##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|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.)

1021 Howard Avenue

San Carlos, CA 94070


(Address of principal executive
offices)


Registrants telephone number, including
area code:

(650) 628-4700




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

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

The aggregate market value of the voting and
non-voting stock held by nonaffiliates of the Registrant based
on the closing sale price of the Registrants Common Stock
on the Nasdaq National Market on June 30, 2003 was
approximately $146,150,602 as of such date. 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 24,933,859 shares of
Registrants Common Stock issued and outstanding as of
February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the
Registrants 2004 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,
2003


TABLE OF CONTENTS

|              |  |                                                                                                        |  |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|              |  |                                                                                                        |  | Page
|              |  |                                                                                                        |  |     
|PART I.      
|Item 1.       |  | Business                                                                                               |  |      | 2  | 
|Item 2.       |  | Properties                                                                                             |  |      | 21 | 
|Item 3.       |  | Legal Proceedings                                                                                      |  |      | 21 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 21 | 
|PART II.     
|Item 5.       |  | Market for Registrants
    Common Stock and Related Stockholder Matters                               |  |      | 22 | 
|Item 6.       |  | Selected Consolidated
    Financial Data                                                               |  |      | 23 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 24 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |      | 42 | 
|Item 8.       |  | Consolidated Financial
    Statements and Supplementary Data                                           |  |      | 42 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 42 | 
|Item 9A.      |  | Controls and Procedures                                                                                |  |      | 42 | 
|PART III.    
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 43 | 
|Item 11.      |  | Executive Compensation                                                                                 |  |      | 43 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 43 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                     |  |      | 43 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                             |  |      | 43 | 
|PART IV.     
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |      | 43 | 
|              |  | Index to Consolidated
    Financial Statements                                                         |  |      | 47 | 
|              |  | Signatures                                                                                             |  |      | 69 | 
|EXHIBIT 3.4  
|EXHIBIT 10.5 
|EXHIBIT 10.26
|EXHIBIT 10.29
|EXHIBIT 14.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 32.1 



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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,
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. These estimates have been included in
studies published by government agencies and market research
firms and our estimates are based on managements knowledge
and experience in the markets in which we operate. These
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
EssureTM, an innovative and proprietary
non-incisional permanent birth control device for women which
was approved for marketing in the United States in November 2002
by the United States Food and Drug Administration, or FDA.
Essure is a soft and flexible micro-insert delivered into a
womans fallopian tubes designed to provide permanent birth
control by causing a benign tissue in-growth that blocks the
fallopian tubes. A successfully placed Essure micro-insert
prohibits the egg from traveling through the fallopian tubes and
therefore prevents fertilization. Based on clinical trial data
filed with the FDA in October 2002, Essure has been demonstrated
to be 99.8% effective at two years of follow-up. As of November
2003, we have accumulated sufficient patient follow-up data from
the Phase II and Pivotal clinical trials for a three-year
effectiveness claim and have filed a PMA supplement with the FDA
for a three-year effectiveness claim consistent with the one and
two-year claim.

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The Essure placement procedure is typically
performed as an outpatient procedure and is intended to be a
less invasive and a less costly alternative to tubal ligation,
the leading form of birth control in the United States and
worldwide. Laparoscopic tubal ligation and tubal ligation by
laparotomy typically involve abdominal incisions and/or
punctures, general or regional anesthesia, four to ten days of
normal recovery time and the risks associated with an incisional
procedure. The Essure placement procedure does not require
cutting or penetrating the abdomen, which is expected to lower
the likelihood of post-operative pain due to the
incisions/punctures, and is typically performed in an outpatient
setting without general or regional anesthesia. In the Pivotal
trial of Essure, the total procedure time averaged 35 minutes,
with an average of 13 minutes of hysteroscopic time to place the
Essure micro-insert. A patient is typically discharged
approximately 45 minutes after the Essure placement procedure.
No overnight hospital stay is required. Furthermore, Essure is
effective without drugs or hormones.

We believe Essure also appeals to women who have
completed childbearing but who are using either temporary birth
control methods or no birth control method. A womans
tolerance to wearing Essure was ascertained in our Phase II
clinical study follow-up to four years and has been rated as
good to excellent in 99% of women at all
visits to November 2003. Among women from our Pivotal trial who
have worn the micro-inserts for up to three years, at least 97%
rated their comfort with Essure as good to
excellent at visits conducted to November 2003.
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 rated their overall satisfaction as somewhat to very
satisfied. Excluding the day of the Essure placement procedure,
92% of the patients in the Pivotal trial who were employed
returned to work in one day or less. The safety and recovery
profile of Essure is one of the reasons that we believe it may
be a preferred alternative to currently available methods of
permanent birth control.

In early March 2004, Planned Parenthood
Federation of America (PPFA) approved Essure for use in
qualifying Planned Parenthood Affiliates across the United
States. PPFA has nearly 900 clinics under 123 PPFA affiliates
that serve nearly 5 million people a year. PPFA tested the
Essure procedure in clinics in Oregon and Pennsylvania,
evaluating the ability of a typical clinic setting to
successfully offer the procedure. Standards for the use of
Essure in PPFA affiliates were then developed along with
guidelines for the introduction of the procedure into Planned
Parenthood clinic settings. We believe that PPFAs thorough
evaluation demonstrated that Essure can safely and effectively
be offered in a clinic setting and this approval is of vital
importance to our goal of making sure all women have access to
Essure, including those who do not have private insurance
coverage.

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

Essure is currently being marketed in multiple
countries. In November 2002, we received FDA approval to market
Essure in the United States. In 2001, we were approved to affix
the CE Mark to Essure, indicating that Essure 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, Essure was listed with Australias
Therapeutic Goods Administration, or the TGA, which allowed us
to market and sell Essure in Australia. In Canada, we received
clearance from Health Canada to market Essure in Canada in
November 2001. We also have distributors in
Singapore, Indonesia, Morocco and Turkey.

In order to focus our resources domestically, in
January 2004, we have 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 Essure with the
acquiring

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group for the European, Middle East and African
markets. The sale agreement includes a long-term call option
that is intended to enable Conceptus to repurchase the French
company at predetermine prices and time periods that are typical
for a distribution company. The transaction did not have any
material impact to our consolidated financial statements. We are
also in the process of negotiating an asset sale agreement of
our wholly owned Australian subsidiary to our Australian
management team along with a long-term distribution agreement
and a call option to repurchase the subsidiary. We expect to
complete the agreement by the end of first quarter of 2004. Both
agreements are meant to allow us to conserve our resources by
eliminating the funding requirements of developing those markets
so that we can focus on the more lucrative U.S. market.


In order to further decrease our production costs
and improve gross profit, we are in the process of transitioning
our manufacturing operations to Venusa, a third party
manufacturer located in Mexico. We are currently working with
the FDA to obtain approval of Venusas facility, and we
expect to receive approval by the end of the first quarter of
2004.

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 the Essure procedure 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. We intend to help those doctors to
build their practices so that they will perform more Essure
procedures on a monthly basis. We will increase our call
frequency to those doctors by our field representatives,
strengthen referral programs to get women who are interested in
the Essure procedure to those doctors, and continue with our
marketing programs to increase Essure awareness among women and
the medical community. We have also build strategic alliances
with other businesses to help to promote Essure and to train new
doctors.

Market acceptance of Essure will also depend in
part upon the availability of reimbursement within prevailing
healthcare payment systems. We believe that physician advocacy
of our product will be required to obtain reimbursement. We have
made significant progress in 2003 by obtaining coverage for 59%
of the total insured, non-Medicare United States of America
population. We intend to continue with our effort to educate
payors of the cost-effectiveness of our product and further
established programs to help physicians in navigating
reimbursement issues to facilitate the process.

In March 2004, the American Medical Association
accepted our application for a level one Current Procedural
Terminology, or CPT, code, which may be effective as early as
January 2005, subject to the completion of certain processes.
Category I codes are reserved for those procedures that
have demonstrated clinical efficacy, widespread use and have FDA
approval. By having a CPT code specific to the Essure procedure,
it is expected that coding for reimbursement will become
considerably easier for doctors and facilities and that there
will be fewer incidents of doctors being reimbursed incorrectly.
We expect that the new code, once the process to establish it is
complete, will significantly ease the burden on a
physicians office in obtaining reimbursement for Essure,
and accelerate the coverage of Essure by private insurance
companies and Medicaid.

We have a limited history of operation and have
incurred significant operating losses since our inception in
1992. We will continue to be in a net loss position until
sufficient revenues can be generated to offset expenses. In
February 2004, we completed a private placement of common stock
to generate enough cash to help us to reach profitability.
However, if our revenue growth does not materialize as planned,
we may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital.

We maintain two websites located at
www.conceptus.com and www.essure.com. We make available free of
charge on or through our website, our annual report on
Form 10-K, our quarterly reports on Form 10-Q,

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current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material, or furnish it to, the SEC. Information contained on
our website is not incorporated by reference into and does not
form a part of this Form 10-K.


Our Market

A 1995 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 64% of the 60.2 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 1995 CDC survey was tubal
ligation, followed by oral contraceptives, condom and vasectomy.

According to the 1995 CDC survey, 39% 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. As a result of the adoption
of a less invasive laparoscopic procedure in 1971, tubal
ligation procedures currently outnumber vasectomies by 75%
annually. 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 90% of United States women who have had tubal
ligation have two or more children and 65% are between the ages
of 35 and 44 at the time of procedure. 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 1995 CDC survey estimated that approximately
21 million United States women use temporary methods of
birth control, such as oral contraceptives, 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. 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 is currently available.

Based on data from the CDCs 1995 National
Survey of Family Growth, the following chart summarizes birth
control methods used by women using contraception between the
ages of 30-44 in the United States:

|               |  |           |              |           |  |           |              |  |  |  |              | 
|-------------- |  | --------- | ------------ | --------- |  | --------- | ------------ |  |  |  | ------------ | 
|               |  | Age 30-34 |              | Age 35-39 |  | Age 40-44
|               |  |           |              |           |  |          
|Fertile women  |  |           | 8.0  million |           |  |           | 8.2  million |  |  |  | 7.3  million | 
|Method:        |  |           |              |           |  |           |              |  |  |  |              | 
|Tubal ligation |  |           | 30%          |           |  |           | 41%          |  |  |  | 50%          | 
|Pill           |  |           | 29%          |           |  |           | 11%          |  |  |  | 6%           | 
|Condom         |  |           | 18%          |           |  |           | 17%          |  |  |  | 12%          | 
|Vasectomy      |  |           | 10%          |           |  |           | 18%          |  |  |  | 20%          | 
|All others     |  |           | 13%          |           |  |           | 13%          |  |  |  | 12%          | 

Worldwide, there is a larger market for permanent
birth control. The most current and available report on
worldwide birth control statistics is a 1998 United Nations
report on birth control methods used in 1993 by reproductive
couples. The report indicated that tubal ligation, the leading
birth control method worldwide, was used by 32% of reproductive
couples, followed by intrauterine devices, or IUDs, at 22%, oral
contraceptives at 14% and condom at 7%.

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Other Available Permanent Birth Control
Methods

Tubal Ligation.Tubal ligation is the most common form of birth control. 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 has made it
necessary to perform incisional surgery. The two most common
methods of tubal ligation are laparoscopic tubal ligation and
tubal ligation performed by mini-laparotomy or laparotomy. Each
method of tubal ligation has a one-year effectiveness rate of
approximately 99.5%.

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.

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 was prepared
and distributed by the FDA, 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, 17th revised
edition, the birth control pill has a perfect use
failure rate of 0.1% but a typical use failure rate
of 5.0% 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

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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 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, 17th revised
edition, the first-year typical use failure rates
are 14% for condoms and 20% 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, 17th 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% of
contraceptive users. Potential side effects from IUDs include
menstrual cycle changes, infection, cramping, expulsion and
uterine perforation.



| |                   
| | ------------------
| | The Essure Product

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

The Essure micro-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 medical grade materials, 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. An Essure micro-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 the Essure system, the coil
catheter, in the United States, Australia and Canada. A
clinical study, performed in Australia, demonstrated a higher
placement rate with the coil catheter than with the previous
delivery catheter. In the clinical study, 101 of
103 patients achieved bilateral placement. These placements
were performed by 5 investigators, most of whom had extensive
experience with Essure. This translates to a statistical
bilateral placement rate, at appropriate confidence levels, of
95%. The Essure system will be marketed with this new claim in
Australia and, once approved, in 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 delivery catheter studies in

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the Pivotal Trial, would be subject to approval
by the FDA. We expect to perform additional clinical evaluation,
in the course of the existing U.S. Post Approval Study,
before seeking approval of the claim in the United States.


Based on clinical trial data filed with the FDA
in October 2002, Essure has been demonstrated to be 99.8%
effective at two years of follow-up. As of November 2003, we
have accumulated sufficient patient follow-up data from the
Phase II and Pivotal clinical trials for a three-year
effectiveness claim and have filed a PMA supplement with the FDA
for a three-year effectiveness claim consistent with the one and
two-year claim.

Essure has proven to have high patient
satisfaction in our clinical trials. Clinical data submitted to
FDA in our Annual Report to PMA shows that Phase II study
patients tolerance to wearing Essure up to four years was
rated as good to excellent in 99% of
women at all visits to 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 Essure 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 the Essure placement procedure,
92% of women in our clinical trials who were employed returned
to work in one day or less.

We did not perform a comparison to laparoscopic
tubal ligation in our Pivotal trial. We believe, however, based
on current data from our Pivotal trial and published reports on
laparoscopic tubal ligation, that the Essure placement procedure
has the following key advantages over laparoscopic tubal
ligation:

|                                      |  |                                                          |  |                                                
|------------------------------------- |  | -------------------------------------------------------- |  | -----------------------------------------------
|                                      |  | Essure Procedure                                         |  | Tubal Ligation                                 
|                                      |  |                                                          |  |                                                
|Procedure                             |  | Transcervical  Non-incisional                           |  | Incisional  Abdominal incision or
    puncture
|Typical anesthesia                    |  | Local, IV sedation                                       |  | General                                        
|Average endoscopic procedure time     |  | 13-18 minutes                                            |  | Not measured                                   
|Average total procedure time          |  | 35 minutes                                               |  | Approximately
    30-45 minutes                
|Average post-op recovery time         |  | 45 minutes                                               |  | 4-5 hours                                      
|Where performed                       |  | Outpatient/hospital, surgi-center or
    doctors office |  | Inpatient/hospital or surgi-center             
|Average return to regular activities* |  | 1-2 days                                                 |  | 4-6 days                                       



---



|  |                               
|- | ------------------------------
|* | Excluding the day of procedure

We believe that Essure and the Essure placement
procedure offer the following important benefits to patients,
physicians, hospitals and payors:



| |                     
| | --------------------
| | Benefits to Patients



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | No risks associated with incisions and use of
    general or regional anesthesia.                                                                                   
|
| |  | Rapid return to regular activities of one to two
    days as compared to four to six days for laparoscopic tubal
    ligation.                                      
|
| |  | Two-year effectiveness rate of 99.8%.                                                                                                                               
|
| |  | No risks associated with hormones used with
    hormone-based contraception.                                                                                        
|
| |  | No recurring management of contraception usage as
    compared to non-permanent contraception methods, such as the
    birth control pill, implants and injectables.

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| |                                     
| | ------------------------------------
| | Benefits to Physicians and Hospitals



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Short and relatively easily performed procedure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | No risks associated with incisions and use of
    general or regional anesthesia. Although currently, the majority
    of Essure placement procedures are performed using conscious
    sedation, such as IV sedation with a local anesthesia, general
    anesthesia is not typically used unless required by hospital
    protocol, if requested by the patient. We believe over time, as
    the experience and comfort level of the physicians increase, the
    majority of Essure procedures will be done in an ambulatory
    surgical center or physician office without a conscious sedation.
|
| |  | May be performed in a less resource-intensive
    environment. Essure procedures are currently performed in
    various settings including hospital operating rooms, ambulatory
    surgery centers and physician offices.                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Elimination of costs related to the use of
    general or regional anesthesia and post-operative hospital stays.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Benefits
to Payors



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Elimination of costs related to the use of
    general or regional anesthesia and post-operative hospital
    stays. Currently, the majority of Essure placement procedures
    are performed using conscious sedation, such as IV sedation with
    a local anesthesia. General anesthesia is not typically used
    unless required by hospital protocol, if requested by the
    patient, or based on the experience and comfort level of the
    physician.
|
| |  | Potential to reduce unplanned pregnancies, which
    are costly to payors.                                                                                                                                                                                                                                                                                                                                                                                     

Patient Considerations

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The woman must be certain that she desires
    permanent birth control, because Essure is not reversible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Like all methods of birth control, the Essure
    procedure should not be considered 100% effective. There have
    been pregnancies related to improper placement of the Essure
    device, failure to follow proper Conceptus protocol by either
    physicians or patients and luteal phase pregnancies (pregnancies
    occurring prior to Essure micro-insert placement). One or more
    of these may also be due to product failure and we expect that
    in the future patients may report pregnancies from time to time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | For three or more months after the Essure
    placement procedure, a temporary method of birth control must be
    used in combination with Essure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Three months post-procedure, U.S. patients
    are required to return for a hysterosalpingogram, or HSG, which
    calls for contrast dye to be injected into the uterus and
    fallopian tubes to confirm occlusion and micro-insert location.
    Outside of the U.S., patients are required to return for a
    pelvic X-ray at three months post-procedure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Not all women who undergo the Essure placement
    procedure will achieve successful placement of both
    micro-inserts. Approximately 1 out of every 7 women in the
    Essure clinical studies did not achieve successful placement of
    both micro-inserts during the first placement procedure. Some of
    these women who chose to undergo a second placement procedure
    achieved successful placement of both micro-inserts during the
    second procedure, and subsequently were able to rely on Essure
    for contraception. We have subsequently introduced a new
    delivery catheter for the Essure system, the coil
    catheter, which demonstrated a higher placement rate in
    our clinical study performed in Australia. In the clinical
    study, 101 and 103 patients achieved bilateral placement
    which translated to a statistical bilateral placement rate, at
    appropriate confidence levels, of 95%. We will perform
    additional clinical evaluation, in the course of the existing
    U.S. Post Approval Study, before seeking approval claim in
    the United States.

9



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| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Essure procedure is newer than other
    procedures and therefore does not yet have long-term safety and
    effectiveness data as compared to other procedures.
|
| |  | Removal of the Essure micro-inserts requires
    surgery; and removal is not intended for procedure reversal
    since Essure is not reversible.                    

As with all medical procedures, there are risks
associated with Essure and the Essure placement procedure.
Because there are no abdominal incisions or punctures and
general or regional anesthesia is typically not required, the
risks associated with the Essure placement procedure 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 Essure placement procedure 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
Essure 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 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 Essure placement. In
addition, all of the patients who choose to undergo a second
Essure placement procedure following a micro-insert expulsion
achieved successful micro-insert placement and were subsequently
able to rely on Essure for contraception. The majority of women
report mild to moderate pain immediately after the Essure
placement procedure. 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 occurred in
<1% of cases. During the first year of reliance on Essure
for contraception (approximately 15 months after
micro-insert placement), the following episodes were reported as
at least possibly related to the Essure micro-inserts: back pain
(9.0%), abdominal pain (3.8%), and dyspareunia (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 Essure in November 1998
and a Pivotal, or Phase III, trial of Essure in May 2000.
The number of women in whom at least one Essure micro-inserts
were placed totaled 682 between the two clinical trials. At
three month follow-up, 647 women began relying on Essure as
method of permanent birth control. The clinical endpoints of the
study include safety, effectiveness and patient satisfaction.

Based on clinical trial data, Essure has been
demonstrated to be 99.8% effective at two years of follow-up. As
of November 2003, we have accumulated sufficient patient
follow-up data from the Phase II and Pivotal clinical
trials for a three year effectiveness claim and we have filed a
PMA supplement with the FDA for a three-year effectiveness claim
consistent with the one and two-year claim.

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##### Table of Contents



The following table summarizes placement
procedure data from our two clinical trials as of October 2002:

|                                                                                   |  |               |            |          |  |  |            |  
|---------------------------------------------------------------------------------- |  | ------------- | ---------- | -------- |  |  | ---------- | -
|                                                                                   |  |               |            | Phase II
|                                                                                   |  | Pivotal Trial |            | 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 Essure                                  |  |               | 3.0        | %*       |  |  | 3.0        | %



---



|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|* | Does not include the nine women who were able to
    rely on Essure after a successful second placement procedure.

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 of Essure.

