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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|- |  | ------------------------------------------------------------------

EXCHANGE ACT OF 1934



For the Fiscal Quarter Ended
June 30, 2003



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|- |  | -------------------------------------------------------------------

EXCHANGE ACT OF 1934



For the
transition period from __________ to __________.



Commission
file number: 0-27596



CONCEPTUS, INC.

(Exact name of registrant as specified in its charter)



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



1021 Howard Avenue

San Carlos, CA 94070

(Address of principal executive offices)



Registrants telephone number, including area code: (650) 628-4700



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



Yes x                                   
                                        
                                  No ̈



Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x    No ̈



As of July 31, 2003, 21,594,053 shares of the registrants Common Stock were outstanding.



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CONCEPTUS, INC.



FORM 10-Q for the Quarter
Ended June 30, 2003



INDEX



|          |  |                                                                                                                     |  | Page
|--------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ----
|Part I.   |  | Financial Information                                                                                               |  |     
|          |  |                                                                                                                    
|Item 1.   |  | Condensed Consolidated Financial Statements (unaudited)                                                             |  |     
|          |  |                                                                                                                    
|          |  | a) Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                                  |  | 3   
|          |  |                                                                                                                    
|          |  | b) Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2003 and 2002 |  | 4   
|          |  |                                                                                                                    
|          |  | c) Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2003 and 2002           |  | 5   
|          |  |                                                                                                                    
|          |  | d) Notes to Condensed Consolidated Financial Statements                                                             |  | 6   
|          |  |                                                                                                                    
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 10  
|          |  |                                                                                                                    
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 22  
|          |  |                                                                                                                    
|Item 4.   |  | Controls and Procedures                                                                                             |  | 23  
|          |  |                                                                                                                    
|Part II.  |  | Other Information                                                                                                   |  | 23  
|          |  |                                                                                                                    
|Item 1.   |  | Legal Proceedings                                                                                                   |  | 23  
|          |  |                                                                                                                    
|Item 2.   |  | Changes in Securities and Use of Proceeds                                                                           |  | 24  
|          |  |                                                                                                                    
|Item 3.   |  | Defaults upon Senior Securities                                                                                     |  | 24  
|          |  |                                                                                                                    
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 24  
|          |  |                                                                                                                    
|Item 5.   |  | Other Information                                                                                                   |  | 24  
|          |  |                                                                                                                    
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                    |  | 24  
|          | 
|Signature |  | 26                                                                                                                 



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PART I:    FINANCIAL INFORMATION



ITEM 1.    Condensed Consolidated Financial Statements



Conceptus, Inc.



Condensed
Consolidated Balance Sheets

(Unaudited)

(In thousands)



|                                            |  | June 30,2003 |          |   | December 31,2002 |  
|------------------------------------------- |  | ------------ | -------- | - | ---------------- | -
|Assets                                      |  |              |          |   |                  |  
|Current assets:                             |  |              |          |   |                  |  
|Cash and cash equivalents                   |  | $            | 44,393   |   |                  | $
|Short-term investments                      |  |              | 5,993    |   |                  |  
|Restricted cash                             |  |              | 69       |   |                  |  
|Accounts receivable, net                    |  |              | 1,350    |   |                  |  
|Inventories, net                            |  |              | 2,157    |   |                  |  
|Other current assets                        |  |              | 1,057    |   |                  |  
|                                            |  |              |          |   |                  |  
|Total current assets                        |  |              | 55,019   |   |                  |  
|                                            |  |             
|Property and equipment, net                 |  |              | 2,220    |   |                  |  
|Other assets                                |  |              | 139      |   |                  |  
|                                            |  |              |          |   |                  |  
|Total assets                                |  | $            | 57,378   |   |                  | $
|                                            |  |              |          |   |                  |  
|Liabilities and stockholders equity        |  |              |          |   |                  |  
|Current liabilities:                        |  |              |          |   |                  |  
|Accounts payable                            |  | $            | 3,473    |   |                  | $
|Clinical trial liabilities                  |  |              | 102      |   |                  |  
|Accrued compensation                        |  |              | 2,696    |   |                  |  
|Other accrued liabilities                   |  |              | 962      |   |                  |  
|                                            |  |              |          |   |                  |  
|Total current liabilities                   |  |              | 7,233    |   |                  |  
|                                            |  |             
|Long-term clinical trial liabilities        |  |              | 208      |   |                  |  
|                                            |  |              |          |   |                  |  
|Total liabilities                           |  |              | 7,441    |   |                  |  
|                                            |  |              |          |   |                  |  
|                                            |  |             
|Contingencies (Note 9)                      |  |              |          |   |                  |  
|                                            |  |             
|Stockholders equity:                       |  |              |          |   |                  |  
|Common stock and additional paid-in capital |  |              | 189,210  |   |                  |  
|Accumulated other comprehensive income      |  |              | 30       |   |                  |  
|Accumulated deficit                         |  |              | (139,303 | ) |                  |  
|                                            |  |              |          |   |                  |  
|Total stockholders equity                  |  |              | 49,937   |   |                  |  
|                                            |  |              |          |   |                  |  
|Total liabilities and stockholders equity  |  | $            | 57,378   |   |                  | $
|                                            |  |              |          |   |                  |  



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



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Conceptus, Inc.



Condensed
Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)



|                                                                               |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | -
|                                                                               |  | 2003                       |         |   | 2002                     |  
|Net sales                                                                      |  | $                          | 2,040   |   |                          | $
|                                                                               |  |                            |         |  
|Cost of goods sold                                                             |  |                            | 1,766   |   |                          |  
|                                                                               |  |                            |         |   |                          |  
|Gross profit (loss)                                                            |  |                            | 274     |   |                          |  
|                                                                               |  |                            |         |  
|Operating expenses:                                                            |  |                            |         |   |                          |  
|Research and development                                                       |  |                            | 1,656   |   |                          |  
|Selling, general and administrative                                            |  |                            | 9,331   |   |                          |  
|                                                                               |  |                            |         |   |                          |  
|Total operating expenses                                                       |  |                            | 10,987  |   |                          |  
|                                                                               |  |                            |         |   |                          |  
|Operating loss                                                                 |  |                            | (10,713 | ) |                          |  
|                                                                               |  |                            |         |  
|Interest and other income (expense), net                                       |  |                            | 167     |   |                          |  
|                                                                               |  |                            |         |   |                          |  
|Net loss                                                                       |  | $                          | (10,546 | ) |                          | $
|                                                                               |  |                            |         |   |                          |  
|Basic and diluted net loss per share                                           |  | $                          | (0.49   | ) |                          | $
|                                                                               |  |                            |         |   |                          |  
|Weighted-average shares used in computing basic and diluted net loss per share |  |                            | 21,499  |   |                          |  
|                                                                               |  |                            |         |   |                          |  



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



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Conceptus, Inc.



