UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission File Number: 0-27596

CONCEPTUS, INC.(Exact name of Registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

94-3170244(I.R.S. Employer Identification No.)331 East Evelyn
Mountain View, CA 94041(Address of principal executive offices)


Registrant's
telephone number, including area code:(650) 962-4000

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Name of Each Exchange on Which Registered:Common Stock, par value $0.003 per share

The NASDAQ Stock Market LLC


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non accelerated filer or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the shares of common stock of the Registrant held by non-affiliates as of June 30, 2008 was $268,191,755 based
upon the closing price of the common stock on the Nasdaq Global Market on June 30, 2008. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.

There
were 30,430,882 shares of Registrant's Common Stock issued and outstanding as of February 27, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2008 Annual Meeting of Stockholders are incorporated by reference
in Part III of this Form 10-K.



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Table of Contents



CONCEPTUS, INC.  FORM 10-K  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008



PagePart I.Item 1.

Business

3Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

31Item 2.

Properties

31Item 3.

Legal Proceedings

32Item 4.

Submission of Matters to a Vote of Security Holders

32Part II.Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32Item 6.

Selected Consolidated Financial Data

34Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

35Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

51Item 8.

Consolidated Financial Statements and Supplementary Data

52Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52Item 9A.

Controls and Procedures

52Item 9B.

Other Information

53Part III.Item 10.

Directors and Executive Officers of the Registrant

54Item 11.

Executive Compensation

54Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

54Item 13.

Certain Relationships and Related Transactions

54Item 14.

Principal Accountant Fees and Services

54Part IV.Item 15.

Exhibits and Financial Statement Schedules

55Index to Consolidated Financial Statements

59Signatures

102


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The following information should be read in conjunction with the Consolidated Financial Statements and the notes thereto located elsewhere
in this Annual Report on Form 10-K. This report, and in particular the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this report, the words "believes," "anticipates," "intends," "expects," "plans," "should,"
"will," "seeks" and words of similar import identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors
include, among others, the following: our limited operating and sales history; our dependence on a single product; the uncertainty of market acceptance of our product; the effects of the current
crisis affecting world financial markets; dependence on obtaining and maintaining reimbursement; effectiveness and safety of our product over the long-term; our ability to obtain and
maintain the necessary governmental clearances or approvals to market our product; our ability to develop and maintain proprietary aspects of our technology; our ability to manage our expansion or any
acquisition; our dependence on suppliers; intense competition in the medical device industry; the inherent risk of exposure to product liability claims and product recalls and other factors referenced
in "Risk Factors" and other sections of this report. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. We assume no obligation to update
these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Market, Ranking and Other Data

This Annual Report on Form 10-K contains various estimates related to the women's healthcare, contraception and
medical device markets. Some of these estimates have been included in studies published by government agencies and market research firms and some are our estimates and are based on our knowledge and
experience in the markets in which we operate. Additionally, other estimates have been produced by industry analysts based on trends to date, their knowledge of technologies and markets and customer
research, but these are forecasts only and are thus subject to inherent uncertainty. Our estimates have been based on information provided by customers, suppliers, trade and business organizations and
other contacts in the markets in which we operate. We believe these estimates to be accurate as of the date of this report. However, this information may prove to be inaccurate because of the method
by which we obtain some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data,
the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and other similar
data included in this report, and estimates and beliefs based on that data, may not be reliable.

PART I

ITEM 1.    BUSINESS

Overview

We develop, manufacture and market theEssure® permanent birth control
system, an innovative and proprietary medical device for women that was approved for marketing in the United States in November 2002 by the U.S. Food and Drug Administration, or FDA. The Essuresystem
uses a soft and flexible micro-insert that is delivered into a woman's fallopian tubes to provide permanent birth control by causing
benign tissue
in-growth that blocks the fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth prohibits the egg from
traveling through the fallopian tubes and therefore prevents fertilization. The effectiveness rate of theEssuresystem is 99.80% after four years of
follow-up.

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On
January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS. As a result of this transaction, Conceptus SAS became our wholly-owned subsidiary, and through it
we sellEssuredirectly in France and use distributors to sellEssurethroughout the rest of Europe. We
believe the acquisition of Conceptus SAS expands our presence in international markets and will increase our revenues as we will recognize sales at end-user pricing as compared to the
price at which we previously sold theEssureproduct directly to Conceptus SAS. Our consolidated financial statements for the year ended
December 31, 2008 include the financial results of Conceptus SAS beginning from the acquisition date of January 7, 2008. Consolidated net sales for the year ended December 31,
2008 was approximately $102.0 million of which 79% were generated in the United States. For financial information about geographic areas and for segment information with respect to net sales,
refer to the information set forth in Note 2Summary of Significant Accounting Policies of our Notes to Consolidated Financial Statements.

We
were incorporated in the state of Delaware on September 18, 1992. We maintain three websites located atwww.conceptus.com, www.essuremd.comandwww.essure.com. We make available free of charge on or through our websites, 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 or furnish such material to the Securities and Exchange Commission (SEC).
Information contained on our websites is not incorporated by reference into and does not form a part of this Form 10-K.

The Essure Procedure

TheEssureprocedure is typically performed in the office setting and is intended to be
a less invasive and a less costly solution to tubal ligation, the leading form of birth control in the United States and worldwide. 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 Essureprocedure does not require cutting or penetrating the abdomen, which lowers the likelihood of post-operative pain and complications
due to the incisions/punctures, and it can be performed in an outpatient setting. Currently, the majority of theEssureprocedures are performed in a
doctor's office using local anesthesia. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient or based on the experience and comfort level of the
physician. In the Pivotal trial of theEssuresystem, the average hysteroscopic procedure time was 13 minutes. A patient is typically discharged
approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, the Essuresystem is effective without drugs or
hormones. There is a three-month waiting period after the procedure during which the woman must use another
form of birth control while tissue in-growth occurs. At three months following the procedure, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which can
determine whether the device was placed successfully and whether the fallopian tubes are occluded. Outside of the United States, patients are required to return for a pelvic X-ray at three
months post-procedure with a subsequent HSG if device location on the initial radiographic image appears suspicious.

We
believe that theEssuresystem is a better alternative to tubal ligation for physicians, hospitals and payers. The Essuresystem is a less invasive
permanent birth control option for physicians to offer to their patients; hospitals are able to utilize their
facilities more cost effectively with theEssureprocedure compared with tubal ligation; and payers are able 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, we believe the Essureprocedure is superior to
other non-tubal ligation permanent contraception alternatives because, unlike other device designs, the Essureprocedure does not involve the use of radio frequency (RF) energy, which subjects the
patient to risks of thermal injury, bowel injury and
dilutional hyponatremia. Payers may also benefit from the reduction

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of
unplanned pregnancies associated with the use of temporary birth control methods. Published reports estimate that approximately 700,000 tubal ligation procedures are performed each year in the
United States. We intend to capture the majority share of this market and establish theEssureprocedure as the gold standard for permanent birth
control. We also believe theEssuresystem is a solution for women whose family is complete but are using temporary birth control methods.

The Essure System

We developed theEssuresystem in response to what we perceived as a market need for a
permanent, less invasive and less costly solution to tubal ligation.

TheEssuremicro-insert is designed to be placed into each fallopian tube during a single procedure using a hysteroscope, an instrument
that allows visual examination of the cervix and uterine cavity, and our minimally invasive tubal access delivery system. The delivery system is a disposable plastic handle with a thumb-wheel that is
connected to our proprietary guidewire and catheter system. The micro-insert is constructed of a stainless steel inner coil, a dynamic outer coil made from a nickel titanium
alloy, called Nitinol, and a layer of polyethylene terephthalate, or polyester fibers, wound between the inner coils. AnEssuremicro-insert is deployed
into each of the woman's fallopian tubes using a hysteroscope. Using the hysteroscope for guidance, the delivery catheter is guided through the uterus and the opening of the fallopian tube. Once the
physician has properly positioned the delivery system in the fallopian tube, the physician releases the micro-insert. When released, the micro-insert automatically expands to the contours of the
fallopian tube. Over a three-month time frame, the polyester fibers within the micro-insert elicit a localized, benign tissue in-growth that occludes, or blocks, the fallopian tubes,
thereby preventing conception.

We
did not conduct a clinical trial to compare theEssureprocedure to laparoscopic tubal ligation. We believe, however, based on current
data from our Pivotal trial and published reports on laparoscopic tubal ligation, that theEssureplacement procedure has the following key advantages
over laparoscopic tubal ligation:

Essure Procedure

Tubal LigationProcedure


Transcervical à Non-
incisional


Incisional à Abdominal
incision or punctureTypical anesthesia


Local, IV sedation


GeneralAverage hysteroscopic procedure time


13 minutes


Not ApplicableAverage post-op recovery time


45 minutes


4-5 hoursWhere performed


Outpatient / hospital,
surgi-center or doctor's office


Inpatient / hospital or
surgi-centerAverage return to regular activities*


typically 24 hours


4-6 days


---

We
believe that theEssuredevice and theEssureprocedure offer the following important
benefits to patients, physicians, hospitals and payers:



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There are, however, certain key factors that a woman must consider when she selects the Essureprocedure.



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As
with all medical procedures, there are risks associated with theEssuredevice and the Essureprocedure. Because there are no abdominal incisions or
punctures and general or regional anesthesia is typically not required, the risks
associated with theEssureprocedure are more typical of hysteroscopic procedures and are of a lesser severity than those of procedures that require
invasion of the abdominal cavity. This is typified by the minor nature of most of the adverse events reported in our clinical trials. The most frequent risk with the Essureprocedure is the inability to
rely on the micro-insert for
contraception, due primarily to lack of micro-insert placement and less frequently to misplacement of the micro-insert. Based on data gathered in our clinical trials, adverse events, which prevented
reliance on theEssuredevice for contraception, were reported as follows: failure to place 2 micro-inserts in first procedure (14%), initial tubal
patency (3.5%), expulsion (2.2%), perforation of fallopian tube (1.8%), or other unsatisfactory device location (0.6%). All of the patients in the Pivotal and Phase II clinical studies who
experienced tubal patency at the 3-month HSG were found to have bilateral occlusion at a repeat HSG performed at approximately 6 months after the Essureprocedure. In addition, all of the patients
in the Pivotal clinical study who chose to undergo a second Essureprocedure following a micro-insert expulsion achieved successful micro-insert placement and were subsequently able to rely on the Essuresystem for contraception. The majority of women report mild to moderate pain immediately after the Essureprocedure. The most frequent adverse
events and side effects reported as a result of the hysteroscopic procedure to place the micro-inserts were
as follows: cramping (29.6%), pain (12.9%), nausea/vomiting (10.8%), dizziness/fainting (8.8%) and spotting/vaginal bleeding (6.8%). Hypervolemia, an increase in blood volume, occurred in
<1% of cases. During the first year of reliance on theEssuresystem for contraception (approximately 15 months after micro-insert
placement), the following episodes were reported as at least possibly related to theEssuremicro-inserts: back pain (9.0%), abdominal pain (3.8%), and
dyspareunia (painful intercourse) (3.6%). All other events occurred in less than 3% of women. Of those women who reported spotting, most reported spotting for an average of three days
post-procedure. Of those women who reported experiencing pain, one-third reported that pain had generally subsided after the day of the procedure.

Our Clinical Progress

We commenced a Phase II clinical study of safety and preliminary effectiveness of the Essuredevice in November 1998 and a Pivotal,
or Phase III, trial of theEssuredevice in May
2000. The number of women in whom at least one of twoEssuremicro-inserts was placed totaled 682 between the two clinical trials. At three month
follow-up, 647 women began relying on theEssuredevice as a method of permanent birth control. The clinical endpoints of the study include
safety, effectiveness and patient satisfaction.

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In
April 2002, based on data from our trials, we submitted our PMA application to the FDA. In November 2002, we received formal approval from the FDA to market the Essuredevice in the United States.

Based
on clinical trial data, theEssuredevice has been demonstrated to be 99.80% effective after four years and 99.74% effective after
five years of follow-up as demonstrated in a small
portion of women undergoing clinical studies. Up to nine year follow up of all patients in clinical trials is currently completed. We intend to submit a PMA supplement to the FDA to update the product
labeling incorporating the results of the follow-up data.

Based
on the ESS205 post-approval study, theEssureProcedure has a 94.6% first procedure bilateral placement rate. In June
2007, the FDA approved a PMA supplement for a modified delivery system. A post-approval study is being conducted to investigate the bilateral placement rate for the modified delivery
system, which is expected to be similar for the newest model of theEssuresystem.

In
addition, theEssureprocedure has proven to have high patient satisfaction in our clinical trials. Clinical data submitted to the FDA
in our Annual Reports show that Phase II study patients' tolerance to wearing theEssuredevice up to five years was rated as "good" to
"excellent" in 99% of women at all visits through January 2006. Among women from our Pivotal trial who have worn the micro-inserts up to five years, at least 99% reported their comfort with the Essuredevice as "good" to "excellent" at all visits. At five-year follow-up (reporting as of December 2007), 98% of women
reported their overall satisfaction as "somewhat satisfied" to "very satisfied." Excluding the day of theEssureplacement procedure, 92% of women in
our clinical trials who were employed returned to work in one day or less.

Data
from our clinical trials are undergoing analysis, and the clinical trial statistics presented may change as longer term follow-up data from the women participating in
the trials is gathered, audited and analyzed, or if the FDA requests that calculations be performed in a different manner than presented in our PMA application.

Other
investigators are also conducting studies on theEssuredevice; as of January 2009, we know of 172 clinical publications related to Essureand
hysteroscopic sterilization.

Our Market

Birth control use in the United States is prevalent among a majority of women of reproductive age, 15-44 years of
age. According to the 2002 National Survey of Family Growth, or NSFG, conducted by the Centers of Disease Control and Prevention and the National Center for Health Statistics, a periodic survey which
provides the most current available statistics on reproductive health in the United States, an estimated 62% of the 61.6 million women of reproductive age in the United States use some form of
birth control. The most common method of contraception in the United States among women using birth control, according to the NSFG, was permanent birth control, including tubal ligation and vasectomy,
at 36%, followed by oral contraceptives at 31%, and the male condom at 18%. Among women aged 35-44 years that use some form of birth control, female sterilization was the leading
method.

According
to the NSFG, approximately 13.8 million women in the United States rely on permanent birth control methods, such as tubal ligation and vasectomy. Published reports
estimate that 700,000 tubal ligation procedures are performed each year in the United States, and the prevalence increases with age and number of children. Approximately 89% of women in the United
States who have had tubal ligation have birthed two or more children, according to the NSFG. According to the same source, among the women in the United States who have had tubal ligation,
approximately 70% are between the ages of 35 and 44.

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In addition to permanent birth control procedures, the NSFG estimated that approximately 24.3 million women in the United States use temporary methods of
birth control, such as oral contraceptives, condoms, implants and injectables. Included in this group, according to the same source, are approximately 7.6 million women who have two or more
children, which we believe makes them more likely to consider permanent forms of birth control. We believe our market includes not only women who desire permanent birth control, but potentially also
women who have completed childbearing but are using either temporary birth control methods or no birth control method at all because no viable non-incisional alternative to tubal ligation
previously has been available.

Based
on data from the CDC's 2002 National Survey of Family Growth, the following chart summarizes birth control methods used by women using contraception between the ages of
30-44 in the United States:

Age 3034

Age 3539

Age 4044Fertile women (% of U.S. women in reproductive age, within their age range)


60.8
%

47.1
%

30.4
%Method:Tubal ligation


28
%

41
%

50
%Pill


31
%

19
%

11
%Condom


17
%

16
%

12
%Vasectomy


9
%

14
%

18
%All others


15
%

10
%

9
%


Worldwide,
there is a larger market for permanent birth control. The most current and available report on worldwide birth control statistics is theUnited Nations
World Contraceptive Use 2007report on birth control methods used by reproductive couples. According to the report, 63% of women aged 15-49 years were using
a form of contraception. The report indicated that tubal ligation, the leading birth control method worldwide, was used by 20% of women, followed by intrauterine devices, or IUDs, at 16%, and oral
contraceptives at 9%.

We
believe that, in addition to women that have completed childbearing, theEssureprocedure also appeals to women who are in search of
permanent birth control and who are currently using either temporary birth control methods or no birth control method. TheEssureprocedure is also a
good choice for women who desire permanent birth control and are not good candidates for a surgical tubal ligation, including obese women, those with multiple previous surgeries and/or
contraindications to general anesthesia. During the Phase II of the clinical study for theEssureprocedure, over a follow up period of five
years, 99% of the women who underwent theEssureprocedure and returned for follow up rated their tolerance to the implanted Essuredevice as "good" to
"excellent." Additionally, at all Pivotal trial visits subsequent to one-week post device placement, at least 99%
of the women rated their comfort as "good" to "excellent." At all Pivotal trial study visits through five years follow up, at least 95% of women rated their overall satisfaction as "somewhat
satisfied" to "very satisfied." Excluding the day of theEssureplacement procedure, 92% of the patients in the Pivotal trial who were employed returned
to work in one day or less. The safety and recovery profile of theEssureprocedure is one of the reasons that we believe it may be a preferred
alternative to currently available methods of permanent birth control.

Sales and Marketing

On November 6, 2002, we received FDA approval to market theEssuredevice in the
United States. The achievement of this major milestone enabled us to begin an aggressive marketing and sales campaign in the United States. We are distributing the Essuredevice in the United States
through our direct sales force.

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Our
sales and marketing strategy is to market theEssuredevice primarily to gynecologists while building interest and awareness among
consumers and general practitioners. Through the use of public relations and targeted advertising and targeted direct-to-consumer advertising, we intend to increase awareness
of theEssureprocedure among consumers, general practitioners and the broader medical community. In this regard, we conduct regional advertisements in
a variety of media, including television, radio, direct mail and print. We also continue to attend meetings for the American Association of Gynecologic Laparoscopists (AAGL) and American College of
Obstetricians and Gynecologists (ACOG) and women's healthcare societies. Through these programs, we hope to drive patient awareness of theEssureprocedure and interest from our clinical community.

We
continue to increase the size of our sales force so as to increase our call frequency on physicians. Among other responsibilities, our sales representatives are attempting to increase
penetration and utilization of theEssureprocedure, as well as to facilitate the movement of theEssureprocedure to the office environment.

The Essuredevice is currently being marketed in multiple countries. Internationally, we are selling the Essuredevice through a combination of direct sales forces and distribution networks.

Our
strategy in the near term is to focus on moving physicians through three stages of usage: preceptorship, in-hospital certification and in-office. We believe
the office is the best site of service for theEssureprocedure because it is where the benefits are most realized, the most satisfying and comfortable
place for the patient, where the physician is the most economically and logistically efficient, and it represents the lowest cost site of service to the payer or state. In addition, we will focus in
the near term on direct to consumer advertising which we expect will grow the awareness of theEssuresystem among women and the medical community,
thereby increasing the number of women who choose theEssureprocedure.

Reimbursement

Market acceptance of theEssuresystem depends in part upon the availability of
reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to continue to obtain reimbursement. As of December 31, 2008, we
have received positive reimbursement decisions for theEssureprocedure from most private insurers and from 46 of the 51 Medicaid programs in the United
States. We continue to receive positive responses relating to reimbursement, which we believe will help increase the adoption of theEssuredevice by
doctors and patients. We intend to continue our effort to educate payers of the cost-effectiveness of our product and to establish further programs to help physicians to navigate
reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individual's specific benefit plan.

Effective
January 1, 2009, the Centers for Medicare and Medicaid Service (CMS), the Medicare Physician Fee Schedule national average payment for hysteroscopic sterilization (CPT
code) is $427 when performed in a hospital (facility) and $1,862 (non-facility) when performed in a physician's office. In addition, in the CMS Final Rule for the 2009 Outpatient
Prospective Payment System or OPPS, which assigns hospital outpatient reimbursement amounts, CPT 58565 maps to APC 202 which is assigned a Medicare National Average of $2,888, which under Medicare
includes the cost of the implant. In 2009, the Medicare national average payment for hysteroscopic sterilization in the ambulatory surgery center is $1,535, which includes the cost of the implant. We
believe these values are very favorable for theEssureprocedure and will help in establishing increased utilization of the device amongst doctors.

Effective
May 15, 2008, California's state fee-for-service Medicaid program announced coverage of the Essureprocedure for beneficiaries that are 21 years of age or older. Physicians may perform the Essureprocedure in the physician's office, the ambulatory surgery center or the hospital outpatient department. Medi-Cal is to pay $2,282
as a global fee for an in-office procedure. We believe these

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values
are very favorable for theEssureprocedure and will continue to help in establishing increased utilization for devices amongst doctors.

Reimbursement
systems 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 healthcare systems that determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as
government-managed systems.

During
the last several years, we received several positive responses from government and private agencies relating to reimbursement, which we believe will help us to speed up the
acceptance of theEssureprocedure by doctors and patients. In Europe, we are developing a strategic plan to obtain reimbursement in a number of
European countries. In France, we obtained official reimbursement under certain conditions for theEssuredevice in February 2005 for the term of two
years with the Haute Autorité de Santé, or HAS. This conditional approval required the procedure to be reserved for patients who had a potential laparoscopic risk. In
addition, it required a follow up to demonstrate the safety of theEssuredevice, for which we conducted a multicenter study. As a result of these
studies, the "Haute Autorité de Santé" lifted all the restrictions in October 2007, thereby putting theEssureprocedure
on an equal footing with tubal ligations. Following this decision, theEssureprocedure is covered in France for all women, regardless of medical
status. In addition, the CEPS in France ruled in November 2007 that the reimbursement for theEssuredevice will remain at the then current levels of
663 Euros for the next five years.

Manufacturing

We have a manufacturing facility at our headquarters in Mountain View, California, which we use only for pilot-line
manufacturing. We have a third-party original equipment manufacturer ("OEM") which manufacturesEssuredevices at their manufacturing facility located
in Mexico. We are currently validating a second source OEM.

Our
agreement with our OEM provides that they will continue to use our qualified suppliers of materials and components, unless we agree otherwise. We conduct periodic quality audits of
our key suppliers. Most components, including nickel titanium alloy, delivery wires, the inner release catheter tubing and stainless steel wires, are available from more than one source and we intend
to qualify at least two sources for certain components. Currently, the key single source supplier component is the polyester fiber. The polyester fiber causes the necessary tissue
in-growth, is made to our specifications and currently has only one qualified source supplier. However, we have accumulated a quantity of this material that exceeds our anticipated
production needs for the next several years. We are in the process of qualifying a second source supplier for this fiber.

