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

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Form 10-K

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

For the fiscal year ended December 31, 2005

or

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

For the transition period from            to

Commission File Number:0-27596

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

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.003 par value per share

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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 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, or a non accelerated filer. See definition of "accelerated filer
and large accelerated filer" in Rule 12b-2 of the Exchange Act

Large
accelerated filer  o    Accelerated
Filer  ý    Non accelerated filer  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 was $74,346,502 based upon the closing price of the
commons stock on the Nasdaq National Market on June 30, 2005. 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 29,135,391 shares of Registrant's Common Stock issued and outstanding as of February 28, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant's 2006 Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K.



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CONCEPTUS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

|          |  |                                                                                                              |  | Page
|--------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Part I.   |  |                                                                                                              |  |     
|Item 1.   |  | Business                                                                                                     |  | 2   
|Item 1.A. |  | Risk Factors                                                                                                 |  | 20  
|Item 1.B. |  | Unresolved Staff Comments                                                                                    |  | 28  
|Item 2.   |  | Properties                                                                                                   |  | 28  
|Item 3.   |  | Legal Proceedings                                                                                            |  | 28  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 28  
|Part II.  |  |                                                                                                              |  |     
|Item 5.   |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 29  
|Item 6.   |  | Selected Consolidated Financial Data                                                                         |  | 30  
|Item 7.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 31  
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 45  
|Item 8.   |  | Consolidated Financial Statements and Supplementary Data                                                     |  | 45  
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 45  
|Item 9A.  |  | Controls and Procedures                                                                                      |  | 45  
|Item 9B.  |  | Other Information                                                                                            |  | 46  
|Part III. |  |                                                                                                              |  |     
|Item 10.  |  | Directors and Executive Officers of the Registrant                                                           |  | 47  
|Item 11.  |  | Executive Compensation                                                                                       |  | 47  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 47  
|Item 13.  |  | Certain Relationships and Related Transactions                                                               |  | 47  
|Item 14.  |  | Principal Accountant Fees and Services                                                                       |  | 47  
|Part IV.  |  |                                                                                                              |  |     
|Item 15.  |  | Exhibits and Financial Statement Schedules                                                                   |  | 48  
|          |  | Index to Consolidated Financial Statements                                                                   |  | 52  
|          |  | Signatures                                                                                                   |  | 79  

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The following information should be read in conjunction with the Consolidated Financial Statements and the notes thereto. This annual report on
Form 10-K, 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; the uncertainty of market acceptance of our product; 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; our limited history of manufacturing our product; our dependence on single source supplies, third party manufacturers and co-marketers;
intense competition in the medical device industry; the inherent risk of exposure to product liability claims and product recalls and other factors referenced in this Form 10-K.
These factors are discussed in more detail below. Given these uncertainties, persons evaluating our business 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 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 management's 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 Form 10-K. 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
Form 10-K, 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 United States 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 Premarket Approval, or PMA, supplement filed in January 2005 and approved in
July 2005 by the FDA supports an extension of the effectiveness rate of theEssuredevice to 99.80% after four years and 99.74% after five years
of follow-up, from the

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previously
approved 99.80% at three years. The five-year effectiveness was demonstrated in a small portion of women undergoing clinical studies. Five year follow up of all patients in
clinical trials is ongoing.

TheEssureprocedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative
to tubal ligation, the leading form of birth control in the United States and worldwide. 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. TheEssureprocedure does not require cutting or penetrating the abdomen, which eliminates post-operative pain often associated with incisions or punctures, and the Essureprocedure can be performed in an
outpatient or clinical setting without general or regional anesthesia. In the Pivotal trial of the Essuresystem, the total procedure time averaged 35 minutes, with an average of 13 minutes of
hysteroscopic time to place the Essuremicro-insert. A patient is typically discharged approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, theEssuresystem 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, the patient completes a
follow-up examination called a hysterosalpingogram (or HSG), which can determine whether the device was placed successfully and whether the fallopian tubes are occluded.

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 four or five
years, 99% of the women who were treated with theEssureprocedure rated their tolerance to the implanted Essuredevice as "good" to "excellent".
Additionally, at all visits subsequent to one-week post device placement, at least 98% of the women
rated their comfort as "good" to "excellent". At all study visits through four years follow up, at least 97% of women rated their overall satisfaction as "somewhat" 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.

We
believe that physicians are receptive to theEssureprocedure because it is a less invasive permanent birth control option to offer
their patients. We also believe physicians find theEssureprocedure relatively easy to perform after completing our training program. We believe
hospitals are able to utilize their facilities more cost effectively with theEssureprocedure compared to tubal ligation. We expect payers will
continue 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. Payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the
drawbacks of traditional permanent birth control methods but who may elect to use theEssuredevice. Additionally, payers should also benefit from the
reduction of costs of complications associated with the tubal ligation procedure.

We
maintain two websites located at www.conceptus.com and www.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 such material, or furnish it to the Securities and Exchange
Commission, or SEC. Information

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contained
on our websites is not incorporated by reference into and does not form a part of this Form 10-K.

Penetration

We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and
patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. We believe that
physicians will not use a product unless they determine, based on clinical data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical
utility in a cost-effective manner. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. Our biggest challenge is
to speed up the adoption process to make theEssureprocedure the standard of care for permanent birth control.

Our
strategy in the near term is to focus on the earlier adopters who have already been trained by our professional education group. As of December 31, 2005, we have trained or
are in the process of training 2,882 physicians. We intend to increase our call frequency to those doctors by our field representatives, to ensure that physicians understand the favorable
reimbursement CPT code recently established, to strengthen referral programs to get women who are interested in theEssureprocedure to those doctors,
and to continue with our marketing programs to increaseEssureawareness among women and the medical community. Additionally, we intend to help those
doctors to market their practices so that they will perform moreEssureprocedures on a monthly basis.

TheEssuredevice is currently being marketed in multiple countries. In 2001, we were approved to affix the CE Mark to the Essureprocedure, indicating that
theEssuredevice is certified for sale throughout the European Union,
subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. In Canada, we received clearance from Health
Canada to marketEssurein Canada in November 2001. In October 2004, the French Medical Device Reimbursement Authority
"Comité Économique de Produit Santé", or CEPS, granted reimbursement status for theEssureprocedure in
France, an important step for successful commercialization of the product. In 1999, theEssureprocedure was listed with Australia's Therapeutic Goods
Administration, or the TGA, which allowed us to market and sellEssurein Australia. Later in August 2004, the Australian Department of Health,
Medical Services Advisory Committee, or MSAC, division recommended against public funding for theEssureprocedure, citing insufficient evidence for
safety, effectiveness and cost effectiveness. The overall market for female sterilization in Australia is very small and we believe that our market penetration will remain limited by the MSAC decision
until such time as we are able to submit sufficient long-term data to obtain public funding.

Reimbursement

Market acceptance ofEssuredepends 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, 2005, we have received positive reimbursement
decisions for theEssureprocedure from most private insurers and from 34 of the 51 Medicaid programs in the country, representing approximately 93% of
the lives in the U.S. 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.

In
2005 we received positive responses relating to reimbursement, which we believe will help us speed up the acceptance of theEssuredevice by doctors and patients. Such is the case of the UnitedHealthcare Services, Inc., or UHC, a member of UnitedHealthcare Group, which approved

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reimbursement
for theEssureprocedure in July 2005. In addition, in February 2006, we received coverage from CIGNA Corporation, or Cigna.
As with all healthcare plans, coverage will vary and is dependent upon the individual's specific benefit plan.

Effective
January 1, 2006, the Centers for Medicare and Medicaid Services, or CMS, released the Final Rule for the 2006 Physician Fee schedule. For the CPT code applicable to the Essureprocedure, the CMS
has provided for a national physician payment of $2,095.01 for procedures performed in the office and $438.47 for physician
payment when the procedure is performed in the hospital. This compares to a Medicare national average payment for tubal ligation, the current standard of care for permanent female sterilization, of
$345.50. In addition, the CMS released the Final Rule for the 2006 OPPS, which assigns hospital outpatient reimbursement amounts. This CPT code was also assigned a 2006 payment level of $2,454.00. We
believe these values are very favorable for theEssureprocedure and will help in establishing increased utilization of the device amongst doctors. We
expect that the new code, once the process to establish it at all private and public payers that have given a favorable coverage decision is complete, will significantly ease the burden on a
physician's office in obtaining reimbursement for theEssureprocedure and accelerate the coverage of the Essureprocedure by private insurance companies
and Medicaid. This process is not automatic following receipt of the new CPT code, however, and we
anticipate continuing to focus on reimbursement issues for sometime in the future, both to secure our code and payment schedule into the payers' databases, as well as to help the physician negotiate a
favorable contract for payment off that schedule.

Our Market

A 2002 National Survey of Family Growth performed by the Centers for Disease Control and Prevention, or CDC, the most current available statistics on United
States reproductive health, estimated that 75.2% of the 61.6 million United States women of reproductive age (15-44) use some form of birth control. The most common form of birth
control in the United States according to this 2002 CDC survey was permanent birth control (including vasectomy and tubal ligation) at 36%, followed by oral contraceptives (19%) and the male condom
(11%). Among women aged 35-44 years of age female sterilization was the leading method.

According
to the 2002 CDC survey, 36.2% of women who use any form of birth control rely on permanent birth control methods, such as tubal ligation and vasectomy. In 1971, vasectomy, a
male sterilization procedure, outnumbered tubal ligation by more than three to one. 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 89.2% of United States women who have had tubal ligation have two or more children and 69.7% are between the ages of 35 and 44.
Despite the decrease in vasectomies since 1971, we estimate that there are still approximately 400,000 vasectomy procedures performed each year in the United States.

In
addition to permanent birth control procedures, the 2002 CDC survey estimated that approximately 24.3 million United States women use temporary methods of birth control, such
as oral contraceptives, condoms, implants and injectables. Included in this group are approximately seven million women, who have two or more children, which we believe makes them more likely to
consider permanent forms of birth control. Furthermore, researchers in a 1999 article published in Family Planning Perspectives theorized that women may not be completely satisfied with
long-term use of temporary methods of birth control. The Family Planning Perspectives article reported that 44% of women using temporary birth control change methods for a method-related
reason within 12 months, increasing to 61% by 24 months. The 2002 CDC reported the rates of discontinuation for different methods of contraception. Among women who have ever discontinued
a method due to dissatisfaction 29.2% discontinued the pill, 11.9% discontinued the male condom, 42.3% discontinued DepoProvera, and 41.6% discontinued Norplant. From these groups, some women
discontinued more than one method of birth control. The most common reason for discontinuation of hormonal methods was side

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effects.
The most common reason for discontinuation of the male condom was partner's dissatisfaction with the method. For these reasons, 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 has been available until now.

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:

|                               
|-------------------------------
|
|                               
|Fertile women (% of U.S. women)
|                               
|Method:                        
|                               
|Tubal ligation                 
|                               
|Pill                           
|                               
|Condom                         
|                               
|Vasectomy                      
|                               
|All others                     
|                               

Worldwide,
there is a larger market for permanent birth control. The most current and available report on worldwide birth control statistics is a United Nations report on birth control
methods used in 2003 by reproductive couples. According to the report 61% of women of reproductive age were using contraception. The report indicated that tubal ligation, the leading birth control
method worldwide, was used by 21% of reproductive couples, followed by intrauterine devices, or IUDs, at 14%, and oral contraceptives at 7%.

Other Available Permanent Birth Control Methods

Tubal Ligation.Tubal ligation is the second most common form of birth control used by women in the
United States according to the CDC's 2002 National Survery of Family Growth. It combines high effectiveness with no required user compliance and a very low risk of long-term side effects.
However, the difficulty in accessing the fallopian tubes makes it necessary to perform incisional surgery to perform the procedure. The two most common methods of tubal ligation are laparoscopic tubal
ligation and tubal ligation performed by mini-laparotomy or laparotomy. These
methods of tubal ligation have a one-year effectiveness rate of approximately 99.5% and a five-year effectiveness rate of approximately 98.7%.

Laparoscopic
tubal ligation, the least invasive method of tubal ligation, requires one to two punctures to be made in the abdomen and carbon dioxide gas to inflate the abdomen to improve
visibility and access for the surgeon. The fallopian tubes are then ligated by cutting or cauterizing, or by mechanical occlusion using clips or rings. Because laparoscopic tubal ligation requires
penetration of the abdomen, 93% of laparoscopic tubal ligations are performed under general anesthesia. The typical surgical procedure takes approximately 45 minutes and is followed by four to five
hours of recovery time in a hospital setting. Women typically return to normal activities four to six days after a laparoscopic tubal ligation. Tubal ligation by laparotomy is a more invasive method
of tubal ligation due to a more extensive incision and is associated with a higher rate of complications and longer hospital stays and recovery periods.

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In
1992, the CDC reported the result of a large, prospective trial conducted between 1978 and 1988 of women undergoing tubal ligation by either laparoscopy or laparotomy, and reported
that major complications occurred in 1.6% to 5.7% of the cases, depending on the surgical approach. The most frequent major complication with laparoscopy was unintended major surgery due to unexpected
bleeding, hematoma formation or stomach/bowel perforation. The major complications reported with laparotomy were fever morbidity and re-hospitalization due to pelvic abscess, pulmonary
abscess, pulmonary embolus and bowel obstructions.

In
addition to the CDC study, published reports of randomized trials involving the three FDA-approved devices for tubal occlusion, Filshie Clip, Hulka Clip and the Tubal
Ring, cited overall complication rates of 11.2% to 24.0%, depending on the surgical approach. The complications reported in these studies included surgical injuries, primary incision complications and
infections. Incision complications were the most frequent and could be eliminated with a non-incisional approach. The complication rates in these studies were higher than reported in the
CDC published reports because the CDC study focused only on major complications.

In
addition to the complications reported in the public research literature, a report entitled Summary of Safety and Effectiveness for the Filshie Clip PMA, which is available on the
FDA's website, also noted the following complications: pelvic pain (35.7%), menstrual pattern changes (12.2%), back/shoulder pain (6.0%), nausea/vomiting (4.3%) and headache (3.0%).

Vasectomy.Vasectomy is a highly effective method of male birth control that is performed in a
doctor's office with local anesthesia and typically takes about 20 minutes. The vas deferens is ligated or resected and the cut ends are typically cauterized or clipped. Patients are observed for
approximately 20 minutes before release and are encouraged to use an ice pack for approximately 4 hours to reduce swelling.
Support devices are recommended for two days. Before relying on the vasectomy for birth control, men are encouraged to be tested 12 weeks after the procedure for the presence of sperm and to use
alternate forms of birth control during the 12 week period. Side effects of vasectomy include bleeding, infection and chronic pain syndrome.

Other Available Temporary Birth Control Methods

Oral contraceptives and drug delivery systems.Birth control pills and other hormone delivery systems
offer temporary birth control to women. Birth control pills contain female hormones and require a daily pill-taking regimen in order to stop the ovaries from releasing eggs. According to
Contraceptive Technology, 18th revised edition, the birth control pill has a "perfect use" failure rate of 0.1% but a "typical use" failure rate of 8.0% in the first year of use. This method has a
relatively high failure rate because of imperfect user compliance, an inherent problem with many methods of temporary birth control. Many physicians will not prescribe birth control pills to women
over the age of 35 who smoke cigarettes because of the potential for serious side effects. Some of the risks associated with the pill are an increased risk of heart attack, stroke and blood clots.

Other
forms of temporary hormonal birth control include injectable hormones, such as Depo-Provera and Lunelle, implantable hormones, such as Implanon, vaginal rings, such as
NuvaRing, and patches, such as OrthoEvra. All work to inhibit ovulation and/or inhibit sperm from entering the uterus. All have high effectiveness rates, but some, such as the ring and the patch,
still require a high level of user compliance, and injectables require periodic re-injections. All have undesirable side effects, such as menstrual cycle changes, weight gain, headache,
nausea and breast tenderness. Those containing estrogen, such as Lunelle, NuvaRing and OrthoEvra, may increase the risk of blood clots, heart attack and stroke.