Condensed
Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



|                                                                            |  | Six Months Ended June 30, |        
|--------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                            |  | 2003                      |        
|Cash flows from operating activities                                        |  |                           |        
|Net loss                                                                    |  | $                         | (21,571
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |        
|Depreciation and amortization                                               |  |                           | 641    
|Stock compensation expense                                                  |  |                           | 278    
|Allowance for doubtful accounts                                             |  |                           | 91     
|Provision for excess and obsolete inventories                               |  |                           | (60    
|Changes in operating assets and liabilities:                                |  |                           |        
|Accounts receivable                                                         |  |                           | (859   
|Inventories                                                                 |  |                           | 415    
|Other current assets                                                        |  |                           | (246   
|Other assets                                                                |  |                           | 46     
|Accounts payable                                                            |  |                           | 287    
|Other accrued liabilities                                                   |  |                           | 581    
|Clinical trial liabilities                                                  |  |                           | (89    
|                                                                            |  |                           |        
|Net cash used in operating activities                                       |  |                           | (20,486
|                                                                            |  |                           |        
|Cash flows from investing activities                                        |  |                           |        
|Purchase of investments                                                     |  |                           | (6,988 
|Maturities of investments                                                   |  |                           | 11,987 
|Capital expenditures                                                        |  |                           | (389   
|                                                                            |  |                           |        
|Net cash provided by (used in) investing activities                         |  |                           | 4,610  
|                                                                            |  |                           |        
|Cash flows from financing activities                                        |  |                           |        
|Proceeds from issuance of common stock, net                                 |  |                           | 497    
|                                                                            |  |                           |        
|Net cash provided by financing activities                                   |  |                           | 497    
|                                                                            |  |                           |        
|Effect of exchange rate changes on cash                                     |  |                           | 99     
|                                                                            |  |                           |        
|Net increase (decrease) in cash and cash equivalents                        |  |                           | (15,280
|                                                                            |  |                          
|Cash and cash equivalents at beginning of period                            |  |                           | 59,673 
|                                                                            |  |                           |        
|Cash and cash equivalents at end of period                                  |  | $                         | 44,393 
|                                                                            |  |                           |        



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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. |  | Basis of Presentation
|-- |  | ---------------------



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included.



The condensed consolidated balance sheet at December 31, 2002
has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements. This financial data should be reviewed in conjunction with the audited consolidated financial statements and related notes included in the Annual Report on Form 10-K for Conceptus, Inc. (the Company) for the year ended
December 31, 2002. The results of operations for the three and six months ended June 30, 2003 may not necessarily be indicative of the operating results for the full 2003 fiscal year or any other future interim periods.



|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------



The Companys significant accounting policies are disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2002
that was filed with the Securities and Exchange Commission on March 31, 2003. The Companys significant accounting policies have not materially changed since December 31, 2002.



|3. |  | Inventories, net
|-- |  | ----------------



Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. The components of
inventories consist of the following (in thousands):



|                |  | June 30,2003 |       | December 31,2002
|--------------- |  | ------------ | ----- | ----------------
|Raw materials   |  | $            | 585   |                 
|Work-in-process |  |              | 946   |                 
|Finished goods  |  |              | 626   |                 
|                |  |              |       |                 
|Total           |  | $            | 2,157 |                 
|                |  |              |       |                 



|4. |  | Warranty
|-- |  | --------



The Company offers warranties on its product and records a liability for the estimated future costs associated with warranty claims, which is based upon
the Companys historical experience and estimate of the level of future costs. Warranty costs are reflected in the statement of operations as cost of goods sold. A reconciliation of the changes in the Companys warranty liability for the
six months ended June 30, 2003 follows (in thousands):



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|                                                 |  | June 30,2003 |    
|------------------------------------------------ |  | ------------ | ---
|Warranty accrual at the beginning of the period  |  | $            | 28 
|Accruals for warranties issued during the period |  |              | 115
|Settlements made in kind during the period       |  |              | (39
|                                                 |  |              |    
|Warranty accrual at the end of the period        |  | $            | 104
|                                                 |  |              |    



|5. |  | Stock-based compensation
|-- |  | ------------------------



As permitted by Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123), as amended
by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123, the Company accounts for employee stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation plans. No stock-based employee compensation expense is included in the net loss as
reported during the six months ended June 30, 2003 and 2002.



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



|                                                                                                             |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | -
|                                                                                                             |  | 2003                       |         |   | 2002                     |  
|Net loss, as reported                                                                                        |  | $                          | (10,546 | ) |                          | $
|Add: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                            | (1,989  | ) |                          |  
|                                                                                                             |  |                            |         |   |                          |  
|Pro forma net loss                                                                                           |  | $                          | (12,535 | ) |                          | $
|                                                                                                             |  |                            |         |   |                          |  
|Basic and diluted net loss per share                                                                         |  |                            |         |   |                          |  
|As reported                                                                                                  |  | $                          | (0.49   | ) |                          | $
|Pro forma                                                                                                    |  | $                          | (0.58   | ) |                          | $



The Company has
adopted the disclosure only provisions of SFAS No. 123. The Company calculated the fair value of each option on the date of grant using the fair value method as prescribed by SFAS No. 123. The assumptions used are as follows:



|                           |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|-------------------------- |  | -------------------------- | - |  | ------------------------ | -
|                           |  | 2003                       |   |  | 2002                     |  
|Risk-free interest rate    |  | 1.89                       | % |  | 3.84                     | %
|Expected life (in years)   |  | 4                          |   |  | 4                        |  
|Expected volatility factor |  | 91                         | % |  | 123                      | %
|Dividend yield             |  |                           |   |  |                         |  



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To comply with pro forma reporting requirements of SFAS No. 123, compensation cost is also estimated for
the fair value of Employee Stock Purchase Plan (ESPP) issuances, which are included in the pro forma totals above.



The fair value of the ESPP issuances is calculated at each reporting date using the following assumptions:



|                           |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|-------------------------- |  | -------------------------- | - |  | ------------------------ | -
|                           |  | 2003                       |   |  | 2002                     |  
|Risk-free interest rate    |  | 1.01                       | % |  | 2.2                      | %
|Expected life (in years)   |  | 1                          |   |  | 1                        |  
|Expected volatility factor |  | 58                         | % |  | 58                       | %
|Dividend yield             |  |                           |   |  |                         |  



The weighted-average
fair value per share of options granted was $10.62 and $19.14, respectively, for the six months ended June 30, 2003 and 2002.