Our
manufacturing facility and our OEM's manufacturing facilities are subject to periodic inspection by regulatory authorities. Our quality management system is subject to FDA
Part 820Quality System Regulations. These regulations require that we conduct our product design, testing, manufacturing and quality control activities in conformance with these
regulations and that we maintain our documentation and records of these activities in a prescribed manner. Our manufacturing facility is licensed by the California Department of Health Services, Food
and Drug Branch and is registered with the FDA. In addition our manufacturing facility has received EN/ISO 13485 Quality Management Systems certification and our quality system is in compliance
with the European Union Medical Device Directive 93/42/EEC, allowing us to affix the CE Mark to our products after assembling appropriate documentation. EN/ISO 13485 Quality Management Systems
standards have been developed to harmonize standards for the design, manufacturing and distribution
of medical devices. Quality operations have been developed to comply with worldwide regulatory requirements that companies know the standards of quality on a worldwide basis.

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Research and Development

Our research and development activities are performed by our product development, process engineering, intellectual property and
regulatory and clinical research staff. Research and development expenses for 2008, 2007, and 2006 were approximately $6.8 million, $5.9 million, and $4.4 million, respectively.
We intend to continue to focus our research and development efforts on the development of new or alternative product designs and enhancements.

Intellectual Property

Our policy is to protect our proprietary position aggressively by, among other things, filing U.S. and foreign patent applications to
protect technology, inventions and improvements that are important to the development of our business. In addition to the patent protection we have obtained in our license from Target Therapeutics, a
division of Boston Scientific Corporation, we have filed device and method patents for the use of our product in new clinical applications and have pursued patents for several of our other inventions
and developments. As of January 31, 2009, we had 20 U.S. patent applications, 26 U.S. issued patents pending, 29 foreign and/or international patent applications pending and 61 issued foreign
patents. Our issued patents include claims relevant to transcervical fallopian tube occlusion devices and methods, guidewire manipulation, a guidewire design, fallopian tube visualization,
electrosurgical instruments and a delivery mechanism for a tubal occlusion device. The pending applications describe various aspects of our proprietary tubal access platform technology, including
claims specific to ourEssuretubal occlusion device.

We
obtained an exclusive license in the field of reproductive physiology to technology developed by Target Therapeutics. In addition, we have granted to Target Therapeutics an exclusive
license to our technology in certain fields of interventional medicine outside of reproductive physiology. Our exclusive license of Target Therapeutics' technology encompasses certain technology
developed by Target Therapeutics as of February 1, 1996. We do not have any preferential rights to technology developed by Target Therapeutics after that date. The license from Target
Therapeutics includes patents which relate to the design of its micro-catheters (the initial patent for which expired in June 2006), certain aspects
of guidewire design and other important aspects of micro-catheter, guidewire and micro-coil technologies. In addition, should any of our Target Therapeutics technology be found to infringe
upon a third party's patent rights, it may affect our ability to develop, market and sell additional products in the future. Finally, Target Therapeutics has the right to terminate our license if we
materially breach the terms of the license. If the Target Therapeutics license were terminated, it might affect our ability to develop, market and sell additional products in the future.

We
believe that we are free to make and sell our product, and that our product and its intended use does not infringe any valid patent rights of any other party. However, a third party,
Ovion, Inc. (a subsidiary of American Medical Systems Holdings, Inc.), or Ovion, brought to our attention a patent and certain claims from a pending patent application owned by it. Ovion
indicated that it believes the claims of its patent and application coverEssureand its use. On October 23, 2003, we entered into a settlement
agreement with Ovion pursuant to which we received a sole, worldwide license to Ovion's patent rights relative to theEssuresystem, and Ovion may not
grant any additional such licenses to other parties. The settlement agreement provided for a cash payment of $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and a license fee
of $2.0 million payable in our common stock in equal installments in the first and second quarters of 2004. We are obligated to pay 3.25% of the accumulative revenue derived from sale of the Essuresystem in excess of $75.0 million as royalty for a period of ten years starting from the date of settlement. In accordance with the terms
of the settlement agreement, our prepaid royalties will be fully amortized when cumulative net sales ofEssuresystem reached $136.5 million.
Prepaid royalties were fully amortized at December 31, 2007. Ovion was not granted any rights to our intellectual property pursuant to the settlement agreement. The settlement agreement was
approved by the U.S. District Court for the Northern District of California on November 6, 2003.

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Although
we have reached a settlement agreement with Ovion, we still believe that some or all of Ovion's claims should be included within our own patents, and we requested that the PTO
declare an interference. An 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 theEssuredevice before Ovion filed the application that issued as its patent, and that we are entitled to
any patentable claims now appearing in their patent that cover our product. 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. Future royalties might be avoided by a favorable interference ruling before the patent office, which
might occur if interference is declared and if we are found to have priority of invention.

Government Regulations

The research, development, manufacture, labeling and distribution of medical diagnostic and surgical devices and pharmaceutical
products intended for commercial use are subject to extensive governmental regulation by the FDA in the United States and by a variety of regulatory agencies in other countries. Under the Federal
Food, Drug and Cosmetic Act, known as the FD&C Act, manufacturers of medical products and devices must comply with certain regulations governing the design, testing, manufacturing, packaging,
servicing and marketing of medical products.



The manufacture and sale of our product are subject to extensive regulation by numerous governmental authorities, principally the FDA
as well as state agencies. In particular, the FDA regulates the research, clinical testing, manufacturing, safety, labeling, storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The FDA requires that all medical devices introduced to the market either be preceded by a pre-market notification clearance under
Section 510(k) of the FD&C Act, or an approved PMA. A PMA application is approved when the FDA has determined that we have submitted clinical trial data and manufacturing quality assurance
information to prove it is safe and effective for its labeled indications, or for devices that are not of the same type or substantially equivalent to a device in commercial distribution prior to
1976.

The
FDA imposes 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 device is specifically approved by the FDA. We and our OEM are required to adhere to applicable FDA and other regulations,
including testing, control and documentation requirements. Ongoing compliance with the Quality Systems Regulations and other applicable regulatory requirements is monitored through periodic
inspections by federal and state agencies, including the FDA and the California Department of Health Services. If we or our OEM do not comply with applicable regulatory requirements, we may be subject
to warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, withdrawal of approvals and criminal prosecution, among other
penalties.

TheEssuredevice is regulated by the FDA and received FDA PMA approval for commercialization in the United States on November 6,
2002. We received approval to commercialize the latest model of ourEssuredevice on June 15, 2007. In July 1994, our former San Carlos facility
was inspected by the California Department of Health Services, and we were subsequently granted a California medical device manufacturing license. In February 1997, our San Carlos facility was
inspected by the California Department of Health Services, and we were granted a California drug manufacturing license. In March 1997, we were inspected by the FDA, with no action indicated and we
became ISO 9001 certified
in December 2000. In July 2002, we successfully passed another FDA inspection and, partly as a result, received our PMA approval in November 2002. Our San Carlos facility was inspected by FDA again in
June 2003, which resulted in FDA483 (audit findings), which were addressed adequately. A California Department of Health Services inspection occurred in June 2008, which generated two minor findings,
and resulted in a State Manufacturing License for Conceptus. In July 2008, our Mountain View facility underwent another FDA inspection and we successfully passed our inspection with no action
indicated.

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As part of the conditions of approval, we are required to provide data annually to the FDA in order to gather long-term safety and effectiveness data
on theEssuresystem. For the newest model of theEssureSystem, we are also required to conduct a post
approval study in the United States to evaluate placement rates. We are required to provide information to the FDA on death or serious injuries which our medical devices have allegedly caused or with
which they have been associated, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. If the FDA believes that a company
is not in compliance with the law or regulations, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the
company, its officers and its employees. We are also subject to regulation by the U.S. Occupational Safety and Health Administration and by other government entities. Regulations regarding the
manufacture and sale of our product are subject to change. We cannot predict what impact, if any, such changes might have on our future ability to manufacture, market and distribute the Essuresystem.



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. No
assurance can be given that such foreign regulatory approvals will be granted on a timely basis, or at all. In addition, there can be no assurance that we will meet the FDA's export requirements or
receive FDA export approval when such approval is necessary, or that countries to which the devices are to be exported will approve the devices for import. Our failure to meet the FDA's export
requirements or obtain FDA export approval when required to do so, or to obtain approval for importation into various countries, could have a material adverse effect on our business, financial
condition and results of operations.

The
European Union has promulgated rules which require manufacturers of medical products to obtain the right to affix to their products the CE Mark, an international symbol of adherence
to quality assurance standards and compliance with applicable European Union Medical Device Directives. In some markets, approval to distribute is subject to compliance with local regulations such as
registration with health ministries and/or particular requirements regarding labeling or distribution.

Some
countries in which we currently operate or contemplate to operate either do not currently regulate medical devices or have minimal registration requirements. However, these
countries may develop more extensive regulations in the future that could delay or prevent us from marketing theEssuresystem in these countries.

On
February 2, 2009, we have obtained the Brazilian National Health Regulatory approval that enables us to market our product in Brazil. We believe that the Brazilian market could
represent a significant market opportunity.

On
December 15, 2008, Conceptus Medical Limited ("CML") was incorporated in the United Kingdom and became a wholly owned subsidiary. CML was established to serve as
our direct sales office in the United Kingdom after the termination of our distributor during the fourth quarter of 2008. We believe that the United Kingdom market supports over 60,000 cases of
permanent birth control between tubal ligation and vasectomies on an annual basis. We believe the establishment of CML continues to expand our direct presence in international markets and will
increase our revenues as we will recognize sales at end user pricing as compared to the price at which we previously sold to the distributor.

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Competition

The medical device industry is highly competitive and is characterized by rapid and significant technological change. To compete
successfully, we will need to continue to demonstrate the advantages of ourEssureproducts and technologies over well-established
alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. As we commercialize and market the Essuresystem, we expect to compete with:



We
compete against other surgical procedures for permanent birth control, mechanical devices and other contraceptive methods, including existing methods of reversible birth control for
both women and men.

As
of December 31, 2008, we were aware of two companies, Hologic, Inc. and American Medical Systems, Inc. which were attempting to bring transcervical sterilization
devices to the market. In January 2009, Hologic received CE marking approval for its permanent contraception system, allowing it to market its product in the 27 countries of the European Union (EU)
and three of the four member states of the European Free Trade Associations (EFTA). In the United States, the PMA application for this company is currently under Food and Drug Administration (FDA)
review. This company is in the process of registering its product in Canada and Australia. In February 2009, American Medical Systems announced it has decided to suspend their development efforts in
the women's permanent contraception product market.

Many
of our competitors possess a larger women's health focused sales force and have access to the greater resources required to develop and market a competitive product than we do. In
addition, new competition and products may arise due to consolidation within the industry and other companies may develop products that could compete with the Essuresystem. Our competitive position
also depends on:



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These
and other competitive factors may render theEssuresystem obsolete or noncompetitive or reduce demand for the Essuresystem.

Product Liability and Insurance

The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls. We
currently maintain product liability insurance with coverage limits of $10.0 million per occurrence and an annual aggregate maximum of $10.0 million, which we believe is comparable to
that maintained by other companies of similar size serving similar markets. However, there can be no assurance that product liability claims in connection with clinical trials or sale of our product
will not exceed such insurance coverage limits, which could have a material adverse effect on us, 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 have a material adverse effect on our business, financial condition and results of operations.

Employees

As of December 31, 2008, we have 236 full-time employees, consisting of 19 in manufacturing and quality assurance
and engineering, 16 in research and development, 162 in sales and marketing and 39 in general and administrative functions worldwide. We generally 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 strategic 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.

None
of our employees are represented by a labor union or covered by a collective bargaining agreement, and we believe our employee relations are good.

ITEM 1A.    RISK FACTORS

In addition to the other information in this Form 10-K, the following factors should be
considered carefully in evaluating Conceptus and our business. The risks and uncertainties described below are those that we currently believe may materially affect us. Other risks and uncertainties
that we do not presently consider to be material or of which we are not presently aware, may become important factors that affect us in the future. You should not consider this list to be a complete
statement of all potential risks and uncertainties.

We are presently a one product company and if our product fails to gain market acceptance, our business will suffer.

We are dependent on theEssuresystem, which is currently our only commercial product.
Notwithstanding FDA approval to market theEssuresystem in November 2002, theEssuresystem is a novel
product compared to other products in 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. Physicians and patients may not accept our product and we may not be
able to obtain their recommendations or endorsements in sufficient amounts to be profitable. 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

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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 the Essuresystem does not
achieve significant market acceptance among physicians, patients and healthcare payers, even if reimbursement levels are
sufficient and necessary U.S. and international regulatory approvals are maintained, we may fail to achieve significant revenues or sustain profitability.

We have a limited history of operation with the Essure system, and since inception, have incurred operating losses. We may continue to incur operating losses and we may
never achieve or maintain profitability.

We have a limited history of operation with theEssuresystem and since our inception
in 1992, we have incurred operating losses until we experienced our first operating profit for the quarter ending September 30, 2008. Our operating income (loss) was $0.9 million in
fiscal year 2008, ($14.2) million in fiscal year 2007 and ($19.8) million in fiscal year 2006. We may continue to incur operating losses as we continue sales and marketing efforts worldwide and in the
United States. Our operating loss will continue until sufficient revenues can be generated to offset these expenses. These losses have caused and may continue to cause our stockholders' equity and net
current assets to decrease. 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 and our ability to satisfy our obligations in the future.

The fluctuation of our quarterly results may adversely affect the trading price of our common stock.

Our revenues and results of operations have in the past and will likely vary in the future from quarter to quarter due to a number of
factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following:



You
should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is likely that in some future
quarters, our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

Our advertising campaigns may not be successful.

Our advertising programs, which are aimed at increasing consumer awareness for our Essuresystem, are generally expensive and may have
limited success, if any. We have recently increased the number and extent of these advertising
programs to make more women aware of theEssureprocedure. Such campaigns require consumers to make contact with an Essuretrained physician, which at
times may involve a referral from their primary care physician, and to then be provided information

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regarding
birth control options by the physician, be preauthorized for insurance reimbursement and then be scheduled for the procedure. Many of these steps are not within our control, and the
advertising programs may not result in revenue generation commensurate with their costs.

We may experience disruption in supply due to our dependence on our contract manufacturer to supply our commercial product requirements and our inability to obtain suppliers
of certain components for our products.

Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols
and procedures, failure to comply with applicable regulations, equipment malfunctions, labor shortages or environmental factors. In addition, we and our third party manufacturer purchase both raw
materials used in our product and finished goods from various suppliers, and we rely on a single source supplier for certain components of our product. Although we anticipate that we have adequate
sources of supply and/or inventory of these components to handle our production needs for the foreseeable future, if we or our contract manufacturer are unable to secure on a timely basis sufficient
quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find
alternate suppliers at an acceptable cost, then the manufacture of our products may be disrupted, which could increase our costs and have a material adverse effect on our business.

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

The medical device industry is highly competitive and is characterized by rapid and significant technological change. To compete
successfully, we will need to continue to demonstrate the advantages of ourEssureproducts and technologies over well-established
alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. As we commercialize and market the Essuresystem, we expect to compete with:



We
compete against other surgical procedures for permanent birth control, mechanical devices and other contraceptive methods, including existing methods of reversible birth control for
both women and men.

As
of December 31, 2008, we were aware of two companies, Hologic, Inc. and American Medical Systems, Inc. which were attempting to bring transcervical sterilization
devices to the market. In January 2009, Hologic received CE marking approval for its permanent contraception system, allowing it to market its product in the 27 countries of the European Union (EU)
and three of the four member states of the European Free Trade Associations (EFTA). In the United States, the PMA application for this company is currently under Food and Drug Administration (FDA)
review. This company is in the process of registering its product in Canada and Australia. In February 2009, American Medical Systems announced that it has decided to suspend their development efforts
in the women's permanent contraception product market.

Many
of our competitors possess a larger women's health focused sales force and have access to the greater resources required to develop and market a competitive product than we do. In
addition,

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new
competition and products may arise due to consolidation within the industry and other companies may develop products that could compete with the Essuresystem. Our competitive position also depends on:



These
and other competitive factors may render theEssuresystem obsolete or noncompetitive or reduce demand for the Essuresystem.

The current crisis affecting world financial markets may adversely affect our business and prospects.

Worldwide market acceptance of ourEssuresystem is dependent upon the medical
equipment purchasing and procurement practices of our physician customers, patient demand for ourEssureSystem and procedures and the reimbursement of
patient's medical expenses by government healthcare programs. The current economic climate may result in the purchasers of medical equipment decreasing their medical equipment purchasing and
procurement activities. Additionally, constrictions in world credit markets may result in our customers having increased difficulty securing the financing necessary to purchase our products which may
result in decreased sales. Widespread economic uncertainty may also result in cost-conscious consumers making fewer elective trips to their physicians and specialists which could result in
reduced demand for theEssuresystem. Furthermore, governments around the world facing tightening budgets could move to further reduce the reimbursement
rates offered by government sponsored healthcare programs. If the current economic condition results in the occurrence of any of these events, our business and prospects may be materially adversely
affected.

Recent disruptions in the financial markets could affect our ability to obtain debt financing on favorable terms or at al,.

The U.S. credit markets have recently experienced significant dislocations and liquidity disruptions which have caused the spreads on
prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain
cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access debt financing on favorable terms
or at all.

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Our stock price is volatile.

The market price of our common stock has been, and may continue to be, highly volatile. We believe that a variety of factors could
cause the price of our common stock to fluctuate, perhaps substantially, including:



The
price of our common stock also may be adversely affected by the amount of common stock issuable upon conversion of our Convertible Notes. In addition, in recent years the stock
market in general and the markets for shares of "high-tech" companies have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected
companies. Any such fluctuations in the future could adversely affect the market price of our common stock, and the market price of our common stock may decline.

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.

In September 2005, we received FDA approval to terminate our post-approval study with physicians newly trained in
performing theEssureprocedure due to the positive placement data obtained to date. The purpose of the post-approval study, required by the
FDA as a condition of the November 2002 approval of theEssuresystem, was to determine the rate of successful bilateral placements of the Essuremicro-inserts at first attempt with a large number of newly trained physicians who were not part of the previous clinical studies. Although
treatment of the total number of patients required by the FDA had not been completed, the data obtained provided us with the ability to request an early termination of the study. Because of the FDA
ruling, the PMA Supplement submitted in March 2005 has been reclassified as a Final Report. The results of the post-approval study demonstrated an improvement in placement rates from those
obtained in the Pivotal study. In November 2005, we filed a PMA supplement with the FDA in order to obtain approval to modify theEssurePhysician and
Patient labeling to reflect a 94.6% first procedure bilateral placement rate based on results of the post-approval study. In
October 2006, we received such approval from the FDA. In March 2006, we filed a PMA supplement with the FDA in order to obtain approval for a modified delivery system and micro-insert, and new valved
introducer. We received such approval from the FDA in June 2007. A post-approval study is being conducted to investigate the bilateral placement rate at first attempt for the modified
delivery system and micro-insert, and is expected to be similar for the newest model of theEssuresystem.

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Nevertheless, the long-term results of using theEssuredevice will not be available for several
years. If long-term studies or clinical experience indicate that theEssuresystem 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.

Our future liquidity and capital requirements are uncertain.

As we commercialize and market theEssuresystem 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 or debt
financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and interest expenses that will affect our financial results. 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 selling and marketing
activities. Our future liquidity and capital requirements will depend upon many factors, including, among others:



We, our contract manufacturer and our subcontractors may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect
on our business.

As a medical device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for
compliance with the FDA's Quality System Regulation (QSR) requirements, which require manufacturers of medical devices to adhere to certain good manufacturing practice regulations, including testing,
quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably
suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with
applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Our contract manufacturer, component suppliers and other
subcontractors are also required to meet certain standards applicable to their manufacturing processes.

In
April 2004, we received FDA approval to begin manufacturing theEssureproduct at Accellent, Inc., or Accellent, formerly named
Venusa, our third-party subcontractor located in Mexico. We transitioned almost all of our internal manufacturing operations to Accellent by the end of 2004 to

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manufacture
the components and assemble our product. Similarly, we have subcontracted with Sterigenics International to handle the sterilization of our products.

We
cannot assure you that we, our contract manufacturer, component suppliers or other subcontractors will be able to maintain compliance with all regulatory requirements. The failure by
us or our contract manufacturer, component suppliers or other subcontractors to achieve or maintain compliance with these requirements or quality standards may disrupt our ability to supply products
sufficient to meet demand until compliance is achieved or, in the case of our contract manufacturer, component supplier or subcontractor, until a new manufacturer, supplier or subcontractor has been
identified and evaluated. In addition, our failure to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of
regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and
criminal prosecutions, any of which could harm our business. Furthermore, we cannot assure you that if we find it necessary to engage new manufacturers, suppliers or subcontractors to satisfy our
business requirements that we will be able to locate new manufacturers, suppliers or contractors who are in compliance with regulatory requirements. Our failure to do so could have a material adverse
effect on our business.

Healthcare 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 payers
to contain or reduce the costs of healthcare 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 healthcare costs. These proposals may contain measures intended to control public and private spending on healthcare, as well as to provide universal public access to the
healthcare system. If enacted, these proposals may result in a substantial restructuring of the healthcare delivery system. Significant changes in the healthcare system in the United States 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.

Our liquidity could be adversely impacted by adverse conditions in the financial markets.

At December 31, 2008, we had cash and cash equivalents of $54.7 million. This available cash and cash equivalents are
held in accounts at financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing money market funds managed by third party
financial institutions. These funds invest in direct obligations of the government of the United States and traditional money market funds. We can provide no assurances that access to our invested
cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

All
of our cash and cash equivalents in our operating accounts are with third party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance
limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or
are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts.

Currency exchange rate fluctuations will impact our financial performance.

Although a majority of our revenue and operating expenses is denominated in U.S. dollars, and we prepare our financial statements in
U.S. dollars in accordance with U.S. GAAP, a portion of our

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revenue
and operating expenses is in foreign currencies. As a result, we are subject to currency risks that could adversely affect our operations, including:



Changes
in exchange rates will result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside the United States and the
amount of our equity. Although we may seek to minimize our currency exposure by engaging in hedging transactions where we deem it appropriate, we do not know whether our efforts will be successful.

A portion of our investment portfolio is in auction rate securities.