Condoms and diaphragms.Condoms are male contraceptives that may also protect against sexually
transmitted diseases. Diaphragms are soft, flexible, cup-shaped products that are placed inside of a woman's vagina and over the cervix in order to prevent the sperm from entering the
uterus and

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fertilizing
the egg. Although condoms and diaphragms have very limited side effects, these methods have relatively high first-year failure rates primarily due to imperfect user compliance.
According to Contraceptive Technology, 18th revised edition, the first-year "typical use" failure rates are 15% for condoms and 16% for diaphragms.

Intrauterine devices (IUDs).IUDs are small devices that are placed in a woman's uterus to prevent
fertilization of the egg. They contain either copper, as in Paragard, or hormones, as in Mirena, which is also known as an intrauterine system. According to Contraceptive Technology, 18th revised
edition, IUDs have a first year failure rate of 0.1% to 0.8%. However, the use of IUDs among United States women has been low in recent years, representing only approximately 1.3% of contraceptive
users. Potential side effects from IUDs include menstrual cycle changes, infection, cramping, expulsion and uterine perforation.

The Essure Product

We developedEssurein response to what we perceived as a market need for a permanent, less invasive and less
costly alternative to tubal ligation.

The Essuremicro-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 and outer coils. All of these materials have been used in the body for a variety of different applications,
including cardiovascular surgery, for many years. Nitinol, a shape-memory metal, has been used in cardiovascular and peripheral vascular stents. Polyester fiber, proven to promote tissue
in-growth, has been used in a variety of other medical applications, including artificial heart valves and vascular grafts. Stainless steel has been used in numerous long-term
medical applications. 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 pregnancy.

On
July 17, 2003, we announced introduction of a new delivery catheter for theEssuresystem, the "coil catheter," in the United
States, Australia and Canada. A clinical study, performed in Australia, demonstrated a higher placement rate with the coil catheter than with the previous delivery catheter. In the clinical study, 101
of 103 patients achieved bilateral placement. These placements were performed by 5 investigators, most of whom had extensive experience withEssure.
This translates to a statistical bilateral placement rate, at appropriate confidence levels, of 95%. TheEssuresystem is being marketed with this claim
in Australia, Canada and the European Union. Any claim in the United States that would change the 86% first procedure bilateral placement rate, which was based on the original version of the Essuredelivery catheter as studied in the Pivotal Trial, would be subject to approval by the FDA. In March 2005, we filed a PMA supplement with
the FDA in order to obtain approval to early terminate our post-approval study and recognize the findings from that study on our label. In September 2005, we received such approval
from the FDA. Although the treatment of the total number of patients required by the FDA had not been completed, the data obtained for the study provided us with the ability to request an early
termination.

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The
clinical trial data filed with the FDA as part of the PMA supplement supports an extension of the effectiveness rate of theEssuresystem to 99.80% after four years and 99.74% after five years of follow-up, from the previously approved 99.80% at three years. The five-year effectiveness was demonstrated in
a small portion of women undergoing clinical studies. Five year follow up of all patients in clinical trials is ongoing.

In
addition, theEssureprocedure has proven to have high patient satisfaction in our clinical trials. Clinical data submitted to the FDA
in our Annual Report to PMA shows that Phase II study patients' tolerance to wearing theEssuredevice up to four years was rated as "good" to
"excellent" in 99% of women at all visits through November 2003. Among women from our Pivotal trial who have worn the micro-inserts up to three years, at least 97% reported their comfort with
theEssuredevice as "good" to "excellent" at all visits. Satisfaction was rated "somewhat" to "very satisfied" in at least 98% of visits through two
years. At three-year follow-up (reporting as of November 2003), 92% of women reported their overall satisfaction as "somewhat" 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.

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:

| |                                       | 
| | ------------------------------------- | 
|
| |                                       | 
| | Procedure                             | 
| |                                       | 
| | Typical anesthesia                    | 
| |                                       | 
| | Average endoscopic procedure time     | 
| |                                       | 
| | Average total procedure time          | 
| |                                       | 
| | Average post-op recovery time         | 
| |                                       | 
| | Where performed                       | 
| |                                       | 
| | Average return to regular activities* | 
| |                                       | 

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

Benefits to patients



Benefits to physicians and hospitals



Benefits to payers



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Patient Considerations

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



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 to date. 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 (1.5%), 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 theEssureprocedure. In addition, all of the patients in the Pivotal
clinical study who chose to undergo a secondEssureprocedure following a micro-insert expulsion achieved successful micro-insert placement and were
subsequently able to rely on

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Essurefor contraception. The majority of women report mild to moderate pain immediately after theEssureprocedure. 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 Essurefor 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. In addition, most women reported spotting for an average of three days post-procedure, and one-third reported pain on the day following the procedure,
with little pain reported on subsequent days. Also, occurrences of back/abdominal/other pain, headache, gas/bloating and transient menstrual changes were reported. Persistent pain was not reported by
any women, and persistent menstrual changes were reported in less than 2% of women, with virtually equal percentages of women reporting heavier than normal menstrual flow and lighter than normal
menstrual flow.

Our Clinical Progress

We commenced a Phase II clinical study of safety and preliminary effectiveness of theEssuredevice 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 two Essuremicro-inserts was placed totaled 682 between the two clinical trials. At three month follow-up, 647 women began relying on the Essuredevice as method of permanent birth control. The clinical
endpoints of the study include safety, effectiveness and patient satisfaction.

In
April 2002, based on data from our trials, we submitted our PMA application to the FDA, which was granted an expedited review. In November 2002, we received formal
notification from the FDA for the approval ofEssure. The following table summarizes placement procedure data from our two clinical trials as of
October 2002:

|                                                                               |  | Pivotal Trial |  | Phase II Study
|------------------------------------------------------------------------------ |  | ------------- |  | --------------
|Number of women undergoing a placement procedure                               |  | 518           |  | 227           
|% of women with micro-inserts placed in both fallopian tubes after 1st attempt |  | 86%           |  | 86%           
|% of women with micro-inserts placed in both fallopian tubes after 2nd attempt |  | 90%           |  | 88%           
|Average hysteroscopic procedure time for placement of micro-inserts            |  | 13 minutes    |  | 18 minutes    
|"Good" to "Excellent" rating of patient tolerance of procedure                 |  | 88%           |  | 89%           
|Adverse event rates preventing reliance on theEssuredevice                     |  | 3.0%*         |  | 3.0%          

---

Based
on clinical trial data, theEssuredevice has been demonstrated to be 99.80% effective at three years of follow-up. As
of January 2005, we accumulated sufficient patient follow-up data from the Phase II and Pivotal clinical trials for a four and five year effectiveness claim. We filed a PMA
supplement with the FDA in March 2005 for a four and five year
effectiveness claim consistent with the three-year claim. In September 2005, we received approval from the FDA to early terminate our post-approval study and recognize
the findings from that study on our label. Although the treatment of the total number of patients required by the FDA had not been completed, the data obtained for the study provided the Company with
the ability to request an early termination.

The
clinical trial data filed with the FDA on the PMA supplement supports an extension of the effectiveness rate of theEssuresystem to
99.80% after four years and 99.74% after five years of

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follow-up,
from the previously approved 99.80% at three years. The five-year effectiveness was demonstrated in a small portion of women undergoing clinical studies. Five year
follow up of all patients in clinical trials is ongoing.

Our
clinical trials are still ongoing, 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.

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 theEssuredevice in the United States through our direct sales force.

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, we intend to increase awareness of theEssureprocedure among consumers, general practitioners and the broader medical community. In April 2003, we presented theEssureprocedure at the
annual conference of the American College of Obstetricians and Gynecologists (ACOG). In early June 2003, we commenced a direct mail campaign to 500,000 women in the Atlanta and Chicago areas,
with the goal of encouraging these women to contact our call center for additional information. In turn, our call center has the ability to offer a referral to a practicing Essurephysician in a
consumer's area. We also conducted regional advertisement in a variety of magazines, such as ParentsandSelf. Since then we have continued to attend
meetings for the American Association of
Gynecologic Laparoscopists (AAGL) and ACOG organizations and women's health care societies. We also continue to conduct a variety of marketing programs to develop awareness and promote the product.

During
2004, we began a direct-to-consumer campaign in the Chicago area that incorporated direct mail, print media and radio advertising. We have opened two new
websites for physicians and patients and have established a call center for patients that are seeking additional information about theEssureprocedure
and who wish to be referred to physicians that are trained to perform theEssureprocedure. Physicians that we refer our patients to are those that have
chosen to participate in ourEssureAccredited Practice program aimed at providing an optimal patient experience.

In
order to focus our resources domestically, we decided to market and sell our product in Australia through a third party distributor which resulted in closing down our direct
operations in January 2005. In January 2004, we completed the sale of our wholly-owned French subsidiary for a nominal amount to an investor group comprised of our former French
management team, and signed a long-term exclusive distribution agreement for theEssuredevice with the acquiring group for the European,
Middle East and African markets. The sale agreement includes a long-term call option that is intended to enable us to repurchase the French company. The contract was amended in
September 2004 to include the territories of Mexico, Central America and South America. The sale transaction of our French subsidiary did not have any material impact to our financial
statements. Both distribution arrangements are meant to allow us to conserve our resources by eliminating the funding requirements necessary to develop those markets so that we can focus on the larger
U.S. market.

PHYSICIAN TRAINING

We have identified, educated and trained qualified gynecologists in theEssureprocedure through a combination of
presentations at major medical conferences, hands-on simulation and preceptored procedures with a clinician experienced in ourEssureprocedure. In order to complete training, we

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proposed
and the FDA agreed that we have a professional trainer in attendance during a physician trainee's initial cases, usually three to five, to observe appropriate technique and to sign off the
physician for the procedure.

In
early 2003, we targeted large-group gynecological practices in the United States with the goal of training, inclusive of preceptorship, approximately 700 physicians by the end of
2003. During the second quarter of 2003, we started to focus on one-on-one training sessions for new physicians who have pre-scheduled Essurecases. This is to accelerate the training process and to
control training costs. As of December 31, 2005, we have a total of 2,882 doctors
that have either completed or are in the process of completing preceptorship. Our accomplishment in obtaining the number of physicians trained provides us with a strong referral base within major
metropolitan areas we have targeted, and we believe also creates the leverage to help us gain additional reimbursement coverage. However, we understand that a strong base of trained physicians does
not necessarily correlate to an increase in revenue proportionately.

REIMBURSEMENT

Obtaining physician fee and device reimbursement for theEssureprocedure will be an important step toward
successful commercialization of theEssuresystem in the United States and internationally. Regardless of the country and its type of reimbursement
system, physician advocacy of our product, together with studies demonstrating clinical and cost effectiveness, will be required to obtain adequate reimbursement.

In
2005, we focused on gaining additional insurance coverage for theEssureprocedure, which despite our success in 2004, remains a
significant barrier to stronger growth. In July 2005, we obtained approval from UHC, which serves more than 18 million people across the United States. As with all healthcare plans,
coverage varies and is dependent upon the individual's specific benefit plan. In February 2006 we received approval from Cigna, which serves approximately 10 million people across the
United States and is the final major private payer that we required a coverage decision from. In 2006, 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
stated in the Reimbursement section of the Business Overview area of this form 10-K, in August 2004, the Australian Department of Health, Medical Services
Advisory Committee (MSAC) division recommended against public reimbursement for theEssureprocedure, citing insufficient evidence for safety,
effectiveness and cost effectiveness. The overall market for female sterilization in Australia is very small and we believe that our market penetration will remain limited by the MSAC decision until
such time as we are able to submit sufficient long-term data to obtain public reimbursement.

United States

Health care providers in the United States typically rely on third-party payers, specifically private health insurers, and government programs such as Medicare
and Medicaid, to reimburse all or part of the cost of procedures in which medical devices are used. Access to these funds is based on coding systems that are specific to procedure type and typically
separate physician fees and fees paid to the facility. In most cases, facility fees include payment for the medical device and are generally paid at rates negotiated between the providers (e.g.,
hospitals) and third-party payers. We have hired a group of reimbursement specialists who are actively working with physicians, facilities and payers to establish reimbursement for the Essureprocedure.
Payer reimbursement affects the pace of physician adoption of theEssureprocedure
because facilities habitually check with payers to determine the patient's applicability of coverage and the payer's policy of reimbursement for the costs of a new procedure. We expect that once a
facility has established a track record of claims paid by third-party payers, the pace of adoption for subsequent physicians will be more rapid than that of the initial physicians.

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International

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

In
2004, 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 the Essureprocedure by doctors
and patients. We have also received one unfavorable government response, the MSAC decision, that we do not consider material
to our future financial results or expectations for the world-wide acceptance of theEssureprocedure by doctors and patients. The overall
market for female sterilization in Australia at fewer than 20,000 cases per year is very small. We believe that our market penetration in Australia will remain limited by the MSAC decision as we are
able to submit sufficient long-term data to obtain public funding. We are in the process of determining exactly what long-term clinical data MSAC will accept.

In
Europe, consultants are assisting us in 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 (2) years with the Haute Autorité de
Santé, or HAS. This conditional approval requires the procedure to be reserved for patients who have a potential
laparoscopic risk. In addition, it requires a follow up to demonstrate the safety of theEssuredevice, for which the Company is conducting a
multicenter study. The results of this study will be filed with the HAS at the end of 2006, upon which final reimbursement is expected.

MANUFACTURING

We have limited experience manufacturing our product in the volumes that will be necessary to achieve significant commercial sales. To achieve our production
volume objectives, we decided to outsource our manufacturing activity to a third party contract manufacturer and in June 2003, we entered into a three-year contract manufacturing
agreement with Accellent, Inc., or Accellent, (formerly known as Venusa Ltd) for the manufacture of our product. Accellent's manufacturing facilities, located in Mexico and the United
States, were approved by the FDA in April 2004 and we transitioned almost all of our commercial production to Accellent by the end of 2004. In November 2005, we signed a new renewable
agreement for three years with Accellent for the manufacturing and procurement of inventory. We intend to maintain only limited manufacturing activity in our facility in Mountain View, California.

Our
agreement with Accellent 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, guidewires, 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. One component, the delivery catheter tubing, was available from only one supplier in early 2003. This tubing was manufactured by our supplier using
its proprietary intellectual property. In 2003, we finished the clinical testing of an internally developed cathether that does not require a third party license. Currently, we do not have any single
source supplier component except for 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 Accellent's manufacturing facilities are subject to periodic inspection by regulatory authorities. Our quality management system is subject to

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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.

RESEARCH AND DEVELOPMENT

Our research and development activities are performed by a product development, process engineering, intellectual property and regulatory/clinical research staff.
Research and development expenses for 2005, 2004 and 2003 were approximately $4.3 million, $4.1 million and $6.0 million, respectively. We intend to continue to focus our research
and development efforts on the development of new or alternative product designs and enhancements along with management of the on-going clinical trials. It is R&D's goal to launch product
enhancements over the coming years, which are intended to result in a lower cost of goods, improved ease of use of theEssuresystem and simplified
packaging systems.

INTELLECTUAL PROPERTY

Our policy is to protect our proprietary position aggressively by, among other things, filing United States 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 February 15, 2006, we had 13 published U.S. patent applications, 26 U.S. issued patents, and 22 foreign and/or international patent applications pending and 32 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.

In
addition to the patents previously mentioned in our SEC filings, on March 25, 2005 the United States Patent and Trademark Office, or PTO, issued patent #6,871,650 Contraceptive transcervical fallopian tube occlusion
devices and their deliverywith claims directed at a hysteroscopically placed permanent
contraceptive device; a system for providing permanent sterilization, comprising; a flexible structure; a plurality of fibers affixed to the structure to promote tissue ingrowth; an elongate body
having a proximal end and a distal end, the elongate body releasably supporting the flexible structure within the distal end; and a hysteroscope through which the distal end of the elongate body is
extendible while the hysteroscope is inserted transcervically, the hysteroscope providing an image from within the uterus to direct the elongate body laterally toward an ostium of the fallopian tube.