Stock-based compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18
(EITF 96-18), Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, which requires that these equity instruments are recorded at their fair value on
the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Stock-based compensation expense relating to non-employees was $214,161 and $72,469 for the six-month
period ended June 30, 2003 and 2002, respectively.



The fair
value of the stock options granted is calculated at each reporting date using the following assumptions:



|                           |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|-------------------------- |  | -------------------------- | - |  | ------------------------ | -
|                           |  | 2003                       |   |  | 2002                     |  
|Risk-free interest rate    |  | 3.33                       | % |  | 4.93                     | %
|Expected life (in years)   |  | 10                         |   |  | 10                       |  
|Expected volatility factor |  | 148                        | % |  | 139                      | %
|Dividend yield             |  |                           |   |  |                         |  



|6. |  | Computation of Net Loss Per Share
|-- |  | ---------------------------------



Basic net loss per share is computed using the weighted-average number of common shares outstanding during each period. Diluted net loss per share is
computed using the weighted-average number of common and dilutive shares of potential common stock outstanding during each period. Under the requirements for calculating basic net loss per share, the effects of potentially dilutive securities such
as stock options are excluded. Basic and diluted net loss per share are equivalent for all periods presented due to the Companys net loss position.



During all periods presented, the Company had securities outstanding, which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. These outstanding securities consist of options to



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purchase 4,307,699 and 3,080,943 shares of common stock as of June 30, 2003 and June 30, 2002, respectively.



|7. |  | Comprehensive Loss
|-- |  | ------------------



Total comprehensive loss for the six months ended June 30, 2003 consisted of unrealized foreign currency translation gains of $30,000 and net loss of
$21,571,000, as unrealized gains and losses on available-for-sale securities were immaterial. Total comprehensive loss for the three months ended June 30, 2003 consisted of unrealized foreign currency gains of $32,000 and net loss of $10,546,000, as
unrealized gains and losses on available-for-sale securities were immaterial. For the three and six months ended June 30, 2002, total comprehensive loss approximates net loss as unrealized gains and losses on available-for-sale securities were
immaterial.



|8. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments
created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company does not expect the adoption of SFAS No. 150 to have a significant impact on its consolidated financial position or
results of operations.



|9. |  | Contingencies
|-- |  | -------------



The Company filed a lawsuit in United States District Court for the Northern District of California on April 23, 2002 against Ovion Inc.
(Ovion). The lawsuit seeks a declaration that Essure does not infringe Ovions United States Patent No. 6,096,052 and that the patent is invalid and unenforceable due to Ovions inequitable conduct before the Patent and Trade
Office (PTO). The Company subsequently amended its lawsuit to include charges of false advertising, trade libel, unfair competition, unjust enrichment and constructive trust against Ovion and its principals Jeffrey Callister and William
S. Tremulis. On August 13, 2002, Ovion filed a separate action, in the same court, charging the Company with infringement of a related patent, United States Patent No. 6,432,116 entitled Occluding Device and Method of Use. However,
during an October 28, 2002 hearing before the court, Ovion stated that it does not intend to charge the Company with infringement of United States Patent 6,096,052. The Company has denied infringement and filed a Declaratory Judgment counterclaim,
seeking a declaration that United States Patent No. 6,432,116 is not infringed and is invalid and unenforceable due to Ovions inequitable conduct before the PTO. While the Company believes that it will prevail in the above litigations, if it
does not, Ovion may be able to obtain damages against the Company and/or obtain an injunction against the Essure device. If Ovion were successful, there is no guarantee that the Company could negotiate a suitable arrangement with Ovion to acquire
rights under its patents. The Company believes that the complaint is without merit and the outcome will not have a material effect on the Companys financial position, results of operations or cash flows. No provision for any liability that may
result upon the resolution of this matter has been made in the accompanying condensed consolidated financial statements.



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



The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes thereto included in Part I-Item 1 of this Quarterly Report. In addition, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. We wish to alert readers that the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2002, as well as other factors, including those set forth in the following discussion and under Risk
Factors below, could in the future affect, and in the past have affected, our actual results and could cause our results for future periods to differ materially from those expressed or implied in any forward-looking statements made by us.



Overview



We develop, manufacture and market Essure, an innovative and proprietary non-incisional permanent birth control device for women. Essure is a soft and flexible
micro-insert delivered into a womans fallopian tubes and is designed to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure prohibits the egg from traveling through
the fallopian tubes and therefore prevents fertilization. The Essure placement procedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative to tubal ligation, the leading form of
birth control in the United States and worldwide. In November 2002, we obtained approval to market Essure in the United States from the United States Food and Drug Administration, or FDA, and have started our sales and marketing campaign in the
United States. Internationally, Essure is currently being marketed in Australia, Canada, Indonesia, Morocco, Singapore and fifteen countries in Europe.



We believe that Essure represents an attractive, less invasive, alternative to tubal ligation for women seeking permanent birth control. Laparoscopic
tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure
placement procedure does not require cutting or penetrating the abdomen, which is expected to lower the likelihood of post-operative pain due to the incisions/punctures, and is typically performed in an outpatient setting without general or regional
anesthesia. In the Pivotal trial of Essure, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essure micro-inserts. Patients in the trial were typically discharged approximately 45 minutes
after the Essure placement procedure. No overnight hospital stay is required. Furthermore, Essure is effective without drugs or hormones.



We believe Essure will also appeal to women who have completed childbearing but who are using either temporary birth control methods or no birth control
method. Among women from our Phase II clinical study and Pivotal trial who have worn the micro-inserts for two years or more, 99% rated their comfort with Essure as good to excellent at the follow-up visits conducted as of
October 2002. Excluding the day of the Essure placement procedure, 92% of the patients in the Pivotal trial who were employed returned to work in one day or less. Essures safety and recovery profile is one of the reasons that we believe it may
be a preferred alternative to currently available methods of permanent birth control.



We believe that physicians will be receptive to Essure because it is a less invasive permanent birth control option to offer their patients. We also believe physicians will find Essure procedures relatively easy to
perform after completing our training program. We believe hospitals will be able to utilize their facilities more cost effectively with the Essure placement procedure compared with tubal



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ligation. We expect payors to experience cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and
post-operative hospital stays associated with tubal ligations. In addition, payors may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the
drawbacks of currently available permanent birth control methods but who may elect to use Essure.



