**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-K**
| **x**                                                                                                                     | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31, 2006**                                                                      |
| **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 Registrantas specified in its charter)

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

**331 East Evelyn**

**Mountain View, CA 94041**

(Address of principalexecutive offices)

Registrant’s telephonenumber, including area code: **(650) 962-4000**

**Securitiesregistered pursuant to Section 12(b) of the Act:**
| Title of Each Class:                     | ** ** | **Name of Each Exchange on Which Registered:** |
|------------------------------------------|------------|------------------------------------------------|
| Common Stock, par value $0.003 per share |       | The NASDAQ Stock Market LLC                    |

 

**Securities registered pursuant to Section 12(g) ofthe Act:**None

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Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined by Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act

Large acceleratedfiler o   Accelerated Filer x   Non accelerated filer o

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

The aggregate market valueof the shares of common stock of the Registrant held by non-affiliates was $131,684,000based upon the closing price of the common stock on the Nasdaq Global Market onJune 30, 2006. Shares of Common Stock held by each officer and directorand by each person who owns 5% or more of the outstanding Common Stock havebeen excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

There were 29,367,411 sharesof Registrant’s Common Stock issued and outstanding as of February 28,2007.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Proxy Statement for the Registrant’s 2007 Annual Meeting of Stockholdersare incorporated by reference in Part III of this Form 10-K.

 

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**CONCEPTUS, INC.**

**FORM 10-K**

**FORTHE FISCAL YEAR ENDED DECEMBER 31, 2006**
|                    | ** ** | ** **                                                                                                                      | ** ** | **Page** |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I.**   |       |                                                                                                                            |       |     |
| Item 1.            |       | Business                                                                                                                        |       | 2        |
| Item 1.A.          |       | Risk  Factors                                                                                                                   |       | 20       |
| Item 1.B.          |       | Unresolved Staff Comments                                                                                                       |       | 32       |
| Item 2.            |       | Properties                                                                                                                      |       | 32       |
| Item 3.            |       | Legal  Proceedings                                                                                                              |       | 32       |
| Item 4.            |       | Submission of Matters to a Vote of Security Holders                                                                             |       | 32       |
| **Part II.**  |       |                                                                                                                            |       |     |
| Item 5.            |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities              |       | 33       |
| Item 6.            |       | Selected Consolidated Financial Data                                                                                            |       | 35       |
| Item 7.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       | 36       |
| Item 7A.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                     |       | 51       |
| Item 8.            |       | Consolidated Financial Statements and Supplementary  Data                                                                       |       | 51       |
| Item 9.            |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                  |       | 51       |
| Item 9A.           |       | Controls and Procedures                                                                                                         |       | 51       |
| Item 9B.           |       | Other  Information                                                                                                              |       | 52       |
| **Part III.** |       |                                                                                                                            |       |     |
| Item 10.           |       | Directors and  Executive Officers of the Registrant                                                                             |       | 53       |
| Item 11.           |       | Executive Compensation                                                                                                          |       | 53       |
| Item 12.           |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                  |       | 53       |
| Item 13.           |       | Certain Relationships and Related Transactions                                                                                  |       | 53       |
| Item 14.           |       | Principal Accountant Fees and Services                                                                                          |       | 53       |
| **Part IV.**  |       |                                                                                                                            |       |     |
| Item 15.           |       | Exhibits and Financial Statement Schedules                                                                                      |       | 54       |
|               |       | Index to Consolidated Financial Statements                                                                                      |       | 58       |
|               |       | Signatures                                                                                                                      |       | 87       |

 

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***The followinginformation should be read in conjunction with the Consolidated FinancialStatements and the notes thereto. This annual report on Form 10-K,and in particular the Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995. Inthis report, the words “believes,” “anticipates,” “intends,” “expects,” “plans,”“should,” “will,” “seeks” and words of similar import identify forward-lookingstatements. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements to be materially different from any future results, performanceor achievements expressed or implied by such forward-looking statements. Suchfactors include, among others, the following: our limited operating and saleshistory; the uncertainty of market acceptance of our product; dependence onobtaining and maintaining reimbursement; effectiveness and safety of ourproduct over the long-term; our ability to obtain and maintain the necessarygovernmental clearances or approvals to market our product; our ability todevelop and maintain proprietary aspects of our technology; our ability tomanage our expansion or any acquisition; our dependence on suppliers; intensecompetition in the medical device industry; the inherent risk of exposure toproduct liability claims and product recalls and other factors referenced inthis Form 10-K. These factors are discussed in more detail below.Given these uncertainties, persons evaluating our business are cautioned not toplace undue reliance on such forward-looking statements. We assume noobligation to update these forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.***