As of December 31, 2008, we held approximately $48.5 million (par value) of investments consisting entirely of auction
rate securities backed by federal and state student loans securities. These auction rate securities have contractual maturities ranging from 2028 through 2047. These investments have characteristics
similar to short-term investments, because at pre-determined intervals, generally ranging from 20 to 30 days, there is a new auction process at which the interest rates
for these securities are reset to current interest rates. At the end of each such period, we historically have either chosen to roll-over these securities or redeem the securities for
cash.

During
2008, we experienced failed auctions of our auction rate securities and there is no assurance that auctions on these securities in our investment portfolio will succeed in the
future. On December 3, 2008, we accepted an offer from UBS, the fund manager with whom we hold our auction rate securities, pursuant to which UBS issued to us Series C-2
Auction Rate Securities Rights, or Rights, which allow us to sell the auction rate securities to UBS at par value during the period beginning June 30, 2010 and ending July 2, 2012. In
exchange, the Company released UBS from claims that it may have for damages related to the auction rate securities (other than consequential damages), and we granted UBS the right to sell or otherwise
dispose of the auction rate securities on its behalf (so long as we are paid the par value of the auction rate securities upon any disposition).

The
Rights are subject to a number of risks. Given the substantial dislocation in the financial markets and among financial services companies, we cannot assure you that UBS will
ultimately have the ability to repurchase our auction rate securities at par, or at any other price during the put period described above. We will be required to periodically assess the economic
ability of UBS to meet that obligation in assessing the fair value of the Rights. Moreover, if we choose to not exercise the Rights or if UBS is unable to honor the Rights, our ability to liquidate
our investments in the near term may be limited, and our ability to fully recover the carrying value of our investments may be limited or non-existent. If issuers of these securities are
unable to successfully close future auctions or their credit ratings deteriorate, we may in the future be required to record further impairment charges on these investments. It could take until the
final maturity of the underlying notes (up to 39 years) to realize our investments' recorded value. Based on our ability to access our cash and cash equivalents, expected operating cash flows,
and our other sources of cash, we do not anticipate that the current lack of liquidity on these investments will affect our ability to continue to operate our business in the ordinary course. However,
we can provide no assurance as to when these investments will again become liquid or as to whether we may ultimately have to recognize additional impairment charges in our results of operations with
respect to these investments.

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Our international operations expose us to additional operational challenges that we might not otherwise face.

We are subject to a number of additional risks and expenses due to our international operations. Any of these risks or expenses could
have a material adverse effect on our operating results. These risks and expenses include:



We may not maintain regulatory approvals for the Essure system, 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 theEssuresystem. 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.

If we lose FDA approval or fail to comply with existing or future regulatory requirements in the United States or internationally, it would delay or prevent us from
generating further 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. Many countries in which we currently market or intend to market theEssuresystem either do not currently regulate
medical devices or have

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minimal
registration requirements; however, these countries may develop more extensive regulations in the future, which could delay or prevent us from marketing the Essuresystem 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 device is specifically approved by the FDA. We are required to adhere to
applicable FDA regulations, such as QSR, and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with QSR and other applicable
regulatory requirements are 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 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.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could
face substantial penalties.

Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws. Such laws
include the federal Anti-Kickback Statute and related state anti-kickback laws, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving
remuneration, directly
or indirectly, to induce or reward either the referral of an individual, or the furnishing, purchasing, leasing or ordering of, or arranging for or recommending the furnishing, purchasing, leasing or
ordering of an item or service, for which payment may be made under federal healthcare programs, such as Medicaid programs. The federal Stark law and self-referral prohibitions under
analogous state laws restrict referrals by physicians and, in some instances, other healthcare providers, practitioners and professionals, to entities with which they have indirect or direct financial
relationships for furnishing of designated health services. These healthcare fraud and abuse laws are subject to evolving interpretations by various state and federal enforcement and regulatory
authorities. Under current interpretations of the federal false claims act and certain similar state laws, some of these laws may also be subject to enforcement in a qui tam lawsuit brought by a
private party "whistleblower," with or without the intervention of the government.

If
our past or present operations are found to be in violation of these laws and not protected under a statutory exception or regulatory safe harbor provision to the applicable fraud and
abuse laws, we, our officers or our employees may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from federal healthcare
program participation, including the exclusion of our products from use in treatment of Medicaid or other federal healthcare program patients. If federal or state investigations or enforcement actions
were to occur, our business and financial condition would be harmed.

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

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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 United States 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 and 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.

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 depend in part 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

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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 have been, and may be in the future, 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 U.S. Patent and Trademark Office, or PTO, 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., or Ovion, which is now a subsidiary of American Medical Systems, or AMS, brought to our attention a patent and certain claims from a pending patent
application owned by it. Ovion indicated that it believes that the claims of its patent and application cover theEssuresystem and its use. On
October 23, 2003, we entered into a settlement agreement with Ovion pursuant to which
we received a sole, worldwide license to Ovion's patent rights relative to theEssuresystem, and Ovion may not grant any additional such licenses to
other parties. The settlement agreement provided for the payment of a royalty to Ovion that will be equal to 3.25% of the cumulative net sales of the Essuresystem in excess of $75.0 million for a
period of no longer than ten years. In addition, the settlement agreement provided for a cash
payment of $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and a license fee of $2.0 million payable in our common stock in equal installments in the first and second
quarters of 2004. Ovion was not granted any rights to our intellectual property pursuant to the settlement agreement. The settlement agreement was approved by the U.S. District Court for the Northern
District of California on November 6, 2003.

Although
we have reached a settlement agreement with Ovion, we still believe that some or all of Ovion's claims should be included within our own patents and we have requested that the
PTO declare an interference. An 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 theEssuresystem before Ovion filed the application that issued as its patent, and that we are entitled to
any patentable claims now appearing in their patent that cover our product. We do not know whether the PTO will declare 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 declares interference in our favor and we are found to have priority of invention, we may avoid having
to pay Ovion future royalties on the sales of our product.

An
adverse determination in new 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

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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 theEssuresystem.

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. We are not a party to this lawsuit. 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.

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

We may in the future acquire one or more technologies, products or companies that complement our business, such as our recent
acquisition of Conceptus SAS in France in January 2008. We may not be able to effectively integrate these into our business and any such acquisition or expansion could bring additional risks,
exposures and challenges to our company. In addition, acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses,
subject us to liabilities and increase our risk of litigation, all of which could harm our business. If we use cash to acquire technologies, products, companies or expand operations, it may divert
resources otherwise available for other purposes. If we use our common stock to acquire technologies, products or companies, our stockholders may experience substantial dilution. If we fail to manage
any expansion or acquisition, our business could be impaired.

Government or third party reimbursement for the Essure procedure may not be available or may be inadequate, which could adversely affect consumer demand, limit our future
product revenues and adversely affect our profitability.

Market acceptance of theEssuresystem 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 healthcare systems that
determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government managed systems. Regardless of the type of reimbursement system, we
believe that physician advocacy of our product will be required to obtain reimbursement.

Availability
and extent of continued reimbursement will depend, at least in part, on the clinical and cost effectiveness of our product. We cannot assure that reimbursement for our
product will continue to be available in the United States or in international markets under either government or private reimbursement systems, or that those physicians will support and advocate
reimbursement for use of our product for all indications intended by us. 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.

In
addition, the level of reimbursement offered by prevailing healthcare payment systems may correspondingly affect the level of co-payment that is required by the patient.
As an elective procedure, a patient's decision to have the Essure procedure may be impacted by a decline in overall economic conditions as patients are forced to prioritize discretionary spending.

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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. We
currently maintain product liability insurance with coverage limits of $10.0 million per occurrence and an annual aggregate maximum of $10.0 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 the Essuresystem 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 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 are required to recognize expense for stock-based compensation related to employee stock options and other share-based payment awards, and we cannot assure you that the
expense that we are required to recognize measures accurately the value of our share-based payment awards and the recognition of this expense could cause the trading price of our common stock to
decline.

Medical technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and
retain our workforce in a competitive marketplace. Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R),Share-Based
Payment("SFAS 123(R)"). SFAS 123(R) established accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is
measured at grant date, based on the fair value of the award which is computed using the Black-Scholes option valuation model, and is recognized as expense over the employee requisite service period.
The application of SFAS 123(R) requires the use of an option pricing model to determine the fair value of share-based payment awards. This determination of fair value is affected by our stock
price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the
awards and actual and projected employee stock option exercise behaviors. Option pricing models were developed for use in estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective
assumptions can materially affect the estimated value, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123(R) and Staff Accounting Bulletin 107 using the Black-Scholes option-pricing model, that value may not be indicative of the fair
value observed in a willing buyer/willing seller market transaction. As a result of the application of SFAS 123(R), our net losses for the fiscal years 2008, 2007, and 2006 were higher than
they would have been had we not been required to adopt SFAS 123(R). This will continue to be the case for future periods. We cannot predict the effect that this adverse impact on our reported
operating results will have on the trading price of our common stock. In addition, this could impact our ability to utilize

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broad
based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our
reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our
reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting
pronouncements and taxation practice have
occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Our 2.25% convertible senior notes present certain liquidity and other risks.

In February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. The net share
settlement feature of the notes may reduce our liquidity. If the notes are convertible, then upon conversion, holders will receive cash and, if applicable, shares of our common stock based on an
initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes (which represents an initial conversion price of $27.89 per share), in certain circumstances. We
must settle at least a portion of our conversion obligation in cash, however we may not have sufficient funds to pay in full the cash obligation upon such conversion.

On
each of February 15, 2012, February 15, 2017 and February 15, 2022, holders of the notes may require us to purchase, for cash, all or a portion of their notes at
100% of their principal amount, plus any accrued and unpaid interest to, but excluding, that date. If a fundamental change occurs (as defined in the indenture governing the notes), holders of the
notes may require us to repurchase, for cash, all or a portion of their notes. In addition, upon conversion of the notes, we must pay the principal return in cash. We may not have sufficient funds to
pay the interest, purchase price, repurchase price or principal return when due. In addition, the terms of any borrowing agreements which we may enter into from time to time may require early
repayment of borrowings under circumstances similar to those constituting a fundamental change. These agreements may also make our repurchase of notes, or the cash payment due upon conversion of the
notes, an event of default under the agreements. If we fail to pay interest on the notes, to repurchase the notes or to pay the cash payment due upon conversion when required, we will be in default
under the indenture for the notes. The indenture for the notes will not restrict our ability to incur in additional indebtedness. Our level of indebtedness could have important consequences on our
future operations, including:



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Provisions in our charter documents, Delaware law and the indenture for our 2.25% convertible senior notes due 2027 could discourage an acquisition of us by a third party,
even if the acquisition would be favorable to you.

Protections against unsolicited takeovers in our rights plan, charter and bylaws may reduce or eliminate our stockholders' ability to
resell their shares at a premium over market price. We have a stockholders rights plan which expires on February 27, 2012. Our rights plan may prevent an unsolicited change of control of our
company. Our rights plan may adversely affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for
their shares. In addition, the issuance of preferred stock or common stock upon exercise of rights issued under the plan could dilute the voting, liquidation and other economic rights of our
stockholders and make it more difficult for a third party to acquire us.

Our
charter and bylaws contain provisions relating to issuance of preferred stock, special meetings of stockholders and advance notification procedures for stockholder proposals that
could have the effect of discouraging, delaying or preventing an unsolicited change in the control of our company. Our charter provides for our board of directors to be divided into three classes of
directors, serving staggered three-year terms. The classified board provision could have the effect of discouraging a third party from making a tender offer or attempting to obtain control
of us.

In
addition, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any
interested stockholder for a
period of three years after the date that such stockholder became an interested stockholder, unless certain conditions are met. Section 203 may discourage, delay or prevent an acquisition of
our company even at a price our stockholders may find attractive.

If
a "fundamental change" (as defined in the indenture governing the 2.25% convertible senior notes due 2007), occurs, holders of the notes will have the right, at their option, to
require us to repurchase all or a portion of their notes. In the event of a "make-whole fundamental change (as defined in the indenture governing the notes)," we also may be required to
increase the conversion rate applicable to the notes surrendered for conversion in connection with that make-whole fundamental change. In addition, the indenture for the notes prohibits us
from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the notes. These and other provisions, including the provisions of our
charter documents and Delaware law, could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to our security holders.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2.    PROPERTIES

We are headquartered in Mountain View, California where we lease a building occupying approximately 58,242 square feet of office,
research and development and manufacturing space. The lease agreement has an expiration date of June 15, 2009. On December 5, 2008 we renegotiated our current lease for an additional
forty-nine months. The new lease agreement has an expiration date of July 31, 2013.

With
the acquisition of Conceptus SAS on January 7, 2008, we assumed a lease of a 1,938 square foot sales office located in Versailles, France. This lease expires on
March 7, 2011.

In
July 2008 we entered into a Lease Agreement for a minimal office space in the United Kingdom. This lease expires on July 16, 2009.

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ITEM 3.    LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of our stockholders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been traded on the Nasdaq Global Market under the symbol CPTS since the effective date of our initial public
offering on February 1, 1996. The following table presents the high and low sale prices for our common stock as reported on the Nasdaq Global Market for the period indicated.

High

LowYear Ended December 31, 2008:Fourth Quarter

$
17.16

$
9.17Third Quarter

$
20.03

$
15.81Second Quarter

$
19.86

$
16.73First Quarter

$
19.41

$
13.97Year Ended December 31, 2007:Fourth Quarter

$
22.22

$
17.87Third Quarter

$
20.38

$
14.68Second Quarter

$
21.95

$
17.12First Quarter

$
23.69

$
17.71


As
of February 23, 2009, there were 116 stockholders of record and the last reported sale price of our common stock was $11.68.

We
have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings for reinvestment in
our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital
requirements and such other factors as the board of directors deems relevant.

The
information under the caption "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in Part III, Item 12 of this Annual
Report on Form 10-K is incorporated herein by reference.

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Performance Graph

The following graph compares the five years cumulative total stockholder return for the Company's common stock, assuming reinvestment
of all dividends, for the period from December 31, 2003 to December 31, 2008 to that of the Nasdaq Stock MarketU.S. Index and the Nasdaq Medical Equipment Index for the
period from December 31, 2003 to December 31, 2008. The graph assumes that $100 was invested on December 31, 2003 in the Company's Common Stock and in each of the comparative
indices.

GRAPHIC

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data of Conceptus, Inc. This historical data should be read in
conjunction with the attached consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in
Item 7 of this report. The selected consolidated statement of operations data for the years ended December 31, 2008, 2007 and 2006 and the consolidated balance sheet data as of
December 31, 2008 and 2007 are derived from our audited consolidated financial statements and the related notes, which are included elsewhere in this report. The selected consolidated statement
of operations data for the years ended December 31, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006, 2005 and 2004 are derived from our audited consolidated
financial statements and the related notes, which are not included in this report.

Years Ended December 31,2008(1)

2007(1)

2006(1)

2005

2004(in thousands, except per share data)Consolidated Statement of Operations Data:Net sales

$
101,977

$
64,442

$
41,900

$
21,169

$
11,612Cost of goods sold


21,650


16,682


14,027


8,396


7,112Gross profit


80,327


47,760


27,873


12,773


4,500Operating expenses:Research and development


6,788


5,875


4,366


4,264


4,067Selling, general and administrative


72,685


56,084


43,318


31,255


27,075Total operating expenses


79,473


61,959


47,684


35,519


31,142Operating income (loss)


854


(14,199
)

(19,811
)

(22,746
)

(26,642
)Interest income and other expense and other expense, net


(961
)

2,567


1,324


945


573Loss before provision for income taxes


(107
)

(11,632
)

(18,487
)

(21,801
)

(26,069
)Benefit from income taxes


(24
)










Net loss

$
(83
)
$
(11,632
)
$
(18,487
)
$
(21,801
)
$
(26,069
)Basic and diluted net loss per share

$
(0.00
)
$
(0.39
)
$
(0.64
)
$
(0.82
)
$
(1.05
)Weighted-average shares used in computingbasic and diluted net loss per share


30,216


29,463


28,993


26,725


24,754


---

December 31,2008

2007

2006

2005

2004(in thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and short term investments(2)

$
54,720

$
45,150

$
25,838

$
32,492

$
32,271Working capital


35,406


50,484


26,079


34,589


32,165Total assets(3)


163,705


120,675


39,751


47,409


42,177Notes payable


86,250


86,250








Accumulated deficit


(235,332
)

(235,249
)

(223,617
)

(205,130
)

(183,329
)Total stockholders' equity


30,446


21,927


31,014


40,171


36,994


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ITEM 7.    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 consolidated financial statements and related notes thereto located elsewhere in this report.

Overview

We develop, manufacture and market theEssure® permanent birth control
system, an innovative and proprietary medical device for women that was approved for marketing in the United States in November 2002 by the U.S. Food and Drug Administration, or FDA. The Essuresystem
uses a soft and flexible micro-insert that is delivered into a woman's fallopian tubes to provide permanent birth control by causing a
benign tissue in-growth that blocks the fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth
prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization. The effectiveness rate of theEssuresystem is 99.80%
after four years of follow-up.

On
January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS. As a result of this transaction, Conceptus SAS became our wholly-owned subsidiary, which sells Essuredirectly in France
and utilizes distributors to sellEssurethroughout the rest of Europe. We
believe the acquisition of Conceptus SAS expands our presence in international markets and will increase our revenues as we will recognize sales at end user pricing as compared to the price at which
we previously sold theEssureproduct directly to Conceptus SAS. Our consolidated financial statements for the year ended December 31, 2008
include the financial results of Conceptus SAS beginning from the acquisition date of January 7, 2008. Consolidated net sales for the year ended December 31, 2008 were
$102.0 million of which 79% were generated in the United States. For financial information about geographic areas and for segment information with respect to net sales, refer to the information
set forth in Note 2 of our consolidated financial statements.

The Essure Procedure

TheEssureprocedure is typically performed in the office setting and is intended to be
a less invasive and a less costly solution to tubal ligation, the leading form of permanent birth control in the United States and worldwide. 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 Essureprocedure does not require cutting or penetrating the abdomen, which lowers the likelihood of post-operative pain due to the
incisions/punctures, and it can be performed in an outpatient setting. Currently, the majority of theEssureprocedures are performed using conscious
sedation, such as IV sedation with a local anesthesia. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and
comfort level of the physician. In the Pivotal trial of theEssuresystem, the average hysteroscopic procedure time was 13 minutes. A patient is
typically discharged approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, the Essuresystem is
effective without drugs or hormones. There is a three-month waiting period after the procedure during which the woman must use another
form of birth control while tissue in-growth occurs. At 90 days following the procedure, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which can
determine whether the device was placed successfully and whether the fallopian tubes are occluded. Outside of the United States, patients are required to return for a pelvic X-ray at three
months post-procedure with a subsequent HSG if device location on the initial radiographic image appears suspicious.

We
believe that theEssuresystem is a better alternative to tubal ligation for physicians, hospitals and payers. The Essuresystem is a less invasive
permanent birth control option for physicians to offer to their patients; hospitals are able to utilize their
facilities more cost effectively with theEssureprocedure compared with tubal ligation; and payers are able to experience cost reductions resulting
from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital

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stays
associated with tubal ligations. In addition, we believe theEssureprocedure is superior to other non-tubal ligation permanent
contraception alternatives because, unlike other device designs, theEssureprocedure does not involve the use of radio frequency (RF) energy, which
subjects the patient to risks of thermal injury, bowel injury and dilutional hyponatremia. Published reports estimate that approximately 700,000 tubal ligation procedures are performed each year in
the United States. We intend to capture the majority share of this market and establish theEssureprocedure as the gold standard for permanent birth
control. We also believe theEssuresystem is a solution for women whose family is complete but are using temporary methods of birth control. In
addition, payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent birth control methods used by patients who have chosen to avoid the drawbacks of
traditional permanent birth control methods but who may otherwise elect to use theEssuresystem.

Critical Accounting Estimates and Policies

We follow accounting principles generally accepted in the United States of America, or GAAP, in preparing our financial statements. As
part of this work, we must make many estimates and judgments about future events. These affect the value of the assets and liabilities, contingent assets and liabilities and revenues and expenses
reported in our financial statements. We believe these estimates and judgments are reasonable and we make them in accordance with policies based on information available at the time. However, actual
results could differ from our estimates and could require us to record adjustments to expenses or revenues material to our financial position and results of operations in future periods. We believe
our most critical accounting policies, estimates and judgments include the following:



Revenue Recognition

Our revenue is primarily comprised of the sale of ourEssuresystem. We recognize
revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 104,Revenue Recognition in Financial
Statementsor SAB 104. Under this standard, the following four criteria must be met in order to recognize revenue:



The
four revenue recognition criteria and other revenue related pronouncements are applied to our sales as described in the following paragraphs.

We
recognize revenues from ourEssuresystem when we ship the device. We recognize revenue upon shipment of the system as we have no
continuing obligations subsequent to shipment. We do not accept returns of theEssuresystem. We obtain written authorizations from our customers for a
specified amount of product at a specified price and the price is not dependent on actualEssureprocedures performed.

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For
sales through distributors we recognize revenues upon shipment as we have no continuing obligations subsequent to shipment. Our distributors are responsible for all marketing, sales,
training and warranty of theEssuredevice in their respective territories. Our standard terms and conditions do not provide price protection or stock
rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or exchange theEssuresystem
and the distributor is obligated to pay us for the sale regardless of their ability to resell the product.

Additionally,
we require physicians to be preceptored between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. There are no revenues
associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship. Physician training is provided upfront and we have
no obligation subsequent to the initial training. Training costs have not been significant from inception to-date.

We
assess the credit worthiness of all customers in connection with their purchases. We only recognize revenue when collectability is reasonably assured.

Certain
sales of ourEssuresystem require delivery of additional items. These obligations are fulfilled after shipment of the Essuresystem, and in these cases,
we recognize revenue in accordance with the multiple element accounting guidance set forth in Emerging Issues Task
Force No. 00-21,Revenue Arrangements with Multiple Deliverablesor EITF 00-21. When we have objective and
reliable evidence of fair value of the undelivered elements we defer revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled.
Otherwise we defer all revenue until all elements are delivered.

Stock-Based Compensation Expense

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based
Payment, or SFAS 123(R), which establishes accounting for stock-based awards exchanged for employee services. Accordingly,
stock-based compensation cost is measured at grant date, based on the fair value of the award which is computed using the Black-Scholes option valuation model, and is recognized as expense over the
employee requisite service period. We previously applied Accounting Principles Board, or APB, Opinion No. 25,Accounting for Stock Issued to
Employees, and related Interpretations and provided the required pro forma disclosures of SFAS No. 123,Accounting for Stock-Based
Compensation.