In November 2002, we received formal notification from the FDA that Essure had been approved for marketing in the United States. As a condition of the
Pre-Market Approval, or PMA approval, we are required by the FDA to follow our clinical trial patients for a five-year period following reliance on Essure for contraception. The information from this planned long-term post-approval study will
provide relevant information for our United States commercialization, as well as allow us to publish long-term data at the conclusion of the follow-up period. In addition, three months post-procedure and consistent with our pivotal trial protocol,
we are required to perform a hysterosalpingogram, or HSG, which calls for contrast dye to be injected into the uterus and fallopian tubes to confirm occlusion and micro-insert location. Because an HSG can be uncomfortable for women, we are working
with the FDA to approve a less-invasive alternative, such as a pelvic x-ray.



On July 17, 2003, we announced introduction of a new delivery catheter for the Essure system, the coil catheter, in the United States, Australia and Canada. A clinical study, performed in Australia,
demonstrated a higher placement rate with the coil catheter than with the previous delivery catheter. In the clinical study, 101 of 103 patients achieved bilateral placement. These placements were performed by 5 investigators, most of whom had
extensive experience with Essure. This translates to a statistical bilateral placement rate, at appropriate confidence levels, of 95%. The Essure system will be marketed with this new claim in Australia, Canada and, once approved, in the European
Union. Any claim in the United States that would change the 86% first procedure bilateral placement rate, which was based on the original delivery catheter studies in the Pivotal Trial, would be subject to approval by the FDA. We expect to perform
additional clinical evaluations, in the course of the existing U.S. Post Approval Study, before seeking approval of the claim in the United States.



Shortly after we received FDA approval in November 2002, we made our first commercial sale of Essure in the United States. We currently have professional
education field trainers and sales representatives across the United States. In order to accelerate the training process and to control training costs, we are now giving one-on-one training sessions to new physicians who have pre-scheduled Essure
cases. We expect to have approximately 700 physicians performing Essure procedures by the end of 2003. As of June 30, 2003, we had over 350 doctors performing Essure procedures.



With regards to reimbursement, we have been working diligently with third-party payors to make sure they understand the
benefits of Essure. To date, United States physicians and facilities using Essure have been reimbursed for the procedure under existing Current Procedural Terminology, or CPT codes. However, as is typical with any new medical procedures, the
reimbursement process could be quite lengthy and difficult.



Recently, Aetna United States Healthcare has issued a covered policy decision and recently issued a Medical Policy recommendation to cover the procedure. The National Blue Cross/Blue Shield Association has issued a positive recommendation
to its local members to cover the Essure procedure. These are the two largest providers of health benefits in the United States. They join a list of leading health insurance companies who have established a coverage policy for Essure, making it
widely available to women and couples seeking an alternative to tubal ligation or vasectomy in the United States. We expect to have reimbursement from payors covering a total of 200 million lives by the end of 2003.



Currently, many of the nations leading hospitals, including Montefiore
Medical Center in New York City, Hahnemann Hospital in Philadelphia, University of Pittsburgh Medical Center, Northwestern Medical Center in Chicago, Presbyterian Hospital of Dallas, Baylor University Medical Center in Houston, and University
Medical Center of Charleston have physicians on their medical staffs that now offer Essure to their patients seeking permanent birth control.



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In our effort to increase consumer awareness, we are testing direct marketing to the consumer. Since we
already have a concentration of physicians performing the Essure procedure in certain geographic areas, we have begun reaching out to the consumer in those areas. In early June, we commenced a direct mail campaign to 500,000 women in the Atlanta and
Chicago areas, with the goal of encouraging these women to contact our call center for additional information. In turn, our call center has the ability to offer a referral to a practicing Essure physician in a consumers area. We are also
running advertisements in a variety of magazines, such as Parents and Self. The advertisement is running regionally, based on locations where we have a concentration of physicians.



Our future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, the extent to which Essure gains market acceptance domestically and internationally, the rate of product adoption by doctors and patients, obtaining government and third-party
reimbursement, the rate at which we train United States physicians, the sales and training activity of our international distributors or marketing partners, the introduction of competitive products and other factors discussed in this Form 10-Q.



We maintain a website located at www.conceptus.com. We
make available free of charge on or through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to the SEC. Information contained on our website is not incorporated by reference into and does not form a part of this Form 10-Q.



Results of OperationsThree and Six Months Ended June 30, 2003 and 2002



Net sales were $2.0 million for the three months
ended June 30, 2003 as compared to $0.4 million for the three months ended June 30, 2002. Net sales for the six months ended June 30, 2003 were $3.2 million as compared to $0.7 million for the same period in the prior year. The increase in net sales
is due to our effort in commercializing Essure in the United States. We expect net sales to increase on a quarterly basis for the reminder of fiscal 2003. For the three months ended June 30, 2003, no single customer accounted for more than 10% of
net sales. For the same period in 2002, three distributors accounted for 51%, 16% and 12% of our net sales. For the six months ending June 30, 2003, one distributor accounted for 10% of our net sales. For the same period in 2002, three distributors
accounted for 41%, 14%, and 13% of our net sales. At June 30, 2003, accounts receivable from one distributor were 21% of the total net accounts receivables outstanding. At June 30, 2002, three distributors accounted for 48%, 15%, and 15% of the
total net accounts receivable outstanding.



Net product sales
by geographic region as a percentage of net sales for the three and six months ending June 30, 2003 and 2002 are as follows:



|                         |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|------------------------ |  | -------------------------- | - |  | ------------------------ | -
|                         |  | 2003                       |   |  | 2002                     |  
|United States of America |  | 75                         | % |  |                         | %
|Europe                   |  | 17                         |   |  | 45                       |  
|Australia                |  | 7                          |   |  | 51                       |  
|Asia and Canada          |  | 1                          |   |  | 4                        |  



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Cost of goods sold for the three and six months ended June 30, 2003 were $1.8 million and $2.9 million as
compared to $0.9 million and $1.6 million for the same periods in the prior year. The increase is primarily due to higher sales volume. We have also attained positive gross margin in the first and second quarters of 2003 and we expect to exit year
2003 with a positive gross margin. Cost of goods sold for the three and six months ended June 30, 2002 represented the costs of early stage product introduction and limited production volumes.



Research and development expenses, which include expenses related to product
development, clinical research and regulatory affairs, decreased to $1.7 million and $3.3 million for three and six months ended June 30, 2003 as compared to $2.3 million and $4.3 million for the same prior-year periods. The decline reflects the
downward trend of clinical research and regulatory affairs expenses now that we have received FDA approval for Essure. We expect research and development expenses for the remaining quarters of fiscal 2003 to remain consistent with that of the second
quarter of fiscal 2003.



