employee stock optionprograms to hire, incentivize and retain our workforce in a competitivemarketplace. Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) allowed companies the choice ofeither using a fair value method of accounting for options, which would resultin expense recognition for all options granted, or using an intrinsic valuemethod, as prescribed by Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB 25), with a pro forma disclosure of theimpact on net income (loss) of using the fair value option expense recognitionmethod. We had elected to apply APB 25 and accordingly we generally do notrecognize any expense with respect to employee stock options as long as suchoptions are granted at exercise prices equal to the fair value of our commonstock on the date of grant.

 

InDecember 2004, the FASB issued, SFAS 123(R) “Share-Based Payments”.  We will adopt this statement on January 1,2006 which is the first annual reporting period after June 15, 2005. Thisstatement will have a significant impact on our consolidated statement ofoperations as we will be required to expense the fair value of our stockoptions rather than disclosing the impact on our consolidated result ofoperations within our footnotes in accordance with the disclosure provisions ofSFAS 123. This will result in lower reported earnings per share, which couldnegatively impact our future stock price. In addition, this could impact ourability to utilize broad based employee stock plans to reward employees andcould result in a competitive disadvantage to us in the employee marketplace.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

The following discussesour exposure to market risk related to changes in interest rates and foreigncurrency exchange rates.  These exposuresmay change over time as business practices evolve and could have a materialadverse impact on our financial results.

 

*InterestRate Risk*:  We havebeen exposed to interest rate risk as it applies to interest earned on holdingsof short-term marketable investments. Interest rates that may affect these items in the future will depend onmarket conditions and may differ from the rates we have experienced in thepast.  A 10% change in interest rateswould not

 

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be material to our results of operations.  We reduce the sensitivity of our results ofoperations to these risks by maintaining an investment portfolio, which isprimarily comprised of highly rated, short-term investments.  We do not hold or issue derivative, commodityinstruments or other financial instruments for trading purposes.

 

*ForeignCurrency Exchange Risk*: Our expenses, except for those related to Australia, were denominated inUnited States dollars.  Our revenues, 1%and 4% of which were in foreign currencies in the three months ended March 31,2005 and 2004, respectively, were immaterial in relation to our overallfinancial position.  As a result, we haverelatively little exposure for currency exchange risks and foreign exchangelosses have been minimal to date.  We donot currently enter into forward exchange contracts to hedge exposuredenominated in foreign currencies or any other derivative financial instrumentsfor trading or speculative purposes.  Inthe future, if we feel our foreign currency exposure has increased, we mayconsider entering into hedging transactions to help mitigate that risk.  As of March 31, 2005, a fluctuation inexchange rates of 10% in the foreign currencies to which we are exposed wouldnot have a material impact on our results of operations or financial condition.

 

**Item 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures:*

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and in reaching a reasonable level of assurance,management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of March 31, 2005, theend of our most recent fiscal quarter, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective at the reasonableassurance level.

 

*Changesin Internal Control Over Financial Reporting:*

 

There has been no changein the company’s internal controls over financial reporting during the company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the company’s internal controls over financialreporting.

 

*InherentLimitations of Internal Controls*

 

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

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we areinvolved in legal proceedings arising in the ordinary course of business.  We believe there is no litigation pendingthat could have, individually or in the aggregate, a material adverse effect onits financial position, result of operations or cash flows.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

In March 2005, theCompany repurchased 2,000 shares of restricted common stock at par value inaccordance with the terms of a restricted stock agreement.  These shares are recorded as treasury stock,and with the 72,000 shares repurchased in fiscal 2004, the Company now holds atotal of 74,000 shares of treasury stock.

 

**ISSUERPURCHASES OF EQUITY SECURITIES**

 
| **Period**                                  | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total  Number of  Shares  Purchased  as Part of  Publicly  Announced  Program** | ** ** | **Maximum  Number of  Shares That  May Yet Be  Purchased  Under this  Program** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| January 1, 2005  through January 31, 2005   |       | —                                     |       | —                             |       | —                                                                            |       | —                                                                          |       |
|                                        |       |                                       |       |                               |       |                                                                              |       |                                                                            |       |
| February 1, 2005  through February 28, 2005 |       | —                                     |       | —                             |       | —                                                                            |       | —                                                                          |       |
|                                        |       |                                       |       |                               |       |                                                                              |       |                                                                            |       |
| March 1, 2005  through March 31, 2005       |       | 2,000                                      |       | $                                  | 0.003      |                                                                              | —     |                                                                            | —     |   |
|                                        |       |                                       |       |                               |       |                                                                              |       |                                                                            |       |
| TOTAL                                       |       | 2,000                                      |       |                               |       |                                                                              |       |                                                                            |       |
|                                             |            |                                            |            |                                    |            |                                                                                   |            |                                                                                 |            |  |

 

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(1)We purchased 2,000 shares of restricted stock from one former employee inaccordance with the terms of the Restricted Stock Purchase Agreements relatingto such shares.

 

**Item 3.  Defaults upon Senior Securities**

 

None.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 
| (a)  Exhibits. |
|--------------------------|
|                     |
| 10.1                     |   | Fifth Amended and Restated 2001 Equity Plan, Incorporated by reference  to Exhibit 10.1 of the Registrant’s Report on Form 8-K filed on January 11,  2005. |
|                     |   |   |
| 31.1                     |   | Certification of Chief Executive Officer and Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|                     |   |   |
| 32.1                     |   | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

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SIGNATURE

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

CONCEPTUS, INC.

 

 
|   | By: /s/ Gregory E. Lichtwardt            |   |
|--------|------------------------------------------|--------|
|   | Gregory E. Lichtwardt                    |
|   | Executive Vice President,  Treasurer and |
|   | Chief Financial Officer                  |

 

Date:    May9, 2005

 

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