***Market, Ranking and Other Data***

This Form 10-Kcontains various estimates related to the women’s healthcare, contraception andmedical device markets. Some of these estimates have been included in studiespublished by government agencies and market research firms and some are ourestimates and are based on our knowledge and experience in the markets in whichwe operate. Additionally, other estimates have been produced by industryanalysts based on trends to date, their knowledge of technologies and markets,and customer research, but these are forecasts only and are thus subject toinherent uncertainty. Our estimates have been based on information provided bycustomers, suppliers, trade and business organizations and other contacts inthe markets in which we operate. We believe these estimates to be accurate asof the date of this Form 10-K. However, this information may proveto be inaccurate because of the method by which we obtain some of the data forour estimates or because this information cannot always be verified withcomplete certainty due to the limits on the availability and reliability of rawdata, the voluntary nature of the data gathering process and other limitationsand uncertainties inherent in a survey of market size. As a result, you shouldbe 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 the *Essure®* permanent birth control system, an innovative andproprietary medical device for women that was approved for marketing in theUnited States in November 2002 by the United States Food and DrugAdministration (or FDA). The *Essure* systemuses a soft and flexible micro-insert that is delivered into a woman’sfallopian tubes to provide permanent birth control by causing a benign tissuein-growth that blocks the fallopian tubes. A successfully placed *Essure* micro-insert and the subsequent tissue growthprohibits the egg from traveling through the fallopian tubes and thereforeprevents fertilization. The Premarket Approval, or PMA, supplement filed in January 2005and approved in July 2005 by the FDA supports an extension of theeffectiveness rate of the *Essure* systemto 99.80% after four years and 99.74% after five years of follow-up, from thepreviously approved 99.80% 

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at three years. Thefive-year effectiveness was demonstrated in a small portion of women undergoingclinical studies. Five year follow up of all patients in clinical trials isongoing.

The *Essure*procedure is typically performed as an outpatient procedure and is intended tobe a less invasive and a less costly alternative to tubal ligation, the leadingform of birth control in the United States and worldwide. Laparoscopic tuballigation and tubal ligation by laparotomy typically involve abdominal incisionsand/or punctures, general or regional anesthesia, four to ten days of normalrecovery time and the risks associated with an incisional procedure. The *Essure* procedure does not require cutting or penetrating theabdomen, which eliminates post-operative pain often associated with incisionsor punctures, and the *Essure*procedure can be performed in an outpatient or clinical setting without generalor regional anesthesia. In the Pivotal trial of the *Essure*system, the total procedure time averaged 35 minutes, with an average of 13minutes of hysteroscopic time to place the *Essure*micro-insert. A patient is typically discharged approximately 45 minutes afterthe *Essure* procedure. No overnight hospitalstay is required. Furthermore, the *Essure* systemis effective without drugs or hormones. There is a three-month waiting periodafter the procedure during which the woman must use another form of birthcontrol while tissue in-growth occurs. At 90 days following the procedure, thepatient completes a follow-up examination called a hysterosalpingogram (orHSG), which can determine whether the device was placed successfully andwhether the fallopian tubes are occluded.

We believe that, in addition to women that havecompleted childbearing, the *Essure*procedure also appeals to women who are in search of permanent birth controland who are currently using either temporary birth control methods or no birthcontrol method. The *Essure*procedure is also a good choice for women who desire permanent birth controland are not good candidates for a surgical tubal ligation, including obesewomen, those with multiple previous surgeries and/or contraindications togeneral anesthesia. During the Phase II of the clinical study for the *Essure* procedure, over a follow up period of four or fiveyears, 99% of the women who were treated with the *Essure*procedure rated their tolerance to the implanted *Essure*device as “good” to “excellent”. Additionally, at all visits subsequent toone-week post device placement, at least 98% of the women rated their comfortas “good” to “excellent”. At all study visits through four years follow up, atleast 97% of women rated their overall satisfaction as “somewhat satisfied” to “verysatisfied”. Excluding the day of the *Essure*placement procedure, 92% of the patients in the Pivotal trial who were employedreturned to work in one day or less. The safety and recovery profile of the *Essure* procedure is one of the reasons that we believe itmay be a preferred alternative to currently available methods of permanentbirth control.