The
fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted average assumptions shown in
Note 2Summary of Significant Accounting Policies of our Notes to Consolidated Financial Statements. The Black-Scholes option valuation model requires the input of highly subjective
assumptions, including the expected life of the stock-based award and the stock-price volatility. The assumptions used in calculating the fair value of share-based compensation represent management's
best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, our stock-based compensation expense
could have been materially different. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate
is materially different from our estimate, the share-based compensation expense could be materially different.

The
expected term of the options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free
interest rate for periods equal to the estimated life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility of
our stock.

As
stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it is reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are
estimated based on historical experience.

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Excess and Obsolete Inventory

Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method.
Inventory reserves are recorded when conditions indicate that the selling price may be less than the cost. Reserves for potentially excess and obsolete inventories are provided based on historical
experience and current product demand. Once established, the original cost of the inventory less the related inventory reserve represents the new cost basis. Reversal of these reserves is recognized
only when the related inventory has been scrapped or sold.

As
of December 31, 2008 and 2007, our reserves were approximately $0.1 million and $0.2 million, respectively.

Allowance for Doubtful Accounts

We assess the credit worthiness of our customers on an ongoing basis in order to mitigate the risk of loss from customers not paying
us. However, we account for the possibility that certain customers may not pay us by maintaining an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our
customers and maintain our allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. Our exposure to credit losses may
change as we increase our receivables. Changes in customer type and mix, as well as domestic and international economic climate, will also impact potential credit losses. Despite the significant
amount of analysis used to compute the required allowance, if the financial condition of our customers were to deteriorate, resulting in an impairment of our ability to make payments, additional
allowances may be required. In addition, our increase in sales may result in a higher accounts receivable balance, which may require a higher balance in the allowance. As of December 31, 2008
and 2007, our allowance for doubtful accounts totaled approximately $0.5 million and $0.4 million, respectively.

Cash Equivalents and Marketable Securities

We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We
maintain deposits with three financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear
minimal risk. Our cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance
limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or
are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2008
long-term investments consist of auction rate securities ("ARS").

As
of December 31, 2008, we held $48.5 million (par value) in ARS backed by federal and state student loans which are variable rate debt instruments and bear interest rates
that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our
ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have
experienced failed auction in 2008 on all of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our
ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In
November 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our auction rate security rights (the "Rights"). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus

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accrued
but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012. Conversely, UBS has the right, at its discretion, to purchase or sell our
ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value. However, if the Rights are
not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. So long as we hold our ARS, they will continue to accrue interest as
determined by the auction process or the terms of the ARS if the auction process fails.

UBS's
obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has
disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

We
have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of SFAS No. 159, Establishing the Fair Value Option for Financial Assets and
Liabilities. As a result, upon acceptance of the offer from UBS, we recorded approximately
$5.1 million as the fair value of the Rights with a corresponding credit to other income. As a result of our elections to record the Rights at fair value, unrealized gains and losses will be
included in earnings in future periods. We estimated the fair value of the Rights using the expected value that we will receive from UBS which was calculated as the difference between the anticipated
recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk.

Although
the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights. We will continue to classify the ARS as long-term investments until June 30, 2009, one year prior to the expected settlement.

Prior
to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our
available-for-sale securities, in accumulated other comprehensive income (loss) in the stockholders' equity section of our balance sheets. Such an unrealized loss did not
change net income (loss) for the applicable accounting period.

In
connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 30, 2010, we
transferred our ARS from available-for-sale to trading securities in accordance with SFAS 115. The transfer to trading securities reflects our intent to exercise our put
option during the period June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.

We
recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated
other comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized
loss of $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer. We determined that use
of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the
probability of future successful auctions occurring. In determining a discount factor for each ARS, the model weights various factors, including assessments of credit quality, duration, insurance
wraps, portfolio composition, discount rates, overall capital market liquidity and comparable securities, if any.

In
the future we expect any changes in the fair value of our ARS to be materially offset in part by changes in the fair value of our put option with UBS.

We
continue to monitor the market for ARS and consider its impact (if any) on the fair market value of our investments. If the market conditions deteriorate further, we may be required
to record additional unrealized losses in earnings, offset partially by corresponding increases in the put option. We believe that, based on our current cash and cash equivalents balance, the current
lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flows or ability to fund our operations.

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In November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value
of our auction rate securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as
security for the credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any
outstanding balance under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to
recover the par value support from UBS. See Note 11Credit Line, for more information about this line of credit, Note 3Long-term Investment and
Note 4Fair Value Measurements of our Notes to Consolidated Financial Statements for information about the accounting treatment of our ARS.

Warranty Obligation

We provide for the estimated cost of our product warranties at the time revenue is recognized. We record a liability for the estimated
future costs associated with warranty claims, which is based upon historical experiences and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a
cost of goods sold. We expect that warranty expense will increase as and if we increase our net sales. Warranty reserve rates may change if
we change manufacturing process or change our third-party manufacturing contractor. Should actual costs differ from historical experience, increases in warranty expense may be required. Warranty
reserves as of December 31, 2008 and 2007 were approximately $0.3 million and $0.2 million, respectively.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. We evaluate the carrying value of our long-lived assets,
consisting primarily of our property and equipment, theEssurelicense acquired from a patent litigation settlement in 2003 and intangible assets
acquired in connection with our acquisition of Conceptus SAS in 2008, whenever certain events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such
events or circumstances include a prolonged industry downturn, a significant decline in our market value or significant reductions in projected future cash flows.

Significant
judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins,
long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition,
significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the
value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to
write down the assets. Our net long-lived assets as of December 31, 2008 and 2007 included property and equipment of $8.6 million and $5.3 million, respectively, and
other identifiable intangible assets of $5.3 million and $1.2 million, respectively.

Goodwill

Goodwill is the excess of the purchase price over the fair value of the other net assets, including customer relationship and covenant
not to compete, of acquired businesses in connection with our acquisition of Conceptus SAS in 2008. Under SFAS 142,Goodwill and Other Intangible
Assets, goodwill is not amortized, but is assigned to reporting units and tested for impairment annually during the fourth quarter, or whenever there is an impairment
indicator. We assess goodwill impairment indicators

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quarterly,
or more frequently, if a change in circumstances or the occurrence of events suggests the remaining value may not be recoverable.

The
first step of the impairment test for goodwill compares the fair value of a reporting unit with its carrying amount, including goodwill and other indefinite lived intangible assets.
If the fair value is less than the carrying amount, the second step determines the amount of the impairment by comparing the implied fair value of the goodwill with the carrying amount of that
goodwill. An impairment charge is recognized only when the calculated fair value of a reporting unit, including goodwill and indefinite lived intangible assets, is less than its carrying amount. We
performed an annual assessment during the fourth quarter of 2008 of our goodwill at the reporting unit level. No impairment charges have been recorded through December 31, 2008.

Debt

We account for our convertible senior notes in accordance with SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities. In this regard, our convertible debt and net share settlement feature does not fall under the category of a derivative, and consequently, we
classify our long term debt as a liability in our consolidated balance sheet. Our convertible hedge and our outstanding warrants are accounted as set forth by Emerging Issues Task Force
00-19, Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, through which we
record the convertible hedge transaction and the warrants in additional paid in capital. Subsequent changes in fair value of the agreement are not recognized.

In
addition, we account for the cost issuance of debt in accordance with Accounting Principles Board 21,Interest on Receivables and
Payables, or APB 21. Consequently, these costs were recognized as an
asset and are amortized by periodic charges to income. We apply the straight-line method, which is not materially different to the effective interest method set forth by APB 21.

Contingent Liabilities

We account for contingencies in accordance with SFAS No. 5,Accounting for
Contingencies, which requires that an estimated loss from a loss contingency shall be accrued when information available prior to issuance of the financial statements indicates
that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and when the amount of the loss can be reasonably estimated. Accounting for
contingencies such as legal and income tax matters requires us to use our judgment. We believe that our accruals for these matters are adequate. Nevertheless, the actual loss from a loss contingency
might differ from our estimates.

Income Taxes

We account for income taxes in accordance with SFAS No. 109,Accounting for Income
Taxes.Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities
using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. On January 1, 2007, we adopted the provisions of Financial Interpretation
No. 48,Accounting for Uncertainty in Income Taxes(FIN 48) which is an interpretation of SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of the provisions
of FIN 48 did not have a material effect on our financial position and results of operations. As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes. This process involves estimating our actual current tax exposure together with assessing temporary differences that may result in deferred tax assets. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We must assess whether it is "more likely than not" that our deferred tax assets will be recovered
from future taxable income and to the extent

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we
believe that recovery is not likely, we must establish a valuation allowance. We evaluate the need for a valuation allowance for our deferred tax assets. Due to our cumulative pre-tax
U.S. losses and the current uncertainty of our ability to realize our U.S. deferred tax assets, a valuation allowance in an amount equal to our U.S. deferred tax assets has been recorded.

RESULTS OF OPERATIONS

2008 results compared to 2007 (in thousands, except percentages)

Years Ended December 31,2008

2007

2008-
2007
%
ChangeAmount

%(a)

Amount

%(a)Net sales

$
101,977


100
%
$
64,442


100
%

58
%Gross profit


80,327


79
%

47,760


74
%

68
%Research and development expenses


6,788


7
%

5,875


9
%

16
%Selling, general and administrative expenses


72,685


71
%

56,084


87
%

30
%Net loss


83


0
%

11,632


18
%

(99
)%


---

Net Sales

The following table summarizes net sales by geographic region:

Years Ended December 31,2008

2007Net sales (in thousands)

$
101,977

$
64,442United States of America


79
%

92
%France


13
%

7
%Europe (other than France)


7
%

0
%Other


1
%

1
%


Net
sales are attributed to region based on the shipping location of our customers.

The
increase in net sales of $37.5 million or 58% is the result of continued commercialization and marketing of theEssuresystem
worldwide, and reflects the increasing numbers of physicians entering and completing training in the use of the procedure. International sales comprised 21% of our total sales in 2008, which is an
increase of 345% compared to 2007, reflecting revenues realized from our acquisition of Conceptus SAS and the recognition of sales at higher end-user pricing. The net sales increase also
reflects a domestic revenue increase of 35% in 2008 as compared to 2007.

We
expect our net sales for 2009 to be in the range of approximately $125.0 million to $135.0 million, which would represent 23% to 32% growth from net sales in 2008 as we
continue to increase the number of physicians performing theEssureprocedure. We will also continue our programs aimed at raising patient awareness of
theEssureprocedure, such as radio, print and television advertising. We believe our revenue growth in 2009 and beyond will be significantly influenced
by how successful we are in achieving our objectives. However, as we have noted elsewhere and in the risk factors in this report, our expected revenue growth involves many risks, many of which are not
entirely within our control.

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Cost of goods sold increased by $5.0 million to $21.7 million in 2008 as compared to $16.7 million in 2007. This
increase was caused by higher volumes of sales. Gross profit margin was 79% for 2008 and 74% for 2007. The year-over-year increase in gross margin is related to higher average
selling prices into the European market that were achieved through the acquisition of Conceptus SAS, lower manufacturing costs associated with higher unit volume, the introduction of our third
generation device and a domestic price increase implemented during the first quarter of 2008. Our gross profit margin will vary as our sales mix changes. Increases in sales of our devices through
distributors in international markets will tend to decrease our overall gross profit margin.



Research and development expenses increased by $0.9 million to $6.8 million in 2008 as compared to $5.9 million in
2007. As a percentage of revenues, research and development expenses for 2008 and 2007 represented 7% and 9%, respectively. Research and development expenses reflect clinical expenditures and product
development, which are substantially related to the ongoing development and associated regulatory approvals of our technology. Our goal is to continue our product developments over the coming years,
which is intended to result in improved ease of use and clinical performance. We expect to identify and hire additional product development and regulatory personnel in the future to staff our planned
product development and clinical activities, and we expect that these costs will increase as we seek to maintain our leading position in the market for permanent female birth control.

To
support these initiatives during 2008 we increased payroll and payroll related expenditures by $0.7 million, consulting and outside service expenses by $0.7 million,
project material prototypes by $0.3 million, offset by a reduction in stock compensation of $0.3 million and supplier charges of $0.3 million.



Selling, general and administrative expenses increased by $16.6 million to $72.7 million in 2008 as compared to
$56.1 million in 2007. As a percentage of revenues, selling, general and administrative expenses for 2008 and 2007 represented 71% and 87%, respectively. The increases were primarily the result
of the operating expenses of Conceptus SAS of $6.6 million, an increase of $6.4 million due to expansion of our U.S. field sales force, and increased domestic advertising expenditures of
$4.1 million, primarily for our direct-to-consumer advertising campaign. This campaign involves television, radio and print media and is intended to drive patient
awareness of theEssureprocedure. In addition, fees related to audit and tax, depreciation, bank related fees, and general building maintenance
increased by $1.1 million; offset by decrease in fees related to legal fees, stock compensation, professional education and bad debt by $1.6 million. We expect selling, general and
administrative expenses to increase in the future as we expect to hire additional sales professionals and to increase patient awareness through our direct-to-consumer campaign
in targeted markets.



Total interest income and expense and other expenses, net for 2008 was a net expense of $1.0 million as compared to net income
of $2.6 million for 2007. Interest income decreased by $2.7 million primarily due to lower interest rates on the Company's investment portfolio, which consists of auction rate securities
and money market accounts that are currently earning lower interest rates compared to 2007. In addition, other expenses decreased by $0.4 million primarily due to foreign exchange losses.

Additionally,
in 2008 we recorded approximately $5.1 million as the fair value of the auction rate security rights associated with a corresponding credit to other expenses, net in
connection with the

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auction
rate securities settlement. We subsequently recorded approximately $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair
value of the auction rate securities at the date of transfer. See Note 3Long-term Investments of our Notes to Consolidated Financial Statements.



We have recorded a net tax benefit of $24,000 primarily related to our foreign operations in 2008. We did not record any income tax
expense in 2007.

We
adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, or FIN 48, on
January 1, 2007.

We
have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2008, our federal returns for the years ended 2005 through
the current period and most state returns for the years ended 2004 through the current period are still open to examination. In addition, all of the net operating losses and research and development
credit carry-forwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of the utilization.

The
tax returns for Conceptus SAS for the years ended 2005 to 2007 were examined and closed by the French tax authorities. As of December 31, 2008, we also recorded approximately
$0.4 million of income tax expense attributable to Conceptus SAS.

The
amount of unrecognized tax benefits at December 31, 2007, was $1.9 million, which, if ultimately recognized, will reduce our annual effective tax rate.

We
do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of FIN 48, we recognize interest and
penalties accrued on any unrecognized tax benefits as a component of income tax expense.

2007 results compared to 2006 (in thousands, except percentages)

Years Ended December 31,2007

2006

2007-
2006
%
ChangeAmount

%(a)

Amount

%(a)Net sales

$
64,442


100
%
$
41,900


100
%

54
%Gross profit


47,760


74
%

27,873


67
%

71
%Research and development expenses


5,875


9
%

4,366


10
%

35
%Selling, general and administrative expenses


56,084


87
%

43,318


103
%

29
%Net loss


11,632


18
%

18,487


44
%

(37
)%


---

Net Sales

The following table summarizes net sales by geographic region:

Years Ended December 31,2007

2006Net sales (in thousands)

$
64,442

$
41,900United States of America


92
%

91
%Europe


7
%

8
%Other


1
%

1
%


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Net
sales are attributed to region based on the shipping location of our customers.

The
increase in net sales of $22.5 million or 54% is the result of continued commercialization and marketing of theEssuresystem
worldwide, and reflects the increasing numbers of physicians entering and completing training in the use of the procedure and higher utilization by trained physicians.



Cost of goods sold increased by $2.7 million to $16.7 million in 2007 as compared to $14.0 million in 2006. Gross
profit increased $19.9 million to $47.8 million from $27.9 million in 2006. Our gross profit percentage was 74% and 67% for the years ended December 31, 2007 and 2006,
respectively. Our gross profit increased throughout 2007 and was 76% in the fourth quarter of
2007, as compared to 69% in the fourth quarter of 2006. The improvement in gross profit percentage in 2007 was primarily the result of the decrease in costs due to our next-generation
device, lower manufacturing costs associated with higher unit volume and a domestic price increase instituted during the first quarter of 2007.



Research and development expenses increased by $1.5 million to $5.9 million in 2007 as compared to $4.4 million in
2006. Research and development expenses reflect clinical expenditures and product development, which are substantially related to the ongoing development and associated regulatory approvals of our
technology.



Selling, general and administrative expenses increased by $12.8 million to $56.1 million in 2007 as compared to
$43.3 million in 2006. The primary reason for the increases in selling, general and administrative expenses were a result of higher payroll expenditures of $5.5 million due to the
expansion of our U.S. field sales force in 2007. Additionally, we incurred direct-to-consumer campaign expenses of $1.5 million, which we began to incur as direct costs
in the fourth quarter of 2007. In 2007, increases in selling, general and administrative expenses were also due to higher consulting expenses of $1.4 million, higher travel expenses of
$0.9 million, higher legal and professional fees and honorarium fees of $1.1 million, higher taxes and insurance of $0.5 million and higher stock-based compensation of
$0.5 million.



Total interest income and expense and other expenses, net of $2.6 million increased by $1.2 million in 2007 compared to
$1.3 million in 2006. The increase is due to higher interest income in 2007 due to higher cash volumes during the year as a result of investing the proceeds of our convertible senior note
offering, completed in February 2007, at a rate in excess of the coupon rate.



At December 31, 2007, we evaluated the need for a valuation allowance for our deferred tax assets. Due to our cumulative
pre-tax losses and the current uncertainty of our ability to realize our deferred tax assets, we recorded a valuation allowance of approximately $99.5 million.

RECENT ACCOUNTING PRONOUNCEMENTS



Effective January 1, 2008, we adopted SFAS No. 157,Fair Value
Measurements("SFAS 157") as amended by Financial Accounting Standards Board ("FASB") Staff Position SFAS 157-1,Application
of

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FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13("FSP SFAS 157-1") and FASB Staff Position SFAS 157-2,Effective Date of FASB Statement
No. 157("FSP SFAS 157-2"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and provides for expanded disclosure about fair value measurements. SFAS 157 applies prospectively to all other accounting pronouncements that require or permit fair value
measurements. FSP SFAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13, Accounting for Leases.FSP
SFAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. We will adopt FSP SFAS 157-2 with our first quarter of fiscal 2009. See
Note 4Fare Value Measurements of our Notes to Consolidated Financial Statements.

The
adoption of SFAS 157 did not have a material impact on our financial condition, results of operations, or cash flows. While we continue to evaluate the impact that
SFAS 157 will have on our non-financial assets and non-financial liabilities, we do not anticipate that the impact will be material to our financial condition, results
of operations, or cash flows. The assets and liabilities typically recorded at fair value on a non-recurring basis to which we have not yet applied SFAS 157 due to the deferral of
SFAS 157 for such items include:



Effective
November 2008 we adopted FASB Staff Position 157-3,Determining Fair Values of a Financial Asset When the Market for That Asset Is Not
Active("FSP FAS 157-3"). FSP FAS 157-3 clarifies the application of SFAS 157 to financial instruments in an inactive market. The
adoption of FSP FAS 157-3 did not have a material impact on our financial condition, results of operations, or cash flows.

Effective
November 2008 we adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The adoption of SFAS 159 did not have a material impact on our financial condition, results of operations, or cash flows since we did not elect to apply the fair value
option for any of our eligible financial instruments or other items on the June 1, 2008 effective date.



In December 2007, FASB issued Statement No. 141 (revised 2007)Business
Combinationsor SFAS 141(R), and Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements,
or SFAS 160, an amendment of Accounting Research Bulleting No. 51, or ARB 51. SFAS 141(R) will impact financial statements on the acquisition date and in subsequent periods. Some
of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings and may impact our acquisition strategy. Additionally, in February 2009, FASB issued
FASB Staff Positions FAS 141(R)-a,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies(the "FSP"), which will amend the previsions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under Statement of Financial Accounting Standards

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No. 141(R),Business CombinationsFAS 141(R). SFAS 160 will change the accounting and reporting for minority interests, which will
be re-characterized as non-controlling interests and classified as a component of equity. In addition, SFAS 141(R) will be applied prospectively and SFAS 160 will
require retroactive adoption of the presentation and disclosure requirements for existing minority interests, while the remaining requirements of SFAS 160 will be applied prospectively.
SFAS 141(R) and SFAS 160 are effective on January 1, 2009. We are currently evaluating the impact, if any of adopting SFAS 141(R) and SFAS 160 on our consolidated
financial statements.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133, or SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for and their effect on an entity's financial position, financial performance and cash flows. SFAS 161 will be effective in the first quarter of fiscal year
2009. We are evaluating the impact that this statement will have, if any, on our consolidated financial statements.

In
April 2008, the FASB issued FSP No. 142-3,Determination of the Useful Life of Intangible Assets, or FSP
142-3. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets
under FASB Statement No. 142,Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008. Early adoption is prohibited. We are evaluating the impact, if any, that FSP 142-3 will have, if any, on our consolidated financial
statements.

In
May 2008, the FASP issued FSP APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement. FSP APB 14-1 specifies that an issue of such instruments should separately account for the liability and equity components of the instruments in a
manner that reflect the issuer's non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. FSP APB 14-1 is effective for fiscal
years beginning after December 15, 2008, and retrospective application is required for all periods presented. We will be required to record increased interest expense on our convertible debt
beginning in 2009. We expect the impact on 2009 interest expense to be in the range of $4.0 million to $4.5 million.

In
June 2008, the FASB ratified EITF Issue 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own
Stock(EITF 07-5). Paragraph 11(a) of SFAS No. 133,Accounting for Derivatives and Hedging
Activities, specifies that a contract that would otherwise meet the definition of derivative but is both (a) indexed to such company's own stock and
(b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new
two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. EITF 07-05 will be effective for the first annual reporting period beginning after December 15, 2008, and early adoption is
prohibited. We are currently evaluating whether the adoption of EITF 07-05 will have an impact on the accounting for our convertible senior notes.

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LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant operating losses since inception; however, we experienced our first two profitable quarters in fiscal
2008. As of December 31, 2008, we had an accumulated deficit of $235.3 million. We have financed our operations since inception primarily through equity and debt financings.