As a condition of the PMA approval, we are
required by the FDA to follow our clinical trial patients for a
five-year period following reliance on Essure for contraception.
The information from this planned long-term post-approval study
will provide relevant information for our
U.S. commercialization, as well as allow us to publish data
at the conclusion of the follow-up period. In addition, we are
required to conduct a post-approval study to evaluate placement
rates among newly trained physicians. This study involves the
first 20 cases performed by 40 physicians in major metropolitan
areas after physician training is completed. As of March 1,
2004, over 300 Essure placement procedures have been performed
by participating physicians. Results will not be reported until
appropriate statistical analyses are performed and data from a
positive outcome will be used to support an improved placement
rate claim with FDA.

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

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.

Other Studies
and Regulatory Activities

On October 30, 2003, we announced the
signing of an exclusive U.S. co-promotional agreement with
GYNECARE, Worldwide division of Ethicon, Inc., involving
Essure and the GYNECARE THERMACHOICE Uterine Balloon Therapy
System, a treatment for menorrhagia (heavy menstrual bleeding)
in pre-menopausal women. ThermaChoice is a minimally invasive,
outpatient treatment for menorrhagia due to benign causes in
pre-menopausal women for whom childbearing is complete. The
device uses a balloon catheter with heated fluid to ablate the
endometrial lining of the uterus during an 8-minute therapy
cycle. The procedure can be performed under local anesthesia in
less than 30 minutes. Endometrial ablation (EA)
procedure is a treatment option only advised for women who are
finished with their

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childbearing. Although women undergoing EA must
be finished with childbearing, intrauterine ablation should not
be considered a means of sterilization. Sterility mayoccur after ablation, but cannot be guaranteed in the uterus
or in the fallopian tubes since ovulation still takes place as
before, and the uterine lining may be receptive to a pregnancy.
Pregnancy in general should not be elected after an ablation
because it can be dangerous for both the fetus and mother
including possible complications such as uterine rupture,
placenta increta/accreta, and intra-uterine growth restriction.
Because of the potential problems with future pregnancies, it is
generally recommended that other methods of contraception be
considered in women who undergo ablations. Many physicians
encourage women to consider permanent birth control, such as
laparoscopic tubal sterilization, at the time of endometrial
ablation if the possibility of future pregnancy exists. In order
to promote use of the Essure device in a concomitant procedure
with the GYNECARE Thermachoice system, we have conducted a study
and filed a PMA supplement with the FDA in order to modify a
warning label in the Essure physician labeling. We expect,
following FDA approval, to be able to state that GYNECARE
Thermachoice endometrial ablation procedure can be performed
immediately following Essure micro-insert placement. The FDA has
completed their initial review of the PMA supplement and
discussed the results of their review with Conceptus and
GYNECARE representatives in February 2004. We are in the process
of submitting a response to the FDAs questions that will
include collecting additional clinical data. We expect to have
the additional study completed in early April 2004 and
submitting the final results and conclusion to the FDA by
mid-April 2004.


In addition, three months post-procedure and
consistent with our pivotal trial protocol, physicians are
required to perform an HSG, which calls for contrast dye to be
injected into the uterus and fallopian tubes to confirm
occlusion and micro-insert location. Because an HSG can be
uncomfortable for women, we are working with the FDA to approve
a less-invasive alternative, such as a pelvic x-ray. Our
regulatory and clinical representatives, along with an advisory
physician, are scheduled to meet with the FDA on March 28,
2004 to discuss a plan to substitute alternative(s) to the HSG
requirement.

Sales and Marketing

On November 6, 2002, we received FDA
approval to market Essure 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 Essure in the United States through our direct
sales force.

Our sales and marketing strategy is to market
Essure 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 Essure among consumers, general
practitioners and the broader medical community. In April 2003,
we presented Essure at the annual conference of the American
College of Obstetricians and Gynecologists. At this meeting, we
had two presentations and there was a Continuing Medical
Education, or CME, accredited symposium with Essure as the main
topic. 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 Essure physician in a
consumers area. We had also conducted regional
advertisement in a variety of magazines, such as Parentsand Self.

In an effort to expand our business rapidly and
effectively, we have established marketing and distribution
relationships with other companies. On October 30, 2003, we
announced the signing of an exclusive U.S. co-promotional
agreement with GYNECARE, Worldwide division of
Ethicon, Inc., involving Essure and the GYNECARE
THERMACHOICE Uterine Balloon Therapy System, a treatment for
menorrhagia (heavy menstrual bleeding) in pre-menopausal women.
ThermaChoice is a minimally invasive, outpatient treatment for
menorrhagia due to benign causes in pre-menopausal women for
whom childbearing is complete. The device uses heat to ablate
the endometrial lining of the uterus during an 8-minute therapy
cycle. The device is used in a procedure that can be performed
under local anesthesia in less than 30 minutes. The endometrial
ablation procedure is a treatment option only advised for women
who are finished with their childbearing. However, since
pregnancy is still possible, women are advised to still use
contraception. The co-promotional agreement between Conceptus
and GYNECARE will offer physicians the option of combining the

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##### Table of Contents



ThermaChoice and Essure treatment, both of which
can be used in a minimally invasive procedure and on an
outpatient basis.


In order to promote use of the Essure device in a
concomitant procedure with the GYNECARE Thermachoice system, we
have conducted a study and filed a PMA supplement with the FDA
in order to modify a warning label in the Essure physician
labeling. We expect, following FDA approval, to be able to state
that the GYNECARE Thermachoice endometrial ablation procedure
can be performed immediately following Essure micro-insert
placement. The FDA has completed its initial review of the PMA
supplement and discussed the results of its review with us and
GYNECARE representatives in February 2004. We are in the process
of submitting a response to the FDAs questions that will
include collecting additional clinical data. We expect to have
the additional study completed in early April 2004 and submit
the final results and conclusion to the FDA by mid-April 2004.

Under the terms of the agreement, a group of
physician consultants specifically hired and trained by
Conceptus will become preceptors in the Essure procedure. This
group of physician preceptors will then train ThermaChoice
physician users in the Essure procedure over a two-year period,
commencing on and subject to the approval of a Conceptus PMA
supplement. This group of physician consultants is separate and
in addition to our existing sales and training team, who will
continue to train additional physicians. The combined sales and
training teams are expected to significantly increase the rate
of physician training for Essure over this two-year period.

We believe this agreement will provide us with
the ability to substantially increase awareness, gaining market
presence and credibility, accelerating 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. During January 2004, we trained 80
GYNECARE sales representatives, and have designated 20 trainers,
who are physicians previously trained on Essure. The designated
trainers will help us to train physicians who wish to perform
Essure procedure in combination with ThermaChoice procedure.

Physician Training

We have identified, educated and trained
qualified gynecologists in the Essure placement procedure
through a combination of presentations at major medical
conferences, hands-on simulation and proctored procedures with a
clinician experienced in our Essure placement procedure. In
order to complete training, we 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 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 to new physicians who have
pre-scheduled Essure cases. This is to accelerate the training
process and to control training costs. As of December 31,
2003, we have a total of 792 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.

We understand that a strong base of trained
physicians does not necessarily correlate to an increase in
revenue proportionately. Another important factor is the average
procedure performed per physician per month, or utilization.
During 2003, our utilization rates declined from a high of over
3 in the first quarter to a utilization of slightly less than
one in the fourth quarter of 2003. In 2004, we intend to focus
our internal resources on improving our utilization rate. We
believe that our alliance with the GYNECARE group will help us
to continue signing new, interested physicians while we focus
our effort on increasing utilization within our current
physician base. In order to accomplish our objective, we have
built marketing programs which include staff training, patient
and referring physician awareness seminars and mailings, billing
models for reimbursement, media outreach kits, hospital
marketing tools and advertising, including radio. We will also
increase the frequency of call patterns by our field sales and
training force to our existing physician base. Since

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there is a trade-off in the amount of time that
the field sales and training forces can devote to preceptoring
new physicians and increasing the utilization by existing
physicians, we are not certain of our ability to increase
utilization.


Reimbursement

Obtaining physician fee and device reimbursement
for Essure will be an important step toward commercialization of
Essure 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.

We have been working diligently with third-party
payors to make sure they understand the benefits of Essure. As
of December 31, 2003, U.S. physicians and facilities
using Essure have been reimbursed for the procedure under
existing Current Procedural Terminology, or CPT, codes.
Currently, many of the nations leading hospitals have
physicians on their medical staffs that now offer Essure to
patients who are seeking permanent birth control. During 2003,
the National Blue Cross/ Blue Shield Association issued a
positive recommendation to its local members to cover the Essure
procedure. Additionally, Aetna U.S. Healthcare, the largest
U.S. health insurance provider have also joined a list of
leading health insurance companies who have established a
coverage policy for Essure, making Essure available to women and
couples seeking an alternative to tubal ligation or vasectomy in
the United States. As of December 31, 2003, we estimate
that we have payor coverage of 124 million lives or 59% of
the total insured, non-Medicare U.S. population.

In 2004, we will continue to focus on gaining
additional insurance coverage of the Essure procedure, which
despite our success in 2003, remains a significant barrier to
fast paced growth. We believe that many doctors are reluctant to
perform the Essure procedure given the uncertainty of
reimbursement. Gaining reimbursement is a difficult and lengthy
process over which we do not have complete control. Physician
demand and patient awareness also act to exert pressure on
insurance carrier to consider reimbursement. We have established
tactical programs, such as hot lines to aid our physicians in
navigating reimbursement issues, to facilitate the process and
ultimately convince major payers the benefits of Essure for
patients, physicians and the payor community.

In March 2004, the American Medical Association
accepted our application for a level one CPT code, which may be
effective as early as January 2005, subject to the completion of
certain processes. Category I codes are reserved for those
procedures that have demonstrated clinical efficacy, widespread
use and have FDA approval. By having a CPT code specific to the
Essure procedure, it is expected that coding for reimbursement
will become considerably easier for doctors and facilities and
that there will be fewer incidents of doctors being reimbursed
incorrectly. We expect that the new code, once the process to
establish it is complete, will significantly ease the burden on
a physicians office in obtaining reimbursement for Essure,
and accelerate the coverage of Essure by private insurance
companies and Medicaid.



| |              
| | -------------
| | United States

Health care providers in the United States
typically rely on third-party payors, 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 payors to establish
reimbursement for Essure. Payor reimbursement affects the pace
of physician adoption of the Essure procedure because facilities
habitually check with payors to determine the patients
applicability of coverage and the payor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 payors, 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 Australia, we obtained approval in 1999 from
the appropriate government agency to use the existing tubal
ligation reimbursement code for Essure and the Essure placement
procedure, and numerous procedures were reimbursed in 2000 using
this code. In March 2001, however, we received oral notification
from the government agency that the continued applicability of
this particular code for Essure and the Essure placement
procedure would be reviewed. The review by the Medicare Service
Advisory Committee commenced in September 2001 and includes an
examination of the clinical and economic outcomes data. The
conclusion of this review will determine the future level of
reimbursement in Australia for Essure and the Essure placement
procedure. We anticipate a response to the MSAC submission
sometime in the first quarter of 2004. We have experienced no
interruption of sales in either the private or public hospitals.

In Europe, consultants are assisting us in
developing a strategic plan to obtain reimbursement in a number
of European countries, and we are conducting a clinical
reimbursement study in France.

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 are planning to outsource our manufacturing
activity to external contract manufacturers.

Currently, manufacturing processes are performed
in our facility in San Carlos, California. As part of our
outsourcing effort, we are in the process of moving our
manufacturing activities to a third party contract manufacturer,
Venusa, whose manufacturing facilities are located in Mexico. We
are currently working with the FDA to obtain approval of
Venusas facility, and we expect to receive approval by the
end of the first quarter of 2004. Once we obtain FDA approval of
the manufacturing facility, we intend to transition to where we
maintain only limited manufacturing activity in our facility in
San Carlos, California.

Currently, we purchase various materials and
components from qualified suppliers and inspect these materials
and components in-house. Our agreement with Venusa provides that
they will continue to use our suppliers, 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 have finished the clinical testing of an internally
developed cathether that does not require third party license.
Currently, we do not have any single source 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. 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 for this fiber.

Our manufacturing facility and Venusas
manufacturing facility are subject to periodic inspection by
regulatory authorities. Our quality assurance systems are
subject to FDA regulations. These regulations require that we
conduct our product design, testing, manufacturing and control
activities in conformance with these regulations and that we
maintain our documentation 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 facility has received
ISO 9001/ EN46001 certification and the European Union Device
Directive 93/42/ EEC, allowing us to affix the CE Mark to our
product after assembling appropriate documentation. ISO 9001/
EN46001 certification standards for quality operations have been
developed to ensure that companies know the standards of quality
on a worldwide basis. We are currently

15



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working with the FDA to obtain approval of
Venusas facility, and we expect to receive approval by the
end of the first quarter of 2004.


Research and Development

Our research and development activities are
performed by a product development, regulatory/clinical research
staff of 18 employees. Research and development expenses for
2003, 2002, and 2001 were approximately $6.0 million,
$8.2 million, and $8.0 million, respectively. We
intend to continue to focus our research and development efforts
on the development of new or alternative product designs and
management of the on-going clinical trials.

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 29, 2004, we had eight pending
U.S. patent applications, 21 U.S. patents which have
been issued to us, and 28 foreign and/or international patent
applications are pending, with five 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 our Essure tubal occlusion device.
In January 2001, the United States Patent and Trademark Office,
or PTO, issued a patent to us granting a number of claims
directed to intrafallopian devices, including devices that are
anchored by resilient coils. On March 4, 2003, the PTO
issued a patent to us with method claims directed to expansion
of a device inserted into a tubal ostium with subsequent tissue
ingrowth, along with claims to conception-inhibiting devices
having coils. These patents describe and claim a variety of
techniques to enhance the effectiveness of these devices,
including the use of polyester fibers attached to the device,
and also discloses methods for deployment of these devices using
a transcervical delivery system.

On October 21, 2003 the PTO issued a patent
to us with device and method claims directed to an expanding
resilient structure to anchor and occlude the fallopian tube
with the use of multiple materials and method, including
polyester fiber, to promote at least one method of occluding the
fallopian tube (scarring of the tubal tissues, ingrowth of the
tubal tissues, and sclerosing of the tubal tissues). The
contraceptive device comprising a narrow first diameter suitable
for axial insertion into the fallopian tube and an expanded
retention structure having a second diameter larger than the
first diameter and adapted to engage the surrounding tubal wall
and retain the contraceptive device within the fallopian tube
while a portion of the fallopian tube is open around or through
the retention structure. This patent also has claims for
applying current through the resilient structure to desiccate a
tubal wall thereby promoting the formation of scar tissue by
electrically energizing the resilient structure within the
fallopian tube.

On January 20, 2004 the PTO issued a patent
to us with method claims directed at non-surgical methods of
sterilizing a female by inserting an instrument assembly into
the patients fallopian tube and delivering electrical
energy from the instrument to inner walls of the fallopian tube
and leaving behind a device that is anchored within the
fallopian tube by imposing a secondary shape on tubal wall, the
secondary shape having a larger cross-section than the fallopian
tube. Additionally, the patent stated the efficacy of the device
may be enhanced by forming the structure at least in part from
copper or a copper alloy.

On February 3, 2004 the PTO issued a patent
to us with device and method claims directed at intrafallopian
devices and non-surgical methods for their placement to prevent
conception. The device being anchored within the fallopian tube
by a resilient structure which has a helical outer surface,
together with a portion of the resilient structure which is
biased to form a secondary shape, the secondary shape having a
larger cross-section than the fallopian tube. Optionally,
permanent sterilization is effected by passing a current

16



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through the resilient structure to the tubal
walls. The efficacy of the device is enhanced by forming the
structure at least in part from copper or a copper alloy.


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 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. If these Target Therapeutics patents were
invalidated, our proprietary position in the marketplace would
be severely compromised. 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. (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 cover Essure 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 Essure
system, 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 Essure 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. 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
Essure 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 PTO, 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

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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 commercial
distribution prior to 1976. Essure is regulated by the FDA and
received FDA approval for commercialization in the United States
on November 6, 2002. If we or our third party manufacturer,
Venusa, do not 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, withdrawal
of approvals and criminal prosecution.


The FDA has the authority to require clinical
testing of medical devices, including Essure. An Investigational
Device Exemption, or IDE, application must be approved prior to
commencement of clinical trials. An IDE application must be
supported by data demonstrating safety for clinical use,
typically including the results of laboratory and animal
testing. If the IDE application is approved by the FDA, clinical
trials may begin at a specific number of investigational sites
with a maximum number of patients, as approved by the agency.
Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do
not exceed recovery of the costs of manufacture, research,
development and handling. Clinical trials must be conducted in
accordance with FDA regulations. We have received an IDE for
each of our clinical studies of Essure.

The FDA imposes numerous requirements with which
medical device manufacturers must comply in order to maintain
regulatory approvals. FDA enforcement policy strictly prohibits
the promotion of approved medical devices for uses other than
those for which the device is specifically approved by the FDA.
We and our third party manufacturer, Venusa, will be required to
adhere to applicable FDA and other regulations regarding Quality
Systems, including testing, control and documentation
requirements. Ongoing compliance with the Quality System
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
for five years in order to gather long-term safety and
effectiveness data on the Essure System. 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 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 Essure.

Export sales to certain countries of
investigational devices or devices not approved for commercial
distribution in the United States are subject to FDA export
requirements. An investigational device may be exported under an
IDE, or to 24 listed countries without FDA approval, or to other
countries after FDA approval for export.



| |                         
| | ------------------------
| | 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

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may be longer or shorter than that required for
FDA clearance, and requirements for licensing may differ
significantly from FDA requirements. Essure 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 Essure in February 2001. In Canada, we received clearance
from Health Canada to market Essure in 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 Essure in these countries.


Competition

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

We are aware of one company that is in the early
stage of developing a non-incisional permanent birth control
device, and other companies may develop products that could
compete with Essure in the future.

The medical device industry 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 a
result, our success will depend in part on our ability to
respond quickly to medical and technological changes through the
development and commercialization of new products. Competitive
factors may render Essure obsolete or noncompetitive or reduce
demand for Essure.

Product Liability and Insurance

The manufacture and sale of medical products
involve an inherent risk of exposure to product liability claims
and product recalls. Although we have experienced only one
product liability claim to date which did not have any financial
impact to us, we cannot assure you that we will be able to avoid
significant product liability claims and potential related
adverse publicity. We currently maintain product liability
insurance with coverage limits of $10.0 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, 2003, we have
178 full-time employees, consisting of 8 in product
development, 7 in process engineering, 40 in
manufacturing, 77 in sales and marketing, 10 in
clinical/regulatory affairs, 15 in quality assurance and
21 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 is represented by a labor
union or covered by a collective bargaining agreement, and we
believe our employee relations are good.

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Executive Officers of The Company

Our executive officers and other key members of
our management team and their age as of March 31, 2004 are
as follows:

|                   |  |     |    |          |  |                                                                    
|------------------ |  | --- | -- | -------- |  | -------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Mark M. Sieczkarek |  |     | 49 |          |  | President, Chief Executive Officer and Director                    
|Gregory Lichtwardt |  |     | 49 |          |  | Executive Vice President, Treasurer and Chief
    Financial Officer
|William H. Dippel  |  |     | 58 |          |  | Vice President, Operations and Research and
    Development        
|Ed Sinclair        |  |     | 47 |          |  | Vice President, Clinical Research and Regulatory
    Affairs       
|Stan Van Gent      |  |     | 43 |          |  | Vice President, Business Development                               

Mr. Sieczkarekjoined Conceptus as President and
Chief Executive Officer and a member of the Board of Directors
in April 2003. From 2001 to 2003, Mr. Sieczkarek served as
President, Americas, of Bausch and Lomb, Inc., where he led
the region to double-digit revenue and profitability growth.
From 1999 to 2001, he was Corporate Vice President and
President  Europe, Middle East and Africa at Bausch
and Lomb, Inc., where he oversaw the introduction of the
Zyoptix laser for LASIK eye surgery. From 1995 to 1999,
Mr. Sieczkarek held positions of increasing responsibility
at various divisions of Bausch and Lomb, Inc. From 1993 to
1995, Mr. Sieczkarek was Vice President and Chief Financial
Officer of KOS Pharmaceuticals. From 1980 to 1993,
Mr. Sieczkarek held executive level positions in Finance
and Commercial Operations with several Bristol-Myers Squibb
subsidiaries and Sanofi Diagnostics Pasteur. Mr. Sieczkarek
has a B.S. degree from the State University of New York at
Buffalo and an MBA from Canisius College.