Selling, general and administrative
expenses increased to $9.3 million for the three months ended June 30, 2003 from $4.0 million for the same period in the prior year. The $5.3 million increase is mainly attributable to the increase in headcount in our U.S. sales and marketing group
($2.0 million), expenses related to U.S. physician training and reimbursement ($1.3 million), expenses related to the recruitment and hiring of our new CEO ($1.0 million), expenses related to advertising and public relations ($0.8 million),
increased expenses in general and administrative expenses mainly to support commercialization activities in the U.S. ($0.7 million), partially offset by decreased expenses for our foreign subsidiaries ($0.5 million). Selling, general and
administrative expenses increased to $18.9 million for the six months ended June 30, 2003 from $7.2 million for the same period in the prior year. The $11.7 million increase is mainly attributable to the increase in headcount in our U.S. sales and
marketing group ($3.9 million), expenses related to U.S. physician training and strategic reimbursement expenditures ($3.7 million), expenses related to advertising and public relations ($2.0 million), increased general and administrative expenses
mainly to support commercialization activities in the U.S. ($1.7 million) and expenses related to the recruitment and hiring of our new CEO ($1.0 million), partially offset by decreased expenses for our foreign subsidiaries ($0.6 million). Although
we are continuing to market Essure outside of the U.S., we will focus most of our resources in developing the U.S. market. We expect domestic sales and marketing expenditures for the remaining quarters of fiscal 2003 to be consistent with or lower
than that of the second quarter of fiscal 2003, as much of the upfront advertising agency expenses have been incurred and we expect a lowering of physician training costs due to the one-on-one training sessions.



Net interest and other income were $0.2 million and $0.4 million for the
three and six months ended June 30, 2003 which represented interest earned on excess cash invested. Net interest and other income was $0.2 million for the three months ending June 30, 2002. For the six months ending June 30, 2002, net interest and
other expense was $12,000 which included a one-time settlement charge in connection with a 1997 distribution agreement related to our discontinued products and foreign currency loss offset by interest earned on excess cash invested.



We have experienced significant operating losses since inception and, as of
June 30, 2003, had an accumulated deficit of $139.3 million. We expect our operating losses to continue at least through 2003 as we continue to expend substantial resources in the selling and marketing of Essure in the United States and the
international markets. Due to the unpredictable nature of these activities, we do not know whether we will achieve or sustain profitability in the future.



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Liquidity and Capital Resources



At June 30, 2003, cash, cash equivalents, and short-term investments were $50.4 million, compared with $70.7 million at
December 31, 2002. The decrease is due to $20.5 million of cash used in operating activities and $0.4 million of capital expenditures, offset by $0.5 million of cash received from the exercise of stock options, and $0.1 million of cash due to the
effect of exchange rate changes on cash.



Net cash used in
operating activities was $20.5 million in the six months ending June 30, 2003, primarily as a result of our sales, marketing and physician training efforts related to the commercialization of Essure in the United States. Net cash used in operating
activities for the same period prior year was $12.6 million, primarily related to commercialization of Essure in Australia and Europe, payments related to our clinical trials, and scale-up of our manufacturing and quality operations in order to
transition to commercial scale manufacturing.



Net cash
provided by investing activities was $4.6 million in the six months ending June 30, 2003, primarily consisting of net maturities of short-term investments of $5.0 million, partly offset by purchases of capital equipment of $0.4 million. Net cash
used in investing activities was $4.8 million for the same period in the prior year, primarily due to net purchases of short-term investments of $4.0 million and purchases of capital equipment of $0.8 million to expand our manufacturing operations
and fund leasehold improvements.



Net cash provided by
financing activities was $0.5 million in the six months ending June 30, 2003, from the exercise of stock options. Net cash provided by financing activities was $67.1 million for the same period in the prior year, which represents net proceeds of
$66.8 million received from the follow-on public offering completed in June 2002 and $0.3 million from the exercise of stock options.



We expect to have negative cash flows from operations into at least 2004 and we estimate that our existing capital resources will be sufficient to meet
our cash requirements into 2004. The successful achievement of our business objectives may require additional financing and therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other
sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional funding may not be available when needed or on terms acceptable to us. If we are
unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing activities. Our future liquidity and capital requirements will depend upon
many factors, including, among others:



| |  |  | resources devoted to establish sales, marketing and distribution capabilities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | resources devoted to increasing our manufacturing capacity;
| | - |  | -----------------------------------------------------------



| |  |  | the rate of product adoption by doctors and patients; and
| | - |  | ---------------------------------------------------------



| |  |  | the insurance payor communitys acceptance of and reimbursement for the Essure procedure.
| | - |  | -----------------------------------------------------------------------------------------



Recent Accounting Pronouncements



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May
31, 2003,



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and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. We do not expect the adoption of SFAS No. 150
to have a significant impact on our financial position or results of operations.



Risk Factors



In addition to the other
information in this Form 10-Q, the following factors should be considered carefully in evaluating Conceptus and our business. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Form 10-Q.



We have a limited history of operation with Essure and have incurred significant operating losses since our inception.
We expect to incur significant operating losses for the foreseeable future and we may never achieve or maintain profitability.



We have a limited history of operation with Essure and have incurred significant operating losses since our inception in 1992, including operating losses
of $10.7 million and $21.9 in the three and six months ended June 30, 2003, $33.1 million in fiscal 2002, $18.8 million in fiscal 2001, and $15.8 million in 2000. We expect to continue to incur significant operating expenses and net losses as we
continue to expand sales and marketing efforts in the United States. Our net losses may continue to increase until sufficient revenues can be generated to offset these expenses. We may not be able to generate these revenues, and we may never achieve
profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.



If our product fails to gain market acceptance, our business will suffer.



We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well
established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. We do not know whether
physicians and patients will accept our product or whether we will be able to obtain their recommendations or endorsements. We believe that physicians will not use a product unless they determine, based on clinical data and other factors, that it is
an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks.
If Essure does not achieve significant market acceptance among physicians, patients and healthcare payors, even if reimbursement and necessary international and United States regulatory approvals are obtained, we may never achieve significant
revenues or profitability.



Government or third party
reimbursement for Essure may not be available or may be inadequate, which would limit our future product revenues and delay or prevent our profitability.