In
December 2006, we filed a shelf Registration Statement on Form S-3, through which we may sell from time to time any combination of debt securities, common stock,
preferred stock and warrants, in one or more offerings. After the sale of our senior convertible notes described below, we had $63,750,000 remaining available for sale under this shelf registration
statement.

In
February 2007, we issued and sold under the shelf Registration Statement an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. These notes bear
a 2.25% interest per annum on the principal amount, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2007. Interest accrual on
the notes commenced on February 12, 2007. The notes will mature on February 15, 2027, unless earlier redeemed, repurchased or purchased by us or converted.

The
notes will be convertible into cash and, if applicable, shares of our common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal
amount of notes (which represents an initial conversion price of approximately $27.89 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of
the note and our common stock in respect of such note's conversion value in excess of such principal amount. We may repurchase such securities from time to time.

The
notes are convertible only in the following circumstances: (1) during any calendar quarter after the quarter ended March 31, 2007 if the closing sale price of our
common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion
price; (2) during the five consecutive business days immediately after any five consecutive trading day period if the average trading price per $1,000 principal amount of the notes is less than
or equal to 97% of the average conversion value of the notes during such five-day period; (3) upon the occurrence of specified corporate transactions; (4) if we call the
notes for redemption and (5) at anytime on or after December 15, 2011 up to and including February 15, 2012 and anytime on or after February 15, 2025. Upon a change in
control or termination of trading, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any
accrued and unpaid interest.

In
addition, in connection with the issuance of the notes, we entered into separate convertible note hedge transactions and separate warrant transactions to reduce the potential dilution
upon conversion of the notes ("Call Spread Transactions"). As a result of the Call Spread Transactions, we do not anticipate experiencing an increase in the total shares outstanding from the
conversion of the notes unless the price of our common stock appreciates above $36.47 per share, effectively increasing the conversion premium to us to $36.47. We purchased call options to cover
approximately 3.1 million shares of our common stock, which is the number of shares underlying the notes. In addition, we sold warrants permitting the purchasers to acquire up to approximately
3.1 million shares of our common stock.

As
of December 31, 2008, we held $48.5 million (par value) in auction rate securities ("ARS") backed by federal and state student loans which are variable rate debt
instruments and bear interest rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

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Our
ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid,
using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have experienced
failed auction in 2008 on all of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a
pre-determined formula with spreads tied to particular interest rate indexes.

In
November 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our auction rate security rights (the "Rights"). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at
par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have
no further rights or obligation to buy our ARS. So long as we hold our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process
fails.

UBS's
obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has
disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

In
November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value of our auction rate
securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the
credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance
under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par
value support from UBS. See Note 11Credit Line, for more information about this line of credit, Note 3Long-term Investment and
Note 4Fair Value Measurements of our Notes to Consolidated Financial Statements for information about the accounting treatment of our ARS.

In
the future, depending on a variety of factors, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Additional
financing may not be available when needed or on terms acceptable to us.

As
of December 31, 2008, we had cash, cash equivalents and short-term investments of $54.7 million, compared to $45.2 million at December 31,
2007. The increase of $9.5 million is primarily due to cash from operating activities and proceeds from the line of credit offset by our acquisition of Conceptus SAS in January 2008. We believe
that our existing cash and cash equivalents will be sufficient to meet our cash requirements for the next twelve months.



Net cash provided by operating activities was $4.7 million in 2008 and cash used in operating activities was $7.6 million
in 2007 and $8.7 million in 2006. Net cash provided by operating activities in 2008 was primarily related to:



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We
expect cash provided by operating activities in the future to increase as our revenues grow.



Net cash used in investing activities for the twelve months ended December 31, 2008 was $12.1 million, due to the sales
and maturity of short-term investments of $22.1 million, offset by the purchase of Conceptus SAS, net of cash acquired of $23.0 million, purchases of investments of
$5.0 million, $0.4 million for restricted cash related to our lease and capital expenditures of $5.8 million. In connection with our renewed lease agreement for our Mountain View
headquarters we were required to open a long term restricted CD account in the amount of $0.4 million.



Net cash provided by financing activities in the twelve months ended December 31, 2008 was $33.8 million from the
issuance of common stock for our stock option programs and proceeds from our demand revolving credit line agreement with UBS. See Note 11Credit Line of our Notes to Consolidated
Financial Statements.



We have operating lease obligations on our current building facilities and automobiles used primarily by our sales personnel,
worldwide. In addition, we have obligations related to our clinical trial obligations.

The
following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of December 31, 2008 (in thousands):

Payments due by periodTotal

Less than 1 year

1-3 years

3-5 years

ThereafterOn balance sheetConvertible senior notes

$
86,250

$


$


$


$
86,250Line of credit


29,944


29,944








Operating lease obligations


6,471


654


3,317


2,498


2Clinical trial obligations


270


270








Interest on our convertible senior notes


35,901


1,941


3,881


3,881


26,198Total

$
158,836

$
32,809

$
7,198

$
6,379

$
112,450


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In
February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. Refer to Note 10Convertible Senior Notes of
our Notes to Consolidated Financial Statements for a description of these instruments.

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 sales and marketing
activities. Our future liquidity and capital requirements will depend upon many factors, including, among others:





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material
effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as of December 31, 2008.

ITEM 7A.    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 through interest earned on holdings of available-for-sale and
trading marketable securities. We have experienced failed auctions in 2008 of all our auction rate securities and there is no assurance that auctions on these auction rate securities in our investment
portfolio will succeed in the future. As a result, our ability to liquidate our investments in the near term may be limited, and our ability to fully recover the carrying value of our investments may
be limited or non-existent. An auction failure means that the parties wishing to sell securities could not carry out the transaction. If the issuers of these securities are unable to
successfully close future auctions or their credit ratings deteriorate, we may be required to record further impairment charges on these investments. It could take until the final maturity of the
underlying notes (up to 39 years) to realize our investments' recorded value. As of December 31, 2008 we held $48.5 million (par value) in auction rate securities which are
variable rate debt instruments and bear interest rates that are due to reset approximately every 20-30 days. All of these auction rate securities were classified as long term
investments in our consolidated balance sheet at December 31, 2008 with an expected maturity of greater than one year. Due in part to these factors, our future investment income may fall short
of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. 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.

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Foreign Currency Exchange Risk:Historically, all of our expenses and our revenues were typically denominated in U. S. Dollars. On
January 7,
2008, we acquired all the outstanding shares of Conceptus SAS. As a result of this transaction, Conceptus SAS became a wholly owned subsidiary and its results of operations have been consolidated with
our results of operations for financial reporting purposes as of the acquisition date. The functional currency of Conceptus SAS is the Euro; therefore, we are now exposed to changes in foreign
exchange rates.

We
are exposed to foreign exchange rate fluctuations as we translate the financial statements of our foreign subsidiaries into U.S. Dollars in consolidation. If there is a change in
foreign currency exchange rates, the translation of the foreign subsidiaries' financial statements into U.S. Dollars will lead to translation gains or losses which are recorded net as a component of
accumulated other comprehensive loss. We will seek to manage our foreign exchange risk through operational means, including managing same currency revenues in relation to same currency expenses, and
same currency assets in relation to same currency liabilities. In connection with the acquisition of Conceptus SAS, we had assumed a forward exchange contract to hedge U.S. Dollar-denominated
estimated accounts payable in 2008. We have recorded the changes of the fair value of the hedge contract in our results of operations for the twelve months ended December 31, 2008. The hedge
contract was fully utilized by December 31, 2008. In 2007, we did not enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. At December 31, 2008, our intercompany receivable balance with foreign subsidiaries is $4.0 million and the potential loss in fair value
resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar/Euro currency exchange rate would be approximately $0.4 million.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements are set forth in this Annual Report on Form 10-K beginning on page 59.

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

None.

ITEM 9A.    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 Securities and Exchange Commission'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 for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a
reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As
of December 31, 2008, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

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Management
is responsible for establishing and maintaining adequate internal control over our financial reporting.

Internal
control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and procedures that:

(1)   Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2)   Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(3)   Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material
effect on the financial statements.

Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2008 based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

Our
internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm who
also audited our consolidated financial statements, as stated in their report which is included elsewhere herein.

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

Inherent Limitations of Internal Controls

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

ITEM 9B.    OTHER INFORMATION

Not applicable.

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PART III

Certain information required by Part III is incorporated by reference from our definitive proxy statement (or Proxy Statement),
for our annual meeting of stockholders to be held on June 3, 2009, which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A, and the
information included therein is incorporated by reference to the extent detailed below.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item, insofar as it relates to directors and officers, will be contained in our Proxy Statement in
connection with our 2009 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year pursuant to Regulation 14A, under the
captions "Election of Directors" and "Management." Information required by this item as to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be contained in the our
Proxy Statement under the caption "Section 16(a) Beneficial Owner Reporting Compliance," and is hereby incorporated by reference into this report.

We
have a written code of ethics that applies to all of our employees and to our Board of Directors. A copy of the code is available on our website at www.conceptus.com.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the information under the caption "Executive Compensation" in
our Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from the information under the captions "Security Ownership of
Certain Beneficial Owners and Management" and "Securities Authorized for Issuance Under Equity Compensation Plans" in our Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and
Related Transactions" in our Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from the information under the caption "Principal Accountant Fees
and Services" in our Proxy Statement.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



Exhibit Number

Description3.1

Amended and Restated Certificate of Incorporation of Registrant. Incorporated by reference to the Registrant's Registration Statement on Form SB-2, as amended (File No. 33-99890-LA), which became effective on
February 1, 1996.3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 333-89266) filed on
June 4, 2002.3.3

Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on December 18, 2008.3.4

Amendment No. 1 to Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 of the Registrant's Form 8-K filed on April 23, 2008.4.1

Indenture between Conceptus, Inc. and Wells Fargo, National Association, dated February 12, 2007. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K filed on February 12,
2007.4.2

Supplemental Indenture No. 1, including the Form of 2.25% Convertible Senior Notes due 2027, between Conceptus, Inc. and Wells Fargo, National Association, dated February 12, 2007. Incorporated by
reference to Exhibit 4.2 to the Registrant's Form 8-K filed on February 12, 2007.10.1

Form of Indemnification Agreement for directors and officers.10.2
*
Amended and Restated 1993 Stock Plan. Incorporated by reference to Exhibit 10.31 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.


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Exhibit Number

Description10.3
*
1995 Employee Stock Purchase Plan. Incorporated by reference to the Registrant's Registration Statement on Form SB-2, as amended (File No. 33-99890-LA), which became effective on February 1,
1996.10.4
*
1995 Directors' Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.10.5
*
Eighth Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to the Registrant's Definitive Proxy Statement on Schedule 14A filed on April 24, 2006.10.6
*
Amended and Restated 2002 Non-Qualified Stock Option Plan. Incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.10.7
*
Form of Senior Management Amended and Restated Change of Control Agreement. Incorporated by reference to Exhibit 10.7 of the Registrant's Report on Form 10-K for the year ended December 31,
2004.10.8
*
Change of Control Agreement dated as of April 27, 2004 by and between Registrant and Gregory Lichtwardt. Incorporated by reference to Exhibit 10.8 of the Registrant's Report on Form 10-K for the year
ended December 31, 2004.10.9
*
Amended and Restated Change of Control Agreement dated as of December 14, 2007 by and between Registrant and Kathryn A. Tunstall. Incorporated by reference to Exhibit 10.1 of the Registrant's Report on
Form 8-K filed on December 17, 2007.10.10

License Agreement dated December 28, 1992 between the Registrant and Target Therapeutics Inc. Incorporated by reference to the Registrant's Registration Statement on Form SB-2, as amended (File
No. 33-99890-LA), which became effective on February 1, 1996.10.11

Settlement and License Agreement between Ovion, Inc., William S. Tremulis and Jeffrey P. Callister and Conceptus, Inc. dated November 6, 2003. Incorporated by reference to Exhibit 10.30 of the
Registrant's Amendment to its Annual Report on Form 10-K/A for the year ended December 31, 2003.10.12

Sublease Agreement for the premises located at 331 East Evelyn, Mountain View, California. Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005.10.13

Landlord Consent to Sublease for the premises located at 331 East Evelyn, Mountain View, California. Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005.10.14

Amended and Restated Preferred Shares Rights Agreement, dated as of February 26, 2007, between the Registrant and Mellon Shareholder Services, L.L.C., including the Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. Incorporated by reference to Exhibit 10.1 of the
Registrant's Report on Form 8-K filed on February 23, 2007.10.15
+
Exclusive U.S. Co-Promotion Agreement, dated as of October 30, 2003, by and between the Registrant and Gynecare Worldwide Division of Ethicon, Inc. Incorporated by reference to Exhibit 10.1 of the
Registrant's Report on Form 8-K filed on March 1, 2004.10.16
+
Amended Share Purchase and Amended Call Option Agreement, dated as of January 17, 2004, by and between Mr. Yves Guillemain d'Echon et al. and the Registrant. Incorporated by reference to Exhibit 10.2 of
the Registrant's Report on Form 8-K filed on March 1, 2004.


56

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Table of Contents

Exhibit Number

Description10.17
+
Supplier Agreement dated November 7, 2005 between the Registrant and Accellent Corp. Incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2005.10.18
*
Letter Agreement by and between the Company and Gregory E. Lichtwardt dated November 12, 2003. Incorporated by reference to Exhibit 10.29 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003.10.19
*
Employment Agreement between Mark M. Sieczkarek and Conceptus, Inc. executed September 30, 2004. Incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K filed on
October 5, 2004.10.20
*
Letter Agreement between Ric Cote and Conceptus, Inc. executed March 25, 2004. Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on 10-Q for the Quarter Ended March 31,
2004.10.21
*
Employment Commencement Nonstatutory Stock Option Agreement between Ric Cote and Conceptus, Inc. executed April 5, 2004. Incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-8 filed on June 29, 2004.10.22
*
Stand-Alone Restricted Stock Purchase Agreement between Ric Cote and Conceptus, Inc. executed April 5, 2004. Incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on
Form S-8 filed on June 29, 2004.10.23
*
Relocation Expense Agreement dated October 28, 2005 between the Registrant and Ulric Cote. Incorporated by reference to Exhibit 10.40 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2005.10.24

Form of Stock Appreciation Right Agreement under Conceptus, Inc. Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
February 6, 2007.10.25

Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under Conceptus, Inc. Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 to
the Registrant's Form 8-K filed on February 6, 2007.10.26

First Amendment, dated February 27, 2007, to Share Purchase and Call Option Agreement, dated as of January 17, 2004, by and between Mr. Yves Guillemain d'Echon et al. and the Registrant. Incorporated by
reference to Exhibit 10.28 to the Registrant's Form 10-K for the year ended December 31, 2006.10.27

Second Amendment, dated November 17, 2007, to Share Purchase and Call Option Agreement, dated as of January 17, 2004, by and between Mr. Yves Guillemain d'Echon et al. and the Registrant. Incorporated
by reference to Exhibit 10.1 to the Registrant's Report on Form 8-K, filed on November 21, 2007.10.28

First Amendment, dated February 27, 2007, to Conceptus SAS Distribution Agreement, dated as of January 17, 2004, by and between Conceptus SAS and the Registrant. Incorporated by reference to
Exhibit 10.29 to the Registrant's Form 10-K for the year ended December 31, 2006.10.29

Confirmation of Convertible Bond Hedge Transaction, dated February 6, 2007, by and between the Registrant and UBS AG, London Branch. Incorporated by reference to Exhibit 10.1 to the Registrant's
Form 8-K filed on February 12, 2007.10.30

Confirmation of Convertible Bond Hedge Transaction, dated February 6, 2007, by and between the Registrant and Societe Generale. Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K
filed on February 12, 2007.


57

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Table of Contents

Exhibit Number

Description10.31

Confirmation of Issuer Warrant Transaction, dated February 6, 2007, by and between the Registrant and UBS AG, London Branch. Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on
February 12, 2007.10.32

Confirmation of Issuer Warrant Transaction, dated February 6, 2007, by and between the Registrant and Societe Generale. Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed on
February 12, 2007.10.34
*
Stock Appreciation Right Agreement, by and between the Registrant and Spencer Roeck, dated October 10, 2007. Incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 filed on
December 4, 2007.10.35

Lease Agreement for the premises located at 331 East Evelyn, Mountain View, California.10.36

Credit Line Account Application and Agreement for Organization and Business and Addendum.10.37

Share Purchase Agreement by and among Conceptus, Inc., Conceptus SAS and the Sellers party thereto, dated January 7, 2008. Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K
filed on January 11, 2008.10.38

Eleventh Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on October 6, 2008.14.1

Code of Ethics. Incorporated by reference to Exhibit 14.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.21

List of Conceptus subsidiaries.23.1

Consent of Independent Registered Public Accounting Firm.24.1

Power of Attorney (See signature page to this Report).31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


---

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Table of Contents



CONCEPTUS, INC.        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageReport of Independent Registered Public Accounting Firm

60Consolidated Balance Sheets, December 31, 2008 and 2007

61Consolidated Statements of Operations for Years Ended December 31, 2008, 2007 and
2006

62Consolidated Statements of Stockholders' Equity for Years Ended December 31, 2008, 2007 and
2006

63Consolidated Statements of Cash Flows for Years Ended December 31, 2008, 2007 and 2006

64Notes to Consolidated Financial Statements

65


59

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Table of Contents

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders of Conceptus, Inc.

In
our opinion, the consolidated financial statements listed in the index under Item 15(a) (1) present fairly, in all material respects, the financial position of
Conceptus, Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting,
included under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PRICEWATERHOUSECOOPERS LLP

San
Jose California
March 13, 2009

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Table of Contents

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS



CONCEPTUS, INC.        CONSOLIDATED BALANCE SHEETS        (In thousands, except share and per share amounts)

December 31,2008

2007AssetsCurrent assets:Cash and cash equivalents

$
54,720

$
28,450Short-term investments





16,700Accounts receivable, net of allowance for doubtful accounts of $478 and $431 at December 31, 2008 and 2007, respectively


14,377


11,903Inventories


3,829


2,418Prepaids


7,478


2,598Other current assets


1,617


673Total current assets


82,021


62,742Property and equipment, net


8,635


5,312Goodwill


17,105


Intangible assets, net


5,287


1,164Debt issuance costs


1,935


2,555Long-term investments


43,177


48,800Put option


5,144


Restricted cash


351


Other assets


50


102Total assets

$
163,705

$
120,675Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
3,869

$
4,744Accrued compensation


6,762


3,175Line of credit


29,944


Interest payable


733


733Deferred tax liability


1,442


Other accrued liabilities


3,865


3,606Total current liabilities


46,615


12,258Notes payable


86,250


86,250Other accrued liabilities


394


240Total liabilities


133,259


98,748Commitments and contingencies (Note 9)Stockholders' equity:Preferred stock:$0.003 par value, authorized 3,000,000 shares; no shares issued or outstanding at December 31, 2008 and 2007





Common stock and additional paid-in capital:$0.003 par value, 50,000,000 shares authorized, 30,494,686 and 29,916,643 shares issued and 30,416,823 and 29,838,780 shares outstanding at
December 31, 2008 and 2007, respectively


266,576


257,176Accumulated deficit


(235,332
)

(235,249
)Accumulated other comprehensive loss


(798
)

Treasury Stock, 77,863 , at cost, at December 31, 2008 and 2007, respectively





Total stockholders' equity


30,446


21,927Total liabilities and stockholders' equity

$
163,705

$
120,675


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

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Table of Contents



CONCEPTUS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

Years Ended December 31,2008

2007

2006Net sales

$
101,977

$
64,442

$
41,900Cost of goods sold


21,650


16,682


14,027Gross profit


80,327


47,760


27,873Operating expenses:Research and development


6,788


5,875


4,366Selling, general and administrative


72,685


56,084


43,318Total operating expenses


79,473


61,959


47,684Operating income (loss)


854


(14,199
)

(19,811
)Interest income and expense and other expense, net:Interest income


2,150


4,852


1,346Interest expense


(2,740
)

(2,285
)

(22
)Other expense, net


(371
)




Total interest income and expense and other expense, net


(961
)

2,567


1,324Loss before benefit from income taxes


(107
)

(11,632
)

(18,487
)Benefit from income taxes


(24
)




Net loss

$
(83
)
$
(11,632
)
$
(18,487
)Basic and diluted net loss per share

$
(0.00
)
$
(0.39
)
$
(0.64
)Weighted-average shares used in computing basic and diluted net loss per share


30,216


29,463


28,993


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

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Table of Contents



CONCEPTUS, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share amounts)

Common Stock
& Additional
Paid-In CapitalAccumulated
Other
Comprehensive
LossDeferred
Stock-Based
Compensation

Accumulated
Deficit

Total
Stockholders'
EquityShares

AmountBalances as of December 31, 2005


29,051,804


246,359


(1,058
)




(205,130
)

40,171Issuance of common stock for cash upon exercise of options


290,700


2,872











2,872Issuance of common stock for cash from employee stock purchase plan


94,009


514











514Reversal of overpayment on stock issuance costs





8











8Stock-based compensation for consultants' services





292











292Grants of restricted stock to employees and directors


28,500














Stock-based compensation related to restricted stock, SSR/SAR and stock option grants





4,351











4,351Stock-based compensation related to employee stock purchase plan





235











235Deferred stock-based compensation related to restricted stock grants








1,058








1,058Cancellation of restricted stock awards


(184,000
)













Purchases of treasury stock


(13,889
)













Treasury stock issuances


3,421














Net loss














(18,487
)

(18,487
)Balances as of December 31, 2006


29,270,545


254,631








(223,617
)

31,014Issuance of common stock for cash upon exercise of options


360,427


3,319











3,319Issuance of common stock for cash from employee stock purchase plan


82,217


1,126











1,126Issuance of common stock upon exercise of SAR's


1,957














Stock-based compensation for consultants' services





243











243Stock-based compensation related to restricted stock, restricted stock units, SAR's and stock option grants





5,941











5,941Stock-based compensation related to employee stock purchase plan





309











309Issuance of common stock upon payment of bonus





219











219Issuance of common stock from restricted stock awards


113,166


(68
)










(68
)Treasury stock issuances


10,468


133











133Issuance of debt





(8,677
)










(8,677
)Net loss














(11,632
)

(11,632
)Balances as of December 31, 2007


29,838,780


257,176








(235,249
)

21,927Issuance of common stock for cash upon exercise of options


378,267


3,100











3,100Issuance of common stock for cash from employee stock purchase plan


61,144


871











871Issuance of common stock upon exercise of SAR's


5,253


(9
)