Mr. Lichtwardtjoined Conceptus as Executive Vice
President, Treasurer and Chief Financial Officer in November
2003. From 2000 to 2002, he was Executive Vice President,
Finance, Chief Financial Officer and Corporate Secretary of
Innoventry, Inc., a financial services company. From 1993
to 2000, Mr. Lichtwardt was Vice President, Finance, Chief
Financial Officer and Treasurer of Ocular Sciences, Inc., a
worldwide developer and marketer of soft contact lenses. Prior
to his employment with Ocular Sciences, Mr. Lichtwardt,
from 1989 to 1993, held senior management positions in various
divisions of Allergan Inc. In addition to these positions,
Mr. Lichtwardt has held various financial positions at AST
Research, Inc. and at divisions of American Hospital Supply
Corporation. He holds a BBA degree from the University of
Michigan and MBA degree from Michigan State University.

Mr. Dippeljoined Conceptus as Vice President,
Operations in May 2001. Mr. Dippel has nearly 30 years
of operations experience, primarily with medical device and
diagnostic companies. Prior to joining our company, from 2000 to
2001, Mr. Dippel was the Vice President of Operations for
PercuSurge, a manufacturer of embolic protection devices which
was acquired by Medtronic, a medical technology company.
Previously, from 1997 to 2000 Mr. Dippel was Vice President
of Operations for Target Therapeutics, a division of Boston
Scientific Corporation. From 1994 to 1997, he worked for
Boehringer Mannheim, first as Vice President of Operations and
Product Development, and then as Vice President for United
States Operations of the Patient Care Group. Mr. Dippel
holds a B.S. in Mechanical Engineering from California State
Polytechnic University.

Mr. Sinclairjoined Conceptus as Vice President,
Clinical Research and Regulatory Affairs in February 2003. Prior
to joining our company, from 2002 to 2003, he was Senior
Director of Regulatory Affairs and Quality Assurance at Novasys
Medical, a private womens health care company developing a
non-surgical treatment for stress urinary incontinence. In late
2001, Mr. Sinclair was a consultant for Conceptus. From
1999 to 2001, he was Vice President of Operations and Quality
and Clinical Affairs at Prolifix Medical, an early-stage
interventional cardiology company. Mr. Sinclair joined
PercuSurge in 1996 as Director of Regulatory and Quality Affairs
and then Vice President of Operations and Quality for this
coronary and cerebral embolic protection company, before its
acquisition by Medtronic. From 1994 to 1996, he was Director of
Regulatory Affairs and Quality Assurance at Cardiac Pathways, a
company founded to treat cardiac

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arrhythmias and acquired later by Boston
Scientific. Mr. Sinclair holds a B.S. degree in Biological
Sciences from the University of California, Irvine, and a
Master of Arts degree in Management from the University of
Redlands.


Mr. Van Genthas served as Vice President of
Business Development for Conceptus since October 2003.
Mr. Van Gent joined Conceptus in February 2000 as Vice
President, Marketing. From 1996 to 2000, Mr. Van Gent
served in varying marketing capacities with Valleylab, a medical
device company, and was Director of International Marketing from
1998 to 2000, where he was responsible for international market
introduction, reimbursement, strategic positioning and branding
for $70 million of product revenues. Mr. Van Gent has
also held various positions in marketing, sales, and engineering
over the past ten years for Allergan Medical Optics, Imagyn
Medical and Cabot Medical. Mr. Van Gent holds a B.S. in
Biomedical Engineering from the University of California,
San Diego.






|        |           
|------- | ----------
|Item 2. | Properties

We are headquartered in San Carlos,
California where we lease two buildings occupying approximately
36,400 square feet of office, research and development, and
manufacturing space under leases that expire on
December 31, 2004 and December 31, 2005, respectively.
Additionally, as of December 31, 2003, we also have sales
and marketing offices in Australia and France, which total no
more than 1,000 square feet of office space. Our lease
liability in France terminated in January 2004 when we completed
the divesture agreement for our France subsidiary. We believe
that our current facilities are adequate for our immediate needs
and that we will be able to renew our leases or obtain
additional space as needed.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

A third party, 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 cover Essure 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 Essure
system, 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 Essure 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. 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
Essure 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 PTO, which might occur
if interference is declared and if we are found to have priority
of invention.

From time to time, we are involved in legal
proceedings arising in the ordinary course of business. We
believe there is no other litigation pending that could have,
individually or in the aggregate, a material adverse effect on
our financial position, 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, 2003.

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##### Table of Contents






PART II






|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Stock and Related Stockholder Matters

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 |   | Low  
|                              |                |      |   |      
|Year Ended December 31, 2003: |                |      |   |       |  |  |   |      
|                              | Fourth Quarter |      | $ | 13.74 |  |  | $ | 9.53  | 
|                              | Third Quarter  |      | $ | 17.34 |  |  | $ | 13.10 | 
|                              | Second Quarter |      | $ | 14.98 |  |  | $ | 8.60  | 
|                              | First Quarter  |      | $ | 11.94 |  |  | $ | 6.98  | 
|Year Ended December 31, 2002: |                |      |   |       |  |  |   |      
|                              | Fourth Quarter |      | $ | 15.96 |  |  | $ | 11.98 | 
|                              | Third Quarter  |      | $ | 16.41 |  |  | $ | 12.00 | 
|                              | Second Quarter |      | $ | 21.49 |  |  | $ | 15.90 | 
|                              | First Quarter  |      | $ | 23.18 |  |  | $ | 17.90 | 

As of February 27, 2004, there were 158
stockholders of record and the last reported sale price of our
common stock on February 27, 2004 was $9.27.

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.

22



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|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The following table presents selected
consolidated financial data of the Company. 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, 2003, 2002 and 2001 and the consolidated
balance sheet data as of December 31, 2003 and 2002 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, 2000 and
1999 and the consolidated balance sheet data as of
December 31, 2001, 2000 and 1999 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,             
|                                                                  |                                     |                                      
|                                                                  |                                     | 2003                                  |         | 2002    |   | 2001 |         | 2000    |   | 1999
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |     
|                                                                  |                                     |                                      
|                                                                  |                                     | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data:                    |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Net sales                                                         |                                     | $                                     | 7,700   |         |   | $    | 1,650   |         |   | $    | 401     |         |   | $ |        |         |   | $ | 95     |       
|Cost of goods sold                                                |                                     |                                       | 6,537   |         |   |      | 3,142   |         |   |      | 1,456   |         |   |   |        |         |   |   | 137    |       
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Gross profit (loss)                                               |                                     |                                       | 1,163   |         |   |      | (1,492  | )       |   |      | (1,055  | )       |   |   |        |         |   |   | (42    | )     
|Operating expenses:                                               |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                  | Research and development            |                                       |         | 6,048   |   |      |         | 8,230   |   |      |         | 7,983   |   |   |         | 10,739  |   |   |        | 4,251  |  
|                                                                  | Selling, general and administrative |                                       |         | 35,306  |   |      |         | 23,417  |   |      |         | 9,776   |   |   |         | 5,012   |   |   |        | 3,729  |  
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                  | Total operating expenses            |                                       |         | 41,354  |   |      |         | 31,647  |   |      |         | 17,759  |   |   |         | 15,751  |   |   |        | 7,980  |  
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                  | Operating loss                      |                                       |         | (40,191 | ) |      |         | (33,139 | ) |      |         | (18,814 | ) |   |         | (15,751 | ) |   |        | (8,022 | )
|Recovery of legal defense costs                                   |                                     |                                       |        |         |   |      |        |         |   |      |        |         |   |   | 586     |         |   |   |       |       
|Interest and other income, net                                    |                                     |                                       | 663     |         |   |      | 629     |         |   |      | 740     |         |   |   | 712     |         |   |   | 723    |       
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Net loss                                                          |                                     | $                                     | (39,528 | )       |   | $    | (32,510 | )       |   | $    | (18,074 | )       |   | $ | (14,453 | )       |   | $ | (7,299 | )     
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Basic and diluted net loss per share                              |                                     |                                       | (1.83   | )       |   |      | (1.71   | )       |   |      | (1.33   | )       |   |   | (1.37   | )       |   |   | (0.76  | )     
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Shares used in computing basic and diluted net
    loss per share |                                     |                                       | 21,565  |         |   |      | 18,968  |         |   |      | 13,561  |         |   |   | 10,559  |         |   |   | 9,662  |       
|                                                                  |                                     |                                       |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       

|                                                   |  |                |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  |               
|                                                   |  | December 31,  
|                                                   |  |               
|                                                   |  | 2003           |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                   |  |                |          |      |  |      |          |      |  |     
|                                                   |  |               
|                                                   |  | (In thousands)
|Consolidated Balance Sheet Data:                   |  |                |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and short term investments* |  | $              | 30,863   |      |  | $    | 70,734   |      |  | $    | 33,803  |   |  | $ | 12,493  |   |  | $ | 10,769  |  
|Working capital                                    |  |                | 27,751   |      |  |      | 68,272   |      |  |      | 31,623  |   |  |   | 9,282   |   |  |   | 10,030  |  
|Total assets                                       |  |                | 41,850   |      |  |      | 77,295   |      |  |      | 37,778  |   |  |   | 14,106  |   |  |   | 11,903  |  
|Long-term clinical liabilities                     |  |                | 193      |      |  |      | 217      |      |  |      | 486     |   |  |   | 810     |   |  |   |        |  
|Accumulated deficit                                |  |                | (157,260 | )    |  |      | (117,732 | )    |  |      | (85,222 | ) |  |   | (67,148 | ) |  |   | (52,695 | )
|Total stockholders equity                         |  |                | 33,737   |      |  |      | 70,714   |      |  |      | 33,175  |   |  |   | 9,959   |   |  |   | 10,914  |  



---



|  |                                                                            
|- | ---------------------------------------------------------------------------
|* | Includes restricted cash of $69,000 at
    December 31, 2003, 2002 and 2001

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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. 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.

Overview

We develop, manufacture and market
EssureTM, an innovative and proprietary
non-incisional permanent birth control device for women which
was approved for marketing in the United States in November 2002
by United States Food and Drug Administration, or FDA. Essure is
a soft and flexible micro-insert delivered into a womans
fallopian tubes designed to provide permanent birth control by
causing a benign tissue in-growth that blocks the fallopian
tubes. A successfully placed Essure micro-insert prohibits the
egg from traveling through the fallopian tubes and therefore
prevents fertilization. Based on clinical trial data filed with
the FDA in October 2002, Essure has been demonstrated to be
99.8% effective at two years of follow-up. As of November 2003,
we have accumulated sufficient patient follow-up data from the
Phase II and Pivotal clinical trials for a three-year
effectiveness claim and we filed a PMA supplement with the FDA
for a three-year effectiveness claim consistent with the one and
two-year claim.

The Essure placement procedure is typically
performed as an outpatient procedure and is intended to be a
less invasive and a less costly alternative to tubal ligation,
the leading form of birth control in the United States and
worldwide. Laparoscopic tubal ligation and tubal ligation by
laparotomy typically involve abdominal incisions and/or
punctures, general or regional anesthesia, four to ten days of
normal recovery time and the risks associated with an incisional
procedure. The Essure placement procedure does not require
cutting or penetrating the abdomen, which is expected to lower
the likelihood of post-operative pain due to the incisions/
punctures, and is typically performed in an outpatient setting
without general or regional anesthesia. In the Pivotal trial of
Essure, the total procedure time averaged 35 minutes, with
an average of 13 minutes of hysteroscopic time to place the
Essure micro-insert. A patient is typically discharged
approximately 45 minutes after the Essure placement
procedure. No overnight hospital stay is required. Furthermore,
Essure is effective without drugs or hormones.

Published reports estimate that 700,000 tubal
ligation procedures are performed each year in the United States
and we believe there is a larger market worldwide. We intend to
tap into this market and establish the Essure procedure as the
standard care for permanent birth control.

Essures safety and recovery profile is one
of the reasons we believe the Essure procedure is an attractive
alternative for women who are seeking permanent birth control. A
womans tolerance to wearing Essure was ascertained in our
Phase II clinical study follow-up to four years and has
been rated as good to excellent in 99%
of women at all visits to November 2003. Among women from our
Pivotal trial who have worn the micro-inserts for up to three
years, at least 97% rated their comfort with Essure as
good to excellent at visits conducted to
November 2003. 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 rated their overall satisfaction as somewhat to
very satisfied. Excluding the day of the Essure placement
procedure, 92% of the patients in the Pivotal trial who were
employed returned to work in one day or less.

In early March 2004, Planned Parenthood
Federation of America, or PPFA, approved Essure for use in
qualifying Planned Parenthood Affiliates across the United
States. PPFA has nearly 900 clinics under 123 PPFA
affiliates that serve nearly 5 million people a year. PPFA
tested the Essure procedure in clinics in Oregon and
Pennsylvania, evaluating the ability of a typical clinic to
successfully offer the procedure. Standards for the use of
Essure in PPFA affiliates were then developed along with
guidelines for the introduction of the procedure into Planned
Parenthood clinic settings. We believe that PPFAs thorough
evaluation demonstrated that Essure can safely and effectively
be offered in a clinic setting and this approval is of vital
importance to our goal of making sure all women have access to
Essure, including those who do not have private insurance
coverage.

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We believe that physicians are receptive to
Essure because it is a less invasive permanent birth control
option to offer their patients. Hospitals are able to utilize
their facilities more cost effectively with the Essure placement
procedure compared with tubal ligation. We expect payors to
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. In addition, payors may also benefit from the
reduction of unplanned pregnancies associated with non-permanent
methods of birth control used by patients who have chosen to
avoid the drawbacks of traditional permanent birth control
methods but who may elect to use Essure.

Essure is currently being marketed in multiple
countries. In November 2002, we received from the FDA, approval
to market Essure in the United States. In 2001, we were approved
to affix the CE Mark to Essure, indicating that Essure 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, Essure was listed with
Australias Therapeutic Goods Administration, or the TGA,
which allows us to market and sell Essure in Australia. In
Canada, we received clearance from Health Canada to market
Essure in Canada in November 2001. We also have distributors in
Singapore, Indonesia, Morocco and Turkey.

In order to focus our resources domestically, in
January 2004, we have 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 Essure 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 Conceptus to repurchase the French
company at predetermined prices and time periods that are
typical for a distribution company. The transaction did not have
any material impact to our consolidated financial statements. We
are also in the process of negotiating an asset sale agreement
of our wholly owned Australian subsidiary to our Australian
management team along with a long-term distribution agreement
and a call option to repurchase the subsidiary. We expect to
complete the agreement by the end of first quarter of 2004. Both
agreements are meant to allow us to conserve our resources by
eliminating the funding requirements of developing those markets
so that we can focus on the more lucrative U.S. market.

In order to further decrease our production costs
and improve gross profit, we are in the process of transitioning
our manufacturing operations to Venusa, a third party
manufacturer located in Mexico. We are currently working with
the FDA to obtain approval of Venusas facility, and we
expect to receive approval by the end of the first quarter of
2004.

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 the Essure procedure 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. We intend to help those doctors to
build their practices so that they will perform more Essure
procedures on a monthly basis. We will increase our call
frequency to those doctors by our field representatives,
strengthen referral programs to get women who are interested in
the Essure procedure to those doctors, and continue with our
marketing programs to increase Essure awareness among women and
the medical community. We have also built strategic alliances
with other businesses to help to promote Essure and to train new
doctors.

Market acceptance of Essure will also depend in
part upon the availability of reimbursement within prevailing
healthcare payment systems. We believe that physician advocacy
of our product will be required to obtain reimbursement. We have
made significant progress in 2003 by obtaining coverage for 59%
of the total insured, non-Medicare population in the United
States of America. We intend to continue with our effort to

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educate payors of the cost-effectiveness of our
product and further established programs to help physicians in
navigating reimbursement issues to facilitate the process.


In March 2004, the American Medical Association
accepted our application for a level one Current Procedural
Terminology, or CPT, code, which may be effective as early as
January 2005, subject to the completion of certain processes.
Category I codes are reserved for those procedures that
have demonstrated clinical efficacy, widespread use and have FDA
approval. By having a CPT code specific to the Essure
procedure, it is expected that coding for reimbursement will
become considerably easier for doctors and facilities and that
there will be fewer incidents of doctors being reimbursed
incorrectly. We expect that the new code, once the process to
establish it is complete, will significantly ease the burden on
a physicians office in obtaining reimbursement for Essure,
and accelerate the coverage of Essure by private insurance
companies and Medicaid.

We have a limited history of operation and have
incurred significant operating losses since our inception in
1992. We will continue to be in a net loss position until
sufficient revenues can be generated to offset expenses. In
February 2004, we completed a private placement of common stock
to generate enough cash to help us to reach profitability.
However, if our revenue growth does not materialize as planned,
we may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital.

Critical Accounting Estimates and
Policies

The consolidated financial statements include
accounts of the Company and all 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 consolidated financial statements, management
has made its best estimates and judgments of certain amounts
included in the consolidated financial statements, giving due
consideration to materiality. Management analyzes historical
returns, customer payment histories, current economic trends and
changes in customer demand and acceptance of our products when
evaluating the adequacy of warranty and other allowances. The
primary estimates underlying the Companys consolidated
financial statements include allowance for doubtful accounts
receivable, reserves for obsolete and slow moving inventory,
product warranty, income taxes and accrual for other
liabilities. Application of these accounting 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.

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 production volumes to satisfy product demand. If
sales expectations and production volumes 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 average selling price that is below
our actual cost of production, we may incur significant
write-downs of inventory.

Revenue Recognition.Revenue on product sales is recognized when persuasive evidence
of an arrangement exists, the price is fixed and final, 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 numerous international distributors in
Europe, Australia and Asia. 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

26



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and 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.


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 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
allowance 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, or SFAS, No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. We
evaluate the carrying value of our long-lived assets, consisting
primarily of our property and equipment and the Essure license
acquired from a patent litigation settlement in 2003 (see
Item 3), whenever certain events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Such events or circumstances include,
but are not limited to, 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, 2003 and
December 31, 2002, included property and equipment of
$2.0 million and $2.5 million, respectively, and other
identifiable intangible assets of $2.0 million and none,
respectively.

Functional Currency.We have a wholly owned foreign subsidiary in Australia and also
have a wholly owned subsidiary in France. In preparing our
consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from the
currency in which they keep their accounting records into U.S.
dollars. Our two subsidiaries maintain accounting records in
their local currencies and the functional currency is determined
to be U.S. dollars. The functional currency is determined
based on managements judgment and involves consideration
of all relevant economic facts and circumstances affecting the
subsidiary. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billing,
financing, payroll, and other expenditures would be considered
the functional currency but any dependency upon the parent and
the nature of the subsidiaries operations must also be
considered. Since the U.S. dollar is deemed to be the functional
currencies for our subsidiaries, any gain or loss associated
with the translation of those subsidiaries financial
statements is included in the consolidated statement of
operations. If in the future we determine that there has been a
change in the functional currency of a subsidiary from
U.S. dollars to its local currency, any translation gains
or losses arising after the date of change would be included
within other comprehensive income. The determination of
functional currency is subject to judgment by the management.

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Contingencies.We
account for contingencies in accordance with SFAS No. 5,
Accounting for Contingencies. SFAS No. 5
requires that we record an estimated loss from a loss
contingency when information available prior to issuance of our
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 the amount of the loss can be
reasonably estimated. Accounting for contingencies such as
environmental, legal and income tax matters requires us to use
our judgment. While we believe that our accruals for these
matters are adequate, if the actual loss from a loss contingency
is significantly different than the estimated loss, our results
of operations may be over or understated.

RESULTS OF OPERATIONS



| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2003 and
    2002



| |          
| | ---------
| | Net Sales

Net sales were $7.7 million in 2003, of
which 77% were from United States, 14% were from Europe, 7% were
from Australia and 2% were from Asia and Canada. Net sales were
$1.7 million in 2002, of which 47% were from Europe, 42%
were from Australia, 6% were from Asia and Canada and 5% were
from United States.

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

|                         |  |                   |       |                   |  |   |       |  
|------------------------ |  | ----------------- | ----- | ----------------- |  | - | ----- | -
|                         |  | December 31, 2003 |       | December 31, 2002
|                         |  |                   |       |                  
|Net Sales (in thousands) |  | $                 | 7,700 |                   |  | $ | 1,700 |  
|United States            |  |                   | 77    | %                 |  |   | 5     | %
|Europe                   |  |                   | 14    | %                 |  |   | 47    | %
|Australia                |  |                   | 7     | %                 |  |   | 42    | %
|Others                   |  |                   | 2     | %                 |  |   | 6     | %

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

The increase in net sales of $6.0 million or
353% is the result of commercialization of Essure in the United
States. Shortly after FDA approval of Essure in the United
States in November 2002, we began an aggressive launch of Essure
in the United States and as a result, dramatically increased net
sales generated within United States. In addition to increased
number of units sold, the increase in average selling price also
contributed to the increase in net sales. Our worldwide average
selling price increased from $460 to $830 because of the higher
selling price in the United States, which was approximately $980
per unit throughout 2003.

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. During the second quarter of 2003, we started to focus on
one-on-one training sessions to new physicians who have
pre-scheduled Essure cases. This is to accelerate the training
process and to control training costs. As of December 31,
2003, we have a total of 792 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.