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's technology encompasses certain technology
developed by Target Therapeutics as of February 1, 1996. We do not have any preferential rights to technology developed by

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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 expires 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 it believes that 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 the payment of a royalty to Ovion that will be equal to 3.25% of the cumulative net sales of the Essuredevice 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 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 REGULATION

The research, development, manufacture, labeling, distribution and marketing of our product are subject to extensive and rigorous regulation by the FDA and, to
varying degrees, by state and foreign regulatory agencies.

United States Regulation

The manufacture and sale of our product are subject to extensive regulation by numerous governmental authorities, principally the FDA as well as state and foreign
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 Federal
Food, Drug & Cosmetic Act, or an approved PMA. A PMA application is approved when the FDA has determined the company has 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

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commercial
distribution prior to 1976. TheEssuredevice is regulated by the FDA and received FDA approval for commercialization in the United States on
November 6, 2002. If we or Accellent, our third party manufacturer, 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.

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 Accellent, our third party manufacturer, will be 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 will be
monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health Services, as well as foreign health authorities. In July 1994,
our 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
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. 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 the EssureSystem. We are
also required to conduct a post approval study in the United States with certain newly trained physicians 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 United States 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 theEssuresystem.

International regulation

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.
TheEssuresystem is listed with Australia's Therapeutic Goods Agency. 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. We received permission to affix the CE Mark to theEssuredevice in February 2001. In Canada, we received clearance from Health
Canada to marketEssurein Canada in November 2001. 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.

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COMPETITION

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.

We
are aware of a company that is in the clinical stages of development for non-incisional permanent contraception devices. In addition, high competition may arise due to
mergers or acquisitions performed by external parties and other companies may develop products that could compete with theEssuresystem. Moreover, the
medical device industry is characterized by rapid and significant technological change. The length of time required for product development and regulatory approval impacts remarkably a company's
competitive position. As a result, our success will depend in part on our ability to respond promptly to medical and technological changes through the development and commercialization of new
products. 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, 2005, we have 139 full-time employees, consisting of 6 in product development and intellectual property, 4 in process
engineering, 13 in manufacturing, 78 in sales and marketing, 7 in clinical/regulatory affairs, 8 in quality assurance and 23 in general and administrative functions. 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 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.

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.

EXECUTIVE OFFICERS OF THE COMPANY

Information required by this item, insofar as it relates to directors and officers, will be contained in the Company's Definitive Proxy Statement in connection
with our 2006 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," "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 Company's Definitive
Proxy Statement under the caption "Section 16(a) Beneficial Owner Reporting Compliance," and is hereby incorporated by reference into this report.

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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. This Form 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and
section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by use of forward-looking words such as "believes," "expects,"
"anticipates," "may," "will," "should," "seeks," "approximates," "intends," "plans," or "estimates," or the negative of these words, or other comparable terminology. The discussion of financial
trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from
those projected. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. The readers should not consider
this list to be a complete statement of all potential risks and uncertainties.

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

We have a limited history of operation with theEssuresystem and have incurred significant operating losses since
our inception in 1992, including operating losses of $22.7 million in the fiscal year 2005, $26.6 million in fiscal 2004 and $40.2 million in fiscal 2003. We expect to continue to
incur significant operating expenses and net losses as we continue sales and marketing efforts in the United States. Our net losses will continue until sufficient revenues can be generated to offset
these expenses. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our
common stock.

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

We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and
patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be
essential for market acceptance of our product. We do not know whether physicians and patients will accept our product or whether we will be able to obtain their recommendations or endorsements 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 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. We are dependent on theEssuresystem, which is currently our only commercial product. If the Essuresystem does not achieve
significant market acceptance among physicians, patients and healthcare payers, even if reimbursement levels are
sufficient and necessary United States and international regulatory approvals are maintained, we may never achieve significant revenues or profitability.

Our future liquidity and capital requirements are uncertain.

As we commercialize 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 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

20

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



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, the Company received from the U.S. Food and Drug Administration, or FDA, approval to terminate the Company's 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 FDA as a condition of the November 2002 approval of theEssuresystem, was to determine the rate of
successful bilateral placements of theEssuremicro-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 FDA had not been completed, the data obtained to date provided the Company with the ability to request an
early termination of the study.

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 agreements and contracts entered into with partners and other third parties may not be successful.

We signed in the past and may pursue in the future contracts and agreements with third parties that would assist our marketing, manufacturing, selling and
distribution efforts. There can be no assurances that, if these agreements are entered into in the future, they will be successful.

Our advertising campaigns may not be successful.

Our advertising programs, which are aimed at increasing consumer awareness for our product, are generally expensive and may have limited success, if any. Such
campaigns require consumers to make contact with anEssuretrained physician, often involving a referral from their primary care physician and then to
be provided information regarding birth control options by the physician, be pre-authorized for insurance reimbursement and then be scheduled for the procedure. Many of these steps are not
within our control, and the program may not result in revenue generation commensurate with its costs.

21

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We depend on our contract manufacturer to supply our commercial product requirements and we may experience disruption in supply if they
are not in compliance with FDA and other health authority regulations or if our manufacturer's business fails to succeed.

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 manufacture the components and assemble our product. If Accellent does not comply with FDA and other health authority regulations or encounters manufacturing difficulties, this could
negatively impact sales of theEssuresystem.

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

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

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

We
have received FDA approval to market theEssuresystem in the United States. If we lose that approval or fail to comply with existing
or future regulatory requirements, 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 minimal registration requirements;
however, these countries may develop more extensive regulations in the future, which could delay or prevent us from marketing theEssuresystem 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

22

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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 will be required to adhere to
applicable FDA regulations, such as the Quality System Regulation, and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with
the Quality System Regulation and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including the FDA and the California Department
of Health Services, and by comparable agencies in other countries. If we fail to comply with applicable regulatory requirements, we may be subject to, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market
approval for devices, withdrawal of approvals and criminal prosecution, any of which could negatively impact our business.

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

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

We
will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained
as trade secrets. The patent positions of companies developing medical devices, including our patent position, generally are uncertain and involve complex legal and factual questions concerning the
enforceability of such patents against alleged infringement. Recent judicial decisions have established new case law and a reinterpretation of previous patent case law, and consequently we cannot
assure you that historical legal standards surrounding the questions of infringement and validity will be applied in future cases. In addition, legislation may be pending in 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

23

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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 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 United States
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., 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 the Essuresystem, 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

24

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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 to 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 an interference, whether we invented our product prior to Ovion's
date of invention, or whether we will prevail in an interference proceeding if it is declared by the PTO. If the PTO declares an 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 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, our business could be impaired.

We may in the future acquire one or more technologies, products or companies that complement our business. We may not be able to effectively integrate these into
our business and any such acquisition could bring additional risks, exposures and challenges to our company. If we fail to manage any acquisition, our business could be impaired.

Our third-party manufacturer and we will depend upon third party and single source suppliers for raw materials and finished goods and we
do not have forward contracts with many of these suppliers.

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 one component
of our product, the polyester fiber. We do not have formal supply contracts with several key vendors and, accordingly, these firms may not continue to supply us or our third party manufacturer with
raw materials or finished goods in sufficient quantities, or at all. Delays associated with any future raw materials or finished goods shortages could impair our sales of the Essuresystem, particularly
as our third-party manufacturer scales up its manufacturing activities in support of United States and international
commercial sales of theEssuresystem.

25

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Health care reform may limit our return on our product.

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

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

The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls. 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 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. The length of time required for product
development and regulatory approval plays an important role in a company's competitive position. As we commercializeEssure, we expect to compete with:



26

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We
are aware of a company that is in the clinical stages of development for non-incisional permanent contraception devices. In addition, new competition and products may
arise due to mergers or acquisitions performed by external parties. Other companies may develop products that could compete with theEssuresystem.
Competitive factors may render theEssuresystem obsolete or noncompetitive or reduce demand for the Essuresystem.

Our future quarterly results may fluctuate.

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



Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally
accepted accounting principles, our stock price and our competitiveness in the employee marketplace.

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. Statement of Financial Accounting Standards, or SFAS, No. 123 allowed companies the choice of either using a fair value method of accounting for options, which would result in
expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", or APB
25, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We had elected to apply APB 25 and accordingly we generally do not
recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

In
December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R) "Share-Based Payments". We adopted this statement on January 1, 2006,
which is the first annual reporting period after June 15, 2005. This statement will have a significant impact on our consolidated statement of operations as we will be required to expense the
fair value of our stock options rather than disclosing the impact on our consolidated result of operations within our footnotes in accordance with the disclosure provisions of SFAS No. 123.
This will result in lower reported earnings per share or in higher reported losses per share, which could negatively impact our future stock price. In addition, this could impact our ability to
utilize 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

27

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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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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. We believe that our current facilities are adequate for our immediate needs and that we will be able to renew
our lease or obtain additional space as needed.

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 other 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 stockholders of the Company during the fourth quarter of the fiscal year ended December 31, 2005.

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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 National 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 closing sale prices for our common stock as reported on the Nasdaq National Market for the period indicated.

High

LowYear Ended December 31, 2005:Fourth Quarter

$
15.79

$
9.00Third Quarter

$
12.09

$
5.76Second Quarter

$
8.10

$
5.15First Quarter

$
8.41

$
6.86Year Ended December 31, 2004:Fourth Quarter

$
11.21

$
8.09Third Quarter

$
11.90

$
8.08Second Quarter

$
14.16

$
9.97First Quarter

$
13.06

$
8.87


As
of February 28, 2006, there were 140 stockholders of record and the last reported sale price of our common stock on February 28, 2006 was $14.33.

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.

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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
Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 2005, 2004 and 2003 and the consolidated balance sheet data as of
December 31, 2005 and 2004 are derived from our audited consolidated financial statements and the related notes, which are included elsewhere in this Form 10-K. The selected
consolidated statement of operations data for the years ended December 31, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001 are derived from
our audited consolidated financial statements and the related notes, which are not included in this Form 10-K.

|                                                                               |                                     | Years Ended December 31, |        
|------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | -------
|
|
|Consolidated Statement of Operations Data:                                     |                                     |                          |        
|Net sales                                                                      |                                     | $                        | 21,169 
|Cost of goods sold                                                             |                                     |                          | 8,396  
|                                                                               |                                     |                          |        
|Gross profit (loss)                                                            |                                     |                          | 12,773 
|                                                                               |                                     |                          |        
|Operating expenses:                                                            |                                     |                          |        
|                                                                               | Research and development            |                          |        
|                                                                               | Selling, general and administrative |                          |        
|                                                                               |                                     |                          |        
|                                                                               | Total operating expenses            |                          |        
|                                                                               |                                     |                          |        
|                                                                               | Operating loss                      |                          |        
|Interest and other income, net                                                 |                                     |                          | 945    
|                                                                               |                                     |                          |        
|Net loss                                                                       |                                     | $                        | (21,801
|                                                                               |                                     |                          |        
|Basic and diluted net loss per share                                           |                                     | $                        | (0.82  
|                                                                               |                                     |                          |        
|Weighted-average shares used in computing basic and diluted net loss per share |                                     |                          | 26,725 
|                                                                               |                                     |                          |        

|                                                   |  | December 31, |         
|-------------------------------------------------- |  | ------------ | --------
|
|
|Consolidated Balance Sheet Data:                   |  |              |         
|Cash, cash equivalents and short term investments* |  | $            | 32,492  
|Working capital                                    |  |              | 34,589  
|Total assets                                       |  |              | 47,409  
|Long-term clinical liabilities                     |  |              |        
|Accumulated deficit                                |  |              | (205,130
|Total stockholders' equity                         |  |              | 40,171  

---

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

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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. This discussion contains forward-looking statements that involve risks and uncertainties such as limited operating and sales history; the uncertainty of
market acceptance of our product; 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; our limited
history of manufacturing our product; our dependence on single source supplies, third party manufacturers and co-marketers; intense competition in the medical device industry; the inherent
risk of exposure to product liability claims and product recalls and other factors referenced in this Form 10-K. Our actual results could differ materially from those expressed or
implied in these forward-looking statements as a result of various factors, including those discussed in "Risk Factors" and elsewhere in this Form 10-K.



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 United States 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.



TheEssureprocedure is typically performed as an outpatient procedure and is intended to be a less invasive and a
less costly alternative to tubal ligation, the leading form of birth control in the United
States and worldwide. 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. TheEssureprocedure 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 without general or regional anesthesia. In the Pivotal trial
of theEssuresystem, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essuremicro-insert. A
patient is typically discharged approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, theEssuresystem 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, the patient completes a
follow-up examination called a hysterosalpingogram, or HSG, which can determine whether the device was placed successfully and whether the fallopian tubes are occluded.

We
believe that theEssuresystem is also an attractive 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. We also believe the Essuresystem is a viable alternative
to other temporary methods of birth control being used when there is no intention of having children in the
future. In addition, payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen

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to
avoid the drawbacks of traditional permanent birth control methods but who may elect to use theEssuresystem.

Published
reports estimate that 700,000 tubal ligation procedures are performed each year in the United States. We intend to tap into this market and establish the Essureprocedure as the gold standard for
permanent birth control.

TheEssuresystem is currently being marketed in multiple countries. In November 2002 we received approval from the FDA to market
theEssuresystem in the United States. In 2001, we were given approval to affix the CE Mark to the Essuresystem, indicating that theEssuresystem is certified for sale throughout the European Union,
subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. In 1999, the EssurePermanent Birth Control
system was listed with Australia's Therapeutic Goods Administration, which allows us to market and sell the Essuresystem in Australia. In December 2004, we made the decision to terminate our
direct subsidiary operations in Australia and convert to an
independent distributor. This decision was largely a cost reduction measure in lieu of the small size of the Australian market and our inability to manage a direct operation to a cash-flow
positive position. We have entered into a distribution agreement and the transition was completed in January 2005. In
Canada, we received clearance from Health Canada to market theEssuresystem in Canada in November 2001. We now have distributors in Australia,
Canada and France, which covers Europe, Middle East, Africa, Mexico, Central America and South America.



In July 2005, we received approval from the FDA to extend effectiveness data on theEssureproduct
labeling. The Premarket Approval, or PMA, supplement filed in late January supports an extension of the effectiveness rate of theEssuresystem to
99.80% after four years and 99.74% after five years of follow-up, from the previously approved 99.80% at three years. The five-year effectiveness was demonstrated in a small
portion of the women undergoing clinical studies. Five year follow up of all patients in clinical trials is ongoing.

In
September 2005, we received approval from the FDA to terminate the Company's post-approval study with physicians who were newly trained in performing the Essureprocedure due to the positive
placement data obtained. 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 FDA had not been completed, the data obtained to date provided the Company with the opportunity to request that the FDA permit an early
termination of the study. Because of the FDA ruling, the PMA Supplement submitted in March 2005 has been re-classified as a Final Report. The results of the
post-approval study demonstrated an improvement in placement rates from those obtained in the pivotal study and the Company will seek to obtain a new placement rate claim for the product
using this new data. This will require the Company to submit a new PMA Supplement for the bilateral placement rate claims for which it is seeking FDA approval in order to update the labeling for the Essuresystem.



We require physicians to be preceptored for between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. As of
December 31, 2005, we have trained or are in the process of training 2,882 physicians in the United States on theEssureprocedure. This
represents an increase of 1,201 physicians over the number of physicians at December 31, 2004 and an increase of 351 physicians over the number of physicians at September 30, 2005. The
level of sales for

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the Essuresystem, particularly in this early period of adoption, is highly dependent on the number of physicians trained to perform the procedure.
However, we understand that a strong base of trained physicians does not necessarily correlate to an increase in revenue proportionately. Furthermore, 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 to-date.



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, 2005, we have received positive
reimbursement decisions for theEssureprocedure from most private insurers and 34 of the 51 Medicaid programs in the country. 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.

In
July 2005, the UnitedHealthcare Group, or UHC, approved theEssureprocedure for reimbursement. In addition, in
February 2006, we received coverage from CIGNA Corporation, or Cigna. As with all healthcare plans, coverage will vary and is dependent upon the individual's specific benefit plan.