(9
)Stock-based compensation for consultants' services





183











183Stock-based compensation related to restricted stock, restricted stock units, SAR's and stock option grants





5,145











5,145Stock-based compensation related to employee stock purchase plan





280











280Issuance of common stock from restricted stock awards


133,379


(170
)










(170
)Accumulated other comprehensive loss











(798
)




(798
)Net loss














(83
)

(83
)Balances as of December 31, 2008


30,416,823


266,576





(798
)

(235,332
)

30,446


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

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Table of Contents



CONCEPTUS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

Years Ended December 31,2008

2007

2006Cash flows from operating activitiesNet loss

$
(83
)
$
(11,632
)
$
(18,487
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization of property, plant and equipment


2,939


1,534


1,191Amortization of debt issuance costs


619


542


Amortization of intangibles


782


186


200Gain on put option


(5,144
)




Unrealized loss on trading securities


5,273





Stock-based compensation expense


5,667


6,493


6,154Loss on retirement of fixed assets


48


61


4Changes in operating assets and liabilities, net of acquisition:Accounts receivable


(1,673
)

(4,927
)

(2,457
)Inventories


559


(1,808
)

2,782Other current assets


(5,198
)

(2,207
)

46Other assets


102


894


607Accounts payable


(1,735
)

1,163


105Accrued compensation


1,333


(515
)

639Deferred tax liability


(417
)




Other accrued and long term liabilities


1,670


2,653


537Net cash provided by (used in) operating activities


4,742


(7,563
)

(8,679
)Cash flows from investing activitiesPurchase of Conceptus SAS, net of cash acquired


(22,978
)




Purchase of investments


(5,000
)

(88,600
)

(21,950
)Sales & maturities of investments


22,050


45,700


19,200Restricted cash


(351
)




69Capital expenditures


(5,781
)

(3,311
)

(1,369
)Net cash used in investing activities


(12,060
)

(46,211
)

(4,050
)Cash flows from financing activitiesProceeds from line of credit


30,000





Proceeds from issuance of long term debt





86,250


Repayment of loan


(56
)




Payment of debt issuance costs





(3,097
)

Purchase of call options on convertible senior notes





(19,372
)

Proceeds from issuance of warrants





10,695


Issuance of common stock under company stock plans


3,792


4,510


3,386Reversal of overpayment on stock issuance costs








8Net cash provided by financing activities


33,736


78,986


3,394Effect of exchange rate changes on cash and cash equivalents


(148
)




Net increase (decrease) in cash and cash equivalents


26,270


25,212


(9,335
)Cash and cash equivalents at beginning of year


28,450


3,238


12,573Cash and cash equivalents at end of year

$
54,720

$
28,450

$
3,238Supplemental information:Cash paid for:Interest

$
1,941

$
986

$
22


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

64

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Table of Contents

CONCEPTUS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Ownership and Business

Conceptus, Inc. ("we" or "us" or "our") was incorporated in the state of Delaware on September 18, 1992 to design, develop and market minimally invasive devices for
reproductive medical applications. We develop, manufacture and market theEssurepermanent birth control system, an innovative and proprietary medical
device for women that was approved for marketing in the United States in November 2002 by the U.S. Food and Drug Administration, or FDA. TheEssuresystem uses a soft and flexible micro-insert that is delivered into a woman's fallopian tubes to provide permanent birth control by causing benign tissue in-growth that blocks the
fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth prohibits the egg from traveling through the fallopian tubes
and therefore prevents fertilization. The effectiveness rate of theEssuresystem is 99.80% after four years of follow-up. Our catheter
systems are based on technology initially developed and used by Target Therapeutics, Inc. ("Target"), a business unit of Boston Scientific Corporation ("BSC"), and licensed exclusively to
Conceptus in the field of reproductive physiology.

We
have a limited history of operations and have incurred significant operating losses since inception. In December 2006, we filed a Registration Statement on
Form S-3, through which we may sell from time to time any combination of debt securities, common stock, preferred stock and warrants, in one or more offerings, with an initial
offering price not to exceed $150,000,000. In February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. If the notes are converted, then
upon conversion, holders will receive cash and, if applicable, shares of our common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of
notes (which represents an initial conversion price of $27.89 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common
stock in respect of such note's conversion value in excess of such principal amount. This net share settlement feature of the notes would reduce our liquidity, and we may not have sufficient funds to
pay in full the cash obligation upon such conversion. In the future, depending upon a variety of factors, we may need 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 covenants that restrict us. 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.

2. Summary of Significant Accounting Policies



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying our financial statements include the write-off of obsolete and slow moving
inventory, allowance for doubtful accounts receivable, product warranty, the fair value of our investment portfolio, assumptions regarding variables used in calculating the fair value of our equity
awards, impairment of goodwill, intangibles and other long-lived assets, income taxes and contingent liabilities. Actual results could differ from those estimates.

65

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Table of Contents

CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated.



On January 7, 2008 we acquired Conceptus SAS, which sells to customers in France and all of Europe. Our condensed consolidated
financial statements for the twelve months ended December 31, 2008 include the financial results of Conceptus SAS starting on January 7, 2008. Sales by Conceptus SAS are denominated in
Euros. In preparing our consolidated financial statements, we are required to translate the financial statements of Conceptus SAS from the currency in which they keep their accounting records into
U.S. Dollars. Conceptus SAS maintains its accounting records in the functional currency which is also its respective local currency, the Euro. The functional currency is determined based on
management's judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its
transactions, including billing, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary's operations
must also be considered. Since the functional currency of Conceptus SAS has been determined to be the Euro, any gain or loss associated with the translation of Conceptus SAS' financial statements into
U.S. Dollars is included as a component of stockholders' equity, in accumulated other comprehensive loss. If in the future we determine that there has been a change in the functional currency of
Conceptus SAS from its local currency to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within our statement of operations.



Goodwill is the excess of the purchase price over the fair value of the other net assets, including customer relationship and covenant
not to compete, of acquired businesses. Under SFAS 142,Goodwill and Other Intangible Assets, goodwill and other intangible assets with
indefinite lives are not amortized, but are assigned to reporting units and tested for impairment annually, or whenever there is an impairment indicator. We operate as one reporting unit engaged in
developing, manufacturing, and marketing medical devices. We assess goodwill impairment indicators quarterly, or more frequently, if a change in circumstances or the occurrence of events suggests the
remaining value may not be recoverable. Intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives.

The
first step of the impairment test for goodwill compares the fair value of a reporting unit with its carrying amount, including goodwill and other indefinite lived intangible assets.
If the fair value is less than the carrying amount, the second step determines the amount of the impairment by comparing the implied fair value of the goodwill with the carrying amount of that
goodwill. An impairment charge is recognized only when the calculated fair value of a reporting unit, including goodwill and indefinite lived intangible assets, is less than its carrying amount. We
performed an annual assessment during the fourth quarter of 2008 of our goodwill at the reporting unit level. No impairment charges have been recorded through December 31, 2008.

Other
intangible assets include customer relationships and non-compete agreements. They are amortized using the straight-line method over their respective
estimated useful lives.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)



We account for the impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the Essurelicense acquired from a patent litigation
settlement in 2003 and intangible assets acquired in connection with our acquisition of Conceptus SAS
in 2008 whenever certain events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or circumstances include a prolonged industry downturn,
a significant decline in our market value or significant reductions in projected future cash flows.

Significant
judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins,
long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition,
significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the
value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to
write down the assets. Our net long-lived assets as of December 31, 2008 and 2007 included property and equipment of $8.6 million, and $5.3 million, respectively, and
other identifiable intangible assets of $5.3 million, and $1.2 million, respectively.



We invest cash that is not required for immediate operating needs principally in a diversified portfolio of financial instruments
issued by institutions with strong credit ratings. We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We maintain deposits
with three financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear minimal risk. Our
cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance limits. While we
monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to
other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2008 long-term
investments consist of auction rate securities ("ARS").

Our
net sales to date consist mainly of product revenues from physicians, hospitals and distributors located worldwide. We do not require collateral and provide for estimated credit
losses based on customer credit assessment.

We
assess the credit worthiness of our customers on an ongoing basis in order to mitigate the risk of loss from customers not paying us. However, we account for the possibility that
certain customers may not pay us by maintaining an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers and maintain our allowance for doubtful
accounts based upon our historical experience and any specific customer collection issues that we have identified. As of

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2. Summary of Significant Accounting Policies (Continued)

December 31,
2008 and 2007, our allowance for doubtful accounts totaled approximately $0.5 million and $0.4 million, respectively.

For
the years ended December 31, 2008, 2007, and 2006 we had no customers that accounted for greater than 10% of our net sales. We had no customers who had an outstanding accounts
receivable balance greater than 10% of our total gross outstanding accounts receivable as of December 31, 2008; however, we had one such customer as of December 31, 2007, that accounted
for 19% of the total accounts receivable.

We
are a one-product company and our only product, theEssuredevice, received approval from the United States Food and Drug
Administration ("FDA") in November 2002. Internationally, we were approved to affix the CE Mark to theEssureprocedure in February 2001. In addition,
we received clearance in November 2001 from Health Canada to market theEssuredevice in that country. We cannot be assured that necessary approvals or
clearances will be obtained in other countries. If we are denied approval or clearance or if approval or clearance is delayed or withdrawn, we may suffer a material adverse impact.

We
are subject to risks characteristic of the medical device industry, including but not limited to uncertainty of market acceptance of products, reimbursement from insurance carriers
and government agencies, compliance with government regulations and protection of proprietary technology, product liability and the need to obtain additional financing. Certain components that meet
our requirements are available only from a limited number of suppliers. The rapid rate of technological change and the necessity of developing and manufacturing products with short life cycles may
intensify these risks. The inability to obtain components as required or to develop alternative sources, if and as required in the future, could result in delays or reductions in product shipments,
which could have a material adverse effect on our business, financial condition, results of operations and cash flows.



We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We
maintain deposits with three financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear
minimal risk. Our cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance
limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or
are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2008
long-term investments consist of auction rate securities ("ARS").

As
of December 31, 2008, we held $48.5 million (par value) in ARS backed by federal and state student loans which are variable rate debt instruments and bear interest rates
that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our
ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have
experienced failed auction in 2008 on all of our ARS. The failures of these auctions do not affect the value of the collateral
underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

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2. Summary of Significant Accounting Policies (Continued)

In November 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our auction rate security rights (the "Rights"). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at
par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have
no further rights or obligation to buy our ARS. So long as we hold
our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails.

UBS's
obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has
disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

We
have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of SFAS No. 159. As a result,
upon acceptance of the offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights with a corresponding credit to other expense, net. As a result of our elections to
record the Rights at fair value, unrealized gains and losses will be included in earnings in future periods. We estimated the fair value of the Rights using the expected value that we will receive
from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default
rate to account for the consideration of UBS credit risk.

Although
the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights. We will continue to classify the ARS as long-term investments until June 30, 2009, one year prior to the expected settlement.

Prior
to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our
available-for-sale securities, in accumulated other comprehensive income (loss) in the stockholders' equity section of our balance sheets. Such an unrealized loss did not
change net income (loss) for the applicable accounting period.

In
connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 30, 2010, we
transferred our ARS from available-for-sale to trading securities in accordance with SFAS 115. The transfer to trading securities reflects our intent to exercise our put
option during the period June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.

We
recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated
other comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized
loss of $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer. We determined that use
of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

estimated
future cash flows, quality of collateral and the probability of future successful auctions occurring. In determining a discount factor for each ARS, the model weights various factors,
including assessments of credit quality, duration, insurance wraps, portfolio composition, discount rates, overall capital market liquidity and comparable securities, if any.

In
November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value of our auction rate
securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the
credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance
under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par
value support from UBS. See Note 11Line of Credit, Note 3Long-term Investment and Note 4Fair Value Measurements.



Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in,
first-out basis. Write-offs for potentially excess and obsolete inventory are made based on our analysis of inventory levels and future sales forecast.



Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment are calculated using the straight-line method over the estimated useful lives of the respective assets, generally
three to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the related assets.

External
direct costs of material and services consumed in website development during the application development stage are capitalized. Capitalized website costs are amortized using the
straight-line method over the estimated useful life of three years. Maintenance and repairs are charged to operations as incurred. These costs were not significant for the years 2008 and
2007.



For financial instruments consisting of cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, demand revolving credit line and accrued liabilities included in our financial statements, the carrying amounts approximate fair value due to their short maturities.



We offer warranties on our product and record a liability for the estimated future costs associated with warranty claims, which is
based upon historical experience and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. A

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2. Summary of Significant Accounting Policies (Continued)

reconciliation
of the changes in our warranty liability for the years ended December 31, 2008 and 2007 (in thousands):

As of December 31,2008

2007Balance at the beginning of the period

$
208

$
209Accruals for warranties issued during the period


350


441Settlements made in kind during the period


(286
)

(442
)Balance at the end of the period

$
272

$
208




Our revenue is primarily comprised of the sale of ourEssuresystem. We recognize
revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements", or SAB 104. Under this
standard, the following four criteria must be met in order to recognize revenue:



The
four revenue recognition criteria and other revenue related pronouncements are applied to our sales as described in the following paragraphs.

We
recognize revenues from ourEssuresystem when we ship the device. We recognize revenue upon shipment of the system as we have no
continuing obligations subsequent to shipment. We do not accept returns of theEssuresystem. We obtain written authorizations from our customers for a
specified
amount of product at a specified price and the price is not dependent on actualEssureprocedures performed.

For
sales through distributors we recognize revenues upon shipment as we have no continuing obligations subsequent to shipment. Our distributors are responsible for all marketing, sales,
training and warranty for theEssuredevice in their respective territories. Our standard terms and conditions do not provide price protection or stock
rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or exchange theEssuresystem
and the distributor is obligated to pay us for the sale regardless of their ability to resell the product.

Additionally,
we require physicians to be preceptored between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. There are no revenues
associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship. Physician training is provided upfront and we have
no obligation subsequent to the initial training. Training costs have not been significant from inception to-date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

We
assess the credit worthiness of all customers in connection with their purchases. We only recognize revenue when collectability is reasonably assured.

Certain
sales of ourEssuresystem require delivery of additional items. These obligations are fulfilled after shipment of the Essuresystem, and in these cases,
we recognize revenue in accordance with the multiple element accounting guidance set forth in Emerging Issues Task
Force No. 00-21, "Revenue Arrangements with Multiple Deliverables" or EITF 00-21. When we have objective and reliable evidence of fair value of the undelivered
elements we defer revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled. Otherwise we defer all revenue until all elements are
delivered.



Research and development expenses reflect clinical expenditures and product development, which are substantially related to the ongoing
development and associated regulatory approvals of our technology. Research and development costs are expensed as incurred.



Advertising production costs are recorded as expense as incurred. Costs of communicating advertising are recorded as expense as
advertising space or airtime is used. All other advertising costs are expensed as incurred. Total advertising expenses were approximately $7.2 million, $2.1 million and
$0.8 million in the years ended December 31, 2008, 2007, and 2006, respectively.



Certain amounts in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year.



Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), "Share-Based Payment," using the modified
prospective transition method. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight line basis as expense over
the employee requisite service period, which is generally the vesting period.

Net
loss for the years ended December 31, 2008, 2007 and 2006 included stock-based compensation expense under SFAS 123(R) of $5.5 million, $6.3 million and
$5.9 million, respectively, which consisted of stock-based compensation expense of $4.8 million, $5.4 million and $4.4 million, respectively, related to employee stock
options, employee stock purchase plan and stock appreciation rights and stock-based compensation expense of approximately $0.7 million, $0.9 million and $1.4 million,
respectively, related to employee restricted stock and restricted stock units.

Awards to consultants:During the fiscal year ended December 31, 2008, we did not grant any stock awards to consultants. During
the fiscal
year ended December 31, 2007, we granted 5,000 shares of common stock to one consultant. In accordance with EITF 96-18 "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," we have recorded compensation expense related to these stock options. We re-measure the

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2. Summary of Significant Accounting Policies (Continued)

fair
value of the options as they vest and recognize changes in fair value as expense in the period. We recorded stock based compensation expense of approximately $0.2 million during the year
ended December 31, 2008 and 2007 and approximately $0.3 million during the year ended December 31, 2006 in connection with our grants to consultants.

The
following table sets forth the total stock-based compensation expense resulting from stock options, stock awards, non-employee stock options, stock appreciation rights
and the Employee Stock Purchase Plan (the "Plan") included in the Consolidated Statements of Operations (in thousands):

Years Ended December 31,2008

2007

2006Cost of goods sold

$
46

$
27

$
128Research and development


238


565


656Selling, general and administrative


5,383


5,901


5,370Total stock-based compensation expense

$
5,667

$
6,493

$
6,154


No
income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

Stock Options and Stock Appreciation Rights:During the year ended December 31, 2008, we granted 1,026,910 stock options and stock
appreciation rights, with an estimated total grant-date fair value of approximately $7.6 million and a grant date weighted-average fair value of $7.40 per share. We recorded
approximately $4.5 million of stock based compensation expense for stock options and stock appreciation rights during the year ended December 31, 2008.

As
of December 31, 2008, there was $9.4 million of unrecognized stock-based compensation cost related to stock options and stock appreciation rights. This cost is expected
to be recognized over a weighted-average amortization period of 2.7 years.

During
the year ended December 31, 2007, we granted 1,019,490 stock options and stock appreciation rights, with an estimated total grant-date fair value of
approximately $7.6 million and a grant date weighted-average fair value of $7.42 per share. We recorded approximately $5.1 million of stock based compensation expense for stock options
and stock appreciation rights during the year ended December 31, 2007.

Employee Stock Purchase Plan (ESPP):The compensation cost in connection with the ESPP for the year ended December 31, 2008 was
approximately
$0.3 million. The grant date weighted-average fair value was $5.18 per share. The compensation cost in connection with the plan for the year ended December 31, 2007 was approximately
$0.3 million. The grant date weighted-average fair value was $5.11 per share.

Restricted Shares and Restricted Stock Units:During the year ended December 31, 2008 we granted 61,710 restricted stock units,
with an
estimated total grant date fair value of approximately $1.0 million and a grant date weighted average fair value of $16.75. This stock compensation is being recorded as compensation expense on
a straight-line basis over the vesting periods of the underlying stock awards. During the years ended December 31, 2008 and 2007, we recorded approximately $0.7 million and
$0.9 million, respectively, of such compensation expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

As
of December 31, 2008, there was $1.2 million of unrecognized stock-based compensation related to nonvested restricted stock awards and restricted stock units. This cost
is expected to be recognized over a weighted-average amortization period of 2.6 years.

Valuation assumptions

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for
the years ended December 31, 2008 and 2007:

Years Ended December 31,2008

2007

2006Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
Plan

Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
Plan

Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
PlanExpected term (in years)


4.55


0.50


3.57


0.67


3.66


0.61Average risk-free interest rate


2.73
%

2.01
%

4.55
%

4.82
%

4.78
%

5.08
%Average volatility factor


47.3
%

42.7
%

47.8
%

41.2
%

53.7
%

45.0
%Dividend yield




















Expected Term:Our expected term represents the period for which our stock-based awards are expected to be outstanding and was
determined based on
historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.

Expected Volatility:We used historical volatility based on the expected term of the awards, which is consistent with our assessment
that the
historical volatility for such period is more representative of future stock price trends than any other type of volatility.

Expected Dividends:We have not paid and do not anticipate paying any dividends in the near future.

Risk-Free Interest Rate:We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the time of grant
based on the expected term of the underlying option.

As
stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.

Refer
to Note 12Incentive and Stock Plans, for a description of our awards.



We account for income taxes in accordance with SFAS No. 109,Accounting for Income
Taxes.Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities
using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. On January 1, 2007, we adopted the provisions of Financial Interpretation
No. 48,Accounting for Uncertainty in Income Taxes

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2. Summary of Significant Accounting Policies (Continued)

(FIN 48)
which is an interpretation of SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The adoption of the provisions of FIN 48 did not have a material effect on our financial position and results of operations. As
part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure together with
assessing temporary differences that may result in deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We
must assess whether it is "more likely than not" that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a
valuation allowance. We evaluate the need for a valuation allowance for our deferred tax assets. Due to our cumulative pre-tax U.S. losses and the current uncertainty of our ability to
realize our U.S. deferred tax assets, a valuation allowance in an amount equal to our U.S. deferred tax assets has been recorded.



Basic net loss per share excludes any potential dilutive effects of options, unvested restricted shares and restricted stock units and
common stock shares subject to repurchase. Diluted net loss per share includes the impact of potentially dilutive securities. In net loss periods presented, basic and diluted net loss per share are
both computed using the weighted average number of common shares outstanding.

The
following table provides a reconciliation of weighted-average number of common shares outstanding to the weighted-average number of common shares outstanding used in computing basic
and diluted net loss per common share (in thousands):

2008

2007

2006Numerator:Numerator for diluted earnings per shareNet loss available to common stockholders

$
(83
)
$
(11,632
)
$
(18,487
)Denominator:Denominator for basic earnings per shareWeighted-average number of common shares outstanding


30,226


29,497


29,251Less: weighted-average unvested and restricted common shares


10


34


258Weighted-average number of common shares outstanding used in computing basic and dilutive net loss per common share


30,216


29,463


28,993


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

The following outstanding equity awards and securities, which could potentially dilute basic net loss per share in the future were excluded from the computation of diluted net loss per
share, as their effect would have been antidilutive (in thousands):

At December 31,2008

2007

2006Outstanding options and SARs


4,234


3,996


3,499Restricted stock


4


17


78Restricted stock units


102


191


255Employee stock purchase plan








27Warrants issued in connection with our convertible notes


3,093


3,093


7,433


7,297


3,859


In
February 2007, we issued an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027 are not included in the calculation of net loss per share
because their effect is anti-dilutive. In addition, our senior convertible notes were excluded from the diluted net income per share calculation in 2008 and 2007 because the conversion
price was greater than the average market price of our stock during the period.



We operate in one business segment, which encompasses all geographical regions. We use one measurement of profitability and do not
segregate our business for internal reporting.