We understand that a strong base of trained
physicians does not necessarily correlate to an increase in
revenue proportionately. Another important factor is the average
procedure performed per physician per month, or utilization.
During 2003, our utilization rates declined from a high of over
three procedures per month per physician in the first quarter to
a utilization of slightly less than one procedure per month per
physician in the fourth quarter of 2003. We believe this decline
is primarily related to the intended focus of the field sales
and training forces on preceptoring doctors, as opposed to
calling on existing doctors in order to increase utilization
rates. We also believe that the reimbursement environment for
gaining coverage of a technologically new medical device such as
Essure creates a level of frustration among physicians and
facilities

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when either not all patients are covered by a
third-party payor or when claims submissions are delayed or
denied inadvertently by payors. This frustration can cause
physicians, who otherwise are positive about the technology, to
temporarily stop performing the procedure until the
reimbursement environment is more assured.


We have been working diligently with third-party
payors to make sure they understand the benefits of Essure. To
date, United States physicians and facilities using Essure have
been reimbursed for the procedure under existing Current
Procedural Terminology, or CPT codes. Currently, many of the
nations leading hospitals have physicians on their medical
staffs that now offer Essure to patients who are seeking
permanent birth control. The National Blue Cross/ Blue Shield
Association has issued a positive recommendation to its local
members to cover the Essure procedure. Additionally, Aetna
United States Healthcare, the largest United States provider
have also joined a list of leading health insurance companies
who have established a coverage policy for Essure, making Essure
available to women and couples seeking an alternative to tubal
ligation or vasectomy in the United States. By the end of 2003,
we estimate that we have payor coverage of 124 million
lives or 59% of the total insured, non-Medicare
U.S. population.

In February 2004, we announced our expected net
sales for 2004 to be approximately $15.0 million to
$16.0 million, which represents more than 100% growth from
2003. We expect net sales from the United States will continue
to be the major contributor of our global net sales. We have
established goals and programs to increase the number of covered
lives under third-party insurance payers, the number of doctors
preceptored and to increase physician utilization of the Essure
procedure. Furthermore, we have signed an exclusive
U.S. co-marketing agreement with GYNECARE, Worldwide
division of Ethicon, Inc., in order to market the Essure device
to a group of doctors that perform permanent female
sterilization which we have not previously targeted. We believe
our revenue growth in 2004 will be significantly influenced by
how successful we are in achieving those objectives.



| |             
| | ------------
| | Gross Profit

Cost of goods sold increased by $3.4 million
to $6.5 million in 2003 as compared to $3.1 million in
2002. Our gross profit was negative in the fourth quarter of
2002 as compared to 20% in the fourth quarter of 2003 and it has
increased from 0% in the first quarter of 2003 to 20% in the
fourth quarter of 2003. The increase was primarily due to
increase in production volume and increase in our average
selling price. Our worldwide average selling price increased
from $460 to $830 because of the higher selling price in the
United States, which was approximately $980 per unit throughout
2003. With respect to 2004, we expect our production costs to
continue to decrease due to the expected increase in production
volume. We are also in the process of transitioning almost all
of our manufacturing activities to a third party manufacturer in
Mexico. This outsource effort will further decrease our
production costs and increase gross profit. We expect to receive
FDA approval for the process at the subcontractor by the end of
the first quarter of 2004. Although we expect lower production
costs to improve our gross profit, our anticipated gross profit
will fluctuate in correlation to revenue growth as production
costs remain sensitive to production volume.



| |                   
| | ------------------
| | Operating Expenses

Research and development expenses, which include
clinical, regulatory and product development, decreased by
$2.2 million to $6.0 million in 2003 as compared with
$8.2 million in 2002. The decrease is primarily due to
transfer of research and development personnel to assist with
improving manufacturing process ($1.4 million); completion
of activities pertaining to the PMA application process and
completion of certain research and development projects such as
the coil catheter study ($0.6 million); reduction in
material expenditures for research and development needs
($0.2 million). Research and development costs in 2004 are
expected to remain relatively consistent to that of 2003 levels
as we complete our Pivotal and Phase II clinical trials and
continue to invest in product development of new or alternative
product designs.

Selling, general and administrative expenses
increased by $11.9 million to $35.3 million in 2003 as
compared to $23.4 million in 2002. The $11.9 million
expenditure increase was due to United States commercialization.
The increases primarily were attributable to a $4.8 million
increase in domestic selling,

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marketing and U.S. physician training and
strategic reimbursement expenditures; a $3.3 million
increase in payroll related expenses for U.S. sales; a
$1.8 million increase in legal fees mainly attributable to
the settlement of the Ovion lawsuit; a $1.4 million
increase in expenses related to the hiring and relocation of our
chief executive officer; a $1.2 million increase in general
and administrative infrastructure expenses to support the
overall growth in the areas of sales, physician training and
reimbursement and a $1.1 million increase in advertising
and public relation expenses. Internationally, expenditures
decreased by $1.7 million as we focused our resources on
the development of Essure in the United States. In 2004, we
expect to have limited international expenditures since we have
already completed the divesture agreement with our French
subsidiary in January 2004 and we are in the process of
completing a similar agreement with our Australian subsidiary.


Selling, general and administrative expenses are
expected to decrease in 2004 as compared to 2003 due to the
settlement of the Ovion litigation, discontinuation of funding
for our French operation and planned discontinuation of funding
for our Australian operation, and the nonrecurring expenses
related to the CEO transition.



| |                          
| | -------------------------
| | Other Income and Expenses

Interest and other income decreased by $222,000
in 2003 as compared to 2002. The decrease is due to decreases in
our average cash balances and lower average interest rates paid
on our invested funds. We invest our excess cash in high
quality, short-term commercial paper, government securities and
money market funds. Interest and other expenses decreased by
$256,000 relating to a one-time settlement charge recorded in
2002 in connection with a 1997 distribution agreement related to
our discontinued product.



| |             
| | ------------
| | Income Taxes

As a result of our net loss of
$39.5 million, we incurred no income tax expense in 2003.
As of December 31, 2003, we had net operating loss carry
forwards for federal and state income tax purposes of
approximately $153.0 million and $59.0 million,
respectively. In addition, at December 31, 2003, we had
federal and state research credit carry forwards of
approximately $1.8 million and $1.6 million,
respectively. The net operating loss and credit carry forwards
described above will expire at various dates beginning in the
years 2008 through 2023, if not utilized. Use of the net
operating losses and credits may be subject to a substantial
annual limitation by the Internal Revenue Service. The annual
limitation may result in the expiration of net operating losses
and credits before we can use them to reduce future earnings, if
any. Because of the Companys lack of earnings history and
anticipated net loss, the deferred tax assets have been fully
offset by a valuation allowance. The increase in the valuation
allowance was approximately $14.8 million,
$14.6 million and $7.5 million during 2003, 2002 and
2001, respectively.



| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2002 and
    2001



| |          
| | ---------
| | Net Sales

Net sales were $1.7 million in 2002, of
which 47% were from Europe, 42% from Australia, 6% from Asia and
Canada and 5% from the United States. Net sales were
$0.4 million in 2001, of which 77% were from Australia, 14%
from Singapore, 9% from Europe and none from the United States.
The increase in net sales of $1.3 million is the result of
increased commercialization of Essure in various regions of the
world, including the United States.

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

|                         |  |                   |       |                   |  |   |     |  
|------------------------ |  | ----------------- | ----- | ----------------- |  | - | --- | -
|                         |  | December 31, 2002 |       | December 31, 2001
|                         |  |                   |       |                  
|Net Sales (in thousands) |  | $                 | 1,700 |                   |  | $ | 400 |  
|United States of America |  |                   | 5     | %                 |  |   |    |  
|Europe                   |  |                   | 47    | %                 |  |   | 9   | %
|Australia                |  |                   | 42    | %                 |  |   | 77  | %
|Other                    |  |                   | 6     | %                 |  |   | 14  | %

Net sales were attributable to regions based on
shipping location of the external customers.



| |             
| | ------------
| | Gross Profit

Cost of goods sold increased by $1.6 million
to $3.1 million in 2002 as compared to $1.5 million in
2001. The increase was primarily due to an increase in units
sold and our investment in manufacturing infrastructure, staff
and capacity to transition to commercial scale manufacturing.
During 2001, our manufacturing infrastructure was still in a
pilot manufacture phase supporting only limited clinical,
research and development needs. As we started to commercialize
Essure internationally in Australia and Europe in 2002, we began
to build and expand our manufacturing infrastructure. We
increased head count in manufacturing, improved and expanded our
manufacturing facility and strengthened our quality control
department in anticipation of FDA approval of which we received
in late November 2002.



| |                   
| | ------------------
| | Operating Expenses

Research and development expenses, which include
clinical, regulatory, quality assurance and pilot manufacturing
expenses, increased by $0.2 million to $8.2 million in
2002 as compared with $8.0 million in 2001. The increase is
primarily due to activities pertaining to the PMA application
process.

Selling, general and administrative expenses
increased by $13.6 million to $23.4 million in 2002 as
compared to $9.8 million in 2001. Expenditures in sales and
marketing increased dramatically due to United States
commercialization efforts. The increases primarily were
attributable to a $3.9 million increase in domestic
selling, marketing and strategic reimbursement headcount and
other employee related expenses; a $2.9 million increase in
connection with establishment of a professional education
department to facilitate the training of doctors which we
believe is essential to the successful commercialization of
Essure; and a $1.3 million increase related to advertising
and tradeshows. We were present in several major medical
conferences and meetings, such as AAGL (American Association of
Gynecologist Laparoscopists) to increase awareness of Essure in
the medical community; and we have also retained outside public
relations firms and advertising agencies to increase awareness
of Essure. In addition, we have added a strategic reimbursement
department to address third party payor matters.
Internationally, expenditures increased by $2.8 million in
connection with establishing a French sales division to develop
the European market and expenditures related to our Australian
subsidiary increased moderately by $0.4 million due primarily to
marketing activities. General and administrative infrastructure
expenses also increased by $2.3 million to support the
growth and expected growth of the Company.



| |                          
| | -------------------------
| | Other Income and Expenses

Interest and other income increased by $153,000
in 2002 as compared to 2001. The increase is primarily due to
higher average cash balance in 2002 due to the completion of our
secondary public offering completed in June 2002. Interest and
other expenses increased by $264,000 relating to a one-time
settlement charge recorded in 2002 in connection with a 1997
distribution agreement related to our discontinued product.

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Recent Accounting Pronouncements

In December 2003, the Financial Accounting
Standards Board (FASB) issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. The FASB published the
revision to clarify and amend some of the original provisions of
FIN 46, which was issued in January 2003, and to exempt certain
entities from its requirements. A variable interest entity
(VIE) refers to an entity subject to consolidation
according to the provisions of this Interpretation. FIN 46R
applies to entities whose equity investment at risk is
insufficient to finance that entitys activities without
receiving additional subordinated financial support provided by
any parties, including equity holders, or where the equity
investors (if any) do not have a controlling financial interest.
FIN 46R provides that if an entity is the primary
beneficiary of a VIE, the assets, liabilities, and results of
operations of the VIE should be consolidated in the
entitys financial statements. In addition, FIN 46R
requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE
provide additional disclosures. The provisions of FIN 46R
are effective for the Companys fiscal 2004 first quarter.
The Company does not expect the adoption of FIN 46R to have
a material impact on the Companys financial position or
results of operations.

Liquidity and Capital Resources

We have experienced significant operating losses
since inception and as of December 31, 2003, had an
accumulated deficit of $157.3 million. We have financed our
operations since inception primarily through equity financings.
In February 2004, we completed a private placement of
approximately 3.0 million shares of common stock at $8.50
per share. Our net proceeds from the private placement were
approximately $23.9 million, after deducting offering costs
and commissions. The proceeds will be used to fund operations
and we expect these will ensure that we have sufficient capital
resources to reach profitability. Once we reach profitability,
we expect to finance our operation through cash received from
sales of our product. However, if our revenue growth does not
materialize as planned, we may in the future seek to raise
additional funds through bank facilities, debt or equity
offerings or other sources of capital.

As of December 31, 2003, we had cash, cash
equivalents, and restricted cash of $30.9 million compared
with $70.7 million of cash, cash equivalents, restricted
cash and short-term investments at December 31, 2002. The
decrease in these balances as of December 31, 2003 was due
to $40.9 million of cash used in operating activities and
$0.9 million of capital expenditures, offset by
$1.9 million of cash received from the exercise of stock
options and $0.1 million of cash due to the effect of exchange
rate changes on cash. We expect cash used by operating
activities to decrease in 2004 as we increase net sales and
control operating expenses.

Operating
Activities

Net cash used in operating activities was
$40.9 million in 2003, $31.1 million in 2002 and
$18.6 million in 2001. The net cash used in operating
activities in 2003 was primarily related to our net loss of
$39.5 million adjusted for non-cash related item of
$2.2 million relating to depreciation and amortization,
stock option expenses and provision for bad debt allowance. The
increase in accounts receivable of $1.1 million and other
assets of $2.1 million also contributed to cash used by
operating activities. Net cash used in operating activities in
2002 and 2001 were primarily our net loss adjusted for non-cash
related items such as depreciation, amortization, stock option
expenses and bad debt allowance. Increase in inventories and
accounts receivables, offset by increases in accounts payable
and other accrued liabilities also contributed to cash used in
operating activities for 2002 and 2001. The increases in net
loss, inventories, accounts receivable, accounts payable and
other accrued liabilities in 2002 and 2001 were related to our
expansion in all areas as we transitioned from an early-stage,
pilot manufacturing company to commercialization.

The increase of $2.1 million in other assets
primarily relates to an upfront royalty payment made in
connection with our settlement agreement with Ovion Inc.

The increase in accounts receivable of
$1.1 million in 2003 is due to increased net sales. We
monitor our accounts receivable turnover closely to ensure that
receivables are collected timely and have established credit and
collection policy to facilitate our collection process and
reduce our credit loss exposure. Our worldwide

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days sales outstanding has improved from
92 days in 2002 to 51 days in 2003. The improvement is
primarily because greater percentage of our accounts receivable
are domestic customers, and previously, most of our customers
were international; domestic receivable have shorter standard
payment terms than international customers. We are still at the
early stage of marketing our product and accounts receivables
has not been our major source of capital. As we grow our
business and increase our revenues, we expect to primarily rely
on accounts receivables as the capital resources to fund our
operations.


Investing
Activities

Net cash provided by investing activities was
$10.1 million in 2003. Net cash used in investing
activities in 2002 was $13.0 million. Net cash provided by
investing activities in 2001 was $6.6 million. The increase
in net cash provided by investing activities in 2003 consisted
primarily of the maturation of short-term investments of
$18.0 million offset by the purchase of short-term
investments of $7.0 million and $0.9 million of
capital expenditures.

Our capital expenditures in 2003, 2002 and 2001
were $0.9 million, $2.0 million and $1.2 million
respectively. In 2003, capital expenditures were primarily
related to 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 better understanding of our customers and
our market. In 2002 and 2001, the primary objective of those
capital expenditures were to expand and improve our
manufacturing facility to transition from pilot manufacturing to
commercial manufacturing. In 2004, we expect our capital
investment to continue in the area of website development and
management tool development for better tracking and gathering of
data so that management can have meaningful data for analysis
and decision making.

Financing
Activities

Net cash provided by financing activities was
$1.9 million in 2003 as compared with $69.9 million in
2002. Net cash provided by financing activities was
$41.1 million in 2001. The net cash provided by financing
activities in 2003 consisted of net proceeds from the exercise
of stock options. The net cash provided by financing activities
in 2002 consisted primarily of the net proceeds from the
follow-on public offering completed in June and July 2002, in
which we sold 4.6 million shares of common stock at $16.00
per share. In 2001, we issued a total of 4.0 million shares
of common stock, primarily in private placement transactions in
April and November of 2001.

Cash Requirements, Contractual Obligations and
Commitments

We have operating lease obligations on our
current building facilities and equipment. Estimated net lease
payments due within a year and years 1-3 total $0.5 million
and $0.3 million, respectively. We also have long-term
obligations related to our Phase II clinical study and Pivotal
trial. Estimated clinical trial liabilities due within a year
and years 1-3 total $0.1 million and $0.2 million,
respectively. Additionally, we have a $69,000 standby letter of
credit commitment in connection with an equipment lease that
expires in 2006. The letter of credit is renewable every year.

The following table discloses aggregate
information about our contractual obligations and the periods in
which payments are due as of December 31, 2003 (in
thousands):

|                            |  |                        |           |                  |  |           |         |  |  |   |         | 
|--------------------------- |  | ---------------------- | --------- | ---------------- |  | --------- | ------- |  |  | - | ------- | 
|                            |  |                       
|                            |  | Payments Due by Period
|                            |  |                       
|                            |  | Total                  |           | Less Than 1 Year |  | 1-3 Years
|                            |  |                        |           |                  |  |          
|Operating lease obligations |  | $                      | 812,000   |                  |  | $         | 525,000 |  |  | $ | 287,000 | 
|Clinical obligations        |  |                        | 241,000   |                  |  |           | 48,000  |  |  |   | 193,000 | 
|                            |  |                        |           |                  |  |           |         |  |  |   |         | 
|Total                       |  | $                      | 1,053,000 |                  |  | $         | 573,000 |  |  | $ | 480,000 | 
|                            |  |                        |           |                  |  |           |         |  |  |   |         | 

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 Essure system for ten years, and Ovion may

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not grant any additional such licenses to other
parties. In exchange for such license, we are 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 will be making another payment of $1.0 million in
common stock to Ovion before the end of April 2004. Pursuant to
the agreement, we made an upfront royalty payment of
$2.0 million in the fourth quarter of 2003. The prepaid
royalty will be used to offset our future royalty obligation to
Ovion. Under the settlement agreement, we will pay 3.25% of our
cumulative revenue derived from sale of the Essure products in
excess of $75.0 million as royalty for a period of ten
years starting from the date of settlement.


We expect to have negative cash flows from
operations into at least 2005 and we estimate that our existing
capital resources will be sufficient to meet our cash
requirements into 2005. Our current quarterly cash usage is
approximately $7.0 million to $8.0 million. We expect
our quarterly cash usage to decrease gradually from quarter to
quarter as our revenue increases. If our revenue growth in 2004
meets our current expectation of $15.0 million to $16.0
million and we achieve our forecasted expenses, we expect to
exit 2004 with approximately $30.0 million of cash on hand.
However, if our revenue growth does not materialize as planned
and/or we incur unexpected extraordinary expenses, we may in the
future seek to raise additional funds through bank facilities,
debt or equity offerings or other sources of capital.

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



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | resources devoted to establish sales, marketing
    and distribution capabilities;           
|
| |  | the rate of product adoption by doctors and
    patients; and                                
|
| |  | the insurance payor communitys acceptance
    of and reimbursement for the Essure procedure.

Off-Balance Sheet
Arrangements.As part of our ongoing
business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities (SPEs), which
would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or
limited purposes. As of December 31, 2003, we are not
involved in SPE transactions.

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TRENDS, RISKS AND UNCERTAINTIES

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 that involve
risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set
forth below and elsewhere in this Form 10-K.

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

We have a limited history of operation with
Essure and have incurred significant operating losses since our
inception in 1992, including operating losses of
$40.2 million in 2003, $33.1 million in 2002 and
$18.8 million in 2001. 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
may 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.

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. If Essure does not achieve
significant market acceptance among physicians, patients and
healthcare payors, even if reimbursement levels are sufficient
and necessary international and United States regulatory
approvals are maintained, we may never achieve significant
revenues or profitability.

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

Market acceptance of Essure in the United States
and in international markets will depend in part upon the
availability of reimbursement within prevailing healthcare
payment systems. Reimbursement systems in international markets
vary significantly by country and sometimes by region, and
reimbursement approvals must be obtained on a country-by-country
basis. Many international markets have government-managed health
care systems that determine reimbursement for new devices and
procedures. In most markets, there are private insurance systems
as well as government-managed systems. Regardless of the type of
reimbursement system, we believe that physician advocacy of our
product will be required to obtain reimbursement. Availability
of continued reimbursement will depend, at least in part, on the
clinical and cost effectiveness of our product. We do not know
whether reimbursement for our product will continue to be
available in the United States or in international markets under
either government or private reimbursement systems, or whether
physicians will support and advocate reimbursement for use of
our product for all indications intended by us. Large-scale
market acceptance of Essure will depend on the availability and
level of reimbursement in the United States and targeted
international markets. We may be unable to obtain or maintain
reimbursement in any country within a particular time frame, for
a particular amount, or at all, which would limit our future
product revenues and delay or prevent our profitability.

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

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

Our Co-Promotion Agreement with GYNECARE may
not be successful.