Effective
January 1, 2006, the United States Centers for Medicare and Medicaid Services, or CMS, released the Final Rule for the 2006 Physician Fee schedule. For the CPT code
applicable to theEssureprocedure, the CMS has provided for a national physician payment of $2,095.01 for procedures performed in the office and
$438.47 for physician payment when the procedure is performed in the hospital. This compares to a Medicare national average payment for tubal ligation, the current standard of care for permanent
female sterilization, of $345.50. In addition, the CMS released the Final Rule for
the 2006 Hospital Outpatient Prospective Payment System, or OPPS, which assigns hospital outpatient reimbursement amounts. This CPT code was assigned a 2006 payment level of $2,454.00. We believe
these values are very favorable for theEssureprocedure and will help in establishing increased utilization of the device amongst doctors. We expect
that the new code, once the process to establish it at all private payers that have given a favorable coverage decision is complete, will significantly ease the burden on a physician's office in
obtaining reimbursement for theEssureprocedure and accelerate the coverage of theEssureprocedure by
private insurance companies and Medicaid. This process is not automatic following receipt of the new CPT code, however, and we anticipate continuing to focus on reimbursement issues for sometime in
the future, both to secure our code and payment schedule into the payers' databases, as well as to help the physician negotiate a favorable contract for payment off that schedule.

In
mid-August 2004, the Australian Department of Health, Medical Services Advisory Committee (MSAC) division recommended against public funding for the Essureprocedure, citing insufficient evidence
for safety, effectiveness and cost effectiveness. The overall market for female sterilization in
Australia is very small and we believe that our market penetration will remain limited by the MSAC decision until such time as we are able to submit sufficient long-term data to obtain
public funding.



TheEssuresystem is a novel product 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 are traditionally slow to adopt new products

33

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and
treatment practices, partly because of perceived liability risks. Our biggest challenge is to speed up the adoption process to make the Essure procedure the standard of care for permanent birth
control. The following discussion summarizes our program in the United States to increase adoption of theEssureprocedure.

First,
we are focused on obtaining favorable coverage decisions from payers representing the private paying and state-paying Medicaid systems. We are also focused on getting the CPT code
and payment schedule implemented at all of the payers that have given a coverage decision. Until such time as the code is completely implemented and all major payers have provided a coverage decision,
we have developed a field based tactical reimbursement group aimed at educating the physician and office staff regarding payer procedures following a declined claim, including appeals and petitioning
procedures. Typically a newly covered product will go through a period where claims are either inadvertently declined or are paid at the incorrect amount. In either instance, the physician is
reluctant to perform additional procedures until payment has been secured for earlier cases, causing a decline in utilization.
Our tactical reimbursement focus is intended to give the physician and his/her staff the tools to ensure that claims will ultimately be paid and thereby encourages the physician to continue performing
theEssureprocedure despite reimbursement issues. This tactical reimbursement group is generally targeting specific accounts with the aim of eventually
meeting with all of our accounts so as to provide them with the knowledge of how to file and follow up on claims on a payer by payer basis.

Second,
we are expanding our sales territories and channels of distribution so as to increase our call frequency on physicians. Since January 1, 2005, we added 22 sales positions
and are expecting to add more in 2006. Also, we have included regional distributors of women's gynecology products to our marketing efforts. Among other responsibilities, our sales representatives are
attempting to increase penetration and utilization of theEssureprocedure, as well as to facilitate the movement of the Essureprocedure to the in the
office environment.

Third,
we have entered into certain strategic agreements in the past and we may explore such opportunities in the future. We intend for these agreements to provide us with the ability to
increase awareness, gain market presence and credibility, accelerate our ability to train doctors, as well as expand our market opportunity by driving adoption among a group of physicians not
previously targeted by our marketing programs. The success of these joint marketing campaigns will depend upon the effectiveness of our sales force training programs, market demand for Essureprocedures
in conjunction with the products marketed by strategic partners and the efforts and commitment of strategic partners to the program.
We cannot be certain how successful these programs will be, if at all.

Fourth,
we are attempting to increase patient awareness, so as to increase the number of women that will ask for information about the Essure procedure. In late July 2004 we
announced that we initiated an extensive direct to consumer advertising campaign in the Chicago, Illinois metropolitan area which commenced in August 2004 and ran for 6 months. The
campaign involved radio, direct mail and print media (magazine) advertisements aimed at increasing consumer awareness. We completed this campaign in August 2005.

Lastly,
as appropriate we intend to make labeling improvements to our product as well as physical product enhancements to enhance the adoption of the Essureprocedure. This may involve working with the various
regulatory agencies around the world that regulate the sale and labeling of medical devices
to provide updates to claims such as effectiveness and placement rates. Where appropriate, we will make physical improvements to the product for improved manufacturability or for the ease of use by
the physician.

We
have experienced significant operating losses since inception and, as of December 31, 2005, had an accumulated deficit of $205.1 million. We expect our operating losses
to continue until at least the end of calendar year 2006 as we continue to expend substantial resources in the selling and marketing of theEssuresystem in the United States and abroad. Due to the unpredictable nature of

34

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these
activities, we do not know whether we will achieve or sustain profitability in the future. We will continue to be in a net loss position until sufficient revenues can be generated to offset
expenses. In August 2005, we completed a private placement of our common stock, which generated cash to help fund our operations. 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. Additional financing may not be available when needed or on terms acceptable to us.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The primary estimates underlying the Company's financial statements include reserves for obsolete and slow moving inventory, allowance for doubtful
accounts receivable, product warranty, impairment reserves for long-lived assets, income taxes and contingent liabilities. Other accounting policies are described in Note 2,
"Summary of Significant Accounting Policies" to our Financial Statements. Application of these policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates.

Revenue Recognition.Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is
fixed and determinable, delivery has occurred and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified
amount of product at a specified price and consider delivery to have occurred at the time of shipment. We have international distributors in France, Australia and Canada. Our revenue recognition
policy for distributors is consistent with our policy for direct customers. We entered into written distribution contracts with our distributors with fixed terms and price and consider delivery to
have occurred at the time of shipment. We do not currently accept product returns from customers or distributors. We may in the future decide to accept returns from customers or distributors, which
will significantly change our revenue recognition policy and could materially impact our financial statements. We may be required to defer all of our revenues until sufficient historical data is
established to support an adequate return reserve. We may receive non-recurring payments from contractual arrangements which are deferred and recognized as revenue when earned based on an
appropriate basis and time frame such as when services are performed or the term of the contract.

Additionally,
we require physicians to be preceptored for 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 to-date.

Inventories.Inventories are stated at the lower of cost or market, cost being determined on the first-in,
first-out method. Reserves for potentially excess and obsolete inventories are provided based on historical experience and current product demand. We have not experienced any significant
write-off of potentially excess and obsolete inventories in the past. However, this could change as we increase inventory purchases to satisfy product demand. If sales expectations and
inventory purchases become mismatched and are not adjusted timely, we may experience material write-offs in the future.

In
addition, we evaluate our inventory on a quarterly basis to ensure that our inventory valuation does not exceed net realizable value. Although unlikely, if we experience a significant
drop in our

35

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average
selling price that is below our actual cost of goods, we may incur significant write-downs of inventory.

Accounts Receivable.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 continuously monitor collections and payments from our customers and maintain
an 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. We may decide to change our bad debt reserve
methodology in the future to better estimate credit losses. While our credit losses have historically been within our expectations and the allowance established, we might not continue to experience
the same credit loss rates that we have in the past.

Warranty Accrual.We offer warranties on our product and 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. Warranty
expense will increase as and if we increase our net sales. Warranty reserve rates may change when we change manufacturing process or change our third-party manufacturing contractor. Although our
warranty expenses have historically been within our expectations and the accrual established, we may not continue to experience the same warranty expense rate that we have in the past.

Impairment of Long-Lived Assets.We account for the impairment of long-lived assets in accordance
with Statement of Financial Accounting Standard ("SFAS 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 and theEssurelicense acquired from a patent litigation settlement in
2003 (See Note 10 to Consolidated Financial Statements), 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, 2005 and December 31, 2004 included property and equipment of $2.7 million and $1.3 million,
respectively, and other identifiable intangible assets of $1.6 million and $1.8 million, respectively.

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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 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. Management judgment is required in determining any valuation allowance recorded against our deferred tax assets. Any such

36

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valuation
allowance would be based on our management estimates of taxable income and the period over which our deferred tax assets would be recoverable.

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.

RESULTS OF OPERATIONS

This section should be read in conjunction with Item 1, "Business", on Part I of this Form 10-K.

Years Ended December 31, 2005 and 2004



Net sales were $21.2 million in 2005, of which 88% were from United States, 10% were from Europe, and 2% were from other regions. Net sales were
$11.6 million in 2004, of which 85% were from United States, 11% were from Europe and 4% were from other regions.

The
following table summarizes the above information related to net sales by geographic region in tabular format:

| |                         
| | ------------------------
| |                         
| |                         
| |                         
| |                         
| | Net sales (in thousands)
| |                         
| | United States of America
| |                         
| | Europe                  
| |                         
| | Other                   
| |                         

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

The
increase in net sales of $9.6 million or 82% is the result of continued commercialization of theEssuresystem in the United
States. Our worldwide average selling price for our product increased from $763 in 2004 to $814 in 2005 due to the increase in our sales price in January 2005, as well as the increase in the
level of domestic sales, which has a higher price than sales to our European distributor. We expect sales to grow in 2006 between 56% and 65% due to the increase in the number of sales
representatives, new programs aimed at increasing patient awareness of theEssureprocedure and new coverage decisions in the area of reimbursement.

In
early 2003, we targeted groups of gynecological practices with the goal of training, inclusive of preceptorship, approximately 700 physicians by the end of 2003 and ended the year
having trained 792 physicians. As of December 31, 2005, we have a total of 2,882 doctors that have either completed or are in the process of completing preceptorship. Our accomplishment in
obtaining the number of physicians trained is very important because it not only provides us with a strong referral base within major metropolitan areas we have targeted, but it will also create the
leverage to help us gain additional reimbursement coverage. In addition, 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
to-date.

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Cost of goods sold increased by $1.3 million to $8.4 million in 2005 as compared to $7.1 million in 2004. Gross profit increased
$8.3 million to $12.8 million from $4.5 million in 2004. Our gross profit percent was 60% and 39% for the years 2005 and 2004, respectively. Our gross profit percent was 62% in
the fourth quarter of 2005, as compared to 51% in the fourth quarter of 2004 and it increased from 55% in the first quarter of 2005 to 62% in the fourth quarter of 2005. The improvement in gross
profit percentage was primarily the result of our domestic price increase and the transition of the manufacturing activities in 2004 to a third party manufacturer in Mexico. This outsourcing effort
decreased our production costs and increased gross profit. In April 2004, we received FDA approval for the process at the third party manufacturer.



Research and development expenses, which include clinical, regulatory and product development, increased by $0.2 million to $4.3 million in 2005 as
compared to $4.1 million in 2004. Research and development expenditures fluctuate in relation to product development, clinical affairs and regulatory activities. We intend to continue to focus
our research and development efforts on the development of new or alternative product designs and enhancements along with management of the on-going clinical trials. It is R&D's goal to
launch product enhancements over the coming years, which are intended to result in a lower cost of goods, improved ease of use of theEssuresystem and
simplified packaging systems.

Selling,
general and administrative expenses increased by $4.2 million to $31.3 million in 2005 as compared to $27.1 million in 2004. The primary reason for the
increase results from higher expenditures in $2.2 million for the expansion of our U.S. field sales force by approximately 22 sales representatives during 2005, which is meant to provide us
with more selling time to focus on physician penetration. Additionally, increases in selling, general and administrative expenses were a result of $0.8 million in headcount increase in
departments other than sales, $0.7 million for the accrual of bonuses for 2005, $0.7 million in the creation of a new department in sales, $0.5 million in training programs,
expenditures of $0.3 million related to the move of our headquarters to new facilities located in Mountain View, California, $0.3 million in consulting fees for the development and
enhancement of our internet website, $0.3 million in legal expenditures, $0.1 million in sales consulting and $0.1 million in recruiting of new sales employees, offset by
$0.9 million in lower sales expenditures in Australia, lower expenses of
$0.5 million in sales and training related to the termination of the agreement with Gynecare, $0.2 for the reduction of Sarbanes-Oxley compliance and technology consulting fees and lower
marketing expenses of $0.2 million. In addition, we had limited international expenditures in 2005, since we completed the divestiture of our French subsidiary in January 2004 and the
closure of our direct operations in Australia in January 2005. From the latter, all severance costs were completely paid out at the end of January 2005. As of December 31, 2005,
all fixed assets have been disposed of, although the dissolution of the legal entity remains. We expect selling, general and administrative expenses to increase in the future mainly due to the
expansion of our sales force to support our revenue growth and expand market penetration.



Interest and other income and expenses of $0.9 million increased by $0.3 million in 2005 compared to $0.6 million in 2004. The increase is
due to higher interest income in 2005 due to higher interest rates applied to the investments portfolio.

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As a result of our net loss of $21.8 million, we incurred no income tax expense in 2005. As of December 31, 2005, we had net operating loss carry
forwards for federal and state income tax purposes of approximately $192.4 million and $107.6 million, respectively. If not utilized, these carryforwards will begin to expire starting in
2008 for federal purposes and 2006 for state purposes. In addition, at December 31, 2005, we had federal and state research credit carry forwards of approximately $2.4 million and
$2.3 million, respectively. If not utilized, the federal tax carryforward will begin to expire in 2008, while the state carryforward does not expire. 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 had a change of ownership, utilization of the carryforwards could be restricted.



We granted 24,840 shares and 312,020 shares of restricted stock to our employees and directors during 2005 and 2004, respectively. Certain of the grants include
acceleration of vesting based upon our achievement of performance goals. From these grants, 5,863 shares were repurchased by us in 2005, which are recorded as treasury stock, and with the 72,000
shares repurchased in fiscal year 2004, we hold as of December 31, 2005 a total of 77,863 shares of treasury stock. The purchase price was $0.003 per share and the Company's repurchase right
with respect to the shares lapses either in equal installments over three years or at the end of the three years, depending on the terms of the agreement.

We
are amortizing the net total deferred restricted stock expense of $2.4 million, calculated based on the fair value of the stock on the date of the grants, over the vesting term
of three years on a straight-line basis. Of the total deferred restricted stock expense of $2.4 million, $0.4 million will relate to research and development and
$2.0 million will relate to selling, general and administrative activities, assuming employees will not change departments.

Years Ended December 31, 2004 and 2003



Net sales were $11.6 million in 2004, of which 85% were from the United States, 11% were from Europe and 4% were from other regions. Net sales were
$7.7 million in 2003, of which 77% were from United States, 14% were from Europe and 9% were from other regions.

The
following table summarizes the above information related to net sales by geographic region in tabular format:

| |                          | 
| | ------------------------ | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 
| | Net sales (in thousands) | 
| |                          | 
| | United States of America | 
| |                          | 
| | Europe                   | 
| |                          | 
| | Other                    | 
| |                          | 

The
increase in net sales of $3.9 million or 51% is the result of continued commercialization of theEssuresystem in the United
States. Our worldwide average selling price decreased from $830 in 2003 to

39

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$763
in 2004 as a direct result of terminating the company's direct operations in Europe and subsequently selling through a distributor, which has a lower selling price.

As
of December 31, 2004, we had a total of 1,681 doctors that had either completed or were in the process of completing preceptorship. As of December 31, 2003 the same
group was comprised of 700 physicians.



Cost of goods sold increased by $0.5 million to $7.1 million in 2004 as compared to $6.6 million in 2003. In 2004 our gross profit increased
$3.4 million to $4.5 million from $1.1 million in 2003. Our gross profit percent was 39% and 14% for the year 2004 and 2003, respectively. Our gross profit percent was 51% in the
fourth quarter of 2004 as compared to 17% in the fourth quarter of 2003. The improvement in gross profit percentage was primarily due to an increase in production volume and a decrease in production
costs. During 2004, we transitioned our manufacturing activities to a third party manufacturer in Mexico. This outsourcing effort decreased our production costs and increased our gross profit.