Net
sales by geographic region, based on shipping location of our customer, are as follows (in thousands, except percentages):

Years Ended December 31,2008

2007Net sales (in thousands)

$
101,977

$
64,442United States of America


79
%

92
%France


13
%

7
%Europe (other than France)


7
%

0
%Other


1
%

1
%




Comprehensive loss generally represents all changes in stockholders' equity except those resulting from investments or contributions by
stockholders. Our comprehensive loss consists of cumulative

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

translation
adjustments. A summary of the comprehensive loss for the periods indicated is as follows (in thousands):

At December 312008

2007

2006Net loss

$
(83
)
$
(11,632
)
$
(18,487
)Other comprehensive lossForeign currency translation adjustment, net of tax


(798
)




Comprehensive loss

$
(881
)
$
(11,632
)
$
(18,487
)


The
balances of each component of accumulated other comprehensive loss, net of taxes, as of December 31, 2008, 2007 and 2006 consist of the following (in thousands):

Foreign
Currency
Translation

Accumulated Other
Comprehensive
LossBalance as of December 31, 2006

$


$
Net change during the twelve month period





Balance as of December 31, 2007





Net change during the twelve month period


(798
)

(798
)Balance as of December 31, 2008

$
(798
)
$
(798
)




Effective January 1, 2008, we adopted SFAS No. 157,Fair Value
Measurements("SFAS 157") as amended by Financial Accounting Standards Board ("FASB") Staff Position SFAS 157-1,Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13("FSP SFAS 157-1") and FASB Staff Position SFAS 157-2,Effective Date of FASB Statement
No. 157("FSP SFAS 157-2"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and provides for expanded disclosure about fair value measurements. SFAS 157 applies prospectively to all other accounting pronouncements that require or
permit fair value measurements. FSP SFAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under SFAS
No. 13,Accounting for Leases.FSP SFAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. We will adopt FSP SFAS 157-2 with our first quarter of fiscal 2009. See
Note 4Fair Value Measurements.

The
adoption of SFAS 157 did not have a material impact on our financial condition, results of operations, or cash flows. While we continue to evaluate the impact that
SFAS 157 will have on our non-financial assets and non-financial liabilities, we do not anticipate that the impact will be material to our financial condition, results
of operations, or cash flows. The assets and liabilities typically recorded

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

at
fair value on a non-recurring basis to which we have not yet applied SFAS 157 due to the deferral of SFAS 157 for such items include:



Effective
November 2008 we adopted FASB Staff Position 157-3,Determining Fair Values of a Financial Asset When the Market for That Asset Is Not
Active("FSP FAS 157-3"). FSP FAS 157-3 clarifies the application of SFAS 157 to financial instruments in an inactive market. The
adoption of FSP FAS 157-3 did not have a material impact on our financial condition, results of operations, or cash flows.

Effective
November 2008, we adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The adoption of SFAS 159 did not have a material impact on our financial condition, results
of operations, or cash flows since we did not elect to apply the fair value option for any of our eligible financial instruments or other items on the June 1, 2008 effective date.



In December 2007, FASB issued Statement No. 141 (revised 2007)Business
Combinationsor SFAS 141(R), and Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements,
or SFAS 160, an amendment of Accounting Research Bulleting No. 51, or ARB 51. SFAS 141(R) will impact financial statements on the acquisition date and in subsequent periods. Some
of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings and may impact our acquisition strategy. Additionally, in February 2009, FASB issued
FASB Staff Positions FAS 141(R)-a,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies(the "FSP"), which will amend the previsions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under Statement of Financial Accounting Standards No. 141(R),Business CombinationsFAS 141(R). SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified
as a component of equity. In addition, SFAS 141(R) will be applied prospectively and SFAS 160 will require retroactive adoption of the presentation and disclosure requirements for
existing minority interests, while the remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) and SFAS 160 are effective on January 1, 2009. We are
currently evaluating the impact, if any of adopting SFAS 141(R) and SFAS 160 on our consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133, or SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for and their effect on an entity's financial position, financial performance and cash flows. SFAS 161 will be effective in the first quarter of fiscal

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2. Summary of Significant Accounting Policies (Continued)

year
2009. We are evaluating the impact that this statement will have, if any, on our consolidated financial statements.

In
April 2008, the FASB issued FSP No. 142-3,Determination of the Useful Life of Intangible Assets, or FSP
142-3. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets
under FASB Statement No. 142,Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008. Early
adoption is prohibited. We are evaluating the impact, if any, that FSP 142-3 will have, if any, on our consolidated financial statements.

In
May 2008, the FASP issued FSP APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement. FSP APB 14-1 specifies that an issue of such instruments should separately account for the liability and equity components of the instruments in a
manner that reflect the issuer's non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. FSP APB 14-1 is effective for fiscal
years beginning after December 15, 2008, and retrospective application is required for all periods presented. We will be required to record increased interest expense on our convertible debt
beginning in 2009 which we expect will have a material impact on our consolidated financial statements.

In
June 2008, the FASB ratified EITF Issue 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own
Stock(EITF 07-5). Paragraph 11(a) of SFAS No. 133,Accounting for Derivatives and Hedging
Activities, specifies that a contract that would otherwise meet the definition of derivative but is both (a) indexed to such company's own stock and
(b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new
two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. EITF 07-05 will be effective for the first annual reporting period beginning after December 15, 2008, and early adoption is
prohibited. We are currently evaluating whether the adoption of EITF 07-05 will have an impact on the accounting for our convertible senior notes.

3. Long-term investments

As of December 31, 2008, we held $48.5 million (par value) in auction rate securities ("ARS") backed by federal and state student loans which are variable rate debt
instruments and bear interest rates that
reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our
ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have
experienced failed auction in 2008 on all of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our
ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

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3. Long-term investments (Continued)

In
November 2008, we accepted an offer from UBS AG ("UBS"), providing us with rights related to our auction rate security rights (the "Rights"). The Rights permit us to require UBS to
purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of
June 30, 2010 through July 2, 2012. Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at
par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value. However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have
no further rights or obligation to buy our ARS. So long as we hold our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process
fails.

UBS's
obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has
disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

We
have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of SFAS No. 159. As a result,
upon acceptance of the offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights with a corresponding credit to other expense, net. As a result of our elections to
record the Rights at fair value, unrealized gains and losses will be included in earnings in future periods. We estimated the fair value of the Rights using the expected value that we will receive
from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default
rate to account for the consideration of UBS credit risk.

Although
the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights. We will continue to classify the ARS as long-term investments until June 30, 2009, one year prior to the expected settlement.

Prior
to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our
available-for-sale securities, in accumulated other comprehensive income (loss) in the stockholders' equity section of our balance sheets. Such an unrealized loss did not
change net income (loss) for the applicable accounting period.

In
connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 30, 2010, we
transferred our ARS from available-for-sale to trading securities in accordance with SFAS 115. The transfer to trading securities reflects our intent to exercise our put
option during the period June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.

We
recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated
other comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized
loss of $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer. We determined that use
of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the
probability of future successful auctions

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Long-term investments (Continued)

occurring.
In determining a discount factor for each ARS, the model weights various factors, including assessments of credit quality, duration, insurance wraps, portfolio composition, discount rates,
overall capital market liquidity and comparable securities, if any.

In
November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value of our auction rate
securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the
credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance
under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par
value support from UBS. See Note 11Credit Line.

4. Fair Value Measurements

On January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value our financial assets and liabilities. As defined in SFAS 157, fair value
is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase
consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels, which are described below:



Our
cash and cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or
alternative pricing sources with a reasonable level of price transparency. As of December 31, 2008, our Level 1 instruments are solely comprised of our investments in money market funds.

As
a result of continued auction failures, quoted prices for our ARS did not exist as of December 31, 2008 and, accordingly, we concluded that Level 1 inputs were not
available for these assets. Brokerage statements received from our broker/dealer that held our ARS included their estimated market value as of December 31, 2008. Our broker/dealer valued our
auction rate securities at 83% of par. We made inquiries relative to the measurements utilized to derive the estimated market values quoted on our
brokerage statements, but the broker/dealer declined to provide detailed information relating to their valuation methodologies. Due to the lack of transparency into the methodologies used to determine
the estimated market values, we concluded that estimated market values provided on our brokerage statements did not constitute valid inputs and thus we did not utilize them in measuring the fair value
of these ARS as of December 31, 2008.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements (Continued)

We determined that use of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash
flows, quality of collateral and the probability of future successful auctions occurring. While our valuation model was based on both Level 2 (credit quality and interest rates) and
Level 3 inputs, we determined that the Level 3 inputs were the most significant to the overall fair value measurement of these assets, particularly the estimates of expected periods of
illiquidity. In determining a discount factor for each ARS, the model weights various factors, including assessments of credit quality, duration, insurance wraps, portfolio composition, discount
rates, overall capital market liquidity and comparable securities, if any.

The
put option is a free standing asset separate from the ARS, and represents our contractual right to require our broker, UBS, to purchase our ARS at par value during the period of
June 30, 2010 through July 2, 2012. See Note 3Long-term Investments.

Assets
and liabilities measured at fair value on a recurring basis at December 31, 2008 are as follows:

Fair Value Measurements at Reporting DataDecember 31
2008

Active Markets
for Identical
Instruments
Level 1

Significant Other
Observable
Inputs
Level 2

Significant
Unobservable
Inputs
Level 3Assets:Money market fund

$
47,170

$
47,170

$


$
Auction rate securities


43,177








43,177Put option


5,144








5,144Total assets

$
95,491

$
47,170

$


$
48,321


The
following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant
unobservable inputs (Level 3) for the twelve months ended December 31, 2008:

Put Option

Auction Rate
Securities

TotalBalance at December 31, 2007

$


$


$
Transfers from Level 2 to Level 3





48,800


48,800Sales of auction rate securities





(350
)

(350
)Impairment of auction rate securities(1)





(5,273
)

(5,273
)Issuance of put option


5,144





5,144Balance at December 31, 2008

$
5,144

$
43,177

$
48,321






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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements (Continued)



5. Business Combination

On January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS on the Closing Date. As a result of this transaction, Conceptus SAS became our wholly owned
subsidiary and its results of operations are consolidated with our results of operations starting on January 7, 2008. We believe the acquisition of Conceptus SAS expands our presence in
international markets and will increase our revenues as we will recognize sales at end user pricing as compared to the price at which we previously sold the Essureproduct directly to Conceptus SAS. Our
consolidated financial statements include the financial results of Conceptus SAS beginning from the
acquisition date of January 7, 2008.

The
total purchase price of $22.5 million included $24.4 million in cash consideration and $0.3 million in direct transaction costs, less a reduction to the purchase
price of $2.2 million as explained below. On February 27, 2007, we entered into an amendment to the Share Purchase and Call Option Agreement with Conceptus SAS and into an amendment to
the Distribution Agreement with Conceptus SAS. Pursuant to the amendment to the Share Purchase and Call Option Agreement, we agreed not to exercise the call option to acquire Conceptus SAS in 2007 and
agreed to exercise our call option to acquire SAS sometime between January 1, 2008 and January 2, 2009 subject to the satisfaction of certain closing conditions. Pursuant to the
amendment to the Distribution Agreement, Conceptus SAS agreed to increase the price they pay to us for theEssureproduct. The difference in price of
product under
the revised Distribution Agreement compared to the previous agreement was recorded as a current liability in our consolidated balance sheet prior to the acquisition. The balance of this current
liability of $2.2 million on the date of acquisition was recorded as a reduction of the purchase price of Conceptus SAS.

The
aggregate Conceptus SAS purchase price of $22.5 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of
acquisition. The estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets with the remainder as goodwill. The
following table summarizes the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Business Combination (Continued)

allocation
of the purchase price of the assets acquired and liabilities assumed based on their fair values on the date of acquisition:

(in thousands):Cash acquired

$
1,689Inventory


1,816Accounts receivable


3,270Deferred tax asset


328Other tangible assets acquired


396Amortizable intangible assets:Customer relationships


5,024Covenant not to compete


71Goodwill


17,807Liabilities assumed


(7,952
)Total

$
22,449


The
amortizable intangible assets have useful lives for customer relationships of 9 years and for the covenant not to compete of 3 years. No amounts have been allocated to
in-process research and development and approximately $17.8 million has been allocated to goodwill. Goodwill was recorded based on the residual purchase price after allocating the
purchase price to the fair market value of tangible and intangible assets acquired less liabilities assumed. The goodwill arising from the acquisition is not deductible for tax purposes.

The
unaudited pro forma information set forth below represents the net sales, net loss and earnings per share of the Company including Conceptus SAS as if the acquisition were effective
as of the beginning of fiscal 2007, after giving effect to certain adjustments, including the amortization of Conceptus SAS acquisition related intangibles and the elimination of preacquisition
intercompany profits. The operating results for the period from January 1, 2008 to January 7, 2008 (the Closing Date) and for the comparable period of fiscal 2007 were not readily
available and were not considered practical to obtain. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined
businesses constituted a single entity during such period, and is not necessarily indicative of results which may be obtained in the future (in thousands, except per share amounts):

Years Ended December 31,(unaudited)

2007

2006Pro forma total net sales

$
74,395

$
49,060Pro forma net loss

$
(9,917
)
$
(17,692
)Pro forma net loss per share basic and diluted

$
(0.34
)
$
(0.61
)Pro forma weighted average basic and diluted shares


29,463


28,993


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Goodwill and Intangible Assets

The changes in carrying amount of goodwill for 2008 and 2007 are as follows:

Years Ended December 31,(in thousands)

2008

2007Goodwill, beginning of period

$


$
Adjustments to goodwill from acquisitions


17,807


Effect of currency translation


(702
)

Goodwill, end of period

$
17,105

$



The
goodwill during the current period relates to the acquisition of Conceptus SAS.

Definite-lived
intangibles are being amortized over periods ranging from 3 to 9 years.

The
following table provides additional information concerning intangible assets:

December 31, 2008(in thousands)

Weighted avg
remaining life
(years)

Gross
carrying
amount

Accumulated
amortization

Effect of
currency
translation

Net book
valueCustomer relationships


8.0

$
5,024

$
(555
)
$
(188
)
$
4,281Covenant not to compete


2.0


71


(23
)

(2
)

46Licenses


4.7


2,020


(1,060
)




960Total intangibles




$
7,115

$
(1,638
)
$
(190
)
$
5,287




December 31, 2007(in thousands)

Weighted avg
remaining life
(years)

Gross
carrying
amount

Accumulated
amortization

Effect of
currency
translation

Net book
valueLicenses


5.7


2,020


(856
)




1,164Total intangibles




$
2,020

$
(856
)
$


$
1,164


The
following discloses expected aggregate amortization expense for currently-owned intangible assets (in thousands) for 2009 through 2017:

Year

Expected2009

$
7602010


7602011


7362012


7342013


686Thereafter


1,611


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Inventories

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):

December 31,2008

2007Raw materials

$
230

$
177Work-in-progress


1,225


1,356Finished goods


2,374


885Total

$
3,829

$
2,418


8. Property and Equipment

The components of property and equipment consist of the following (in thousands):

December 31,2008

2007Equipment, tooling and furniture and fixtures

$
10,408

$
5,882Software


3,277


3,278Leasehold improvements


1,039


896Machinery


833


1,00815,557


11,064Less: accumulated depreciation and amortization


(6,922
)

(5,752
)Property and equipment, net

$
8,635

$
5,312


Property
and equipment depreciation and amortization expenses for the years 2008, 2007 and 2006 were approximately $2.9 million, $1.5 million, and $1.2 million,
respectively.

9. Commitments and Contingencies



On December 5, 2008 we renegotiated our current Lease Agreement for our 58,242 square foot headquarters located in Mountain
View, California. The lease will commence on
July 1, 2009 and the term on the lease is for forty-nine months. We are recognizing the rent expense on a straight-line basis over the life of the lease. In connection
with this lease we were required to open a long term restricted CD account for $0.4 million, which is classified as "restricted cash" on our balance sheet. This restricted cash accounts earns a
nominal interest rate.

With
the acquisition of Conceptus SAS on January 7, 2008 we assumed a lease of a 1,938 square foot sales office located in Versailles, France. This lease expires on
March 7, 2011. See Note 5Business Combinations.

In
July 2008 we entered into a Lease Agreement for minimal office space in the United Kingdom. This lease expires on July 16, 2009. See Note 16Establishment of
Foreign Subsidiary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Commitments and Contingencies (Continued)

In
addition to the lease agreements for the facilities we have certain operating leases on automobiles, and copiers, worldwide. These leases have terms expiring from March 2009 through
February 2014. Expenses for all leases were approximately $2.3 million, $1.5 million and $0.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Aggregate
future minimum annual lease commitments under all leases are as follows (in thousands):

2009

$
6542010


1,6872011


1,6302012


1,5772013


921Thereafter


2Total operating lease obligations

$
6,471




We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify,
hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally the business partners or customers, in connection with any trade
secret, copyright, patent or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual after
the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable. We have never incurred costs to defend lawsuits
or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.

We
have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason
of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and to make good faith determination whether or not it is practicable for us to obtain directors and officers insurance. We currently have directors
and officers insurance.

In
addition, we have commitments related to our clinical trial obligations, as follows (in thousands):

2009

$
270Total clinical trial obligations

$
270




From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We account
for contingent liabilities when it is probable that future expenditures

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Commitments and Contingencies (Continued)

will
be made and such expenditures can be reasonable estimated. At December 31, 2008 we had no material outstanding contingencies.

10. Convertible Senior Notes

In February 2007, we issued an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027. These notes bear a 2.25% interest per annum on the
principal amount, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2007.

The
notes will mature on February 15, 2027, unless earlier redeemed, repurchased or purchased by us or converted, and are convertible into cash and, if applicable, shares of our
common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $27.89
per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note's conversion value in excess of
such principal amount. The notes are convertible only in the following circumstances: (1) if the closing sale price of our common stock exceeds 120% of the conversion price during a period as
defined in the indenture; (2) if the average trading price per $1,000 principal amount of the notes is less than or equal to 97% of the average conversion value of the notes during a period as
defined in the indenture; (3) upon the occurrence of specified corporate transactions; (4) if we call the notes for redemption and (5) at any
time on or after December 15, 2011 up to and including February 15, 2012 and anytime on or after February 15, 2025. Upon a change in control or termination of trading, holders of
the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest. We may not have
sufficient funds to pay the interest, purchase price, repurchase price or principal return when conversion is triggered or a note becomes payable under the above terms.

In
connection with the sale and issuance of the notes we incurred debt issuance costs of $3.1 million which is being amortized to interest expense over a five year period.

We
concluded that the embedded stock conversion option is not considered a derivative under SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities,or SFAS 133, because the embedded stock conversion option would be recorded in stockholders' equity if it were a freestanding instrument per Emerging Issues
Task Force EITF Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock,or EITF 00-19. We concluded that the notes are accounted for similar to traditional convertible debt (that is, as a combined instrument) because the
embedded stock conversion option meets the requirements of EITF No. 00-19, including the provisions contained in paragraphs 12-32 of
EITF 00-19. Accordingly, the embedded stock conversion option is not separated as a derivative.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Convertible Senior Notes (Continued)

In connection with the offering, we entered into convertible note hedge transactions with affiliates of the initial purchasers. These transactions are intended to reduce the potential
dilution to our Company's stockholders upon any future conversion of the notes. The call options, which cost an aggregate $19.4 million, were recorded as a reduction of additional
paid-in capital. We also entered into warrant transactions concurrently with the offering, pursuant to which we sold warrants to purchase approximately 3.1 million shares of our
common stock to the same counterparties that entered into the convertible note hedge transactions. The convertible note hedge and warrant transactions effectively increased the conversion price of the
convertible notes to approximately $36.47 per share of our common stock. Proceeds received from the issuance of the warrants totaled
approximately $10.7 million and were recorded as an addition to additional paid-in capital.

EITF 00-19
provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or
(2) the contract gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of
our purchased call options and sold warrant contracts require net-share settlement. Based on the guidance in EITF 00-19 and SFAS 133, the purchased call option
contracts were recorded as a reduction of equity and the warrants were recorded as an addition to equity as of the trade date. SFAS 133 states that a reporting entity shall not consider
contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in stockholders' equity in its statement of financial
position. We concluded the purchased call option contracts and the warrant contracts should be accounted for in stockholders' equity.

11. Credit Line

In November 2008 we entered into a demand revolving credit line agreement with UBS, payable on demand, in an amount equal to a specified percentage of fair value of our auction rate
securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the
credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance
under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par
value support from UBS See Note 3Long-term Investments.

12. Incentive and Stock Plans



In November 1995, the Board of Directors adopted the Employee Stock Purchase Plan (ESPP). The ESPP became effective November 29,
1995. At that time, 200,000 shares were reserved for issuance under the ESPP. The ESPP permits participants to purchase common stock through payroll deductions of up to 10% of an employee's annual
base earnings. The purchase price per share is equal to 85% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85% of the fair market value per
share on the semi-annual purchase date. In March 2004, the Board of Directors approved an amendment to the ESPP to increase the number of shares of common stock reserved for issuance by
150,000 shares. The stockholders approved this amendment in June 2004, to be effective July 1, 2004. In March 2006, the Board of Directors approved an amendment to the

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)

ESPP
to increase the number of shares of Common Stock reserved for issuance by 160,000 shares. This amendment was approved by the stockholders in June 2006. In April 2008, the Board of Directors
approved an amendment to the ESPP to increase the number of shares of Common Stock reserved for issuance by 150,000 shares. This amendment was approved by the stockholders in June 2008. As of
December 31, 2008, 486,641 shares had been issued under the ESPP and 173,359 shares were available for future issuance.



In August 2002, the Board of Directors approved the 2002 Non-Qualified Stock Option Plan ("2002 Plan") and amendments to
the 2002 Plan were approved by the Board in March 2003. Under the Amended and Restated 2002 Plan, non-qualified stock options and stock purchase rights may be granted only to the following
classes of persons: (i) except as provided in (ii) below, consultants and employees who are not our officers or directors, and (ii) newly hired employees (including employees who
will become our officers or directors) and who have not previously been employed by us and with respect to whom options are to be granted as an inducement essential to such employees' entering into
employment contracts with us. The 2002 Plan was enacted to address the increased hiring done during the second half of 2002, primarily in our U.S. sales, professional education and marketing
functions. The maximum aggregate number of shares that may be issued upon exercise of options or stock purchase rights is 1,500,000 shares. In December 2005, the Board of Directors approved an
amendment and restatement of the 2002 Plan to provide a fair market value established upon the closing price on the day of the grant rather than the previous trading day. This amendment became
effective immediately after approval and did not require stockholder approval.

Under
the terms of the 2002 Plan, options may be granted with different vesting terms from time to time and all options under the 2002 Plan expire ten years after grant. The options may
include provisions permitting exercise of the option prior to full vesting. In 2008, there were no shares that were exercised prior to full vesting.