On October 30, 2003, we announced the
signing of an exclusive U.S. co-promotion agreement with
GYNECARE for marketing Essure in the United States. in
combination with GYNECARES Thermachoice endometrial
ablation product. Before joint marketing may begin however, the
FDA must approve supplements to our PMA regarding marketing and
labeling claims of the compatibility of the Essure and
ThermaChoice device and treatment in the same patient. In
addition, once the PMA supplements are approved by the FDA, if
at all, the success of the joint marketing campaign would depend
upon the effectiveness of our GYNECARE salesforce training
programs, market demand for Essure in conjunction with the
Thermachoice treatment and the efforts and commitment of
GYNECARE to this new program.

We have limited sales and marketing experience
and minimal distribution capabilities, and if we are unable to
develop our sales and marketing capabilities or be successful in
our co-marketing agreement with GYNECARE, we may be unsuccessful
in commercializing Essure.

In order to market, sell and distribute Essure,
we will need to maintain and continue to develop a sales force
and marketing group with relevant experience and continue to
develop the relationship with GYNECARE for co-marketing the
Essure device to the endometrial ablation market. Developing a
marketing and sales force is expensive and time consuming and
can impact the affectivity of our product launch. If we fail to
establish adequate marketing and sales capabilities, we may be
unable to commercialize Essure successfully. Furthermore,
certain factors in our relationship with GYNECARE are outside of
our control, such as the number of sales persons, their
compensation and the number of products they are selling, which
could adversely impact the revenues and market development we
expect from this co-marketing agreement.

We have limited experience in manufacturing
Essure in commercial quantities and are presently pursing the
outsourcing of our manufacturing to a third party which may
result in disruption to supply.

We are in the process of transitioning our
internal manufacturing operations to Venusa, a third party
manufacturer located in Mexico, to manufacture the entire
processes and assemblies of our product. Third-party
manufacturers often encounter difficulties in scaling up
production of new products, including problems involving
production yields, quality control and assurance, component
supply and shortages of qualified personnel, and compliances
with FDA or other health authority requirements. We and/or
Venusa may encounter manufacturing difficulties which could
negatively impact or delay commercialization of Essure.

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

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

We have received FDA approval to market Essure in
the United States. If we lose that approval or fail to comply
with existing or future regulatory requirements, it could delay
or prevent us from generating further product revenues.

36



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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
Essure either do not currently regulate medical devices or have
minimal registration requirements; however, these countries may
develop more extensive regulations in the future, which could
delay or prevent us from marketing Essure in these countries.

The FDA and certain foreign regulatory
authorities impose numerous requirements with which medical
device manufacturers must comply in order to maintain regulatory
approvals. FDA enforcement policy strictly prohibits the
promotion of approved medical devices for uses other than those
for which the 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.

We currently have applied for PMA approvals on
four supplements: warning label changes for the concomitant use
of Essure with Thermachoice; the 3 year effectiveness
claim; the outsourcing manufacturing validation; and the
proposed HSG substitute. There can be no guarantees that we will
receive approvals on any or all of these submissions. Further,
the timing of FDA approval is not something that we control and
delays in approvals could materially impact our business.

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

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

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

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

We have taken security measures to protect our
proprietary information, especially proprietary information that
is not covered by patents or patent applications. These
measures, however, may not provide adequate protection of our
trade secrets or other proprietary information. We seek to
protect our proprietary information by entering into
confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or
consultants could still disclose our proprietary information and
we may not be able to protect our trade secrets in a meaningful
way. If we lose any employees we may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or
other trade secrets by those former employees despite the
existence of a nondisclosure and confidentiality agreement and
other contractual restrictions designed/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 also depend on our ability to
operate without infringing or misappropriating the proprietary
rights of others. We may be exposed to future litigation by
third parties based on claims that our product infringes the
intellectual property rights of others. There are numerous
issued patents in the medical device industry and, as described
in the next risk factor, the validity and breadth of medical
device patents involve complex legal and factual questions for
which important legal principles remain unresolved. Our
competitors may assert that our product and the methods we
employ may be covered by United States or foreign patents held
by them. In addition, because patent applications can take many
years to issue, there may be currently pending patent
applications of which we are unaware that may later result in
issued patents that our product may infringe. There could also
be existing patents of which we are unaware that our product may
inadvertently infringe. If we lose a patent infringement
lawsuit, we could be prevented from selling our product unless
we can obtain a license to use technology or ideas covered by
that patent or are able to redesign the product to avoid
infringement. A license may not be available to us on terms
acceptable to us, or at all, and we may not be able to redesign
our product to avoid any infringement. If we are not successful
in obtaining a license or redesigning our product, we may be
unable to sell our product and our business would suffer.

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

The medical device industry has been
characterized by extensive litigation regarding patents and
other intellectual property rights, and companies in the
industry have used intellectual property litigation to gain a
competitive advantage. We may become a party to patent
infringement claims and litigation or interference proceedings
declared by the United States Patent and Trademark Office, 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.

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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. (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 cover Essure 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 Essure
system, 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 Essure 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. 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
Essure 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 PTO, which might occur
if interference is declared and if we are found to have priority
of invention.

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

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

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

Although we have no current plans to do so, we
may in the future acquire one or more technologies, products or
companies that complement our business. We may not be able to
effectively integrate these into our business. If we fail to
manage our growth and expansion, our business could be impaired.

We and our third-party manufacturer 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 single source 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 delay
commercialization of

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Essure, particularly as our third-party
manufacturer scales up its manufacturing activities in support
of United States and international commercial sales of Essure.


Health care reform may limit our return on our
product.

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

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

The manufacture and sale of medical products
involve an inherent risk of exposure to product liability claims
and product recalls. Although we have not experienced any
product liability claims to date, we cannot assure you that we
will be able to avoid significant product liability claims and
potential related adverse publicity. We currently maintain
product liability insurance with coverage limits of
$10.0 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 Essure will not exceed such insurance
coverage limits or that such insurance will continue to be
available on commercially reasonable terms, or at all. Insurance
is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability
claim or series of claims brought against us in excess of our
insurance coverage, or a recall of our product, could cause our
stock price to fall.

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

We depend on a number of key management, sales
and marketing and technical personnel. The loss of the services
of one or more key employees could delay the achievement of our
development and marketing objectives. Our success will also
depend on our ability to attract and retain additional highly
qualified management, sales and marketing and technical
personnel to meet our growth goals. We face intense competition
for qualified personnel, many of whom are often subject to
competing employment offers, and we do not know whether we will
be able to attract and retain such personnel.

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

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



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | other methods of permanent contraception, in
    particular tubal ligation;                                                                                                                                                                                    
|
| |  | other methods of non-permanent contraception,
    including devices such as intrauterine devices, or IUDs, vaginal
    rings, condoms and prescription drugs such as the birth control
    pill, injectable and implantable contraceptives and
    patches; and
|
| |  | other companies that may develop permanent
    contraception devices that are similar to or otherwise compete
    with Essure.                                                                                                                                 

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We are aware of a company that is in the earlier
stages of development for non-incisional permanent contraception
devices, and other companies may develop products that could
compete with Essure. Competitive factors may render Essure
obsolete or noncompetitive or reduce demand for Essure.

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

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



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | difficulties in accounts receivable collection;                                                  
|
| |  | recessions in economics;                                                                         
|
| |  | changes in regulatory requirements;                                                              
|
| |  | potentially adverse tax consequences;                                                            
|
| |  | reduced protection for intellectual property
    rights in United States and other countries; and
|
| |  | political and economic instability.                                                              

Our future liquidity and capital requirements
are uncertain.

As we commercialize Essure on a wide-scale basis,
we may require additional financing and therefore may in the
future seek to raise additional funds through bank facilities,
debt or equity offerings or other sources of capital. Any
additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants.
Additional funding may not be available when needed or on terms
acceptable to us. If we are unable to obtain additional capital,
we may be required to delay, reduce the scope of or eliminate
our research and development programs or reduce our selling and
marketing activities. We expect to have negative cash flows from
operations into at least 2005. Our future liquidity and capital
requirements will depend upon many factors, including, among
others:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | the rate of product adoption by doctors and
    patients;                                    
|
| |  | obtaining government and third-party
    reimbursement for Essure;                           
|
| |  | the resources devoted to increasing manufacturing
    capacity to meet commercial demands;   
|
| |  | our ability to reduce our cost of sales;                                                     
|
| |  | the resources devoted to establish sales and
    marketing and distribution capabilities; and
|
| |  | the progress and cost of product development
    programs.                                   

Our future quarterly results may
fluctuate.

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



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate at which new physicians are trained;                                                                                             
|
| |  | actions relating to reimbursement matters;                                                                                                
|
| |  | the rate at which we establish United States and
    international distributors or marketing partners and the degree
    of their success;
|
| |  | the extent to which Essure gains market
    acceptance;                                                                                   
|
| |  | the timing and size of distributor
    purchases; and                                                                                     
|
| |  | introduction of competitive products.                                                                                                     

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

Foreign Currency Exchange Risk: Our
expenses, except for those related to Europe and Australia, were
denominated in U.S. dollars. Our revenues, 23%, 95% and
100% of which were in foreign currencies in 2003, 2002 and 2001,
respectively, were immaterial in relation to our overall
financial position. As a result, we have relatively little
exposure for currency exchange risks and foreign exchange losses
have been minimal to date. We do not currently enter into
forward exchange contracts to hedge exposure denominated in
foreign currencies or any other derivative financial instruments
for trading or speculative purposes. In the future, if we feel
our foreign currency exposure has increased, we may consider
entering into hedging transactions to help mitigate that risk.
As of December 31, 2003, a fluctuation in exchange rates of
10% in the foreign currencies to which we are exposed would not
have a material impact on our results of operations or financial
condition.






|        |                                                             
|------- | ------------------------------------------------------------
|Item 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 47.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

During our two most recent fiscal years and
through the date of this report, we have had no reportable
events as defined in Item 304(a)(1)(v) of
Regulation S-K.

We engaged PricewaterhouseCoopers LLP as our
independent auditor effective January 11, 2002.






|         |                        
|-------- | -----------------------
|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 management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

As of December 31, 2003, 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 at the reasonable assurance level.

There have been no significant changes in our
internal controls or in other factors that could significantly
affect the internal controls during the most recent fiscal
quarter.

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PART III

Certain information required by Part III is
incorporated by reference from our proxy statement (the
Proxy Statement) for our annual meeting of
stockholders to be held May 11, 2004, 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

The information required by this item as to our
executive officers is set forth in Item 1 
Business  Executive Officers of the Company in
this Form 10-K. The information required by this item as to
our directors is incorporated by reference from the information
under the caption Proposal No. 1 Election of
Directors in the Proxy Statement. The information required
by this item as to compliance with Section 16 of the
Securities Exchange Act of 1934 is incorporated by reference
from the information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy
Statement.

We have adopted a written code of ethics that
applies to all of our employees and to our Board of Directors. A
copy of the code is being filed as an exhibit of this report and
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 the 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 the 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
the 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 the Proxy
Statement.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this Report:

(1) Report of Independent Auditors



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets at December 31,
    2003 and 2002                                           
|
| | Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001          
|
| | Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2003, 2002 and 2001

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| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001
|
| | Notes to Consolidated Financial Statements                                                    

(2) Financial Statement Schedules



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following financial statement schedule of
    Conceptus, Inc. for the years ended December 31, 2003,
    2002, and 2001 is filed as part of this Form 10-K and
    should be read in conjunction with Conceptus, Inc.s
    Consolidated Financial Statements.
|
| | Schedule II  Valuation and
    Qualifying Accounts                                                                                                                                                                                                               
|
| | Other schedules have been omitted because the
    information required to be set forth therein is not applicable
    or is shown in the financial statements or notes thereto.                                                                                    

(3) Exhibits (numbered in accordance with
Item 601 of Regulation S-K)

|        |    |             |  |                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Certificate of Incorporation
    of Registrant.                                            
|        | 3  | .2(2)       |  | Certificate of Amendment to Amended and Restated
    Certificate of Incorporation of Registrant.                
|        | 3  | .3(1)       |  | Bylaws of Registrant.                                                                                           
|        | 3  | .4          |  | Amendment to the Bylaws of the Registrant.                                                                      
|        | 10 | .1(1)       |  | Form of Indemnification Agreement for directors
    and officers.                                               
|        | 10 | .2(3)*      |  | Amended and Restated 1993 Stock Plan.                                                                           
|        | 10 | .3(1)*      |  | 1995 Employee Stock Purchase Plan.                                                                              
|        | 10 | .4(4)*      |  | 1995 Directors Stock Option Plan.                                                                              
|        | 10 | .5*         |  | Amended and Restated 2001 Equity Incentive Plan.                                                                
|        | 10 | .6(5)*      |  | Amended and Restated 2002 Non-Qualified Stock
    Option Plan.                                                  
|        | 10 | .7(6)*      |  | Form of Senior Management Change of Control
    Agreement.                                                      
|        | 10 | .8(6)*      |  | Change of Control Agreement dated as of
    May 13, 1997 by and between Registrant and Kathryn A.
    Tunstall. 
|        | 10 | .9(7)*      |  | Master Consulting Agreement with Florence Comite
    dated September 10, 1997.                                  
|        | 10 | .10(8)      |  | Relocation bonus agreement dated April 25,
    2002 between the Registrant and Stan Van Gent.                   
|        | 10 | .11(8)      |  | Promissory note dated April 25, 2002 between
    the Registrant and Stan Van Gent.                              
|        | 10 | .12(8)      |  | Promissory note dated May 22, 2002 between
    the Registrant and Stan Van Gent.                                
|        | 10 | .13(1)      |  | Supplier Agreement dated March 29, 1995
    between the Registrant and Advanced Cardiovascular
    Systems, Inc.
|        | 10 | .14(1)      |  | License Agreement dated December 28, 1992
    between the Registrant and Target Therapeutics Inc.               
|        | 10 | .15(9)      |  | Lease agreement dated November 14, 2000 with
    Dani Investment Partners.                                      
|        | 10 | .16(15)     |  | Offer and Acceptance of Lease Extension with Dani
    Investment Partners dated September 12, 2003.             
|        | 10 | .17(10)     |  | Lease Agreement with Three Sisters Ranch
    Enterprises dated April 15, 1997.                                  
|        | 10 | .18(5)      |  | First Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                    
|        | 10 | .19(5)      |  | Second Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                   
|        | 10 | .20(5)      |  | Third Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                    
|        | 10 | .21(11)     |  | Fourth Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                   
|        | 10 | .22(15)     |  | Fifth Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                    

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .23(14)     |  | 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.
|        | 10 | .24(16)     |  | Exclusive U.S. Co-Promotion Agreement, dated
    as of October 30, 2003, by and between the Registrant and
    Gynecare Worldwide Division of Ethicon, Inc.                                                                                                                                                                                                                                             
|        | 10 | .25(17)     |  | 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.                                                                                                                                                                                                                                                   
|        | 10 | .26         |  | Contract Manufacturing Agreement, dated as of
    June 20, 2003, between the Registrant and Venusa, Ltd.                                                                                                                                                                                                                                                                                                
|        | 10 | .27(18)*    |  | Letter Agreement by and between the Company and
    Mark M. Sieczkarek, dated April 15, 2003.                                                                                                                                                                                                                                                                                                           
|        | 10 | .28(15)*    |  | Amended Letter Agreement by and between the
    Company and Mark Sieczkarek, dated July 25, 2003.                                                                                                                                                                                                                                                                                                       
|        | 10 | .29*        |  | Letter Agreement by and between the Company and
    Gregory E. Lichtwardt dated November 12, 2003.                                                                                                                                                                                                                                                                                                      
|        | 14 | .1          |  | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                         
|        | 23 | .1          |  | Consent of Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                     
|        | 24 | .1          |  | Power of Attorney (See Page 71 of this
    Report).                                                                                                                                                                                                                                                                                                                                                     
|        | 31 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                 
|        | 32 | .1          |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                            



---



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management contract or compensatory plan or
    arrangement.



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been requested with
    respect to certain portions of this Exhibit by order from the
    Securities and Exchange Commission or requested.



| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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.
|
| | (2) | Incorporated by reference to the
    Registrants Registration Statement on Form S-3 (File
    No, 333-89266) filed on June 4, 2002.                                        
|
| | (3) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2000.                                                   
|
| | (4) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1995.                                                      
|
| | (5) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002.                                                      
|
| | (6) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 1997.                                                    
|
| | (7) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001.                                                      
|
| | (8) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002.                                                    
|
| | (9) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000.                                                      



|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended April 30, 1997.
|    
|(11) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001.   

45



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##### Table of Contents





|     |                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(12) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1998.                       
|    
|(13) | Incorporated by reference to Exhibit 2.1 of
    the Registrants Report on Form 8-K filed on
    December 10, 1996.                          
|    
|(14) | 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.
|    
|(15) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003.                
|    
|(16) | Incorporated by reference to Exhibit 1 of
    the Registrants Report on Form 8-K filed on
    March 1, 2004                                 
|    
|(17) | Incorporated by reference to Exhibit 2 of
    the Registrants Report on Form 8-K filed on
    March 1, 2004                                 
|    
|(18) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2003.                    

(b) Reports on Form 8-K



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | On October 24, 2003, the Company filed a
    current report on Form 8-K under Item 5 (Other
    Events) reporting that it had issued a press release
    announcing that the Company and Ovion, Inc. have arrived at
    an agreement to settle their ongoing patent infringement
    litigation matters.                                                                                                                                                                                                                                  
|
| | (2) | On October 30, 2003, the Company filed a
    current report on Form 8-K under Item 5 (Other
    Events) reporting that it had issued a press release
    announcing certain financial results for the financial quarter
    ended September 30, 2003.                                                                                                                                                                                                                                                                                      
|
| | (3) | On November 4, 2003, the Company filed a
    current report on Form 8-K under Item 5 (Other
    Events) reporting that it had issued a press release
    announcing that the Company signed an exclusive
    U.S. co-promotion agreement with GYNECARE Worldwide
    division of ETHICON, INC., involving Conceptus Essure
    non-incisional permanent birth control procedure and the
    GYNECARE THERMACHOICE* Uterine Balloon Therapy System, a
    treatment for menorrhagia (heavy menstrual bleeding) in
    pre-menopausal women.
|
| | (4) | On November 21, 2003, the Company filed a
    current report on Form 8-K under Item 5 (Other
    Events) reporting that it had issued a press release
    announcing the appointment of Gregory E. Lichtwardt, to the
    position of executive vice president, treasurer and chief
    financial officer.                                                                                                                                                                                                                                 
|
| | (5) | On December 15, 2003, the Company filed a
    current report on Form 8-K under Item 5 (Other
    Events) reporting that it had issued a press release
    commenting on the outlook for Company financial and operational
    performance during 2004.                                                                                                                                                                                                                                                                                     

46



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CONCEPTUS, INC.



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                                                                     |  |      |    | 
|---------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Report of Independent Auditors                                                                       |  |      | 48 | 
|Consolidated Balance Sheets, December 31,
    2003 and 2002                                          |  |      | 49 | 
|Consolidated Statements of Operations for Years
    Ended December 31, 2003, 2002 and 2001           |  |      | 50 | 
|Consolidated Statements of Stockholders
    Equity for Years Ended December 31, 2003, 2002 and 2001 |  |      | 51 | 
|Consolidated Statements of Cash Flows for Years
    Ended December 31, 2003, 2002 and 2001           |  |      | 52 | 
|Notes to Consolidated Financial Statements                                                           |  |      | 53 | 

47



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Conceptus, Inc.


In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of
Conceptus, Inc. (the Company) and its
subsidiaries at December 31, 2003 and 2002 and the results
of their consolidated operations and their cash flows for each
of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements 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
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 15, 2004


48



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|        |                                      
|------- | -------------------------------------
|Item 1. | Consolidated Financial
    Statements

CONCEPTUS, INC.