Research and development expenses, which include clinical, regulatory and product development, decreased by $1.9 million to $4.1 million in 2004 as
compared to $6.0 million in 2003. The decrease was primarily due to the completion of activities pertaining to the PMA application process and completion of certain research and development
projects. A decrease in the headcount resulted in a reduction of $1.1 million of payroll related expenses. Other factors that contributed to the decrease were a $0.2 million decrease in
travel expenses, a decrease of $0.4 million in clinical expenses related to the completion of the PMA application process and a $0.2 million decrease in consulting expenses.

Selling,
general and administrative expenses decreased by $8.2 million to $27.1 million in 2004 as compared to $35.3 million in 2003. The decrease was primarily
attributable to a $2.8 million decrease in international sales expense as a result of the sale of the subsidiary in France in early 2004, a $1.8 million decrease in legal fees as a
result of the settlement of the Ovion case in October 2003, a $1.2 million decrease in payroll related expenses for marketing and U.S. physician training, a $1.4 million decrease
in expenses as a result of severance for former officers and recruitment of a new CEO in 2003, a $1.1 million decrease in expense for demonstration units due to the shift toward reusable
demonstration units and a shift from large group to a smaller individual training program, a $0.5 million decrease in advertising and a $0.5 million decrease in travel expenses. These
decreases were partially offset by an increase of $1.1 million in consulting and audit expenses for Sarbanes-Oxley compliance. In addition, we recorded expenses of approximately $200,000 in
December 2004 related to the close down of our Australia operations, which included $183,000 of severance costs and $22,000 for the impairment of fixed assets. All severance costs were
completely paid out at the end of January 2005.



Interest and other income and expenses of $0.6 million in 2004 decreased by $0.1 million compared to $0.7 million in 2003 due to lower
average cash and cash equivalent balances.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 123(R),
"Share-Based Payments" (revised 2004). The provisions of SFAS No. 123(R) will require us to measure all stock-based compensation awards using a fair value method and record such expense in the
consolidated financial statements, including grants of

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employee
stock options. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow
effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective for all public companies for annual periods beginning after June 15, 2005. We will adopt SFAS
No. 123 (R) in the first quarter of 2006 and we have not yet determined whether this adoption will result in amounts that are similar to the current pro forma disclosures under SFAS
No. 123. We have not determined the method of transition or the reasonably likely effect in the financial statements as we are evaluating the requirements for SFAS No. 123(R).
Nevertheless, we expect the adoption to have a significant adverse impact on our statement of operations and net loss per share.

In
March 2005, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin, or SAB, No. 107, which provides guidance for the implementation of SFAS
No. 123(R) with respect to valuation techniques, expected volatility and expected term for valuing employee stock options among other matters. The provisions of SAB No. 107 were
effective for us at the time we adopted SFAS No. 123(R).

In
May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement
No. 3". SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of the changing to the new accounting principle. The statement is effective for fiscal years beginning after December 15, 2005. We have
evaluated the impact of the adoption of SFAS
No. 154, and do not believe the impact will be significant to our overall results of operations or financial position.

In
August 2005, the FASB issued FASB Interpretation 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47") to clarify that the term "conditional asset retirement
obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) the method
of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies that an entity is required to recognize a liability for the fair value of
a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after
December 15, 2005 (December 31, 2005 for calendar-year companies). The adoption of the provisions of FIN 47 did not have a material impact on the Company's financial position
and results of operations.

In
September 2005, the Emerging Issues Task Force (the "Task Force") issued EITF Statement 05-6, "Determining the Amortization Period for Leasehold Improvements
Purchased after Lease Inception or Acquired in a Business Combination" ("EITF 05-6"). The Task Force reached a consensus that leasehold improvements acquired in a business combination or
that are placed in service significantly after, and not contemplated at or near the beginning of, the lease term should be amortized over the shorter of the useful life of the assets or a term that
includes required lease periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 applies to leasehold
improvements that are purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of the provisions of EITF 05-6 did not have a material impact on the
Company's financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant operating losses since inception. As of December 31, 2005 we had an accumulated deficit of $205.1 million. We have
financed our operations since inception primarily through equity financings. In February 2004 we completed a private placement of approximately

41

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3.0 million
shares of common stock at $8.50 per share. Our net proceeds from were approximately $23.9 million, after deducting offering costs and commissions. In addition, in
August 2005, we finalized a second private placement of approximately 3.2 million shares of common stock at a price of $7.20 and $8.10 per share. Our net proceeds, which were
approximately $22.9 million after deducting offering costs, are being used to fund operations. 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.

As
of December 31, 2005, we had cash, cash equivalents, restricted cash and short-term investments of $32.5 million, compared to $32.3 million at
December 31, 2004. The increase of $0.2 million is primarily due to the proceeds of approximately $22.9 million from the private placement of common stock and $1.0 million
from the exercise of options to purchase common stock and the issuance of shares under the Employee Stock Purchase Plan, partially offset by $21.4 million of cash used in operating activities
and capital expenditures of $2.3 million. Additional financing may not be available when needed or on terms acceptable to us.



Net cash used in operating activities was $21.4 million in 2005, $24.7 million in 2004 and $40.9 million in 2003. Net cash used in operating
activities in 2005 was primarily related to our net loss of $21.8 million adjusted for non-cash related items of $2.1 million corresponding primarily to depreciation and
amortization, stock compensation expenses, retirement of fixed assets and changes in inventory reserves and allowance for doubtful accounts. Other major items that contributed to net cash used in
operating activities were related to a planned increase in inventories of $1.2 million, an increase in accounts receivable of $2.5 million related to our sales growth, an increase in
other current assets of $0.2 million and a decrease in deferred revenue of $0.1 million, offset by an increase in accounts payable of $0.1 million, a decrease in other assets of
$0.2 million, an increase in other accrued liabilities of $0.3 million and an increase in accrued compensation of $1.7 million related primarily to the growth of our sales force
and the accrual of a company-wide employee bonus. We expect cash usage in operating activities in the future to decrease. Net cash used in operating activities in 2004 and 2003 was
primarily our net loss adjusted for non-cash related items such as depreciation and amortization, stock compensation expense, allowance for doubtful accounts and provision for inventories.
Other items that contributed to our net cash used in operating activities in 2004 and 2003 were increases in accounts receivable, other assets and decreases in clinical trial liabilities, offset by
increases in deferred revenue and other accrued liabilities and decreases in inventories, accounts payable and accrued compensation.

The
increases in accounts receivable of $2.5 million in 2005 and $0.4 million in 2004 were due to increases in year to year net sales. We monitor our accounts receivable
turnover closely to ensure that receivables are collected timely and have established a credit and collection policy to facilitate our collection process and reduce our credit loss exposure. Our
worldwide days sales outstanding as of December 31, 2005 was 55 days, which represents a decrease of 2 days compared to December 31, 2004. We are still at the early stage
of marketing our product and accounts receivables have not been our major source of capital. We expect to grow our business and increase our revenues and to primarily rely on accounts receivables as
the capital resources to fund our operations.



Net cash provided by investing activities in 2005 was $8.0 million. The inflow of cash was related to the sales and maturities of investments of
$96.2 million, offset by the purchase of investments of $85.9 million and capital expenditures of $2.3 million. Net cash used in investing activities was $5.8 million in
2004. Short-term investments of $38.3 million purchased in 2004 plus capital expenditures of $0.5 million were offset by sales and maturities of $33.0 million of
short-term

42

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investments.
Net cash provided by investing activities in 2003 was $8.2 million. The net cash provided by investing activities in 2003 consisted primarily of the maturation of
short-term investments of $36.3 million offset by the purchase of short-term investments of $27.2 million and $0.9 million of capital expenditures.

Our
capital expenditures in 2005, 2004 and 2003 were $2.3 million, $0.5 million and $0.9 million, respectively. In 2005, 2004 and 2003, capital expenditures were
primarily related to leasehold improvements in our new facility, website development as part of our marketing campaign to increase consumer awareness and software management tool development to help
us to gather meaningful data for management analysis and to gain a better understanding of our customers and our market.



Net cash provided by financing activities was $23.9 million in 2005 compared to $26.6 million in 2004. Net cash provided by financing activities was
$1.9 million in 2003. In 2005, the net cash provided by financing activities consisted primarily of a private placement of common stock, from which we received net proceeds of
$22.9 million. An additional $1.0 million consisted of proceeds from the exercise of stock options and employee stock purchase plan shares. The net cash provided by financing activities
in 2004 consisted of a private placement of common stock, from which we received net proceeds of approximately $23.9 million and net proceeds from the exercise of stock options of and employee
stock purchase plan shares of $2.7 million. The net cash provided by financing activities in 2003 consisted of proceeds from the exercise of stock options of approximately $1.9 million.

CASH REQUIREMENTS, CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We have operating lease obligations on our current building facility and equipment. In addition, we have obligations related to our Phase II clinical study and
Pivotal trial.

The
following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of December 31, 2005:

Payments due by periodTotal

Less than
1 year

1-3 years

3-5 yearsOperating lease obligations

$
2,133

$
552

$
1,562

$
19Clinical trial obligations


261


261





Total

$
2,394

$
813

$
1,562

$
19


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 the Essuresystem for ten years, and
Ovion may not grant any additional such licenses to other parties. In exchange for such license, we were required to
pay a license fee of $2.0 million payable in our common stock in equal installments in the first and second quarters of 2004. In January 2004, we paid $1.0 million in common stock
to Ovion, and we made another payment of $1.0 million in common stock to Ovion in April 2004. In addition, the settlement agreement provided for a cash payment of $2.0 million in
the fourth quarter of 2003 as a prepaid royalty. We are obligated to pay 3.25% of the accumulative revenue derived from sale of theEssuresystem 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 reach $136.5 million, thereby resulting in an effective royalty rate of 1.47%. We are
amortizing the prepaid royalties to cost of goods sold over our net sales using this effective rate. Prepaid royalties were approximately $1.5 million, $1.8 million and
$2.0 million as of December 31, 2005, 2004 and 2003, respectively.

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With
gross margin improvements and appropriate operating expenditures, we expect to reduce our net loss in the future, while obtaining positive cash flow from operations. In the future,
depending upon a variety of factors, we will likely 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.

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:



Off-Balance Sheet Arrangements.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.

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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 marketable securities. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have
experienced in the past. The fair value of our investment portfolio or related income would not be significantly impacted by changes in interest rates since we reduce the sensitivity of our results of
operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated, marketable securities. We do not hold or issue derivatives, commodity instruments or
other financial instruments for trading purposes.

Foreign Currency Exchange Risk:Our expenses, except for those related to Australia, were denominated in United States
dollars. Our revenues in foreign currencies were 0%, 3% and 23% in 2005, 2004 and 2003, respectively, which were nominal in relation to our overall financial position. As a result, we have low
exposure for currency exchange risks and foreign exchange losses have been minimal to date. We do not enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. In the future, if our assessment of our foreign currency exposure changes, we may consider hedging transactions for risk
mitigation.

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 52.

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, 2005, 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.

45

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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 our
board of directors, 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, 2005 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, 2005.

Management's
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included elsewhere herein.

There
has been no change in the company's internal controls 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 7, 2006, 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 2006 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 caption "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 |  | Description                                                                                                                                                                                                                       
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | 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            |  | Bylaws 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.                                           
|3.4            |  | Amendment to the Bylaws of the Registrant. Incorporated by reference to Exhibit 3.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.                                                          
|3.5            |  | Amendment to the Bylaws of the Registrant dated April 8, 2004.                                                                                                                                                                    
|10.1           |  | Form of Indemnification Agreement for directors and officers. 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.   
|10.2*          |  | Amended and Restated 1993 Stock Plan. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.                                                                           
|               |  |                                                                                                                                                                                                                                   

48

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|10.3*  |  | 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*  |  | Fifth Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to the Registrant's Report on Form 8-K filed on January 11, 2005.                                                                                                                        
|10.6*  |  | Amended and Restated 2002 Non-Qualified Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                 
|10.7*  |  | Fifth Amended and Restated 2001 Equity Incentive Plan.                                                                                                                                                                                                                    
|10.8*  |  | Amended and Restated 2002 Non-Qualified Stock Option Plan.                                                                                                                                                                                                                
|10.9*  |  | 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.                                                                       
|10.10* |  | 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.                                          
|10.11* |  | Change of Control Agreement dated as of May 13, 1997 by and between Registrant and Kathryn A. Tunstall. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.                                                  
|10.12* |  | Master Consulting Agreement with Florence Comite dated September 10, 1997. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                 
|10.13  |  | Settlement and Mutual Release Agreement with Dr. Florence Comite dated July 27, 2005. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.                                                                    
|10.14  |  | Relocation bonus agreement dated April 25, 2002 between the Registrant and Stan Van Gent. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.                                                                
|10.15  |  | Promissory note dated April 25, 2002 between the Registrant and Stan Van Gent. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.                                                                           
|10.16  |  | Promissory note dated May 22, 2002 between the Registrant and Stan Van Gent. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.                                                                             
|10.17  |  | Supplier Agreement dated March 29, 1995 between the Registrant and Advanced Cardiovascular Systems, 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.
|10.18  |  | 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.           
|       |  |                                                                                                                                                                                                                                                                           

49

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|10.19  |  | 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 the Registrant's Amendment to its Annual Report on
Form 10-K/A for the year ended December 31, 2003.                                                                                                                                                                                                                                      
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20  |  | Lease agreement dated November 14, 2000 with Dani Investment Partners. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                 
|10.21  |  | Offer and Acceptance of Lease Extension with Dani Investment Partners dated September 12, 2003. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.                                                                                                                                                                                                                                                                                                 
|10.22  |  | Lease Agreement with Three Sisters Ranch Enterprises dated April 15, 1997. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997.                                                                                                                                                                                                                                                                                                                          
|10.23  |  | First Amendment to Lease Agreement with Three Sisters Ranch Enterprises. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                               
|10.24  |  | Second Amendment to Lease Agreement with Three Sisters Ranch Enterprises. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                              
|10.25  |  | Third Amendment to Lease Agreement with Three Sisters Ranch Enterprises. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                               
|10.26  |  | Fourth Amendment to Lease Agreement with Three Sisters Ranch Enterprises. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                              
|10.27  |  | Fifth Amendment to Lease Agreement with Three Sisters Ranch Enterprises. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.                                                                                                                                                                                                                                                                                                                        
|10.28  |  | Sublease Agreement for the premises located at 331 East Evelyn, Mountain View, California. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.                                                                                                                                                                                                                                                                                                           
|10.29  |  | Landlord Consent to Sublease for the premises located at 331 East Evelyn, Mountain View, California. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.                                                                                                                                                                                                                                                                                                 
|10.30  |  | Preferred Shares Rights Agreement, dated as of February 27, 1997, between the Registrant and ChaseMellon 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 1 filed in response to Item 2 of the Registrant's Report on
Form 8-K filed on February 28, 1997.
|10.31+ |  | 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 1 of the Registrant's Report on Form 8-K filed on
March 1, 2004.                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

50

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|10.32+ |  | 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 2 of the Registrant's Report on Form 8-K filed on
March 1, 2004.       
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.33  |  | Contract Manufacturing Agreement, dated as of June 20, 2003, between the Registrant and Venusa, Ltd. (now Accellent, Inc.) Incorporated by reference to Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
|10.34+ |  | Supplier Agreement dated November 7, 2005 between the Registrant and Accellent Corp.                                                                                                                                                                      
|10.35* |  | 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.                            
|10.36* |  | 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.                                               
|10.37* |  | 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.                                               
|10.38* |  | 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.                                 
|10.39* |  | 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.                                             
|10.40* |  | Relocation bonus agreement dated October 28, 2005 between the Registrant and Ulric Cote.                                                                                                                                                                  
|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.                                                                                                            
|23.10  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                 
|24.10  |  | Power of Attorney (See Page 79 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.                                                                                                                                                       

---

51

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CONCEPTUS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                 |  | Page
|------------------------------------------------------------------------------------------------ |  | ----
|Report of Independent Registered Public Accounting Firm                                          |  | 53  
|Consolidated Balance Sheets, December 31, 2005 and 2004                                          |  | 55  
|Consolidated Statements of Operations for Years Ended December 31, 2005, 2004 and 2003           |  | 56  
|Consolidated Statements of Stockholders' Equity for Years Ended December 31, 2005, 2004 and 2003 |  | 57  
|Consolidated Statements of Cash Flows for Years Ended December 31, 2005, 2004 and 2003           |  | 58  
|Notes to Consolidated Financial Statements                                                       |  | 59  

52

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Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders
Conceptus, Inc.