Market acceptance of Essure in the United States and in international markets will depend in part upon the availability of
reimbursement within prevailing healthcare payment systems. Reimbursement systems in international markets vary significantly by country and sometimes by region, and reimbursement approvals must be obtained on a country-by-country basis. Many
international markets have government-managed health care systems that determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed



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systems. Regardless of the type of reimbursement system, we believe that physician advocacy of our product will be required to obtain reimbursement.
Availability of reimbursement will depend, at least in part, on the clinical and cost effectiveness of our product. We do not know whether reimbursement for our product will be available in the United States or in international markets under either
government or private reimbursement systems, or whether physicians will support and advocate reimbursement for use of our product for all indications intended by us. Large-scale market acceptance of Essure will depend on the availability and level
of reimbursement in the United States and targeted international markets. We may be unable to obtain or maintain reimbursement in any country within a particular time frame, for a particular amount, or at all, which would limit our future product
revenues and delay or prevent our profitability.



If the
effectiveness and safety of our product are not supported by long-term data, we may not achieve market acceptance and we could be subject to liability.



The Pivotal trial of Essure was designed to support a PMA application and to have five years of post-market follow-up. In addition, patients in the
Phase II study will be followed to five years. The long-term results of using Essure will not be available for several years. If long-term studies or clinical experience indicate that Essure is less effective or less safe than our current data
suggest, we may not achieve or sustain market acceptance and/or we could be subject to significant liability.



We may not maintain regulatory approvals for Essure, our only product, which would delay or prevent us from generating product revenues, and would
harm our business and force us to curtail or cease operations.



Numerous government authorities, both in the United States and internationally, regulate the manufacture and sale of medical devices, including Essure. In the United States, the principal regulatory authorities are the FDA and corresponding
state agencies, such as the California Department of Health Services. The process of obtaining and maintaining required regulatory clearances is lengthy, expensive and uncertain.



We have received FDA approval to market Essure in the United States, the loss of which or our failure to comply with
existing or future regulatory requirements, could delay or prevent us from generating product revenues.



Sales of medical devices outside of the United States are subject to international regulatory requirements that vary widely from country to country. The
time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing may differ significantly from FDA requirements. Some countries in which we currently market
or intend to market Essure either do not currently regulate medical devices or have minimal registration requirements; however, these countries may develop more extensive regulations in the future, which could delay or prevent us from marketing
Essure in these countries.



The FDA and certain foreign
regulatory authorities impose numerous requirements with which medical device manufacturers must comply in order to maintain regulatory approvals. FDA enforcement policy strictly prohibits the promotion of approved medical devices for uses other
than those for which the FDA specifically approves the device. We will be required to adhere to applicable FDA regulations, such as the Quality System Regulation, and similar regulations in other countries, which include testing, control and
documentation requirements. Ongoing compliance with the Quality System Regulation and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including the FDA and the California
Department of Health Services, and by comparable agencies in other countries. If we fail to comply with applicable regulatory requirements, we may be



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subject to, 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 approval for devices, withdrawal of approvals and criminal prosecution, any of which could negatively impact our business.



Our intellectual property rights may not provide meaningful commercial
protection for our product, which could enable third parties to use our technology, or very similar technology, and could impair our ability to compete in the market.



We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the
same or similar technology in the United States and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may
have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights abroad. These problems
can be caused by the absence of rules and methods for defending intellectual property rights.



We will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent
positions of companies developing medical devices, including our patent position, generally are uncertain and involve complex legal and factual questions concerning the enforceability of such patents against alleged infringement. Recent judicial
decisions have established new case law and a reinterpretation of previous patent case law, and consequently, we cannot assure you that historical legal standards surrounding the questions of 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 obtain patents on surgical and medical procedures that are not performed by, or
as a part of, devices or compositions that are themselves patentable. Our ability to protect our proprietary methods and procedures may be compromised by the enactment of this legislation or any other limitation or reduction in the patentability of
medical and surgical methods and procedures. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may therefore diminish the value of our intellectual property.



We own, or control through licenses, a variety of issued patents and pending
patent applications. However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others
from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies.



We have taken security measures to protect our proprietary information,
especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection of our trade secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants could still disclose our proprietary information and we may not be able to protect our trade
secrets in a meaningful way. If we lose any employees we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees despite the existence of a nondisclosure and
confidentiality agreement and other contractual restrictions designed or intended to protect our proprietary technology. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.



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



If we cannot operate our business without infringing third-party
intellectual property rights, our prospects will suffer.



Our success will also depend on our ability to operate without infringing or misappropriating the proprietary rights of others. We may be exposed to future litigation by third parties based on claims that our product infringes the
intellectual property rights of others. There are numerous issued patents in the medical device industry and, as described in the next risk factor, the validity and breadth of medical device patents involve complex legal and factual questions for
which important legal principles remain unresolved. Our competitors may assert that our product and the methods we employ may be covered by United States or foreign patents held by them. In addition, because patent applications can take many years
to issue, there may be currently pending patent applications of which we are unaware that may later result in issued patents that our product may infringe. There could also be existing patents of which we are unaware that our product may
inadvertently infringe. If we lose a patent infringement lawsuit, we could be prevented from selling our product unless we can obtain a license to use technology or ideas covered by that patent or are able to redesign the product to avoid
infringement. A license may not be available to us on terms acceptable to us, or at all, and we may not be able to redesign our product to avoid any infringement. If we are not successful in obtaining a license or redesigning our product, we may be
unable to sell our product and our business would suffer.



We are currently and may in the future be a party to patent litigation, which could be expensive and divert our managements attention.



The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property
rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the United States Patent and
Trademark Office, to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. We may need to commence proceedings against others to enforce our patents, to protect our trade secrets or
know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us, and significant diversion of effort by our technical and management personnel.



A third party, Ovion, Inc., has brought to our attention two
patents and certain claims from a pending patent application owned by it. Ovion has indicated it believes that the claims of its patent and application cover Essure and its use. Because we believe that some or all of Ovions claims should be
included within our own patents, we have requested that the PTO to declare at least one interference. Interference is a proceeding within the PTO to determine which party was the first to invent, and which party is thereby entitled to ownership of,
the claims. We believe that we filed our patent applications for our product before Ovion filed the application that issued as its patent, and that we are entitled to any patentable claims now appearing in Ovions patent that cover Essure. We
do not know whether the PTO will declare an interference, whether we invented our product prior to Ovions date of invention, or whether we will prevail in an interference proceeding if it is declared by the PTO. If the PTO refuses to declare
an interference, or if Ovions claims are upheld in the interference proceeding, Ovion may be able to assert its patent successfully against us.