CONSOLIDATED BALANCE SHEETS

|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |        |          |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------ | ------ | -------- | - | ------ | ------ | -------- | -
|                                               |                                                                              |                                                                                                                                                             
|                                               |                                                                              | December 31                                                                                                                                                 
|                                               |                                                                              |                                                                                                                                                             
|                                               |                                                                              | 2003                                                                                                                                                         |        | 2002  
|                                               |                                                                              |                                                                                                                                                              |        |       
|                                               |                                                                              |                                                                                                                                                             
|                                               |                                                                              | (In thousands, except share                                                                                                                                 
|                                               |                                                                              | and per share amounts)                                                                                                                                      
|ASSETS                                        
|                                               | Current assets:                                                              |                                                                                                                                                              |        |        |          |   |        |        |         
|                                               |                                                                              | Cash and cash equivalents                                                                                                                                    |        | $      | 30,794   |   |        | $      | 59,673   |  
|                                               |                                                                              | Short-term investments                                                                                                                                       |        |        |         |   |        |        | 10,992   |  
|                                               |                                                                              | Restricted cash                                                                                                                                              |        |        | 69       |   |        |        | 69       |  
|                                               |                                                                              | Accounts receivable, net of allowance for
    doubtful accounts of $164 and $45 at December 31, 2003 and
    2002, respectively                              |        |        | 1,582    |   |        |        | 581      |  
|                                               |                                                                              | Inventories, net                                                                                                                                             |        |        | 2,682    |   |        |        | 2,524    |  
|                                               |                                                                              | Other current assets                                                                                                                                         |        |        | 504      |   |        |        | 797      |  
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                               | Total current assets                                                         |                                                                                                                                                              |        | 35,631 |          |   |        | 74,636 |         
|                                               | Property and equipment, net                                                  |                                                                                                                                                              |        | 2,031  |          |   |        | 2,474  |         
|                                               | Intangibles assets, less accumulated amortization
    of $50                 |                                                                                                                                                              |        | 1,950  |          |   |        |       |         
|                                               | Other assets                                                                 |                                                                                                                                                              |        | 2,238  |          |   |        | 185    |         
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|Total assets                                   |                                                                              | $                                                                                                                                                            | 41,850 |        |          | $ | 77,295 |       
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                              
|LIABILITIES AND STOCKHOLDERS
    EQUITY      
|                                               | Current liabilities:                                                         |                                                                                                                                                              |        |        |          |   |        |        |         
|                                               |                                                                              | Accounts payable                                                                                                                                             |        | $      | 2,698    |   |        | $      | 3,148    |  
|                                               |                                                                              | Clinical trial liabilities                                                                                                                                   |        |        | 48       |   |        |        | 182      |  
|                                               |                                                                              | Accrued compensation                                                                                                                                         |        |        | 2,691    |   |        |        | 2,614    |  
|                                               |                                                                              | Other accrued liabilities                                                                                                                                    |        |        | 2,443    |   |        |        | 420      |  
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                               | Total current liabilities                                                    |                                                                                                                                                              |        | 7,880  |          |   |        | 6,364  |         
|                                               |                                                                              | Long-term clinical trial liabilities                                                                                                                         |        |        | 193      |   |        |        | 217      |  
|                                               |                                                                              | Other long-term liabilities                                                                                                                                  |        |        | 40       |   |        |        |         |  
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                               | Total liabilities                                                            |                                                                                                                                                              |        | 8,113  |          |   |        | 6,581  |         
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                               | Commitments and Contingencies (Notes 6 and
    10)
    Stockholders equity: |                                                                                                                                                              |        |        |          |   |        |        |         
|                                               |                                                                              | Preferred stock:                                                                                                                                             |        |        |          |   |        |        |          |  
|                                               |                                                                              | $0.003 par value, 3,000,000 shares
    authorized; no shares issued or outstanding at December 31,
    2003 and 2002                                         |        |        |         |   |        |        |         |  
|                                               |                                                                              | Common stock and additional paid-in capital:                                                                                                                 |        |        |          |   |        |        |          |  
|                                               |                                                                              | $0.003 par value, 50,000,0000 shares
    authorized, 21,817,066 and 21,349,441 shares issued and
    outstanding at December 31, 2003 and 2002, respectively |        |        | 190,971  |   |        |        | 188,435  |  
|                                               |                                                                              | Accumulated other comprehensive income                                                                                                                       |        |        | 26       |   |        |        | 11       |  
|                                               |                                                                              | Accumulated deficit                                                                                                                                          |        |        | (157,260 | ) |        |        | (117,732 | )
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|                                               | Total stockholders equity                                                   |                                                                                                                                                              |        | 33,737 |          |   |        | 70,714 |         
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       
|Total liabilities and stockholders
    equity |                                                                              | $                                                                                                                                                            | 41,850 |        |          | $ | 77,295 |       
|                                               |                                                                              |                                                                                                                                                              |        |        |          |   |        |       

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

49



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CONCEPTUS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |       |  
|---------------------------------------------------------------------------------- | ----------------------------------- | ------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ----- | -
|                                                                                   |                                     |                                
|                                                                                   |                                     | Years Ended December 31,       
|                                                                                   |                                     |                                
|                                                                                   |                                     | 2003                            |         | 2002   |   | 2001
|                                                                                   |                                     |                                 |         |        |   |     
|                                                                                   |                                     |                                
|                                                                                   |                                     | (In thousands, except per share
|                                                                                   |                                     | amounts)                       
|Net sales                                                                          |                                     | $                               | 7,700   |        |   | $    | 1,650   |        |   | $ | 401     |      
|Cost of goods sold                                                                 |                                     |                                 | 6,537   |        |   |      | 3,142   |        |   |   | 1,456   |      
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Gross profit (loss)                                                                |                                     |                                 | 1,163   |        |   |      | (1,492  | )      |   |   | (1,055  | )    
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Operating expenses:                                                                |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|                                                                                   | Research and development            |                                 |         | 6,048  |   |      |         | 8,230  |   |   |         | 7,983 |  
|                                                                                   | Selling, general and administrative |                                 |         | 35,306 |   |      |         | 23,417 |   |   |         | 9,776 |  
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Total operating expenses                                                           |                                     |                                 | 41,354  |        |   |      | 31,647  |        |   |   | 17,759  |      
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Operating loss                                                                     |                                     |                                 | (40,191 | )      |   |      | (33,139 | )      |   |   | (18,814 | )    
|Interest and other income and expenses:                                            |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|                                                                                   | Interest and other income           |                                 |         | 674    |   |      |         | 896    |   |   |         | 743   |  
|                                                                                   | Interest and other expenses         |                                 |         | (11    | ) |      |         | (267   | ) |   |         | (3    | )
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Net loss                                                                           |                                     | $                               | (39,528 | )      |   | $    | (32,510 | )      |   | $ | (18,074 | )    
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Basic and diluted net loss per share                                               |                                     | $                               | (1.83   | )      |   | $    | (1.71   | )      |   | $ | (1.33   | )    
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      
|Weighted-average shares used in computing basic
    and diluted net loss per share |                                     |                                 | 21,565  |        |   |      | 18,968  |        |   |   | 13,561  |      
|                                                                                   |                                     |                                 |         |        |   |      |         |        |   |   |         |      

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

50



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CONCEPTUS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |        |    |  |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ---------- | ------------- |  | ----------- | ------- | ------------- |  | ------ | -- |  |  | - | -------- | - |  | - | ------- | -
|                                                                                                              |  |                                                    |            |               |  |             |         |              
|                                                                                                              |  | Common Stock &                                     |            | Accumulated   |  |             |         |              
|                                                                                                              |  | Additional Paid-In Capital                         |            | Other         |  |             |         | Total        
|                                                                                                              |  |                                                    |            | Comprehensive |  | Accumulated |         | Stockholders
|                                                                                                              |  | Shares                                             |            | Amount        |  | Income      |         | Deficit       |  | Equity
|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |       
|                                                                                                              |  |                                                   
|                                                                                                              |  | (In thousands, except share and per share amounts)
|Balances as of January 1, 2001                                                                                |  |                                                    | 11,701,733 |               |  | $           | 77,107  |               |  | $      |   |  |  | $ | (67,148  | ) |  | $ | 9,959   |  
|Issuance of common stock for cash upon exercise
    of options                                                |  |                                                    | 697,144    |               |  |             | 1,507   |               |  |        |   |  |  |   |         |   |  |   | 1,507   |  
|Issuance of common stock for cash from employee
    stock purchase plan                                       |  |                                                    | 18,582     |               |  |             | 219     |               |  |        |   |  |  |   |         |   |  |   | 219     |  
|Issuance of common stock for cash pursuant to two
    private financings, net of issuance costs of $2,957     |  |                                                    | 3,968,858  |               |  |             | 39,362  |               |  |        |   |  |  |   |         |   |  |   | 39,362  |  
|Issuance of stock options to consultants for
    services                                                     |  |                                                    |           |               |  |             | 202     |               |  |        |   |  |  |   |         |   |  |   | 202     |  
|Issuance of common stock for warrant exercise                                                                 |  |                                                    | 12,469     |               |  |             |        |               |  |        |   |  |  |   |         |   |  |   |        |  
|Net loss                                                                                                      |  |                                                    |           |               |  |             |        |               |  |        |   |  |  |   | (18,074  | ) |  |   | (18,074 | )
|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |        |    |  |  |   |          |   |  |   |         |  
|Balances as of December 31, 2001                                                                              |  |                                                    | 16,398,786 |               |  |             | 118,397 |               |  |        |   |  |  |   | (85,222  | ) |  |   | 33,175  |  
|Issuance of common stock for cash upon exercise
    of options                                                |  |                                                    | 285,813    |               |  |             | 966     |               |  |        |   |  |  |   |         |   |  |   | 966     |  
|Issuance of common stock for cash from employee
    stock purchase plan                                       |  |                                                    | 29,842     |               |  |             | 319     |               |  |        |   |  |  |   |         |   |  |   | 319     |  
|Issuance of common stock for cash pursuant to
    secondary public offering, net of issurance costs of $5,502 |  |                                                    | 4,635,000  |               |  |             | 68,658  |               |  |        |   |  |  |   |         |   |  |   | 68,658  |  
|Issuance of stock options to consultants for
    services                                                     |  |                                                    |           |               |  |             | 95      |               |  |        |   |  |  |   |         |   |  |   | 95      |  
|Cumulative translation adjustments                                                                            |  |                                                    |           |               |  |             |        |               |  |        | 11 |  |  |   |         |   |  |   | 11      |  
|Net loss                                                                                                      |  |                                                    |           |               |  |             |        |               |  |        |   |  |  |   | (32,510  | ) |  |   | (32,510 | )
|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |        |    |  |  |   |          |   |  |   |         |  
|Balances as of December 31, 2002                                                                              |  |                                                    | 21,349,441 |               |  |             | 188,435 |               |  |        | 11 |  |  |   | (117,732 | ) |  |   | 70,714  |  
|Issuance of common stock for cash upon exercise
    of options                                                |  |                                                    | 429,393    |               |  |             | 1,526   |               |  |        |   |  |  |   |         |   |  |   | 1,526   |  
|Issuance of common stock for cash from employee
    stock purchase plan                                       |  |                                                    | 38,232     |               |  |             | 387     |               |  |        |   |  |  |   |         |   |  |   | 387     |  
|Issuance of stock options to consultants for
    services                                                     |  |                                                    |           |               |  |             | 623     |               |  |        |   |  |  |   |         |   |  |   | 623     |  
|Cumulative translation adjustments                                                                            |  |                                                    |           |               |  |             |        |               |  |        | 15 |  |  |   |         |   |  |   | 15      |  
|Net loss                                                                                                      |  |                                                    |           |               |  |             |        |               |  |        |   |  |  |   | (39,528  | ) |  |   | (39,528 | )
|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |        |    |  |  |   |          |   |  |   |         |  
|Balances as of December 31, 2003                                                                              |  |                                                    | 21,817,066 |               |  | $           | 190,971 |               |  | $      | 26 |  |  | $ | (157,260 | ) |  | $ | 33,737  |  
|                                                                                                              |  |                                                    |            |               |  |             |         |               |  |        |    |  |  |   |          |   |  |   |         |  

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

51



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CONCEPTUS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |        |        |   | 
|------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------- | -------- | ------ | ------ | ---- | ------- | ------- | ------ | - | ------- | ------ | ------ | - | 
|                                                                                |                                              |                                 
|                                                                                |                                              | Years Ended December 31,        
|                                                                                |                                              |                                 
|                                                                                |                                              | 2003                             |          | 2002   |        | 2001
|                                                                                |                                              |                                  |          |        |        |     
|                                                                                |                                              |                                 
|                                                                                |                                              | (In thousands)                  
|Cash flows from operating activities                                            |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Net loss                                                                        |                                              | $                                | (39,528  | )      |        | $    | (32,510 | )       |        | $ | (18,074 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|                                                                                | Depreciation and amortization                |                                  |          | 1,427  |        |      |         | 1,135   |        |   |         | 670    |       
|                                                                                | Stock compensation expense                   |                                  |          | 623    |        |      |         | 95      |        |   |         | 202    |       
|                                                                                | Allowance for doubtful accounts              |                                  |          | 119    |        |      |         | 31      |        |   |         | 14     |       
|                                                                                | Provision for inventories                    |                                  |          | 62     |        |      |         | 60      |        |   |         | 168    |       
|                                                                                | Changes in operating assets and liabilities: |                                  |          |        |        |      |         |         |        |   |         |        |       
|                                                                                |                                              | Accounts receivable              |          |        | (1,112 | )    |         |         | (364   | ) |         |        | (261   | )
|                                                                                |                                              | Inventories                      |          |        | (153   | )    |         |         | (1,450 | ) |         |        | (1,235 | )
|                                                                                |                                              | Other current assets             |          |        | 316    |      |         |         | (216   | ) |         |        | (497   | )
|                                                                                |                                              | Other assets                     |          |        | (2,053 | )    |         |         | 193    |   |         |        | (46    | )
|                                                                                |                                              | Accounts payable                 |          |        | (508   | )    |         |         | 1,307  |   |         |        | 826    |  
|                                                                                |                                              | Accrued and other liabilities    |          |        | 61     |      |         |         | 1,107  |   |         |        | 632    |  
|                                                                                |                                              | Clinical trial liabilities       |          |        | (158   | )    |         |         | (509   | ) |         |        | (1,002 | )
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Net cash used in operating activities                                           |                                              |                                  | (40,904  | )      |        |      | (31,121 | )       |        |   | (18,603 | )     
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Cash flows from investing activities                                            |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|                                                                                | Purchase of investments                      |                                  |          | (6,989 | )      |      |         | (23,916 | )      |   |         | (5,153 | )     
|                                                                                | Maturities of investments                    |                                  |          | 17,981 |        |      |         | 12,924  |        |   |         | 13,025 |       
|                                                                                | Capital expenditures                         |                                  |          | (935   | )      |      |         | (1,959  | )      |   |         | (1,175 | )     
|                                                                                | Restricted cash                              |                                  |          |       |        |      |         |        |        |   |         | (69    | )     
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Net cash (used in) provided by investing
    activities                         |                                              |                                  | 10,057   |        |        |      | (12,951 | )       |        |   | 6,628   |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Cash flows from financing activities                                            |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|                                                                                | Proceeds from issuance of common stock, net  |                                  |          | 1,913  |        |      |         | 69,943  |        |   |         | 41,088 |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Net cash provided by financing activities                                       |                                              |                                  | 1,913    |        |        |      | 69,943  |         |        |   | 41,088  |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Effect of foreign exchange rate changes on cash                                 |                                              |                                  | 55       |        |        |      | 68      |         |        |   |        |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Net (decrease) increase in cash and cash
    equivalents                        |                                              |                                  | (28,879  | )      |        |      | 25,939  |         |        |   | 29,113  |       
|Cash and cash equivalents at beginning of year                                  |                                              |                                  | 59,673   |        |        |      | 33,734  |         |        |   | 4,621   |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Cash and cash equivalents at end of year                                        |                                              | $                                | 30,794   |        |        | $    | 59,673  |         |        | $ | 33,734  |       
|                                                                                |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|Supplemental Information:                                                       |                                              |                                  |          |        |        |      |         |         |        |   |         |       
|                                                                                |                                              | Acquisition of license           |          | $      | 2,000  |      |         | $       |       |   |         | $      |       |  
|                                                                                |                                              | Cash paid during the period for: |          |        |        |      |         |         |        |   |         |        |        |  
|                                                                                |                                              |                                  | Interest |        | $      | 11   |         |         | $      |  |         |        | $      |  | 

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

52



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##### Table of Contents



CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                     
|-- | ------------------------------------
|1. | Organization, Ownership and Business

Conceptus, Inc. (Conceptus, the
Company) 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 markets
EssureTM, an innovative medical device and procedure
designed to provide a non-incisional alternative to tubal
ligation, the leading form of contraception worldwide. The
Essure device 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 the Essure
device 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 Essure 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 Essure in that region.

In January 2004, the Company has 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
Essure 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 at predetermined prices and time periods that
are typical for a distribution company. The transaction did not
have any material financial impact to the Companys
consolidated financial statements.

The Company has a limited history of operation
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. In February 2004, the Company completed a private
placement of common stock to generate enough cash to help it to
reach profitability. However, if the Companys revenue
growth does not materialize as planned, it may in the future
seek to raise additional funds through bank facilities, debt or
equity offerings or other sources of capital.



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



| |                                                            
| | -----------------------------------------------------------
| | Basis of Consolidation and Foreign Currency
    Translation

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

Functional Currency.The Company has a wholly owned foreign subsidiary in Australia,
and also has a wholly owned subsidiary in France. In preparing
the Companys consolidated financial statements, it is
required to translate the financial statements of the foreign
subsidiaries from the currency in which they keep their
accounting records into U.S. dollars. The Companys
two subsidiaries maintain their accounting records in their
local currencies and the functional currency is determined to be
U.S. dollars. The functional currency is determined based
on managements judgment and involves consideration of all
relevant economic facts and circumstances affecting the
subsidiary. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billing,
financing, payroll, and other expenditures would be considered
the functional currency but any dependency upon the parent and
the nature of the subsidiaries operations must also be
considered. Since U.S. Dollar is deemed to be the
functional currencies for the Companys subsidiaries, any
gain or loss associated with the translation of those
subsidiaries financial statements is included in the
consolidated statement of operations. Currency gain and loss is
reported under interest and other income in the

53



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consolidated statement of operations. Currency
gain recognized was $80,000 in 2003, currency loss recognized
was $41,000 in 2002 and currency gain recognized in 2001 was
immaterial.



| |                 
| | ----------------
| | Use of Estimates

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 consolidated
financial statements include allowance for doubtful accounts
receivable, reserves for obsolete and slow moving inventory,
product warranty, income taxes and accrual for other
liabilities. Actual results could differ from those estimates.



| |                                                                   
| | ------------------------------------------------------------------
| | Concentration of Credit Risk and Other
    Risks and Uncertainties

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
and the United States of America. The Company does not require
collateral and provides for estimated credit losses based on
customer credit assessment.

The following table summarizes customers with
greater than 10% of the Companys net sales for the
years ended December 31, 2003, 2002 and 2001:

|           |  |              |   |      |  |      |    |   |  |  |    |  
|---------- |  | ------------ | - | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |             
|           |  | Years Ended 
|           |  | December 31,
|           |  |             
|           |  | 2003         |   | 2002 |  | 2001
|           |  |              |   |      |  |     
|Customer A |  |              |  |      |  |      | 41 | % |  |  | 15 | %
|Customer B |  |              |  |      |  |      |   |   |  |  | 23 | %
|Customer C |  |              |  |      |  |      | 16 | % |  |  |    |  
|Customer D |  |              |  |      |  |      | 13 | % |  |  |    |  

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, 2003 and 2002.

|           |  |              |    |      |  |  |    |  
|---------- |  | ------------ | -- | ---- |  |  | -- | -
|           |  |             
|           |  | As of       
|           |  | December 31,
|           |  |             
|           |  | 2003         |    | 2002
|           |  |              |    |     
|Customer B |  |              | 11 | %    |  |  | 22 | %
|Customer C |  |              | 15 | %    |  |  | 25 | %
|Customer D |  |              |    |      |  |  | 24 | %

The Company is a one-product company and its only
product, Essure, received approval from the United States Food
and Drug Administration (FDA) in November 2002.
Internationally, the Company received CE Mark approval to
market its products from the European regulatory agency in
February 2001. The Company also has regulatory clearance in
Australia and Canada to distribute its product. 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.

54



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is subject to risks common to
companies in 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 in turn could have a
material adverse effect on the Companys business,
financial condition, and results of operations.



| |                                           
| | ------------------------------------------
| | Cash, Cash Equivalents and
    Investments

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 financial institutions in the U.S. and invests its excess
cash in money market funds, corporate notes and government
securities, which bear minimal risk. At times, these deposits
may be in excess of federally insured amounts.