We
have completed integrated audits of Conceptus, Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Conceptus, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2005 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. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements
includes 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. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on
criteria established inInternal ControlIntegrated Frameworkissued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's
assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

53

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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, CA
March 15, 2006

54

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

|                                           |                                                                                                               | December 31,                                                                                                            |                                                                                                                                                                                     
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Assets                                     |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Current assets:                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               | Cash and cash equivalents                                                                                               |                                                                                                                                                                                     
|                                           |                                                                                                               | Short-term investments                                                                                                  |                                                                                                                                                                                     
|                                           |                                                                                                               | Restricted cash                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               | Accounts receivable, net of allowance for doubtful accounts of $106 and $62 at December 31, 2005 and 2004, respectively |                                                                                                                                                                                     
|                                           |                                                                                                               | Inventories, net                                                                                                        |                                                                                                                                                                                     
|                                           |                                                                                                               | Other current assets                                                                                                    |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Total current assets                                                                                          |                                                                                                                         |                                                                                                                                                                                     
|                                           | Property and equipment, net                                                                                   |                                                                                                                         |                                                                                                                                                                                     
|                                           | Intangible assets, less accumulated amortization of $450 and $250 at December 31, 2005 and 2004, respectively |                                                                                                                         |                                                                                                                                                                                     
|                                           | Other assets                                                                                                  |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|Total assets                               |                                                                                                               | $                                                                                                                       | 47,409                                                                                                                                                                              
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|Liabilities and stockholders' equity       |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Current liabilities:                                                                                          |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               | Accounts payable                                                                                                        |                                                                                                                                                                                     
|                                           |                                                                                                               | Accrued compensation                                                                                                    |                                                                                                                                                                                     
|                                           |                                                                                                               | Other accrued liabilities                                                                                               |                                                                                                                                                                                     
|                                           |                                                                                                               | Deferred revenue                                                                                                        |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Total current liabilities                                                                                     |                                                                                                                         |                                                                                                                                                                                     
|                                           | Other accrued liabilities                                                                                     |                                                                                                                         |                                                                                                                                                                                     
|                                           | Deferred revenue                                                                                              |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Total liabilities                                                                                             |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Commitments and contingencies (Notes 6 and 10)                                                                |                                                                                                                         |                                                                                                                                                                                     
|                                           | Stockholders' equity:                                                                                         |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               | Preferred stock:                                                                                                        |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         | $0.003 par value, authorized 3,000,000 shares; no shares issued or outstanding at December 31, 2005 and 2004                                                                        
|                                           |                                                                                                               | Common stock and additional paid-in capital:                                                                            |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         | $0.003 par value, 50,000,000 shares authorized, 29,051,804 and 25,729,371 shares issued and 29,051,804 and 25,657,371 shares outstanding at December 31, 2005 and 2004, respectively
|                                           |                                                                                                               | Deferred stock-based compensation                                                                                       |                                                                                                                                                                                     
|                                           |                                                                                                               | Accumulated deficit                                                                                                     |                                                                                                                                                                                     
|                                           |                                                                                                               | Treasury Stock, 77,863 and 72,000 shares, at cost, at December 31, 2005 and 2004, respectively                          |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|                                           | Total stockholders' equity                                                                                    |                                                                                                                         |                                                                                                                                                                                     
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     
|Total liabilities and stockholders' equity |                                                                                                               | $                                                                                                                       | 47,409                                                                                                                                                                              
|                                           |                                                                                                               |                                                                                                                         |                                                                                                                                                                                     

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

55

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

|                                                                               |                                     | Years Ended December 31, |        
|------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | -------
|
|Net sales                                                                      |                                     | $                        | 21,169 
|Cost of goods sold                                                             |                                     |                          | 8,396  
|                                                                               |                                     |                          |        
|Gross profit                                                                   |                                     |                          | 12,773 
|                                                                               |                                     |                          |        
|Operating expenses:                                                            |                                     |                          |        
|                                                                               | Research and development            |                          |        
|                                                                               | Selling, general and administrative |                          |        
|                                                                               |                                     |                          |        
|Total operating expenses                                                       |                                     |                          | 35,519 
|                                                                               |                                     |                          |        
|Operating loss                                                                 |                                     |                          | (22,746
|Interest and other income and expenses:                                        |                                     |                          |        
|                                                                               | Interest and other income           |                          |        
|                                                                               | Interest and other expenses         |                          |        
|                                                                               |                                     |                          |        
|Net loss                                                                       |                                     | $                        | (21,801
|                                                                               |                                     |                          |        
|Basic and diluted net loss per share                                           |                                     | $                        | (0.82  
|                                                                               |                                     |                          |        
|Weighted-average shares used in computing basic and diluted net loss per share |                                     |                          | 26,725 
|                                                                               |                                     |                          |        

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

56

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

|                                                                                     |  | Common Stock
& Additional
Paid-In Capital |   |   |         |  |   |        |   |   |    
|------------------------------------------------------------------------------------ |  | ----------------------------------------- | - | - | ------- |  | - | ------ | - | - | ---
|
|
|
|Balances as of January 1, 2003                                                       |  | 21,349,441                                |   | $ | 188,435 |  | $ |       |   | $ | 11 
|Issuance of common stock for cash upon exercise of options                           |  | 429,393                                   |   |   | 1,526   |  |   |       |   |   |   
|Issuance of common stock for cash from employee stock purchase plan                  |  | 38,232                                    |   |   | 387     |  |   |       |   |   |   
|Issuance of stock options to consultants for services                                |  |                                          |   |   | 623     |  |   |       |   |   |   
|Cumulative translation adjustments                                                   |  |                                          |   |   |        |  |   |       |   |   | 15 
|Net loss                                                                             |  |                                          |   |   |        |  |   |       |   |   |   
|                                                                                     |  |                                           |   |   |         |  |   |        |   |   |    
|Balances as of December 31, 2003                                                     |  | 21,817,066                                |   |   | 190,971 |  |   |       |   |   | 26 
|Issuance of common stock for cash upon exercise of options                           |  | 415,417                                   |   |   | 2,532   |  |   |       |   |   |   
|Issuance of common stock for cash from employee stock purchase plan                  |  | 12,273                                    |   |   | 88      |  |   |       |   |   |   
|Issuance of common stock in connection with Ovion settlement                         |  | 177,595                                   |   |   | 2,000   |  |   |       |   |   |   
|Private placement of common stock, net of issuance costs of $1,518                   |  | 2,995,000                                 |   |   | 23,939  |  |   |       |   |   |   
|Issuance of stock options to consultants for services                                |  |                                          |   |   | 261     |  |   |       |   |   |   
|Deferred stock-based compensation related to restricted stock grants                 |  | 312,020                                   |   |   | 2,169   |  |   | (2,169 | ) |   |    
|Amortization of deferred stock-based compensation related to restricted stock grants |  |                                          |   |   |        |  |   | 532    |   |   |   
|Cumulative translation adjustments                                                   |  |                                          |   |   |        |  |   |       |   |   | (26
|Net loss                                                                             |  |                                          |   |   |        |  |   |       |   |   |   
|Purchase of treasury stock                                                           |  | (72,000                                   | ) |   |        |  |   |       |   |   |   
|                                                                                     |  |                                           |   |   |         |  |   |        |   |   |    
|Balances as of December 31, 2004                                                     |  | 25,657,371                                |   |   | 221,960 |  |   | (1,637 | ) |   |   
|Issuance of common stock for cash upon exercise of options                           |  | 143,997                                   |   |   | 780     |  |   |       |   |   |   
|Issuance of common stock for cash from employee stock purchase plan                  |  | 45,070                                    |   |   | 248     |  |   |       |   |   |   
|Private placement of common stock, net of issuance costs of $125                     |  | 3,186,389                                 |   |   | 22,882  |  |   |       |   |   |   
|Issuance of stock options to consultants for services                                |  |                                          |   |   | 221     |  |   |       |   |   |   
|Deferred stock-based compensation related to restricted stock grants                 |  | 24,840                                    |   |   | 268     |  |   | (268   | ) |   |   
|Amortization of deferred stock-based compensation related to restricted stock grants |  |                                          |   |   |        |  |   | 847    |   |   |   
|Net loss                                                                             |  |                                          |   |   |        |  |   |       |   |   |   
|Purchase of treasury stock                                                           |  | (5,863                                    | ) |   |        |  |   |       |   |   |   
|                                                                                     |  |                                           |   |   |         |  |   |        |   |   |    
|Balances as of December 31, 2005                                                     |  | 29,051,804                                |   | $ | 246,359 |  | $ | (1,058 | ) | $ |   
|                                                                                     |  |                                           |   |   |         |  |   |        |   |   |    

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

57

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

|                                                                            |                                                                | Years Ended December 31,                                           |        
|--------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------ | -------
|
|Cash flows from operating activities                                        |                                                                |                                                                    |        
|Net loss                                                                    |                                                                | $                                                                  | (21,801
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                |                                                                    |        
|                                                                            | Depreciation and amortization of property, plant and equipment |                                                                    |        
|                                                                            | Amortization of intangibles                                    |                                                                    |        
|                                                                            | Stock compensation expense                                     |                                                                    |        
|                                                                            | Allowance for (recovery of) doubtful accounts                  |                                                                    |        
|                                                                            | Provision for inventories                                      |                                                                    |        
|                                                                            | Loss on retirement of fixed assets                             |                                                                    |        
|                                                                            | Changes in operating assets and liabilities:                   |                                                                    |        
|                                                                            |                                                                | Accounts receivable                                                |        
|                                                                            |                                                                | Inventories                                                        |        
|                                                                            |                                                                | Other current assets                                               |        
|                                                                            |                                                                | Other assets                                                       |        
|                                                                            |                                                                | Accounts payable                                                   |        
|                                                                            |                                                                | Accrued compensation                                               |        
|                                                                            |                                                                | Other accrued liabilities                                          |        
|                                                                            |                                                                | Deferred revenue                                                   |        
|                                                                            |                                                                | Clinical trial liabilities                                         |        
|                                                                            |                                                                |                                                                    |        
|Net cash used in operating activities                                       |                                                                |                                                                    | (21,356
|                                                                            |                                                                |                                                                    |        
|Cash flows from investing activities                                        |                                                                |                                                                    |        
|                                                                            | Purchase of investments                                        |                                                                    |        
|                                                                            | Maturities of investments                                      |                                                                    |        
|                                                                            | Capital expenditures                                           |                                                                    |        
|                                                                            |                                                                |                                                                    |        
|Net cash provided by (used in) investing activities                         |                                                                |                                                                    | 8,017  
|                                                                            |                                                                |                                                                    |        
|Cash flows from financing activities                                        |                                                                |                                                                    |        
|                                                                            | Issuance of common stock from company stock plans              |                                                                    |        
|                                                                            | Issuance of common stock from equity financings, net           |                                                                    |        
|                                                                            |                                                                |                                                                    |        
|Net cash provided by financing activities                                   |                                                                |                                                                    | 23,910 
|                                                                            |                                                                |                                                                    |        
|Effect of exchange rate changes on cash                                     |                                                                |                                                                    |       
|                                                                            |                                                                |                                                                    |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                |                                                                    | 10,571 
|Cash and cash equivalents at beginning of year                              |                                                                |                                                                    | 2,002  
|                                                                            |                                                                |                                                                    |        
|Cash and cash equivalents at end of year                                    |                                                                | $                                                                  | 12,573 
|                                                                            |                                                                |                                                                    |        
|Supplemental information:                                                   |                                                                |                                                                    |        
|                                                                            | Cash paid during the year for:                                 |                                                                    |        
|                                                                            |                                                                | Interest                                                           |        
|                                                                            | Non-cash activities                                            |                                                                    |        
|                                                                            |                                                                | Issuance of common stock in connection with acquisition of license |        

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

58

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CONCEPTUS, INC.    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization, Ownership and Business

Conceptus, Inc. ("Conceptus" or the "Company" or "we") was incorporated in the state of Delaware on September 18, 1992 to design, develop and market
minimally invasive devices for reproductive medical applications. The Company manufactures and marketsEssure®, an innovative medical device
and procedure designed to provide a non-incisional alternative to tubal ligation, the leading form of contraception worldwide. TheEssuredevice is a unique and proprietary micro-insert designed to be deployed permanently into each fallopian tube using the Company's minimally invasive transcervical tubal access catheter system. Clinical
studies have shown that theEssuredevice induces an occlusive tissue response. The Company's 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.

In
December 2001, the Company established a wholly owned subsidiary, Conceptus SAS ("Conceptus France"), in France for the distribution and commercialization of the Essuresystem in Europe. In
April 2000, the Company established a wholly owned subsidiary, Conceptus (Australia) Pty Limited, in New South Wales,
Australia ("Conceptus Australia") for the distribution and commercialization of theEssuresystem in that region.

In
January 2004, the Company completed the sale of its wholly owned French subsidiary for a nominal amount to an investor group comprised of its former French management team and
signed a long-term exclusive distribution agreement for theEssuresystem with the acquiring group for the European, Middle East and African
markets. The sale agreement includes a long-term call option that is intended to enable the Company to repurchase the French company. The contract was amended in September 2004 to
include the territories of Mexico, Central America and South America. The transaction did not have any material financial impact to the Company's consolidated financial statements. In
December 2004, the Company decided to close down its direct operations in Australia and sell its product through a third party distributor. As a result, costs related to the closure were
recorded in 2004 as selling, general and administrative expense and
included approximately $22,000 for impaired fixed assets and $183,000 of termination benefits for the five employees, which were completely paid out on January 31, 2005. As of
December 31, 2005, all fixed assets have been disposed of, although the dissolution of the legal entity remains.

The
Company has a limited history of operations and has incurred significant operating losses since its inception in 1992. The Company will continue to be in a net loss position until
sufficient revenues can be generated to offset expenses. We raised approximately $23.9 million and $22.9 million, after deducting offering costs, in 2004 and 2005, respectively, to help
fund our operations. In the future, depending upon a variety of factors, we will likely 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 restrictive covenants. Additional funding may not be available when needed or on terms
acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing
activities.

2.     Summary of Significant Accounting Policies



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

59

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Functional
Currency:    The Company had a wholly owned foreign subsidiary in Australia, which the Company decided to close down in December 2004, as well as a wholly
owned subsidiary in France, which was divested in January 2004. In preparing the Company's consolidated financial statements for fiscal years 2003 and 2004, the registrant applied the
translation methodology set forth by the Statement of Financial Accounting Standard No. 52 ("SFAS 52"). The former subsidiaries maintained their accounting records in their respective
local currencies and the Company's functional currency was identified as the United States dollars. Currency gain and loss is reported under interest and other income in the consolidated statement of
operations. Net currency gains were $38,000 in 2004 and $80,000 in 2003.



The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The primary estimates underlying the Company's financial statements include reserves for obsolete and slow moving inventory, allowance for
doubtful accounts receivable, product warranty, impairment reserves for long-lived assets, income taxes and contingent liabilities. Actual results could differ from those estimates.



The Company invests cash that is not required for immediate operating needs principally in a diversified portfolio of financial instruments issued by institutions
with strong credit ratings. By policy, the amount of credit exposure to any one institution, with the exception of U.S. government backed securities, is limited.

The
Company's net sales to date consist of product revenues from physicians, hospitals and distributors located in Australia, Canada, Europe, Indonesia, Singapore, South America and the
United States of America. The Company does not require collateral and provides for estimated credit losses based on customer credit assessment.

Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses
in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review our allowance for doubtful accounts monthly. Past due balances over
90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are written off
against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

The
following table summarizes customers with greater than 10% of the Company's net sales for the years ended December 31, 2005, 2004 and 2003:

| |            | 
| | ---------- | 
| |            | 
| |            | 
| |            | 
| |            | 
| | Customer A | 
| |            | 

60

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The
following table summarizes customers with outstanding accounts receivable balance greater than 10% of the Company's total outstanding accounts receivable as of December 31,
2005 and 2004.

| |            | 
| | ---------- | 
| |            | 
| |            | 
|
| |            | 
| | Customer A | 
| |            | 
| | Customer B | 
| |            | 

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

The
Company is subject to risks characteristic of the medical device industry, including but not limited to uncertainty of market acceptance of products, reimbursement from insurance
carriers, compliance with government regulations and protection of proprietary technology, product liability and the need to obtain additional financing. Certain components that meet the Company's
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 the Company's business, financial condition and results of operations.



The Company considers all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. The Company maintains
deposits with two financial institutions in the U.S. and invests its excess cash in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear minimal
risk. At times, these deposits may be in excess of federally insured amounts. Short-term investments generally consist of municipal bonds, corporate notes and U.S. Treasury obligations.

The
short-term investment portfolio is comprised of available-for-sale investments, which are carried at estimated fair value, with the unrealized
gains and losses, if material, reported in stockholders' equity until realized. The fair values for marketable debt investments are based on quoted market prices. At December 31, 2005 and 2004,
the fair value of investments approximates cost. Realized gains and losses, computed using the specific identification cost method, were immaterial for the periods presented. Interest and dividends on
investments classified as available-for-sale are included in interest and other income.

As
of December 31, 2005, the Company holds approximately $10,664,000 in Commercial Paper with a maturity less than 90 days. These highly liquid investments have been
classified as cash equivalents due to their characteristics of being readily convertible to known amounts of cash and so near to their maturity that they represent insignificant risk of changes in
value because of interest rate changes. The Company also held auction rate securities of approximately $19,850,000 at December 31, 2005 and classified the entire amount as
short-term investments. Moreover, the Company classifies all of its short-term investments as current using the approach defined by the Accounting Research Bulleting
No. 43. Accordingly, these securities represent the investment of funds available for current operations. Management does not have a stated expectation to sell such securities within one year
or

61

---



within
the normal operating cycle. Nonetheless, these securities are available for use, if needed, for current operations.



At December 31, 2005 and 2004, the Company had restricted cash of $69,000, which represents a certificate of deposit held under a letter of credit related
to an equipment lease. The certificate of deposit is renewable every year with a five-year term that expires in 2006.



Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. Reserves for
potentially excess and obsolete inventory are made based on management's 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 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.



Intangible assets as of December 31, 2005 and 2004 are comprised of a technology license obtained as a result of the settlement of a patent litigation with
Ovion, Inc. (See Note 10). The license was acquired at a cost of $2,000,000 in October 2003, which was paid in the Company's common stock, in equal installments in the first and
second quarters of 2004, and has an expected useful life of ten years from the date of settlement. Amortization expense of $200,000 has been classified as cost of goods sold on the Company's
consolidated statement of operations for each of the years ended December 31, 2005 and 2004 and is measured using the straight-line method. Estimated future amortization expense for
each of the years ended December 31, 2006 through 2012 is $200,000 per year and $150,000 for the year ended December 31, 2013.



Other assets as of December 31, 2005 are principally comprised of the $1.5 million carrying value of the $2.0 million cash payment that the
Company made to Ovion, Inc. as part of the settlement of a patent litigation suit (See Note 10). The settlement agreement provided for the payment of a royalty to Ovion that will be
equal to 3.25% of the cumulative net sales ofEssurein excess of $75.0 million for a period of no longer than ten years. In accordance with the
terms of the settlement agreement, the Company's prepaid royalties will be fully amortized when cumulative net sales ofEssurereach
$136.5 million, thereby resulting in an effective royalty rate of 1.47%. The Company is amortizing the prepaid royalties to cost of goods sold over its net sales using this effective rate.
Prepaid royalty as of December 31, 2004 was approximately $1.8 million.



The Company accounts for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standard, or SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company evaluates the carrying value of its long-lived assets, consisting

62

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primarily
of property and equipment and theEssurelicense acquired from a patent litigation settlement in 2003, whenever certain events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated
undiscounted future net cash flow to the related asset's carrying value. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in market
value or significant reductions in projected future cash flows.



For financial instruments consisting of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued
liabilities included in the Company's financial statements, the carrying amounts approximate fair value due to their short maturities. Estimated fair values for short term investments, which are
disclosed elsewhere, are based on quoted market prices for the same or similar instruments.



The Company offers warranties on its product and records a liability for the estimated future costs associated with warranty claims, which is based upon
historical experience and the Company's estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. A reconciliation of the changes in
the Company's warranty liability for the years ended December 31, 2005 and 2004 follows (in thousands):

As of December 31,2005

2004Warranty accrual at the beginning of the period

$
68

$
99Accruals for warranties issued during the period


162


189Settlements made in kind during the period


(160
)

(220
)Warranty accrual at the end of the period

$
70

$
68




Product revenue is recognized when title and risk of ownership has been transferred, provided that persuasive evidence of an arrangement exists, the price is
fixed and determinable, remaining obligations are insignificant and collectibility is reasonably assured. Revenue from product sales to distributors is recognized in the same manner as product sales
to customers. Net sales generated by distributors were 12%, 15% and 12% for the years ended December 31, 2005, 2004 and 2003, respectively. The Company does not currently accept product returns
from customers or distributors. Where appropriate, provision is made for estimated warranty costs relating to product sales at the time revenue is recognized. Non-recurring payments from
contractual arrangements are deferred and recognized as revenue is earned based on an appropriate basis and time frame such as when services are performed or the term of the contract.

In
addition, we require that a hospital have at least one physician preceptored for generally 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 to-date.

63

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Research and development costs are expensed as incurred.



Advertising costs are expensed as incurred. Total advertising expenses were approximately $1,372,000, $1,526,000 and $2,000,000 in the years ended
December 31, 2005, 2004 and 2003, respectively.



As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123," the Company accounts for employee stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans.

The
Company granted 24,840 shares and 312,020 shares of restricted stock to its employees and directors during 2005 and 2004, respectively. Certain of the grants include acceleration of
vesting based upon the Company's achievement of performance goals. From these grants, 5,863 shares were repurchased by the Company in 2005, which are recorded as treasury stock, and with the 72,000
shares
repurchased in fiscal year 2004, the Company holds as of December 31, 2005 a total of 77,863 shares of treasury stock. The purchase price was $0.003 per share and the Company's repurchase right
lapses either in equal installments over three years or at the end of the three years, depending on the terms of the agreement.

The
Company is amortizing the net total deferred restricted stock expense of $2.4 million, calculated based on the fair value of the stock on the date of the grants, over the
vesting term of three years on a straight-line basis. Of the total deferred restricted stock expense of $2.4 million, $0.4 million will relate to research and development and
$2.0 million will relate to selling, general and administrative activities, assuming employees will not change departments.

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

Years Ended December 31,2005

2004

2003Net loss, as reported

$
(21,801
)
$
(26,069
)
$
(39,528
)Add: Stock-based employee compensation expense included in reported net loss


847


532


0Less: Total stock-based employee compensation expense determined under fair value based method for all awards


(5,482
)

(7,742
)

(6,543
)Pro forma net loss

$
(26,436
)
$
(33,279
)
$
(46,071
)Basic and diluted net loss per shareAs reported

$
(0.82
)
$
(1.05
)
$
(1.83
)Pro forma

$
(0.99
)
$
(1.34
)
$
(2.14
)


Stock-based
compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue ("EITF")
No. 96-18, "Accounting for Equity

64

---



Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," which requires that these equity instruments are recorded at their fair value on
the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Stock compensation expense relating to
non-employees was approximately $242,000 in 2005, of which approximately $19,000 was allocated to research and development expense, $96,000 to manufacturing and $127,000 to selling,
general and administrative expense. Stock compensation expense relating to employees was approximately $847,000 in 2005, of which approximately $122,000 was allocated to research and development
expense and $725,000 was allocated to selling, general and administrative expense.

Stock
compensation expense relating to non-employees was approximately $261,000 in 2004, of which $44,000 was allocated to research and development expense and $217,000 was
allocated to selling, general and administrative expense. Stock compensation expenses relating to employees was approximately $532,000 in 2004, of which $98,000 was allocated to research and
development expense and $434,000 was allocated to selling, general and administrative expense. In 2003, the stock compensation expense recognized for non-employees was approximately
$623,000, of which $300,000 was allocated to research and development expense and $323,000 was allocated to selling, general and administrative. The Company did not have any stock compensation
expenses for employees in 2003.

The
Company calculated the fair value of each option on the date of grant using the Black-Scholes method as prescribed by SFAS No. 123. The assumptions used are as follows:

Years Ended December 31,2005

2004

2003Dividends





Average risk-free interest rate

4.1
%
3.3
%
2.5
%Expected life (in years)

4

4

4Volatility factor

0.6

0.7

0.9


To
comply with pro forma reporting requirements of SFAS No. 123, compensation cost is also estimated for the fair value of ESPP issuances, which are included in the pro forma
totals. The fair value of purchase rights granted under the ESPP is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Years Ended December 31,2005

2004

2003Dividends





Average risk-free interest rate

4.0
%
2.3
%
1.4
%Expected life (in years)

1

1

1Volatility factor

0.6

0.5

0.6


The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The effects of applying SFAS No. 123 for recognizing compensation
expense and providing pro forma disclosures in 2005, 2004 and 2003 are not likely to be representative of the effects on reported net loss in future years.

The
weighted-average fair value per share of options granted was $4.22, $5.28 and $7.69 respectively, for 2005, 2004 and 2003. The weighted-average fair value of the purchase rights
granted under the ESPP during fiscal 2005, 2004 and 2003 was $4.86, $2.65 and $3.34 per share, respectively.

65

---





The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under the liability 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.



Basic net loss per share excludes any potential dilutive effects of options and common stock shares subject to repurchase. Diluted net loss per share includes the
impact of potentially dilutive securities. However, due to the Company's net loss position, 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 and the weighted-average of unvested common shares (in thousands):

At December 31,2005

2004

2003Denominator:Weighted-average number of common shares outstanding

26,972

24,962

21,565Less: Weighted-average unvested and restricted common shares

247

208

Weighted-average number common shares outstanding used in computing basic and diluted net loss per common share

26,725

24,754

21,565


The
following outstanding options and restricted stock shares, 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 31,2005

2004

2003Outstanding options

3,514

3,550

4,216Restricted stock

255

240

Employee Stock Purchase Plan

47

15

Total

3,816

3,805

4,216




The Company operates in one business segment, which encompasses all the geographical regions. Management uses one measurement of profitability and does not
segregate its business for internal reporting. As of December 31, 2005, 2004 and 2003, 97%, 95% and 98%, respectively, of all long-lived assets were maintained in the United States
of America.

Net
sales by geographic region, based on shipping location of the external customer, are as follows:

Years Ended December 31,2005

2004

2003Net sales (in thousands)

$
21,169

$
11,612

$
7,700United States of America


88
%

85
%

77
%Europe


10
%

11
%

14
%Other


2
%

4
%

9
%


66

---





Comprehensive income (loss) generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The
Company's unrealized gains on available-for-sale securities, and cumulative translation adjustment, if material, represent the components of comprehensive loss that are
excluded from the net loss. These components are not significant, individually or in aggregate, for the years ended December 31, 2005, 2004 and 2003.



In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payments" (revised 2004). The provisions of SFAS No. 123(R) will require us
to measure all stock-based compensation awards using a fair value method and record such expense in the consolidated financial statements, including grants of employee stock options. In addition, the
adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) is effective for all public companies for annual periods beginning after June 15, 2005. We will adopt SFAS No. 123(R) in the first quarter of 2006
and we have not yet determined whether this adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123. We have not determined the method of
transition or the reasonably likely effect in the financial statements as we are evaluating the requirements for SFAS No. 123(R). Nevertheless, we expect the adoption to have a significant
adverse impact on our statement of operations and net loss per share.

In
March 2005, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin ("SAB") No. 107 ("SAB 107"). SAB 107 provides guidance for the
implementation of SFAS 123(R) with respect to valuation techniques, expected volatility and expected term for valuing employee stock options among other matters. The provisions of
SAB 107 will be effective for the Company at the time the Company adopts SFAS 123(R).

In
May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3".
SFAS 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the
cumulative effect of the changing to the new accounting principle. The statement is effective for fiscal years beginning after December 15, 2005. The Company has evaluated the impact of the
adoption of SFAS 154, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In
August 2005, the FASB issued FASB Interpretation 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47") to clarify that the term "conditional
asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and
(or) the method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies). The adoption of the provisions of FIN 47 did not have a material impact on
the Company's financial position and results of operations.

In
September 2005, the Emerging Issues Task Force (the "Task Force") issued EITF Statement 05-6, "Determining the Amortization Period for Leasehold Improvements
Purchased after Lease Inception or Acquired in a Business Combination" ("EITF 05-6"). The Task Force reached a consensus that leasehold improvements acquired in a business
combination or that are placed in service

67

---



significantly
after, and not contemplated at or near the beginning of, the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease
periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 applies to leasehold improvements that are
purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of the provisions of EITF 05-6 did not have a material impact on the Company's
financial position and results of operations.

3.     Investments (in thousands)

Cost and Estimated
Fair Value
December 31,2005

2004Cash and cash equivalents:Cash

$
274

$
157Commercial Paper


10,664


Money market funds


1,635


1,845$
12,573

$
2,002Short-term investments:Municipal bonds

$
19,850

$
30,200$
19,850

$
30,200


At
December 31, 2005 and 2004, the amortized cost basis of the available-for-sale investments represents the fair value of the investments due to their
short maturities. Gross realized gains and losses from the sale of securities classified as available-for-sale were not material for the years ended December 31, 2005,
2004 and 2003.

As
of December 31, 2005, the Company holds approximately $10,664,000 in Commercial Paper with an original maturity less than 90 days. These highly liquid investments have
been classified as cash equivalents due to their characteristics of being readily convertible to known amounts of cash and so near to their maturity that they represent insignificant risk of changes
in value because of interest rate changes. The Company also held auction rate securities of approximately $19,850,000 at December 31, 2005 and classified the entire amount as
short-term investments. Moreover, the Company classifies all of its short-term investments as current using the approach defined by the Accounting Research Bulleting
No. 43. Accordingly, these securities represent the investment of funds available for current operations. Management does not have a stated expectation to sell such securities within one year
or within the normal operating cycle. Nonetheless, these securities are available for use, if needed, for current operations.

68

---



4.     Inventories, net (in thousands)

December 31,2005

2004Raw materials

$
122

$
250Work-in-progress


1,940


1,073Finished goods


1,330


699Total

$
3,392

$
2,022


5.     Property and Equipment (in thousands)

December 31,2005

2004Machinery and equipment

$
1,812

$
1,440Equipment, tooling and furniture and fixtures


2,032


1,762Software


2,619


1,865Leasehold improvements


704


1,1077,167


6,174Less: accumulated depreciation and amortization


(4,424
)

(4,852
)Property and equipment, net

$
2,743

$
1,322


Property
and equipment depreciation and amortization expenses for the years 2005, 2004 and 2003 was approximately $886,000, $1,159,000 and $1,377,000, respectively.

6.     Commitments and Contingencies

On June 28, 2005, the Company entered into a Sublease Agreement with Verisity Design, Inc. for the relocation of its headquarters to 331 East
Evelyn, Mountain View, California. The agreement was subject to the Master Landlord's consent within 45 days after delivery of and receipt by Master Landlord of the executed Sublease. On
July 19, 2005, SFERS Real Estate, the Master Landlord, and Verisity Design, Inc. signed a Landlord Consent Agreement allowing the Sublease Agreement between the Company and Verisity
Design, Inc. The Company is recognizing the rent expense on a straight-line basis over the life of the lease.