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We filed a lawsuit in United States District Court for the Northern District of California on April 23,
2002 against Ovion. The lawsuit seeks a declaration that Essure does not infringe Ovions United States Patent No. 6,096,052 and that the patent is invalid and unenforceable due to Ovions inequitable conduct before the PTO. We
subsequently amended our lawsuit to include charges of false advertising, trade libel, unfair competition, unjust enrichment and constructive trust against Ovion and its principals Jeffrey Callister and William S. Tremulis. During an October 28,
2002 hearing before the court, Ovion stated that it does not intend to charge us with infringement of United States Patent 6,096,052. However, on August 13, 2002, Ovion filed a separate action, in the same court, charging us with infringement of a
related patent, United States Patent No. 6,432,116 entitled Occluding Device and Method of Use. We have denied infringement and filed a Declaratory Judgment counterclaim, seeking a declaration that United States Patent No. 6,432,116 is
not infringed and is invalid and unenforceable due to Ovions inequitable conduct before the PTO. While we believe that we will prevail in the above litigations, if we do not, Ovion may be able to obtain damages against us and/or obtain an
injunction against the Essure device. If Ovion were successful, there is no guarantee that we could negotiate a suitable arrangement with it to acquire rights under its patents.



An adverse determination in litigation or interference proceedings to which we are or may become a party could subject us to
significant liabilities to third parties or require us to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing and selling Essure.



One of the patents included in our license from Target Therapeutics, a division of Boston Scientific Corporation, has been the subject of reexamination proceedings in the PTO and an infringement lawsuit by Target
Therapeutics. The patent is directed to variable stiffness catheters for use with guidewires, as might be used in our future products. Although the PTO reaffirmed the patent with amended claims and the lawsuit was settled, the patent could be
challenged or invalidated in the future. If this patent is invalidated, our ability to prevent others from using this proprietary technology would be compromised.



We have limited sales and marketing experience and minimal distribution capabilities, and if we are unable to develop
our sales and marketing capabilities or enter into appropriate distribution agreements, we may be unsuccessful in commercializing Essure.



In order to market, sell and distribute Essure, we will need to continue to develop a sales force and marketing group with relevant experience and enter
into additional arrangements with third parties to distribute Essure. Developing a marketing and sales force is expensive and time consuming and could delay our product launch in new geographic areas. If we fail to establish adequate marketing and
sales capabilities or enter into successful distribution arrangements with third parties, we may be unable to commercialize Essure successfully.



If we fail to manage our expansion, our business could be impaired.



Our number of employees has increased to 178 on June 30, 2003 from 138 on June 30, 2002. The growth that we have
experienced, and in the future may experience, provides challenges to our organization. Although we have no current plans to do so, we may in the future acquire one or more technologies, products or companies that complement our business. We may not
be able to effectively integrate these into our business. If we fail to manage our growth and expansion, our business could be impaired.



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We have limited experience in manufacturing Essure in commercial quantities.



If we are successful in marketing Essure, we plan to transition internal
manufacturing operations to that of third-party manufacturers to manufacture certain processes and assemblies of the product. We have identified various candidates that we believe could adequately produce Essure with the appropriate quality level
and in sufficient volumes. However, third-party manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and shortages of
qualified personnel, and compliance with FDA or other health authority requirements. We and/or our future third-party manufacturers may encounter manufacturing difficulties, which could negatively impact or delay commercialization of Essure.



We depend upon outside suppliers for raw materials and
finished goods.



We purchase both raw materials used
in our products and finished goods from various suppliers. These firms may not continue to supply us with raw materials or finished goods in sufficient quantities, or at all. Delays associated with any future raw materials or finished goods
shortages could delay commercialization of Essure, particularly as we scale up our manufacturing activities in support of United States and international commercial sales of Essure.



Health care reform may limit our return on our product.



The levels of revenue and profitability of medical device companies may be
affected by the efforts of government and third party payors to contain or reduce the costs of health care through various means. In the United States, there have been, and we expect that there will continue to be, a number of federal, state and
private proposals to control health care costs. These proposals may contain measures intended to control public and private spending on health care as well as to provide universal public access to the health care system. If enacted, these proposals
may result in a substantial restructuring of the health care delivery system. Significant changes in the United States health care system are likely to have a substantial impact over time on the manner in which we conduct our business and could have
a material adverse effect on our business, financial condition and results of operations.



We may be exposed to product liability claims, and we have only limited insurance coverage.



The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls. Although we have not
experienced any product liability claims to date, we cannot assure you that we will be able to avoid significant product liability claims and potential related adverse publicity. We currently maintain product liability insurance with coverage limits
of $10 million per occurrence and an annual aggregate maximum of $10 million, which we believe is comparable to that maintained by other companies of similar size serving similar markets. However, we cannot assure you that product liability claims
in connection with clinical trials or commercial sales of Essure will not exceed such insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, or at all. Insurance is expensive and in the
future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against us in excess of our insurance coverage, or a recall of our product, could cause our stock price to fall.



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



We depend on a number of key management, sales and marketing and technical
personnel. The loss of the services of one or more key employees could delay the achievement of our development and



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marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified
management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to
attract and retain such personnel.



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



The medical device industry is highly competitive and is characterized by rapid and significant technological change. The length of time required for
product development and regulatory approval plays an important role in a companys competitive position. As we commercialize Essure, we expect to compete with:



| |  |  | other methods of permanent contraception, in particular tubal ligation;
| | - |  | -----------------------------------------------------------------------



| |  |  | other methods of non-permanent contraception, including devices such as intrauterine devices, or IUDs, vaginal rings, condoms and prescription drugs such as the birth control pill,
injectable and implantable contraceptives and contraceptive patches; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other companies that may develop permanent contraception devices that are similar to or otherwise compete with Essure.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



We are aware of companies that are in earlier stages of development for
non-incisional permanent contraception devices, and other companies may develop products that could compete with Essure. We also compete with other companies for clinical sites at which to conduct trials. Competitive factors may render Essure
obsolete or noncompetitive or reduce demand for Essure.



If we experience difficulties in our sales and operations, our financial condition will be harmed.



Our financial condition is highly dependent on the sale of Essure in the United States, Australia, Europe and other countries. If we experience
difficulties in our domestic and international sales and operations, our business will suffer and our financial condition will be harmed. Our domestic and/or international operations and sales are subject to a number of risks, including:



| |  |  | recessions in economies;
| | - |  | ------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | reduced protection for intellectual property rights in United States and other countries;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | difficulties in accounts receivable collection; and
| | - |  | ---------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------



Our future liquidity and capital requirements are uncertain.