We believe that physicians are receptive to the *Essure* procedure because it is a less invasive permanentbirth control option to offer their patients. We also believe physicians findthe *Essure* procedure relatively easy toperform after completing our training program. We believe hospitals are able toutilize their facilities more cost effectively with the *Essure*procedure compared to tubal ligation. We expect payers will continue toexperience cost reductions resulting from the elimination of overhead andprocedural costs related to anesthesia and post-operative hospital staysassociated with tubal ligations. Payers may also benefit from the reduction ofunplanned pregnancies associated with non-permanent methods of birth controlused by patients who have chosen to avoid the drawbacks of traditionalpermanent birth control methods but who may elect to use the *Essure* device. Additionally, payers should also benefit fromthe reduction of costs of complications associated with the tubal ligationprocedure.

We maintain two websiteslocated at www.conceptus.com and www.essure.com. We makeavailable free of charge on or through our websites, our annual report on Form 10-K,our quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after weelectronically file such material, or furnish it to the Securities and ExchangeCommission (SEC). Information contained on our websites is not incorporated byreference into and does not form a part of this Form 10-K.

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***Penetration***

We are attempting to introduce a novel product intothe contraception market, which is dominated by procedures that are wellestablished among physicians and patients and are routinely taught to newphysicians. As a result, we believe that recommendations and endorsements byphysicians will be essential for market acceptance of our product. We believethat physicians will not use a product unless they determine, based on clinicaldata and other factors, that it is an attractive alternative to other means ofcontraception and that it offers clinical utility in a cost-effective manner.Physicians are traditionally slow to adopt new products and treatmentpractices, partly because of perceived liability risks. Our biggest challengeis 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 theearlier adopters who have already been trained by our professional educationgroup. As of December 31, 2006, the increase of physicians that have beentrained or that are in the process of training has been commensurate with theincrease in sales. We intend to increase our call frequency to those doctors byour field representatives, to ensure that physicians understand the favorablereimbursement CPT code recently established, to strengthen referral programs toget women who are interested in the *Essure*procedure to those doctors, and to continue with our marketing programs toincrease awareness on the *Essure* systemamong women and the medical community. Additionally, we intend to supportdoctors advertising campaigns so that they will perform more *Essure* procedures on a monthly basis.

The *Essure*device is currently being marketed in multiple countries. In 2001, we wereapproved to affix the CE Mark to the *Essure*procedure, indicating that the *Essure* deviceis certified for sale throughout the European Union, subject to compliance withlocal regulations such as registration with health ministries and/or particularrequirements regarding labeling or distribution. In Canada, we receivedclearance from Health Canada to market the *Essure* systemin Canada in November 2001. In October 2004, the French MedicalDevice Reimbursement Authority “Comité Économique de Produit Santé”, or CEPS,granted reimbursement status for the *Essure*procedure in France, an important step for successful commercialization of theproduct. In 1999, the *Essure*procedure was listed with Australia’s Therapeutic Goods Administration, or theTGA, which allowed us to market and sell the *Essure*system in Australia. Later in August 2004, the Australian Department ofHealth, Medical Services Advisory Committee, or MSAC, division recommendedagainst public funding for the *Essure*procedure, citing insufficient evidence for safety, effectiveness and costeffectiveness. The overall market for female sterilization in Australia is verysmall and we believe that our market penetration will remain limited by theMSAC decision until such time as we are able to submit sufficient long-termdata to obtain public funding.

***Reimbursement***

Market acceptance of the *Essure*device depends in part upon the availability of reimbursement within prevailinghealthcare payment systems. We believe that physician advocacy of our productwill be required to continue to obtain reimbursement. As of December 31,2006, we have received positive reimbursement decisions for the *Essure* procedure from most private insurers and from 40 ofthe 51 Medicaid programs in the United States. We intend to continue our effortto educate payers of the cost-effectiveness of our product and to establishfurther programs to help physicians to navigate reimbursement issues.

In the last two years we received positive responsesrelating to reimbursement, which we believe will help us speed up theacceptance of the *Essure* device by doctors andpatients. Such is the case of the UnitedHealthcare Services, Inc., or UHC,a member of UnitedHealthcare Group and CIGNA Corporation, or Cigna, from whichwe received coverage in February 2006. As with all healthcare plans,coverage will vary and is dependent upon the individual’s specific benefitplan.