Management considers all of their investments as
available-for-sale. Available-for-sale investments 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, 2003 and
2002, 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.



| |                
| | ---------------
| | Restricted Cash

At December 31, 2003 and 2002, the Company
has 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

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

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.



| |                  
| | -----------------
| | Intangible Assets

Intangible assets as of December 31, 2003
are principally 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 and has an expected useful life of ten
years from the date of settlement. Amortization expense of
$50,000 has been classified as cost of goods sold on the
Companys consolidated statement of operations for the year
ended December 31, 2003 and is measured using the
straight-line method. Estimated

55



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

future amortization expense for each of the years
ended December 31, 2004 through 2012 is $200,000 per
year and $150,000 for the year ended December 31, 2013.



| |             
| | ------------
| | Other Assets

Prepaid royalty as of December 31, 2003
represents the un-amortized balance of a $2,000,000 payment that
the Company made to Ovion, Inc. as a result of the
settlement of a patent litigation (See Note 10) and
has been classified with other assets on the Companys
consolidated balance sheet. In accordance with the terms of the
settlement agreement, the Companys prepaid royalties will
be fully amortized when its cumulative net sales reach
$136,500,000 thereby resulting in an effective royalty rate of
1.47%. The Company is amortizing the prepayment to cost of goods
sold over its net sales using this effective rate.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

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 primarily of property and equipment and the Essure
license acquired from a patent litigation settlement in 2003
(see Note 10), 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. Predicting future cash flows
attributable to a particular asset is difficult, and requires
the use of significant judgment.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

For financial instruments consisting of cash and
cash equivalents, accounts receivable, accounts payable and
accrued liabilities included in the Companys consolidated
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.



| |         
| | --------
| | Warranty

The Company offers warranties on its products and
records a liability at the time the products are sold for the
estimated future costs associated warranty claims, which is
based upon historical experiences and the Companys
estimate of the level of future costs. Warranty costs are
reflected in the consolidated statement of operations as cost of
goods sold. A reconciliation of the changes in the
Companys warranty liability for the years ended
December 31, 2003 and 2002 follows (in thousands):

|                                               |  |              |      |      |  |   |    | 
|---------------------------------------------- |  | ------------ | ---- | ---- |  | - | -- | 
|                                               |  |             
|                                               |  | As of       
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |      | 2002
|                                               |  |              |      |     
|Beginning warranty accrual                     |  | $            | 28   |      |  | $ |   | 
|Accruals for warranties issued during the year |  |              | 186  |      |  |   | 28 | 
|Settlements made in kind during the year       |  |              | (115 | )    |  |   |   | 
|                                               |  |              |      |      |  |   |    | 
|Ending warranty accrual                        |  | $            | 99   |      |  | $ | 28 | 
|                                               |  |              |      |      |  |   |    | 

56



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Revenue Recognition

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
collectability 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%, 53% and 16% for the years ended December 31, 2003,
2002 and 2001, 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.



| |                         
| | ------------------------
| | Research and Development

Research and development costs are expensed as
incurred.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs are expensed as incurred. Total
advertising expenses were approximately $2,000,000, $2,000,000
and $1,100,000 in the years ended December 31, 2003, 2002
and 2001, respectively.



| |                         
| | ------------------------
| | Stock-Based Compensation

As permitted by Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) as
amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123, (SFAS No. 148)
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. Accordingly, compensation
costs for stock options granted to employees and directors are
measured as the excess, if any, of the quoted market price of
the Companys stock on the date of the grant over the
amount an employee must pay to acquire the stock.

The following table provides a reconciliation of
net loss to pro forma net loss as if compensation cost for all
of the Companys employee stock option grants including
grants under the Employee Stock Purchase Plan
(ESPP), had been determined based on the fair value
of the stock option at the date of grant consistent with the
provision of SFAS No. 123 (in thousands, except per
share data):

|                                                                                                                 |           |                          |         |       |   |      |         |       |   |   |         |       |  
|---------------------------------------------------------------------------------------------------------------- | --------- | ------------------------ | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                 |           |                         
|                                                                                                                 |           | Years Ended December 31,
|                                                                                                                 |           |                         
|                                                                                                                 |           | 2003                     |         | 2002  |   | 2001
|                                                                                                                 |           |                          |         |       |   |     
|Net loss, as reported                                                                                            |           | $                        | (39,528 | )     |   | $    | (32,510 | )     |   | $ | (18,074 | )    
|Add: Total stock based employee compensation
    expense determined under fair value based method for all awards |           |                          | (6,543  | )     |   |      | (5,650  | )     |   |   | (2,465  | )    
|                                                                                                                 |           |                          |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                               |           | $                        | (46,071 | )     |   | $    | (38,160 | )     |   | $ | (20,539 | )    
|                                                                                                                 |           |                          |         |       |   |      |         |       |   |   |         |      
|Basis and diluted net loss per share
    As reported                                                             |           | $                        | (1.83   | )     |   | $    | (1.71   | )     |   | $ | (1.33   | )    
|                                                                                                                 |           |                          |         |       |   |      |         |       |   |   |         |      
|                                                                                                                 | Pro forma |                          | $       | (2.14 | ) |      | $       | (2.01 | ) |   | $       | (1.51 | )
|                                                                                                                 |           |                          |         |       |   |      |         |       |   |   |         |      

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

57



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock compensation expenses relating to
non-employees was $623,000 in 2003, of which $300,000 was
allocated to research and development expense and $323,000 was
allocated to selling, general and administrative expense.

Stock compensation expense relating to
non-employees was $95,000 in 2002, of which $30,000 was
allocated to research and development expense and $65,000 was
allocated to selling, general and administrative expense. Stock
compensation expenses relating to non-employees was $202,000 in
2001, of which $106,000 was allocated to research and
development expense and $96,000 was allocated to selling,
general and administrative expense. The Company did not have any
stock compensation expenses for employees in 2003, 2002 and 2001.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes under
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.



| |                   
| | ------------------
| | Net Loss Per Share

Basic net loss per share excludes any potential
dilutive effects of options, common stock shares subject to
repurchase, warrants and convertible securities. 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 equivalent
and are computed using the weighted average number of common
shares outstanding.

The following outstanding options, 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):

|                    |  |                    |       |      |  |      |       |  |  |  |       | 
|------------------- |  | ------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                    |  |                   
|                    |  | As of December 31,
|                    |  |                   
|                    |  | 2003               |       | 2002 |  | 2001
|                    |  |                    |       |      |  |     
|Outstanding options |  |                    | 4,317 |      |  |      | 3,540 |  |  |  | 2,459 | 



| |                    
| | -------------------
| | Segment Information

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.

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

|                         |  |                          |       |      |  |      |       |   |  |   |     |  
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | --- | -
|                         |  |                         
|                         |  | Years Ended December 31,
|                         |  |                         
|                         |  | 2003                     |       | 2002 |  | 2001
|                         |  |                          |       |      |  |     
|Net sales (in thousands) |  | $                        | 7,700 |      |  | $    | 1,700 |   |  | $ | 400 |  
|United States            |  |                          | 77    | %    |  |      | 5     | % |  |   |    | %
|Europe                   |  |                          | 14    |      |  |      | 47    |   |  |   | 9   |  
|Australia                |  |                          | 7     |      |  |      | 42    |   |  |   | 77  |  
|Other                    |  |                          | 2     |      |  |      | 6     |   |  |   | 14  |  

58



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Long term assets by geographic region based on
physical location of the assets is as follows:

|              |  |              |    |      |  |  |    |  
|------------- |  | ------------ | -- | ---- |  |  | -- | -
|              |  |             
|              |  | As of       
|              |  | December 31,
|              |  |             
|              |  | 2003         |    | 2002
|              |  |              |    |     
|United States |  |              | 98 | %    |  |  | 94 | %
|Europe        |  |              | 1  |      |  |  | 4  |  
|Australia     |  |              | 1  |      |  |  | 2  |  



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

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. As these components are not significant,
individually or in aggregate, no separate statement of
comprehensive income (loss) has been presented.



| |                 
| | ----------------
| | Reclassification

Certain prior period balances have been
reclassified to conform to the current years presentation.
These reclassifications had no effect on the prior years
stockholders equity or results of operations.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 applied to
revenue arrangements entered into in fiscal periods, including
interim periods, beginning after June 15, 2003. The
adoption of EITF Issue No. 00-21 did not have a material
impact on the Companys financial position or on its
results of operations.

In December 2003, the FASB issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. The FASB published the
revision to clarify and amend some of the original provisions of
FIN 46, which was issued in January 2003, and to exempt
certain entities from its requirements. A variable interest
entity (VIE) refers to an entity subject to
consolidation according to the provisions of this
Interpretation. FIN 46R applies to entities whose equity
investment at risk is insufficient to finance that entitys
activities without receiving additional subordinated financial
support provided by any parties, including equity holders, or
where the equity investors (if any) do not have a controlling
financial interest. FIN 46R provides that if an entity is
the primary beneficiary of a VIE, the assets, liabilities, and
results of operations of the VIE should be consolidated in the
entitys financial statements. In addition, FIN 46R
requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE
provide additional disclosures. The provisions of FIN 46R
are effective for the Companys fiscal 2004 first quarter.
The Company does not expect the adoption of FIN 46R to have
a material impact on the Companys financial position or
results of operations.

59



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |            
|-- | -----------
|3. | Investments

The following is a summary of available-for-sale
investments (in thousands):

|                           |                            |                    |        |        |  |   |        |        | 
|-------------------------- | -------------------------- | ------------------ | ------ | ------ |  | - | ------ | ------ | 
|                           |                            |                   
|                           |                            | Cost and Estimated
|                           |                            | Fair Value        
|                           |                            | December 31,      
|                           |                            |                   
|                           |                            | 2003               |        | 2002  
|                           |                            |                    |        |       
|Cash and cash equivalents: |                            |                    |        |        |  |   |        |       
|                           | Cash                       |                    | $      | 552    |  |   | $      | 9,214  | 
|                           | Money market funds         |                    |        | 5,292  |  |   |        | 27,384 | 
|                           | Government debt securities |                    |        | 12,300 |  |   |        | 3,000  | 
|                           | Corporate notes            |                    |        | 12,650 |  |   |        | 20,075 | 
|                           |                            |                    |        |        |  |   |        |       
|                           |                            | $                  | 30,794 |        |  | $ | 59,673 |       
|                           |                            |                    |        |        |  |   |        |       
|Short-term investments:    |                            |                    |        |        |  |   |        |       
|                           | Government debt securities |                    | $      |       |  |   | $      | 5,992  | 
|                           | Corporate notes            |                    |        |       |  |   |        | 5,000  | 
|                           |                            |                    |        |        |  |   |        |       
|                           |                            | $                  |       |        |  | $ | 10,992 |       
|                           |                            |                    |        |        |  |   |        |       

At December 31, 2003 and 2002, the amortized
cost basis of the available-for-sale investments represents the
fair value of the investments due to their short maturities.



|   |                                
|-- | -------------------------------
|4. | Inventories, net (in thousands)

|                |  |              |       |      |  |   |       | 
|--------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2003         |       | 2002
|                |  |              |       |     
|Raw materials   |  | $            | 516   |      |  | $ | 867   | 
|Work-in-process |  |              | 1,420 |      |  |   | 442   | 
|Finished goods  |  |              | 746   |      |  |   | 1,215 | 
|                |  |              |       |      |  |   |       | 
|Total           |  | $            | 2,682 |      |  | $ | 2,524 | 
|                |  |              |       |      |  |   |       | 



|   |                                          
|-- | -----------------------------------------
|5. | Property and Equipment (in
    thousands)

|                                                |  |              |        |      |  |   |        |  
|----------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2003         |        | 2002
|                                                |  |              |        |     
|Machinery and equipment                         |  | $            | 1,356  |      |  | $ | 1,870  |  
|Office equipment and furniture and fixtures     |  |              | 3,332  |      |  |   | 3,969  |  
|Leasehold improvements                          |  |              | 1,107  |      |  |   | 1,140  |  
|                                                |  |              |        |      |  |   |        |  
|                                                |  |              | 5,795  |      |  |   | 6,979  |  
|Less: accumulated depreciation and amortization |  |              | (3,764 | )    |  |   | (4,505 | )
|                                                |  |              |        |      |  |   |        |  
|Property and equipment, net                     |  | $            | 2,031  |      |  | $ | 2,474  |  
|                                                |  |              |        |      |  |   |        |  



|   |            
|-- | -----------
|6. | Commitments

In 2003, the Company renewed the lease on its
current facility. The extended lease term will expire on
December 31, 2005. In conjunction with a renewal of the
lease in 2000, the Company granted the landlord a warrant to
purchase 25,000 shares of common stock at $9.00 per
share. The fair value of the warrant,

60



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determined using the Black-Scholes pricing model
was capitalized and amortized to rent expense over the term of
the lease ending December 31, 2003. In 2001, the landlord
fully exercised the warrant.

In addition, the Company has an operating lease,
effective May 1997, on an additional facility, which was renewed
and extended to December 31, 2004. This facility had been
subleased, since October 15, 1998, under a separate
sublease agreement, which expired in May 2002. In December 2001,
the sublease tenant and the Company agreed to early termination
of the sublease agreement upon receipt of $150,000 from the
subtenant to the Company as rent abatement. The rent abatement
was amortized over the remaining period of the sublease.
Internationally, the Company has an operating lease on a
facility in France, which has a three-year term that expires in
2005. As of January 2004, the Company has completed the
divestiture agreement with its French subsidiary. The lease
obligation is transferred to the new entity and the Company is
not longer liable to the lease obligation. The following table
includes the lease obligation for France. The operating lease
obligation in Australia is immaterial.

Aggregate minimum annual rental commitments under
the leases as of December 31, 2003 are as follows (in
thousands):

|                                |  |   |     | 
|------------------------------- |  | - | --- | 
|2004                            |  | $ | 525 | 
|2005                            |  |   | 287 | 
|                                |  |   |     | 
|Total minimum rental commitment |  | $ | 812 | 
|                                |  |   |     | 

Rent expense was $1,637,000 for the year ended
December 31, 2003, including $42,000 office rent expense
for the office in France. Rent expense, net of sublease income
of zero and $496,000, was $1,493,000 and $947,000 for the years
ended December 31, 2002 and 2001 respectively.

In 2003, the Company entered into a settlement
agreement with Ovion, Inc. (see Note 10). Pursuant to the
settlement agreement, the Company is required to pay a license
fee of $2.0 million 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 it will be making another payment of
$1.0 million in common stock to Ovion before the end of
April 2004. In addition, the Company is obligated to pay 3.25%
of its cumulative revenue derived from sale of the Essure
products 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 our 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 our business
partners or customers, in connection with any trade secret,
copyright, patent or other intellectual property infringement
claim by any third party with respect to our products. The term
of these indemnification agreements is generally perpetual
anytime 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.

61



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                          
|-- | -------------------------
|7. | Incentive and Stock Plans



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

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. As of December 31, 2003, 191,966 shares
had been issued under the ESPP and 8,034 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.



| |                           
| | --------------------------
| | Company Stock Option Plans

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 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, 2003 and 2002,
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 our 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.

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. 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

62



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value. The options expire ten years from date of
grant. Options granted under the Directors Plan would vest
over one or three years. The options are only exercisable while
the outside director remains a director.

In July 1993, the Board of Directors adopted the
1993 stock plan (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, 2003 and 2002, there are no shares that are
subject to repurchase.

As of December 31, 2003, 203,726 shares
remain as available for grant under the 2002 Plan,
25,312 shares remained as available for grant under the
2001 Plan, no shares remained available for grant under the 1993
Plan and 12,250 shares remained available for grant under
the Directors Plan.

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

|                             |                       |               |           |                     |   |                  |           |           |   |   |       |       | 
|---------------------------- | --------------------- | ------------- | --------- | ------------------- | - | ---------------- | --------- | --------- | - | - | ----- | ----- | 
|                             |                       |               |           |                    
|                             |                       |               |           | Options Outstanding
|                             |                       | Options       |           |                    
|                             |                       | Available for |           | Options             |   | Weighted-Average
|                             |                       | Grant         |           | Outstanding         |   | Exercise Price  
|                             |                       |               |           |                     |   |                 
|Balance at January 1, 2001   |                       |               | 334,120   |                     |   |                  | 2,211,030 |           |   | $ | 3.30  |      
|                             | Additional authorized |               |           | 1,000,000           |   |                  |           |          |   |   |       |      | 
|                             | Options granted       |               |           | (1,093,749          | ) |                  |           | 1,093,749 |   |   |       | 12.33 | 
|                             | Options exercised     |               |           |                    |   |                  |           | (697,144  | ) |   |       | 2.20  | 
|                             | Options cancelled     |               |           | 148,710             |   |                  |           | (148,710  | ) |   |       | 10.45 | 
|                             |                       |               |           |                     |   |                  |           |           |   |   |       |      
|Balance at December 31, 2001 |                       |               | 389,081   |                     |   |                  | 2,458,925 |           |   |   | 7.17  |      
|                             | Additional authorized |               |           | 2,000,000           |   |                  |           |          |   |   |       |      | 
|                             | Options granted       |               |           | (1,516,661          | ) |                  |           | 1,516,661 |   |   |       | 16.90 | 
|                             | Options exercised     |               |           |                    |   |                  |           | (285,813  | ) |   |       | 3.38  | 
|                             | Options cancelled     |               |           | 149,795             |   |                  |           | (149,795  | ) |   |       | 14.95 | 
|                             |                       |               |           |                     |   |                  |           |           |   |   |       |      
|Balance at December 31, 2002 |                       |               | 1,022,215 |                     |   |                  | 3,539,978 |           |   |   | 11.37 |      
|                             | Additional authorized |               |           | 500,000             |   |                  |           |          |   |   |       |      | 
|                             | Options granted       |               |           | (1,643,150          | ) |                  |           | 1,643,150 |   |   |       | 11.51 | 
|                             | Options exercised     |               |           |                    |   |                  |           | (429,393  | ) |   |       | 3.55  | 
|                             | Options cancelled     |               |           | 436,609             |   |                  |           | (436,609  | ) |   |       | 13.23 | 
|                             | Options expired       |               |           | (74,386             | ) |                  |           |          |   |   |       |      | 
|                             |                       |               |           |                     |   |                  |           |           |   |   |       |      
|Balance at December 31, 2003 |                       |               | 241,288   |                     |   |                  | 4,317,126 |           |   | $ | 11.87 |      
|                             |                       |               |           |                     |   |                  |           |           |   |   |       |      

63



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2003:

|                         |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |       | 
|------------------------ | -------------- | ------------------- |  | ------------------- | --------- | -------- |  | ----------- | ---- | -------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |                |                     |  |                    
|                         |                | Options Outstanding |  | Options Exercisable
|                         |                |                     |  |                    
|                         |                |                     |  | Weighted            |           |          |  | Weighted   
|                         |                |                     |  | Weighted-Avg.       |           | Average  |  |             |      | Average 
|                         |                | Options             |  | Remaining           |           | Exercise |  | Options     |      | Exercise
|Range of Exercise Prices |                | Outstanding         |  | Life (Years)        |           | Price    |  | Exercisable |      | Price   
|                         |                |                     |  |                     |           |          |  |             |      |         
|$                        | 0.48 - $ 6.98  |                     |  |                     | 634,382   |          |  |             | 4.80 |          |  | $ | 2.98  |  |  |  | 568,714   |  |  | $ | 2.53  | 
|$                        | 7.06 - $ 9.62  |                     |  |                     | 647,379   |          |  |             | 7.45 |          |  |   | 9.33  |  |  |  | 456,938   |  |  |   | 9.32  | 
|$                        | 9.75 - $ 9.95  |                     |  |                     | 631,355   |          |  |             | 9.29 |          |  |   | 9.95  |  |  |  | 84,812    |  |  |   | 9.95  | 
|$                        | 10.00 - $13.40 |                     |  |                     | 645,730   |          |  |             | 8.47 |          |  |   | 12.35 |  |  |  | 226,540   |  |  |   | 11.84 | 
|$                        | 13.43 - $14.95 |                     |  |                     | 858,631   |          |  |             | 8.80 |          |  |   | 14.34 |  |  |  | 269,632   |  |  |   | 14.36 | 
|$                        | 14.99 - $19.18 |                     |  |                     | 681,299   |          |  |             | 8.35 |          |  |   | 17.99 |  |  |  | 307,436   |  |  |   | 18.11 | 
|$                        | 19.25 - $23.18 |                     |  |                     | 218,350   |          |  |             | 7.40 |          |  |   | 20.51 |  |  |  | 110,710   |  |  |   | 20.48 | 
|                         |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |       | 
|$                        | 0.48 - $23.18  |                     |  |                     | 4,317,126 |          |  |             | 7.89 |          |  | $ | 11.87 |  |  |  | 2,024,782 |  |  | $ | 10.34 | 
|                         |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |       | 

The Company has reserved 4,317,126 shares of
its common stock, which may be issued with respect to
outstanding options at December 31, 2003. The Company had
reserved 3,539,978 shares of its common stock on
December 31, 2002 and there were 1,496,344 options
exercisable at December 31, 2002.