In
addition to the lease agreement for the facility located in Mountain View, the Company has certain operating leases on a telephone system and copiers. These leases have terms expiring
from September 2006 through November 2010. Rent expense for all leases was approximately $790,000, $604,000 and $1,637,000 for the years ended December 31, 2005, 2004 and 2003,
respectively. Aggregate minimum annual lease commitments under all leases are as follows (in thousands):

2006

$
5522007


6192008


6202009


3232010


122011


7Total operating leases commitment

$
2,133


In
2003, the Company entered into a settlement agreement with Ovion Inc. (see Note 10). Pursuant to the settlement agreement, the Company was required to pay a license fee
of $2.0 million

69

---



payable
in its common stock in equal installments in the first and second quarters of 2004. In January 2004, the Company paid $1.0 million in common stock to Ovion and made another
payment of $1.0 million in common stock to Ovion in April 2004. In addition, the settlement agreement provided for a cash payment of $2.0 million in the fourth quarter of 2003 as
a prepaid royalty. The Company is obligated to pay 3.25% of its cumulative revenue derived from sale of theEssureproducts in excess of
$75.0 million as royalty for a period of ten years starting from the date of settlement.

The
Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees 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 the Company's products. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The
maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.

The
Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its 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 the Company to obtain directors and officers insurance. The
Company currently has directors and officers insurance.

7.     Incentive and Stock Plans



In November 1995, the Company's Board of Directors adopted the 1995 Employee Stock Purchase Plan (the "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. As of December 31, 2005, 249,271 shares had been
issued under the ESPP and 100,729 shares were available for future issuance. The fair value of the discount and look-back features are considered compensation for purposes of computing the
Company's pro-forma earnings under SFAS No. 123 in the stock based compensation



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 under the 2002 Plan only to the
following classes of persons: (i) except as provided in (ii) below, consultants and employees who are not officers or directors of the Company, and (ii) newly hired employees
(including employees who will become officers or directors of the Company) and who have not previously been employed by the Company and with respect to whom options are to be granted as an inducement
essential to such employees' entering into employment contracts with the

70

---



Company.
The 2002 Plan was enacted to address the increased hiring done during the second half of 2002, primarily in the Company's 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.

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. As of December 31, 2005 and 2004, there are 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 was approved by a majority of the stockholders on May 16, 2001. In March 2002, the Board of Directors approved an amendment and restatement of the 2001 Equity
Incentive Plan to increase the shares of common stock 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 2004,
the Board of Directors approved an amendment and restatement of the 2001 Equity Incentive Plan to increase the shares of common stock reserved for issuance to 2,500,000 shares of common stock, 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. The
stockholders approved this amendment and restatement in June 2004 (Third Amendment and Restatement). In November 2004, the Board of Directors approved an amendment and restatement of the
2001 Equity Incentive Plan to permit the administrator of the Plan to grant stock appreciation rights and restricted stock units. This Fourth Amendment and Restatement became effective immediately
after approval. In January 2005, the Board of Directors approved an amendment and restatement of the 2001 Equity Incentive Plan to provide for a change to the number of options and shares of
restricted stock granted annually to our non-employee directors. Under this Fifth Amendment and Restatement, the additional option to repurchase was increased from 5,000 to 7,500 shares of
common stock and the Subsequent
Restricted Stock Grant was increased from 1,670 shares to 2,000 shares of restricted stock. This Fifth Amendment and Restatement became effective immediately after approval. In December 2005,
the Board of Directors approved the Sixth Amendment and Restatement of the 2001 Equity Incentive Plan to provide a fair market value established upon the closing price on the day of the grant. This
Sixth Amendment and Restatement became effective immediately after approval.

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. Options 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 under the 2001 Plan
expire ten years after grant, and five years in the case of a grant to a 10% stockholder. The options may include provisions permitting exercise of the option prior to full vesting. As of
December 31, 2005 and 2004, there were no shares that were exercised prior to fully 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 ("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.

71

---



In
July 1993, the Board of Directors adopted the 1993 stock plan ("1993 Plan"), and amendments to the Stock 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 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 the
Company 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, 2005 and
2004, there are 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 the Company's 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 the Company as Vice President, Sales. Stockholder approval was not
required for either grant. In December 2005, the Board of Directors approved an amendment and restatement of the 2002 Non-qualified Stock Option Plan to provide a fair market value
established upon the closing price on the day of the grant. This Sixth Amendment and Restatement became effective immediately after approval and did not require stockholder approval.

As
of December 31, 2005, 11,105 shares remain as available for grant under the 2002 Plan, 693,207 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.

72

---



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

|                             |                               |         |            | Options Outstanding
|---------------------------- | ----------------------------- | ------- | ---------- | -------------------
|
|Balance at December 31, 2002 |                               | 848,848 |            | 3,715,659          
|                             | Additional authorized         |         | 500,000    |                    
|                             | Options granted               |         | (1,742,650 | )                  
|                             | Options exercised             |         |           |                    
|                             | Options cancelled             |         | 812,736    |                    
|                             | Options expired               |         | (94,699    | )                  
|                             |                               |         |            |                    
|Balance at December 31, 2003 |                               | 324,235 |            | 4,216,180          
|                             | Additional authorized         |         | 661,000    |                    
|                             | Options granted               |         | (886,618   | )                  
|                             | Restricted stock grants       |         | (312,020   | )                  
|                             | Restricted stock issuances    |         |           |                    
|                             | Options exercised             |         |           |                    
|                             | Options cancelled             |         | 1,137,037  |                    
|                             | Shares repurchased            |         | 72,000     |                    
|                             | Options expired               |         | (124,828   | )                  
|                             |                               |         |            |                    
|Balance at December 31, 2004 |                               | 870,806 |            | 3,550,344          
|                             | Additional authorized(a)      |         | 100,000    |                    
|                             | Options granted(a)            |         | (575,100   | )                  
|                             | Restricted stock grants(a)    |         | (24,840    | )                  
|                             | Restricted stock issuances(a) |         |           |                    
|                             | Options exercised             |         |           |                    
|                             | Options cancelled             |         | 467,696    |                    
|                             | Shares repurchased            |         | 5,863      |                    
|                             | Options expired               |         | (140,113   | )                  
|                             |                               |         |            |                    
|Balance at December 31, 2005 |                               | 704,312 |            | 3,513,751          
|                             |                               |         |            |                    

---

73

---



The
following table summarizes information about stock options outstanding and exercisable at December 31, 2005:

Options Outstanding

Options Vested
and ExercisableRange of Exercise Prices

Options
Outstanding

Weighted
Average
Remaining
Life (years)

Weighted
Average
Exercise
Price

Options
Vested
and
Exercisable

Weighted
Average
Exercise
Price$  1.25 - $  6.98

399,308

4.94

$
4.03

332,639

$
3.62$  6.99 - $  8.72

360,808

8.88

$
7.96

88,510

$
7.92$  8.75 - $  8.88

3,104

6.91

$
8.82

3,104

$
8.82$  8.94 - $  8.94

407,903

8.92

$
8.94

105,297

$
8.94$  9.00 - $  9.76

322,606

5.57

$
9.41

251,629

$
9.46$  9.95 - $  9.95

630,000

7.29

$
9.95

336,000

$
9.95$  9.96 - $13.11

500,311

8.06

$
12.30

250,813

$
12.27$13.34 - $14.20

414,217

7.50

$
13.76

219,791

$
13.86$14.35 - $18.40

355,375

6.76

$
15.71

294,587

$
15.85$18.46 - $21.80

120,119

5.03

$
20.07

117,219

$
20.09$  1.25 - $21.80

3,513,751

7.22

$
10.62

1,999,589

$
10.88


The
weighted average exercise price for options vested and exercisable at December 31, 2004 was $10.96.

The
Company has reserved 3,963,547 shares of its common stock, which may be issued with respect to outstanding options at December 31, 2005. The Company had reserved 3,549,164
shares of its common stock as of December 31, 2004 and there were 1,749,852 options vested and exercisable as of December 31, 2004.

The
Company granted 70,000 shares of common stock to its consultants in fiscal year 2005. In fiscal years 2004 and 2003, the grants to consultants in exchange for services were of 40,000
and 73,618 shares, respectively. In accordance with SFAS No 123 "Accounting for Stock-Based Compensation" and EITF 96-18 "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services", the Company has recorded compensation expense related to these stock options. The Company periodically
re-measures the fair value of the options as they vest and recognizes changes in fair value as compensation in the period.



Under the Company's 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 2005, 2004 and 2003.

8.     Stockholder's Equity

Pursuant to the Company's 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. The Company's 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.

74

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As
part of the settlement agreement with Ovion Inc. (see Note 10), the Company was 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.

On
February 25, 2004, the Company completed a private placement of approximately 2,995,000 shares of common stock at $8.50 per share, based upon a negotiated discount to market.
The net proceeds to the Company, after fees and other offering costs totaling $1.5 million, were approximately $23.9 million.

On
August 11, 2005, the Company closed the sale of a private placement of approximately 3,200,000 shares of newly issued common stock at $7.20 per share to institutional investors
and $8.10 per share to officers and directors. The net proceeds to the Company, after fees and other offering costs totaling approximately $0.1 million were approximately $22.9 million.

In
2005 and 2004, the Company repurchased 5,863 and 72,000 shares, respectively, of restricted common stock at par value in accordance with the terms of a restricted stock agreements.
These shares are recorded as treasury stock.

9.     Income Taxes

The Company has recorded no income tax expense for any of the years presented in the Consolidated Statement of Operations due to its recurring losses. As of
December 31, 2005, we had net operating loss carry forwards for federal and state income tax purposes of approximately $192.4 million and $107.6 million, respectively. If not
utilized, these carryforwards will begin to expire starting in 2008 for federal purposes and 2006 for state purposes. In addition, at December 31, 2005, the Company had federal and state
research credit carry forwards of approximately $2.4 million and $2.3 million, respectively. If not utilized, the federal tax carryforward will begin to expire in 2008, while the state
carryforward does not expire. 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 the Company has had 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 effects 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.

Significant
components of the Company's deferred tax assets as of December 31, 2005 and December 31, 2004 are as follows (in thousands):

2005

2004Net operating loss carryforwards

$
68,500

$
62,100Research credits


3,900


3,600Capitalized research and development


5,400


4,500Othernet


1,600


1,200Less: valuation allowance


(79,400
)

(71,400
)Net deferred tax assets

$


$



75

---



Because
of the Company's lack of earnings history and anticipated future losses, the deferred tax assets have been fully offset by a valuation allowance. The increase in the valuation
allowance was approximately $8,000,000, $10,200,000 and $14,800,000 during 2005, 2004 and 2003, respectively.

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

2005

2004

2003U.S. federal statutory income tax rate

$
(7,412
)
$
(8,863
)
$
(13,439
)Other permanent items


79


59


56Stock based compensation


127


(452
)

Other


(255
)

(313
)

(394
)Valuation Allowance


7,461


9,569


13,777Total income taxes

$


$


$



10.   Legal Proceedings

A third party, Ovion, Inc. ("Ovion"), brought to the Company's 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, the Company
entered into a settlement agreement with Ovion pursuant to which it 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 $2,000,000 in the fourth quarter of 2003 as a prepaid royalty,
and a license fee of $2,000,000 payable in the Company's 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 $75,000,000 for a period of no longer than
ten years. Ovion was not granted any rights to the Company's 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, the Company believes that some or all of Ovion's claims should be included within its 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. The Company believes that it filed its patent applications for theEssuredevice before Ovion filed the application that issued as its
patent and that the Company is 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 the Company is found to have priority of invention.

From
time to time, the Company is 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, results of operations or cash flows.

11.   Related Parties

During fiscal year 2005, the Company paid $22,500 to Florence Comite, a member of the Board of Directors, for the termination of a consulting agreement. There
were no related party transactions in

76

---



2004.
During 2003, the Company paid for consulting services provided by Dr. Florence Comite, a member of the Board of Directors, $2,500 per month.

12.   Quarterly Information (unaudited)

Supplementary Data

Quarterly Results of Operations (Unaudited)

|                                                                               |                                     | Three Months Ended |       
|------------------------------------------------------------------------------ | ----------------------------------- | ------------------ | ------
|
|Net Sales                                                                      |                                     | $                  | 6,767 
|Cost of goods sold                                                             |                                     |                    | 2,568 
|                                                                               |                                     |                    |       
|Gross profit                                                                   |                                     |                    | 4,199 
|Operating expenses:                                                            |                                     |                    |       
|                                                                               | Research and development            |                    |       
|                                                                               | Selling, general and administrative |                    |       
|                                                                               |                                     |                    |       
|                                                                               | Total operating expenses            |                    |       
|                                                                               |                                     |                    |       
|Operating loss                                                                 |                                     |                    | (4,732
|Interest and other income and expenses                                         |                                     |                    | 334   
|                                                                               |                                     |                    |       
|Net loss                                                                       |                                     | $                  | (4,398
|                                                                               |                                     |                    |       
|Basic and diluted net loss per share                                           |                                     | $                  | (0.15 
|                                                                               |                                     |                    |       
|Weighted average shares used in computing basic and diluted net loss per share |                                     |                    | 28,741
|                                                                               |                                     |                    |       

---

77

---





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

|                              |                                 | Balance at
Beginning of
Period |   | Changes to
Expenses or
Other Accounts |  | Deductions |   | Balance at End
of Period
|----------------------------- | ------------------------------- | ------------------------------ | - | ------------------------------------- |  | ---------- | - | ------------------------
|Year Ended December 31, 2003: |                                 |                                |   |                                       |  |            |   |                         
|                              | Allowance for doubtful accounts |                                | $ | 45                                    |  | 119        |   |                        
|                              | Reserve for inventories         |                                | $ | 254                                   |  | (26        | ) |                        
|                              |                                 |                                |   |                                       |  |            |   |                         
|Year Ended December 31, 2004: |                                 |                                |   |                                       |  |            |   |                         
|                              | Allowance for doubtful accounts |                                | $ | 164                                   |  | (102       | ) |                        
|                              | Reserve for inventories         |                                | $ | 228                                   |  | 152        |   |                        
|                              |                                 |                                |   |                                       |  |            |   |                         
|Year Ended December 31, 2005: |                                 |                                |   |                                       |  |            |   |                         
|                              | Allowance for doubtful accounts |                                | $ | 62                                    |  | 44         |   |                        
|                              | Reserve for inventories         |                                | $ | 380                                   |  | (147       | ) |                        
|                              |                                 |                                |   |                                       |  |            |   |                         

78

---





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 16 day of March 2006.

| | CONCEPTUS, INC.
| | ---------------
| | By:            

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 16, 2006
|/s/GREGORY E. LICHTWARDT(Gregory E. Lichtwardt) |  | Executive Vice President, Treasurer and Chief Financial Officer               |  | March 16, 2006
|/s/MICHAEL A. BAKER(Michael E. Baker)           |  | Director                                                                      |  | March 16, 2006
|/s/THOMAS F. BONADIO(Thomas F. Bonadio)         |  | Director                                                                      |  | March 16, 2006
|/s/FLORENCE COMITE(Florence Comite)             |  | Director                                                                      |  | March 16, 2006
|/s/ANNETTE BIANCHI(Annette Bianchi)             |  | Director                                                                      |  | March 16, 2006
|/s/ROBERT V. TONI(Robert V. Toni)               |  | Director                                                                      |  | March 16, 2006
|/s/KATHRYN A. TUNSTALL(Kathryn A. Tunstall)     |  | Director                                                                      |  | March 16, 2006
|/s/PETER L. WILSON(Peter L. Wilson)             |  | Director                                                                      |  | March 16, 2006

79

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------
|3.5            |  | Amendment of the Bylaws dated April 8, 2004.                                                       
|10.7*          |  | Fifth Amended and Restated 2001 Equity Incentive Plan.                                             
|10.8*          |  | Amended and Restated 2002 Non-Qualified Stock Option Plan.                                         
|10.34+         |  | Supplier Agreement dated November 7, 2005 between the Registrant and Accellent Corp.               
|10.40*         |  | Relocation bonus agreement dated October 28, 2005 between the Registrant and Ulric Cote.           
|23.1           |  | Consent of Independent Registered Public Accounting Firm.                                          
|24.1           |  | Power of Attorney (See Page 79 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.

---

80

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