As we commercialize Essure on a wide-scale basis, we may require additional financing and therefore may in the future seek
to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional
funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our selling and



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marketing activities. We expect to have negative cash flows from operations into at least 2004. Our future liquidity and capital requirements will depend
upon many factors, including, among others:



| |  |  | the rate of product adoption by doctors and patients;
| | - |  | -----------------------------------------------------



| |  |  | obtaining government and third-party reimbursement for Essure;
| | - |  | --------------------------------------------------------------



| |  |  | the resources devoted to increasing manufacturing capacity to meet commercial demands;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to reduce our cost of sales;
| | - |  | ----------------------------------------



| |  |  | the resources devoted to establish sales and marketing and distribution capabilities; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the progress and cost of product development programs.
| | - |  | ------------------------------------------------------



Our future quarterly results may fluctuate.



Our future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors:



| |  |  | the rate at which new physicians are trained;
| | - |  | ---------------------------------------------



| |  |  | the rate of product adoption by doctors and patients;
| | - |  | -----------------------------------------------------



| |  |  | actions relating to reimbursement matters;
| | - |  | ------------------------------------------



| |  |  | the rate at which we establish distributors or marketing partners;
| | - |  | ------------------------------------------------------------------



| |  |  | the extent to which Essure gains market acceptance;
| | - |  | ---------------------------------------------------



| |  |  | the timing and size of distributor purchases; and
| | - |  | -------------------------------------------------



| |  |  | introduction of competitive products.
| | - |  | -------------------------------------



Item 3.    Quantitative and Qualitative Disclosures About Market Risk



The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change
over time as business practices evolve and could have a material adverse impact on our financial results.



Interest Rate Risk:    We have been exposed to interest rate risk as it applies to interest earned on holdings of short-term
marketable securities. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past. A 10% change in interest rates would not be material to our results of
operations. We reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated, short-term investments. We do not hold or issue derivative, commodity instruments
or other financial instruments for trading purposes.



Foreign Currency Exchange Risk:    Our expenses, except for those related to Europe and Australia, were denominated in United States dollars. Our revenues, 25% and 100% of which were in foreign currencies in the
three months ended June 30, 2003 and 2002, respectively, and 29% and 100% for the six months ended June 30, 2003, respectively, were immaterial in relation to our overall financial position. As a result, we have relatively little exposure for
currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or



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speculative purposes. In the future, if we feel our foreign currency exposure has increased, we may consider entering into hedging transactions to help
mitigate that risk. As of June 30, 2003, a fluctuation in exchange rates of 10% in the foreign currencies to which we are exposed would not have a material impact on our results of operations or financial condition.



Item 4.    Controls and Procedures



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



As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls financial reporting.



PART II.    OTHER INFORMATION



Item 1.    Legal Proceedings



We filed a lawsuit in United States District Court for the Northern District of California on April 23, 2002 against Ovion. The lawsuit seeks a declaration that Essure does not infringe Ovions United States
Patent No. 6,096,052 and that the patent is invalid and unenforceable due to Ovions inequitable conduct before the PTO. We subsequently amended our lawsuit to include charges of false advertising, trade libel, unfair competition, unjust
enrichment and constructive trust against Ovion and its principals Jeffrey Callister and William S. Tremulis. During an October 28, 2002 hearing before the court, Ovion stated that it does not intend to charge us with infringement of United States
Patent 6,096,052. However, on August 13, 2002, Ovion filed a separate action, in the same court, charging us with infringement of a related patent, United States Patent No. 6,432,116 entitled Occluding Device and Method of Use. We have
denied infringement and filed a Declaratory Judgment counterclaim, seeking a declaration that United States Patent No. 6,432,116 is not infringed and is invalid and unenforceable due to Ovions inequitable conduct before the PTO. While we
believe that we will prevail in the above litigations, if we do not, Ovion may be able to obtain damages against us and/or obtain an injunction against the Essure device. If Ovion were successful, there is no guarantee that we could negotiate a
suitable arrangement with it to acquire rights under its patents. We believe that the complaint is without merit and the outcome will not have a material effect on our financial position, results of operations or cash flows. No



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provision for any liability that may result upon the resolution of this matter has been made in the accompanying financial statements.



From time to time, we are involved in legal proceedings arising in the
ordinary course of business. We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on its financial position, result of operations or cash flow.



Item 2.    Changes in Securities and Use of Proceeds



None.



Item 3.    Defaults upon Senior Securities



None.



Item 4.    Submission of Matters to a Vote of Security Holders



The 2003 Annual Stockholders Meeting was held on June 10, 2003 and the following votes were obtained, approving all matters proposed to
stockholders:



|Proposal 1              |  | Required Vote           |  | Votes for Nominee |  | Votes Withheld
|----------------------- |  | ----------------------- |  | ----------------- |  | --------------
|Nomination of Directors |  | Plurality of votes cast |  |                   |  |               
|   Florence Comite     |  |                         |  | 17,616,261        |  | 765,534       
|   Sanford Fitch       |  |                         |  | 9,176,982         |  | 9,204,813     
|   Kathryn A. Tunstall |  |                         |  | 17,376,086        |  | 1,005,709     





|Proposal 2                                                                                                      |  | Required Vote          |  | For        |  | Against   |  | Abstain
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | ---------- |  | --------- |  | -------
|Selection of PricewaterhouseCoopers LLP
as Independent Accountants for the fiscal year ending December
31, 2003 |  | Majority of votes cast |  | 17,589,834 |  | 779,825   |  | 12,136 
|                                                                                                                |  |                        |  |           
|Proposal 3                                                                                                      |  | Required Vote          |  | For        |  | Against   |  | Abstain
|Proposal to adopt the Second Amended and
Restated 2001 Equity Incentive Plan                                    |  | Majority of votes cast |  | 15,958,091 |  | 2,389,222 |  | 34,482 



Item 5.    Other Information



None.



Item 6.    Exhibits and Reports on Form 8-K



(a)  Exhibits.



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|Exhibit Number |  | Description                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|               | 
|31             |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|               | 
|32             |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                       



(b)  Reports
on Form 8-K.



On April 18, 2003, the Company filed a current
report on Form 8-K under Item 5 (Other events) reporting that it had issued a press release announcing that Mark M. Sieczkarek had been appointed president and chief executive officer and a member of the board of directors, effective
immediately.



On May 8, 2003, the Company filed a current
report on Form 8-K under Item 5 (Other Events) reporting that it had issued a press release announcing financial results for the three financial quarter ended March 31, 2003.



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SIGNATURE



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



CONCEPTUS, INC.



By:

/s/    GLEN K. FURUTAGlen K. Furuta Vice President,
Finance and Administration and Chief Financial Officer




Date: August 14, 2003



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