In
March 2001, the Board of Directors approved the 2001 Equity Incentive Plan ("2001 Plan") allowing granting of stock options and restricted stock to employees, directors and
consultants. The 2001 Plan provides for the grant of options, restricted stock, stock appreciation rights, performance share awards, dividend equivalents awards, stock payment awards, stock purchase
rights and restricted stock unit awards to our employees, directors and consultants. The 2001 Plan was originally adopted by the Board of Directors on March 21, 2001 with a total of 1,000,000
shares of common stock reserved for issuance thereunder, and was approved by the stockholders in May 2001. In March 2002, the Board of Directors approved an amendment and restatement of the 2001 Plan
to increase the shares reserved for issuance thereunder by an additional 1,000,000 shares, bringing the aggregate number reserved for issuance to 2,000,000 shares of common stock, and to provide for
automatic grants of non-qualified stock options to non-employee directors as had been provided under the 1995 Director's Stock Option Plan. The stockholders approved this
amendment and restatement in May 2002. In April 2003, the Board of Directors approved the Second Amended and Restated 2001 Plan to increase the size of the formula grants to non-employee
directors and to prohibit repricing. The stockholders approved this amendment and restatement in June 2003. In March 2004, the Board of Directors approved the Third Amended and Restated 2001 Plan to
reduce the size of the automatic grants of stock options to non-employee directors and to provide for automatic grants of restricted stock to non-employee directors and to
increase the shares of Common Stock reserved for issuance thereunder by an

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)

additional
500,000 shares, bringing the aggregate number reserved for issuance to 2,500,000 shares of common stock. The stockholders approved this amendment and restatement in June 2004. In November
2004, the Board of Directors approved the Fourth Amended and Restated 2001 Plan to provide for the grant of restricted stock units and stock appreciation rights. In January 2005, the Board of
Directors approved the Fifth Amended and Restated 2001 Plan to provide for a change in the number of shares to be automatically granted to non-employee directors under the plan. In
December 2005, the Board of Directors approved the Sixth Amended and Restated 2001 Plan to establish that the price of future grants be based on the closing price of our stock on the date of grant,
rather than the previous trading day. In February 2006, the Board of Directors approved the Seventh Amended and Restated 2001 Plan to provide for the increase the annual grant of restricted stock for
directors from 2,000 shares to 2,500 shares. In April 2006, the Board of Directors approved the amendment to the Eighth Amended and Restated 2001 Plan to increase the shares of Common Stock reserved
for issuance thereunder by an additional 1,500,000 shares, bringing the aggregate number reserved for issuance to 4,000,000 shares of Common Stock. This amendment was approved by the stockholders in
June 2006. In June 2008, the Board of Directors approved the Tenth Amended and Restated 2001 Plan to provide for the increase the number of shares of Common Stock reserved for issuance thereunder by
an additional 1,500,000 shares, bringing the aggregate number reserved for issuance to 5,500,000 shares of common stock. This amendment was approved by the stockholders in June 2008.

Under
the terms of the 2001 Plan, incentive stock options may be granted only to employees with exercise prices not less than the fair market value of the common stock on the date of
grant. Stock options and stock appreciation rights may be granted with different vesting terms from time to time but generally provide for vesting of at least 20% of the total number of shares per
year. All options and stock appreciation rights under the 2001 Plan expire ten years after grant, and five years in the case of a grant to a 10% stockholder. Stock appreciation rights are to be
settled in stock. Stock options may include provisions permitting exercise of the option prior to full vesting. To the extent that the
aggregate fair market value of the shares subject to a holder's incentive stock options exceeds $100,000, the excess options will be treated as non-qualified stock options.

On
November 29, 1995, the Board of Directors approved the 1995 Director's Stock Option Plan (the "Directors' Plan"), which allows the granting of options for up to 100,000 shares
of common stock to outside directors. Stock options may be granted to outside directors with exercise prices of not less than fair market value. The options expire ten years from date of grant.
Options granted under the Directors' Plan vest over one or three years. The options are only exercisable while the outside director remains a director.

In
July 1993, the Board of Directors adopted the 1993 Stock Plan (the "1993 Plan"), and amendments to the 1993 Plan were adopted by the Board of Directors in March 1994, May 1995,
October 1995, February 1997 and April 2000 and approved by the stockholders in March 1994, January 1996, May 1997 and May 2000 to allow granting of options up to 3,075,000 shares of common stock in
the aggregate. Stock options granted under the 1993 Plan may be either incentive stock options or non-qualified stock options and can be granted to employees, distributors, consultants and
directors. Incentive stock options may be granted to employees with exercise prices of no less than the fair market value and non-qualified options may be granted at exercise prices of no
less than 85% of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The options expire no more than 10 years after the date of grant.
Options may be granted with different vesting terms from time to time but generally provide for vesting of at least 25% of the total

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)

number
of shares per year. The options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares so purchased shall be subject to repurchase by us at the
original exercise price of the option. Such repurchase rights generally lapse at a minimum rate of 25% per year from the date the option was granted. As of December 31, 2008, there were no
shares that are subject to repurchase.

In
April 2004, the Board of Directors approved a nonqualified stock option grant for 125,000 shares of our common stock and a grant of 36,000 shares of restricted stock for
Mr. Ulric E. Cote as a stand-alone inducement grant in connection with his initial commencement of employment with us as Vice President, Sales. In October 2007, the Board of Directors approved
a stock appreciation right grant of 100,000 shares of our common stock for Mr. Spencer Roeck as a stand-alone inducement grant in connection with his initial commencement of employment with us
as Vice President of International. In March 2008, the Board of Directors approved a stock appreciation right grant of 100,000 shares of our common stock for Mr. Todd Sloan as a stand-alone
inducement grant in connection with his initial commencement of employment with us as Vice President of Strategic and Professional Marketing. Stockholder approval was not required for any of these
grants.

As
of December 31, 2008, 112,147 shares remained as available for grant under the 2002 Plan, 1,690,321 shares remained as available for grant under the 2001 Plan, no shares
remained available for grant under the 1993 Plan and no shares remained available for grant under the Director's Plan.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)

A
summary of the activity of our 1993, 2001 and 2002 Plans, the 1995 Directors' Plan and stand alone grant activity is as follows:

Awards OutstandingShares
Available
For Grant

Awards
Outstanding

Weighted-
Average Exercise
PriceBalance at December 31, 2005


704,312


3,513,751

$
10.62Additional authorized


1,500,000





Options granted


(604,500
)

604,500


15.00Restricted stock awards and restricted stock units granted


(291,999
)

291,999


Restricted stock awards issued





(28,500
)

Options exercised(a)





(294,121
)

9.77Options cancelled and expired(b)


206,699


(314,717
)

13.53Restricted stock awards and restricted stock units cancelled


192,710


(192,710
)

Restricted stock awards expired


(24,000
)

184,000


Shares repurchased


13,889





Balance at December 31, 2006


1,697,111


3,764,202


11.18Additional authorized(c)


225,000





Options granted(c)


(1,024,490
)

1,024,490


18.57Restricted stock awards and restricted stock units granted


(60,550
)

60,550


Restricted stock units issued





(116,721
)

Options exercised(d)





(370,731
)

9.31Stock appreciation rights exercised(d)


5,912


(8,033
)

14.42Options cancelled and expired


159,505


(159,505
)

14.85Restricted stock awards and restricted stock units cancelled


8,062


(8,062
)

Balance at December 31, 2007


1,010,550


4,186,190


11.60Additional authorized(e)


1,600,000





Options granted(e)


(1,026,910
)

1,026,910


17.47Restricted stock awards and restricted stock units granted


(61,710
)

61,710


Restricted stock units issued





(142,789
)

Options exercised





(378,267
)

8.20Stock appreciation rights exercised


8,571


(52,025
)

17.30Options cancelled and expired(f)


260,453


(357,932
)

17.21Restricted stock awards and restricted stock units cancelled


11,514


(7,625
)

Balance at December 31, 2008


1,802,468


4,336,172

$
12.62


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)

A
summary of the activity for the year ended December 31, 2008 of stock options and stock appreciation rights is as follows:

Options
and Stock
Appreciation
Rights
Outstanding

Weighted-
Average
Exercise Price

Aggregate
Intrinsic
ValueBalance outstanding at December 31, 2007


3,995,634

$
13.10Grants


1,026,910


17.47Exercises


(430,292
)

9.30Cancelled and expired


(357,932
)

17.21Balance outstanding at December 31, 2008


4,234,320


14.20

$
9,701,062Exercisable at December 31, 2008


2,879,009

$
12.62

$
9,529,039


The
following table summarizes information about stock options outstanding and exercisable at December 31, 2008:

Options Outstanding

Options Vested
and ExercisableWeighted
Average
Contractual
Remaining
Life (years)Range of
Exercise Prices

Options
Outstanding

Weighted
Average
Exercise
Price

Options
Vested
and
Exercisable

Weighted Average Exercise Price$1.75$8.94


516,621


5.21

$
7.52


508,997

$
7.52$9.00$9.76


83,061


3.36


9.35


83,061


9.35$9.95$9.95


630,000


4.29


9.95


630,000


9.95$9.96$13.11


435,827


5.08


12.44


426,918


12.45$13.29$14.76


643,349


5.26


14.15


541,196


14.10$14.92$17.54


481,335


8.17


16.58


148,524


16.04$17.74$17.74


443,889


9.14


17.74


92,471


17.74$17.97$17.97


61,868


9.42


17.97





0.00$18.06$18.06


437,364


8.10


18.06


192,062


18.06$18.24$22.93


501,006


7.32


19.54


255,780


19.69$1.75$22.93


4,234,320


6.39

$
14.20


2,879,009

$
12.62


The
weighted average exercise price for options vested and exercisable at December 31, 2007 was $11.60 per share.

We
granted zero and 5,000 shares of common stock to consultants in 2008 and 2007, respectively. In 2006 we did not grant any shares to consultants.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Incentive and Stock Plans (Continued)



Restricted stock award and restricted stock unit activity for the year ended December 31, 2008, is as follows:

Shares
and Units

Weighted-
Average
Grant Date
Fair ValueNonvested stock outstanding at December 31, 2007


207,942

$
18.35Grants


61,710


16.75Vested


(152,453
)

16.62Cancellations


(11,514
)

15.00Nonvested stock outstanding at December 31, 2008


105,685

$
16.26




Under our retirement savings plan ("401K Plan"), employees may elect to defer up to 15% of their total compensation, not to exceed the
amount allowed by applicable Internal Revenue Service regulations. There were no employer contributions to the 401K Plan for the years ended 2008, 2007 and 2006.

13. Stockholder's Equity

Pursuant to our certificate of incorporation, the Board of Directors will have the authority, without further action by the stockholders, to issue up to 3,000,000 shares of preferred
stock, in one or more series. Our Board of Directors shall determine the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of any series.

As
part of the settlement agreement with Ovion Inc., we were required to pay $2.0 million in common stock for a license fee. The obligation was paid in equal installments
in January and April 2004 for a total of 177,595 shares of common stock. See Note 15Legal Proceedings

In
2006, we repurchased 13,889 shares of restricted common stock at par value in accordance with the terms of restricted stock agreements. These shares, net of treasury stock grants of
10,468 shares in 2007 and 3,421 shares in 2006 are recorded as treasury stock. No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefit has been
realized from exercised stock options.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes

The provision for income taxes consists of the following (in thousands):

Years Ended December 31,2008

2007

2006CurrentU.S. Federal

$


$


$
State & local








Foreign


393





DeferredU.S. Federal








State & local








Foreign


(417
)




Income tax benefit

$
(24
)
$


$



As
of December 31, 2008, we had net operating loss carryforwards for federal and state income tax purposes of approximately $205.7 million and $119.8 million,
respectively. The net operating loss carryforwards excludes $5.6 million which relates to stock option deductions that will be recognized through additional paid in capital when utilized. As
such, these deductions are not reflected in our deferred tax assets. If not utilized, these carryforwards will begin to expire starting in 2009. In addition, at December 31, 2008 we had both
federal and state research credit carryforwards of approximately $2.6 million and $2.7 million, respectively. If not utilized the federal tax carryforward will begin to expire in 2009
while the California credit can be carried forward indefinitely. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986, as amended. The annual limitation may result in the expiration of net operating losses and credits before utilization and in the event we have a change
of ownership, utilization of the carryforwards could be restricted.

We
account for income taxes under the asset and liability method set forth by SFAS No. 109 "Accounting for Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements. Under the liability method, deferred tax assets and liabilities are determined based
on the difference between the financial statements and tax basis of assets and liabilities.

Deferred
income taxes reflect the net effect of tax carryforward and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amount used for income tax purposes.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

Significant
components of our deferred tax assets and liabilities as of December 31, 2008 and December 31, 2007 are as follows (in thousands):

Years Ended December 31,2008

2007Current deferred tax assets:Othernet

$
3,300

$
3,400Total current deferred tax assets


3,300


3,400Net current deferred tax assets:Net operating loss carryforwards


76,900


77,300Research credits


4,400


4,400Capitalized research and development


5,900


6,900Interest


7,500


7,500Total non-current deferred tax assets


94,700


96,100Total deferred tax assets


98,000


99,500Less: valuation allowance


(97,700
)

(99,500
)Net deferred tax assets


300


Non current deferred tax liability:Intangible assets


(1,400
)

Net non-current deferred tax liability

$
(1,100
)
$



Because
of our lack of U.S. earnings history and anticipated future losses, the U.S. deferred tax assets have been offset by a valuation allowance. The increase (decrease) in the
valuation allowance was approximately $(1.8) million, $14.6 million and $5.5 million during 2008, 2007 and 2006, respectively. Included in the valuation allowance is approximately
$7.6 million of deferred tax assets that when recognized will be a credit to additional paid in capital.

We
revised our 2007 tax footnote to record additional deferred tax assets of approximately $12.1 million for future tax benefits related to interest deductions of Convertible
Senior Notes and for the state net operating losses that were not properly recorded in previous periods. These additional deferred taxes are offset by a corresponding increase in the valuation
allowance, and are not material to any of the 2008, 2007 and 2006 interim or full year consolidated financial statements. The revision has no effect on our income statement, earnings per share,
balance sheet, statement of cash flows, or statement of equity for any period presented.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

The
reconciliation between our effective tax rate on income from continuing operations and the statutory tax rate is as follows (in thousands):

Years Ended December 31,2008

2007

2006U.S. federal statutory income tax rate

$
(36
)
$
(3,945
)
$
(6,286
)Foreign tax


731





State tax





231


Permanent items


129


(27
)

(69
)Stock based compensation


(6
)

1,390


693Valuation allowance


(842
)

2,351


5,662Total income taxes

$
(24
)
$


$



We
adopted the provisions of FIN 48 on January 1, 2007. We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We
have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2008, our federal returns for the years ended 2005 through the current
period and most state returns for the years ended 2004 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit
carryforwards that may be used in future years are still subject to adjustment. The tax returns for our newly acquired French subsidiary for the years ended 2005 to 2007 were examined and closed by
the French tax authorities. As of December 31, 2008, we also recorded approximately $0.4 million of income tax expense related to uncertain tax position attributable to our French
subsidiary.

A
reconciliation of the change in our unrecognized tax benefits ("UTB") is as follows (in thousands):

Federal and State Tax

Foreign Tax

Federal Tax Benefit of State Income Tax UTBs

Unrecognized
Income Tax Benefits-
Net of Federal
Benefit of State UTBsBalance at January 1, 2007

$


$


$


$
Increases for tax positions during 2007


2,271





357


1,914Balance at December 31, 2007


2,271





357


1,914Increases for tax positions related to current year





393





393Decreases related to expiration / lapse of statute of limitations


(46
)







(46
)Balance at December 31, 2008

$
2,225

$
393

$
357

$
2,261


If
the $2.3 million of unrecognized income tax benefits is recognized, approximately $0.4 million would decrease the effective tax rate in the period in which each of the
benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

We
do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of FIN 48, the Company recognizes interest
and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

U.S.
income taxes have not been provided on undistributed earnings of the French subsidiary. Those earnings are considered to be indefinitely reinvested. Upon distribution of those
earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to adjustment for foreign tax credits) and withholding taxes payable to the various
foreign countries.

15. Legal Proceedings

A third party, Ovion, Inc. ("Ovion"), brought to our attention a patent and certain claims from a pending patent application owned by it. Ovion indicated it believed that the
claims of its patent and application covered theEssuresystem and its use. On October 23, 2003, we entered into a settlement agreement with
Ovion pursuant to which we received a sole, worldwide license to Ovion's patent rights relative to theEssuresystem, and Ovion may not grant any
additional such licenses to other parties. The settlement agreement provided for a cash payment of $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and a license fee of
$2.0 million payable in our common stock in equal installments in the first and second quarters of 2004. In addition, the settlement agreement provided for the payment of a royalty to Ovion
that will be equal to 3.25% of the cumulative net sales of theEssuresystem in excess of $75.0 million for a period of no longer than ten years.
In accordance with the terms of the settlement agreement, our prepaid royalties were fully amortized when cumulative net sales ofEssuresystem reached
$136.5 million. As of December 31, 2007, the prepaid royalties were fully amortized to cost of goods. Ovion was not granted any rights to our intellectual property pursuant to the
settlement agreement. The settlement agreement was approved by the U.S. District Court for the Northern District of California on November 6, 2003.

Despite
the settlement agreement with Ovion, we believe that some or all of Ovion's claims should be included within our own patents and, therefore, requested that the Patent and
Trademark Office ("PTO") declare an interference, which represents 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 theEssuredevice before Ovion filed the application that issued
as its patent and that we are entitled to any patentable claims now appearing in their patent that cover theEssureproduct. We have no knowledge
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.
Future royalties might be avoided by a favorable interference ruling before the patent office, which might occur if interference is declared and if we are found to have priority of invention.

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 our financial position and results of operations or cash flows.

16. Establishment of Foreign Subsidiary

On December 15, 2008 Conceptus Medical Limited ("CML") was incorporated in the United Kingdom and became a subsidiary. CML was established to serve as our direct
sales office in the United Kingdom after the termination of our distributor agreement during the fourth quarter of 2008. We believe the establishment of CML continues to expand our direct presence in
international markets and will increase our revenues as we will recognize sales at end user pricing as compared to the price at which we previously sold to the distributor.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. Quarterly Information (unaudited)

Supplementary Data

Quarterly Results of Operations (Unaudited)

Three Months EndedDecember 31,
2008

September 30,
2008

June 30,
2008

March 31,
2008

December 31,
2007

September 30,
2007

June 30,
2007

March 31,
2007Net Sales

$
28,525

$
26,645

$
25,680

$
21,127

$
18,563

$
16,430

$
15,669

$
13,780Cost of goods sold


5,919


5,090


5,196


5,445


4,422


4,317


4,238


3,705Gross profit


22,606


21,555


20,484


15,682


14,141


12,113


11,431


10,075Operating expenses:Research and development


1,602


1,611


1,644


1,931


1,659


1,513


1,061


1,642Selling, general and administrative


16,139


16,363


20,081


20,102


15,986


13,917


13,172


13,009Total operating expenses


17,741


17,974


21,725


22,033


17,645


15,430


14,233


14,651Operating income (loss)


4,865


3,581


(1,241
)

(6,351
)

(3,504
)

(3,317
)

(2,802
)

(4,576
)Interest income and expense and other expense, net


(241
)

(493
)

(199
)

(28
)

747


682


662


476Net income (loss) before provision for income taxes


4,624


3,088


(1,440
)

(6,379
)

(2,757
)

(2,635
)

(2,140
)

(4,100
)Provision for (Benefit from) income taxes


(305
)

113


168


0











Net income (loss)


4,929


2,975


(1,608
)

(6,379
)

(2,757
)

(2,635
)

(2,140
)

(4,100
)Basic income (loss) per share

$
0.16

$
0.10

$
(0.05
)
$
(0.21
)
$
(0.09
)
$
(0.09
)
$
(0.07
)
$
(0.14
)Diluted income (loss) per share

$
0.16

$
0.10

$
(0.05
)
$
(0.21
)
$
(0.09
)
$
(0.09
)
$
(0.07
)
$
(0.14
)Weighted average shares used in computing basic net income (loss) per share


30,362


30,342


30,217


29,935


29,634


29,525


29,420


29,260Weighted average shares used in computing diluted net income (loss) per share


30,874


31,207


30,217


29,935


29,634


29,525


29,420


29,260


100

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Table of Contents

Conceptus, Inc.    Schedule II  Schedule of Valuation and Qualifying Accounts  (In thousands)

Balance at
Beginning
of Period

Additions

Deductions

Balance at
End of
PeriodAllowance for doubtful accounts:Year ended December 31, 2006

$
106

$
61

$


$
167Year ended December 31, 2007


167


264





431Year ended December 31, 2008


431


74


27


478


101

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Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Mountain View, California on this 13th day of March 2009.

CONCEPTUS, INC.By:

/s/ MARK M. SIECZKAREK, Mark M. Sieczkarek President and Chief Executive Officer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark Sieczkarek and Gregory
E. Lichtwardt, his or her attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and on the dates indicated.

Signature

Title

Date/s/ MARK M. SIECZKAREK Mark M. Sieczkarek

President, Chief Executive Officer and Director (Principal Executive Officer)

March 13, 2009/s/ GREGORY E. LICHTWARDT Gregory E. Lichtwardt

Executive Vice President, Treasurer and Chief Financial Officer

March 13, 2009/s/ JOHN BISHOP John Bishop

Director

March 13, 2009/s/ THOMAS F. BONADIO Thomas F. Bonadio

Director

March 13, 2009/s/ PAUL A. LAVIOLETTE Paul A. Laviolette

Director

March 13, 2009/s/ ROBERT V. TONI Robert V. Toni

Director

March 13, 2009/s/ KATHRYN A. TUNSTALL Kathryn A. Tunstall

Director

March 13, 2009/s/ PETER L. WILSON Peter L. Wilson

Director

March 13, 2009


102

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Table of Contents

EXHIBIT INDEX

Exhibit
Number

Description10.1

Form of Indemnification Agreement for directors and officers.10.35

Lease agreement for the premises located at 331 East Evelyn, Mountain View, California.10.36

Credit Line Account Application and Agreement for Organization and Business and Addendum.21.0

List of Conceptus subsidiaries.23.1

Consent of Independent Registered Public Accounting Firm.24.1

Power of Attorney (See signature page of this Report).31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


103

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