The Company granted common stock of 73,618,
11,911 and 8,750 shares in 2003, 2002 and 2001,
respectively, to consultants in exchange for services. In
accordance with SFAS No. 123 and EITF 96-18, 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.



| |                         
| | ------------------------
| | Stock-Based Compensation

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

|                         |  |              |     |      |  |      |     |   |  |  |     |  
|------------------------ |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                         |  |             
|                         |  | Years Ended 
|                         |  | December 31,
|                         |  |             
|                         |  | 2003         |     | 2002 |  | 2001
|                         |  |              |     |      |  |     
|Dividends                |  |              |    |      |  |      |    |   |  |  |    |  
|Risk-free interest rate  |  |              | 3.0 | %    |  |      | 3.5 | % |  |  | 4.0 | %
|Expected life (in years) |  |              | 4   |      |  |      | 4   |   |  |  | 4   |  
|Volatility factor        |  |              | 0.9 |      |  |      | 1.0 |   |  |  | 1.3 |  

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 above. The fair value of

64



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                         |  |             
|                         |  | 2003         |     | 2002 |  | 2001
|                         |  |              |     |      |  |     
|Dividends                |  |              |    |      |  |      |    |   |  |  |    |  
|Risk-free interest rate  |  |              | 1.4 | %    |  |      | 4.0 | % |  |  | 4.0 | %
|Expected life (in years) |  |              | 1   |      |  |      | 1   |   |  |  | 1   |  
|Volatility factor        |  |              | 0.6 |      |  |      | 0.5 |   |  |  | 0.7 |  

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. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing model does not
necessarily provide a reliable single measure of the fair value
of its employee stock options. The effects of applying
SFAS No. 123 for recognizing compensation expense and
providing pro forma disclosures in 2003, 2002 and 2001 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 $7.69, $11.87 and $9.99 respectively, for
2003, 2002 and 2001. The weighted-average fair value of the
purchase rights granted under the ESPP during fiscal 2003, 2002
and 2001 was $3.34, $11.58 and $11.77 per share,
respectively.



| |                        
| | -----------------------
| | Retirement Savings Plan

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
2003, 2002 and 2001.



|   |                     
|-- | --------------------
|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.

On February 25, 2004, the Company completed
a private placement of approximately 3,000,000 shares of
common stock at $8.50 per share. The net proceeds to the
Company, after fees and other offering costs, were approximately
$23,900,000.

On June 26, 2002, the Company completed a
secondary offering in which it sold 4,500,000 shares of
common stock for $16.00 per share. The net proceeds to the
Company from the sale of the shares were approximately
$66,700,000, net of underwriting discounts, commissions and
other offering costs.

On July 24, 2002, the underwriters exercised
the over-allotment option related to the follow-on public
offering completed in June 2002, and the Company issued an
additional 135,000 shares of common stock at
$16.00 per share. The net proceeds to the Company from the
sale of the additional shares were approximately $2,000,000
after underwriting discounts and commissions and other offering
costs.

65



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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In November 2001, the Company completed a private
placement of approximately 2,300,000 shares of common stock
at $13.25 per share. The net proceeds to the Company, after
fees and other offering costs, were approximately $28,700,000.

In April 2001, the Company completed a private
placement of 1,600,000 shares of common stock at
$7.00 per share. The net proceeds to the Company, after
fees and other offering costs, were approximately $10,600,000.



|   |             
|-- | ------------
|9. | Income Taxes

The Company has recorded no income tax expense
for any of the years presented in the Companys
consolidated statement of operations due to its net operating
loss carryforwards. As of December 31, 2003, the Company
had net operating loss carryforwards for federal and state
income tax purposes of approximately $153,000,000 and
$59,000,000, respectively. If not utilized, these carryforwards
will begin to expire beginning in 2008 through 2023 for both
federal and state tax purposes. In addition, at
December 31, 2003, the Company had federal and state
research credit carryforwards of approximately $1,800,000 and
$1,600,000 respectively. If not utilized, the federal
carryforward will expire in various amounts beginning in 2008.
The California research credit can be carried forward
indefinitely. Utilization of the net operating losses and
credits may be subject to a substantial annual limitation due to
the ownership change provisions of the Internal Revenue Code of
1986, as amended. The annual limitation may result in the
expiration of net operating losses and credits before
utilization and in the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted.

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, 2003 and
December 31, 2002 are as follows (in thousands):

|                                     |  |      |         |      |  |   |         |  
|------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                     |  | 2003 |         | 2002
|                                     |  |      |         |     
|Net operating loss carryforwards     |  | $    | 55,700  |      |  | $ | 41,300  |  
|Research credits                     |  |      | 2,900   |      |  |   | 2,600   |  
|Capitalized research and development |  |      | 1,500   |      |  |   | 1,400   |  
|Other  net                          |  |      | 1,100   |      |  |   | 1,100   |  
|Less: valuation allowance            |  |      | (61,200 | )    |  |   | (46,400 | )
|                                     |  |      |         |      |  |   |         |  
|Net deferred tax assets              |  | $    |        |      |  | $ |        |  
|                                     |  |      |         |      |  |   |         |  

Because of the Companys lack of earnings
history and anticipated net loss, the deferred tax assets have
been fully offset by a valuation allowance. The increase in the
valuation allowance was approximately $14,800,000, $14,600,000
and $7,500,000 during 2003, 2002 and 2001, respectively.



|    |                  
|--- | -----------------
|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 believes that the claims of its patent and
application cover Essure 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 the Essure system, 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

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CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Essure in
excess of $75,000,000 for a period 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.

Although the Company has reached a settlement
agreement with Ovion, it still believes that some or all of
Ovions claims should be included within its own patents.
It requested that the Patent and Trademark Office
(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. The Company believes that it filed its patent
applications for Essure before Ovion filed the application that
issued as its patent, and that it is entitled to any patentable
claims now appearing in their patent that cover the Essure
product. The Company does not know whether the PTO will declare
an interference, whether it invented its product prior to
Ovions date of invention, or whether it 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 PTO, which might occur if interference is declared
and if the Company is found to have priority of invention.

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. It
believes there is no other litigation pending that could have,
individually or in the aggregate, a material adverse effect on
its financial position, results of operations or cash flows.



|    |                
|--- | ---------------
|11. | Related Parties

During 2003, 2002 and 2001, the Company paid for
consulting services provided by Dr. Florence Comite, a
member of the Board of Directors. The Company paid
Dr. Comite $2,500 per month in consulting fees for
services rendered in 2003, 2002 and 2001.

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##### Table of Contents



CONCEPTUS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                  
|--- | ---------------------------------
|12. | Quarterly Information (Unaudited)

Supplementary Data

Quarterly Results of Operations

|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |       |       | 
|----------------------------------------------------------------- | ----------------------------------- | ---------------------------------------- | ------ | ------------- | ----- | -------- | ------ | --------- | ----- | ------------ | ------- | ------------- | ------ | -------- | ------- | --------- | ------ | - | ------- | ------ | ------ | - | ------ | ----- | ----- | - | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                  |                                     |                                         
|                                                                  |                                     | Three Months Ended                      
|                                                                  |                                     |                                         
|                                                                  |                                     | December 31,                             |        | September 30, |       | June 30, |        | March 31, |       | December 31, |         | September 30, |        | June 30, |         | March 31,
|                                                                  |                                     | 2003                                     |        | 2003          |       | 2003     |        | 2003      |       | 2002         |         | 2002          |        | 2002     |         | 2002     
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |          
|                                                                  |                                     |                                         
|                                                                  |                                     | (In thousands, except per share amounts)
|                                                                  |                                     |                                         
|                                                                  |                                     | (Unaudited)                             
|Net sales                                                         |                                     | $                                        | 2,254  |               |       | $        | 2,252  |           |       | $            | 2,040   |               |        | $        | 1,154   |           |        | $ | 465     |        |        | $ | 481    |       |       | $ | 428    |       |       | $ | 276    |      
|Cost of goods sold                                                |                                     |                                          | 1,812  |               |       |          | 1,809  |           |       |              | 1,766   |               |        |          | 1,150   |           |        |   | 658     |        |        |   | 845    |       |       |   | 893    |       |       |   | 746    |      
|Gross profit (loss)                                               |                                     |                                          | 442    |               |       |          | 443    |           |       |              | 274     |               |        |          | 4       |           |        |   | (193    | )      |        |   | (364   | )     |       |   | (465   | )     |       |   | (470   | )    
|Operating expenses:                                               |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|                                                                  | Research and development            |                                          |        | 1,260         |       |          |        | 1,521     |       |              |         | 1,656         |        |          |         | 1,611     |        |   |         | 1,730  |        |   |        | 2,170 |       |   |        | 2,348 |       |   |        | 1,982 |      
|                                                                  | Selling, general and administrative |                                          |        | 8,362         |       |          |        | 7,995     |       |              |         | 9,331         |        |          |         | 9,618     |        |   |         | 10,210 |        |   |        | 5,972 |       |   |        | 4,021 |       |   |        | 3,214 |      
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|                                                                  |                                     | Total operating costs                    |        |               | 9,622 |          |        |           | 9,516 |              |         |               | 10,987 |          |         |           | 11,229 |   |         |        | 11,940 |   |        |       | 8,142 |   |        |       | 6,369 |   |        |       | 5,196 | 
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Operating loss                                                    |                                     |                                          | (9,180 | )             |       |          | (9,073 | )         |       |              | (10,713 | )             |        |          | (11,225 | )         |        |   | (12,133 | )      |        |   | (8,506 | )     |       |   | (6,834 | )     |       |   | (5,666 | )    
|Interest and other income (expense), net                          |                                     |                                          | 199    |               |       |          | 97     |           |       |              | 167     |               |        |          | 200     |           |        |   | 282     |        |        |   | 359    |       |       |   | 177    |       |       |   | (189   | )    
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Net loss                                                          |                                     | $                                        | (8,981 | )             |       | $        | (8,976 | )         |       | $            | (10,546 | )             |        | $        | (11,025 | )         |        | $ | (11,851 | )      |        | $ | (8,147 | )     |       | $ | (6,657 | )     |       | $ | (5,855 | )    
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Basic and diluted net loss per share                              |                                     | $                                        | (0.41  | )             |       | $        | (0.41  | )         |       | $            | (0.49   | )             |        | $        | (0.52   | )         |        | $ | (0.56   | )      |        | $ | (0.38  | )     |       | $ | (0.40  | )     |       | $ | (0.36  | )    
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      
|Shares used in computing basic and diluted net
    loss per share |                                     |                                          | 21,739 |               |       |          | 21,635 |           |       |              | 21,499  |               |        |          | 21,383  |           |        |   | 21,297  |        |        |   | 21,220 |       |       |   | 16,806 |       |       |   | 16,471 |      
|                                                                  |                                     |                                          |        |               |       |          |        |           |       |              |         |               |        |          |         |           |        |   |         |        |        |   |        |       |       |   |        |       |       |   |        |      

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REPORT OF INDEPENDENT AUDITORS ON FINANCIAL
STATEMENT SCHEDULE

To the Board of Directors

of Conceptus, Inc.:


Our audits of the consolidated financial
statements referred to in our report dated March 15, 2004
appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in
Item 15(a)(2) of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

March 15, 2004


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Conceptus, Inc.

Schedule II


Schedule of Valuation and Qualifying
Accounts

|                             |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |     | 
|---------------------------- | ------------------------------- | -------------- | - | -------------- |  | ---------- | - | -------------- |  |  | - | --- |  |  | - | --- | 
|                             |                                 | Balance at     |   | Charges to     |  |            |   |               
|                             |                                 | Beginning of   |   | Expenses or    |  |            |   | Balance at End
|                             |                                 | Period         |   | Other Accounts |  | Deductions |   | of Period     
|                             |                                 |                |   |                |  |            |   |               
|                             |                                 |               
|                             |                                 | (In thousands)
|Year Ended December 31, 2001 |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    
|                             | Allowance for doubtful accounts |                | $ | 596            |  |            | $ | 14             |  |  | $ | 596 |  |  | $ | 14  | 
|                             | Provision for inventories       |                | $ |               |  |            | $ | 168            |  |  | $ |    |  |  | $ | 168 | 
|                             |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    
|Year Ended December 31, 2002 |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    
|                             | Allowance for doubtful accounts |                | $ | 14             |  |            | $ | 31             |  |  | $ |    |  |  | $ | 45  | 
|                             | Provision for inventories       |                | $ | 168            |  |            | $ | 60             |  |  | $ | 93  |  |  | $ | 135 | 
|                             |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    
|Year Ended December 31, 2003 |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    
|                             | Allowance for doubtful accounts |                | $ | 45             |  |            | $ | 119            |  |  | $ |    |  |  | $ | 164 | 
|                             | Provision for inventories       |                | $ | 135            |  |            | $ | 62             |  |  | $ | 60  |  |  | $ | 137 | 
|                             |                                 |                |   |                |  |            |   |                |  |  |   |     |  |  |   |    

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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
San Carlos, California on this 15th day of March 2004.



| |                
| | ---------------
| | CONCEPTUS, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ MARK M. SIECZKAREK

| |                                          
| | -----------------------------------------
| |                                          
| | Mark M. Sieczkarek,                      
| | President and Chief Executive
    Officer

POWER OF ATTORNEY

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

|                                                         |  |                                                                                   |  |                |  | 
|-------------------------------------------------------- |  | --------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                         |  |                                                                                   |  |               
|Signature                                                |  | Title                                                                             |  | Date          
|                                                         |  |                                                                                   |  |               
|                                                        
|                                                        
|/s/ MARK M. SIECZKAREK(Mark M. Sieczkarek)               |  | President, Chief Executive Officer and Director
    (Principal Executive Officer) |  | March 15, 2004
|                                                        
|/s/ GREGORY E. LICHTWARDT(Gregory E. Lichtwardt)         |  | Executive Vice President, Treasurer and Chief
    Financial Officer               |  | March 15, 2004
|                                                        
|/s/ MICHAEL A. BAKER(Michael A. Baker)                   |  | Director                                                                          |  | March 15, 2004
|                                                        
|/s/ THOMAS F. BONADIO(Thomas Bonadio)                    |  | Director                                                                          |  | March 15, 2004
|                                                        
|/s/ FLORENCE COMITE(Florence Comite)                     |  | Director                                                                          |  | March 15, 2004
|                                                        
|/s/ SANFORD FITCH(Sanford Fitch)                         |  | Director                                                                          |  | March 15, 2004
|                                                        
|/s/ MARIE-HELENE PLAIS-COTREL(Marie-Helene Plais-Cotrel) |  | Director                                                                          |  | March 15, 2004
|                                                        
|/s/ ROBERT V. TONI(Robert V. Toni)                       |  | Director                                                                          |  | March 15, 2004

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|                                            |  |          |  |                |  | 
|------------------------------------------- |  | -------- |  | -------------- |  | 
|                                            |  |          |  |               
|Signature                                   |  | Title    |  | Date          
|                                            |  |          |  |               
|                                           
|/s/ KATHRYN A.TUNSTALL(Kathryn A. Tunstall) |  | Director |  | March 15, 2004
|                                           
|/s/ PETER L. WILSON(Peter L. Wilson)        |  | Director |  | March 15, 2004

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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Certificate of Incorporation
    of Registrant.                                                                                                                                                                                                                                                                                                                                    
|        | 3  | .2(2)       |  | Certificate of Amendment to Amended and Restated
    Certificate of Incorporation of Registrant.                                                                                                                                                                                                                                                                                                        
|        | 3  | .3(1)       |  | Bylaws of Registrant.                                                                                                                                                                                                                                                                                                                                                                                   
|        | 3  | .4          |  | Amendment to the Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .1(1)       |  | Form of Indemnification Agreement for directors
    and officers.                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .2(3)*      |  | Amended and Restated 1993 Stock Plan.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .3(1)*      |  | 1995 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .4(4)*      |  | 1995 Directors Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .5*         |  | Amended and Restated 2001 Equity Incentive Plan.                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .6(5)*      |  | Amended and Restated 2002 Non-Qualified Stock
    Option Plan.                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .7(6)*      |  | Form of Senior Management Change of Control
    Agreement.                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .8(6)*      |  | Change of Control Agreement dated as of
    May 13, 1997 by and between Registrant and Kathryn A.
    Tunstall.                                                                                                                                                                                                                                                                                         
|        | 10 | .9(7)*      |  | Master Consulting Agreement with Florence Comite
    dated September 10, 1997.                                                                                                                                                                                                                                                                                                                          
|        | 10 | .10(8)      |  | Relocation bonus agreement dated April 25,
    2002 between the Registrant and Stan Van Gent.                                                                                                                                                                                                                                                                                                           
|        | 10 | .11(8)      |  | Promissory note dated April 25, 2002 between
    the Registrant and Stan Van Gent.                                                                                                                                                                                                                                                                                                                      
|        | 10 | .12(8)      |  | Promissory note dated May 22, 2002 between
    the Registrant and Stan Van Gent.                                                                                                                                                                                                                                                                                                                        
|        | 10 | .13(1)      |  | Supplier Agreement dated March 29, 1995
    between the Registrant and Advanced Cardiovascular
    Systems, Inc.                                                                                                                                                                                                                                                                                        
|        | 10 | .14(1)      |  | License Agreement dated December 28, 1992
    between the Registrant and Target Therapeutics Inc.                                                                                                                                                                                                                                                                                                       
|        | 10 | .15(9)      |  | Lease agreement dated November 14, 2000 with
    Dani Investment Partners.                                                                                                                                                                                                                                                                                                                              
|        | 10 | .16(15)     |  | Offer and Acceptance of Lease Extension with Dani
    Investment Partners dated September 12, 2003.                                                                                                                                                                                                                                                                                                     
|        | 10 | .17(10)     |  | Lease Agreement with Three Sisters Ranch
    Enterprises dated April 15, 1997.                                                                                                                                                                                                                                                                                                                          
|        | 10 | .18(5)      |  | First Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                                                                                                                                                                                                                                                                                                            
|        | 10 | .19(5)      |  | Second Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                                                                                                                                                                                                                                                                                                           
|        | 10 | .20(5)      |  | Third Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                                                                                                                                                                                                                                                                                                            
|        | 10 | .21(11)     |  | Fourth Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                                                                                                                                                                                                                                                                                                           
|        | 10 | .22(15)     |  | Fifth Amendment to Lease Agreement with Three
    Sisters Ranch Enterprises.                                                                                                                                                                                                                                                                                                                            
|        | 10 | .23(14)     |  | 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.
|        | 10 | .24(16)     |  | Exclusive U.S. Co-Promotion Agreement, dated
    as of October 30, 2003, by and between the Registrant and
    Gynecare Worldwide Division of Ethicon, Inc.                                                                                                                                                                                                                                             
|        | 10 | .25(17)     |  | 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.                                                                                                                                                                                                                                                   
|        | 10 | .26         |  | Contract Manufacturing Agreement, dated as of
    June 20, 2003, between the Registrant and Venusa, Ltd.                                                                                                                                                                                                                                                                                                
|        | 10 | .27(18)*    |  | Letter Agreement by and between the Company and
    Mark M. Sieczkarek, dated April 15, 2003.                                                                                                                                                                                                                                                                                                           
|        | 10 | .28(15)*    |  | Amended Letter Agreement by and between the
    Company and Mark Sieczkarek, dated July 25, 2003.                                                                                                                                                                                                                                                                                                       
|        | 10 | .29*        |  | Letter Agreement by and between the Company and
    Gregory E. Lichtwardt dated November 12, 2003.                                                                                                                                                                                                                                                                                                      

73



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##### Table of Contents



|        |    |             |  |                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 14 | .1          |  | Code of Ethics.                                                                                                                        
|        | 23 | .1          |  | Consent of Independent Accountants.                                                                                                    
|        | 24 | .1          |  | Power of Attorney (See Page 71 of this
    Report).                                                                                    
|        | 31 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.
|        | 32 | .1          |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                           



---



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management contract or compensatory plan or
    arrangement.



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment has been requested with
    respect to certain portions of this Exhibit by order from the
    Securities and Exchange Commission or requested.



| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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.
|
| | (2) | Incorporated by reference to the
    Registrants Registration Statement on Form S-3 (File
    No, 333-89266) filed on June 4, 2002.                                        
|
| | (3) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2000.                                                   
|
| | (4) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1995.                                                      
|
| | (5) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002.                                                      
|
| | (6) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 1997.                                                    
|
| | (7) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001.                                                      
|
| | (8) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002.                                                    
|
| | (9) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000.                                                      



|     |                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended April 30, 1997.                    
|    
|(11) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001.                       
|    
|(12) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1998.                       
|    
|(13) | Incorporated by reference to Exhibit 2.1 of
    the Registrants Report on Form 8-K filed on
    December 10, 1996.                          
|    
|(14) | 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.
|    
|(15) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003.                
|    
|(16) | Incorporated by reference to Exhibit 1 of
    the Registrants Report on Form 8-K filed on
    March 1, 2004                                 
|    
|(17) | Incorporated by reference to Exhibit 2 of
    the Registrants Report on Form 8-K filed on
    March 1, 2004                                 
|    
|(18) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2003.                    

74