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Effective January 1,2007, the Centers for Medicare and Medicaid Services, or CMS, the MedicareNational unadjusted average payment for hysteroscopic sterilization, the CPTcode, is $433 when performed in a hospital and $2,017 when performed in aphysician’s office. This compares to a Medicare national average payment fortubal ligation, the current standard of care for permanent femalesterilization, of $370. In addition, in the CMS Final Rule for the 2007Outpatient Prospective Payment System or OPPS, which assigns hospitaloutpatient reimbursement amounts, the CPT code was assigned a Medicare NationalAverage of $2,642. In 2007, the CPT code was moved from Group 4 which had anational average reimbursement of $633 to Group 9 which has a national averagereimbursement of $1,339. We believe these values are very favorable for the *Essure* procedure and will help in establishing increasedutilization of the device amongst doctors.

***Our Market***

Birth control use in the United States is prevalentamong a majority of women of reproductive age, 15-44 years of age.According to the 2002 National Survey of Family Growth, or NSFG, conducted bythe Centers of Disease Control and Prevention and the National Center forHealth Statistics, a periodic survey which provides the most current availablestatistics on reproductive health in the United States, an estimated 62% of the61.6 million women of reproductive age in the United States use some form ofbirth control. The most common method of contraception in the United Statesamong women using birth control, according to the NSFG, was permanent birthcontrol, including tubal ligation and vasectomy, at 36%, followed by oralcontraceptives at 31%, and the male condom at 18%. Among women aged 35-44years that use some form of birth control, female sterilization was the leadingmethod.

According to the NSFG, approximately 13.8 millionwomen in the United States rely on permanent birth control methods, such astubal ligation and vasectomy. Published reports estimate that 700,000 tuballigation procedures are performed each year in the United States, and theprevalence increases with age and number of children. Approximately 89% ofwomen in the United States who have had tubal ligation have two or morechildren, according to the NSFG. According to the same source, among the womenin the United States who have had tubal ligation, approximately 70% are betweenthe ages of 35 and 44.

In addition to permanent birth control procedures, theNSFG estimated that approximately 24.3 million women in the United States usetemporary methods of birth control, such as oral contraceptives, condoms,implants and injectables. Included in this group, according to the same source,are approximately 7.6 million women who have two or more children, which webelieve makes them more likely to consider permanent forms of birth control.Furthermore, researchers in a 1999 article published in Family PlanningPerspectives theorized that women may not be completely satisfied withlong-term use of temporary methods of birth control. The Family PlanningPerspectives article reported that 44% of women using temporary birth controlchange methods for a method-related reason within 12 months, increasing to 61%by 24 months. The NSFG reported the percentage of women who ever used aselected method of contraception and then discontinued the use of that methoddue to dissatisfaction. These results indicated that 29.2% discontinued thepill, 11.9% discontinued the male condom, 42.3% discontinued Depo-ProveraTM, and41.6% discontinued NorplantTM. From these groups, some women discontinued morethan one method of birth control. The most common reason for discontinuation ofhormonal methods was side effects. The most common reason for discontinuationof the male condom was the partner’s dissatisfaction with the method. For thesereasons, we believe our market includes not only women who desire permanentbirth control, but potentially also women who have completed childbearing butare using either temporary birth control methods or no birth control method atall because no viable non-incisional alternative to tubal ligation has beenavailable until now.

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Basedon data from the CDC’s 2002 National Survey of Family Growth, the followingchart summarizes birth control methods used by women using contraceptionbetween the ages of 30-44 in the United States:
|                                                                              | **Age 30-34** | **Age 35-39** | **Age 40-44** |
|------------------------------------------------------------------------------|---------------|---------------|---------------|
| Fertile women (% of U.S. women in  reproductive age, within their age range) | 60.8%         | 47.1%         | 30.4%         |
| **Method:**                                                                  |          |          |          |
| Tubal ligation                                                               | 28%           | 41%           | 50%           |
| Pill                                                                         | 31%           | 19%           | 11%           |
| Condom                                                                       | 17%           | 16%           | 12%           |
| Vasectomy                                                                    | 9%            | 14%           | 18%           |
| All others                                                                   | 15%           | 10%           | 9%            |

 

Worldwide, there is alarger market for permanent birth control. The most current and availablereport on worldwide birth control statistics is the United Nations WorldContraceptive Use 2005 report on birth control methods used by reproductivecouples. According to the report, 61% of women aged 15-49 years wereusing a form of contraception. The report indicated that tubal ligation, theleading birth control method worldwide, was used by 21% of the reproductivecouples, followed by intrauterine devices, or IUDs, at 14%, and oralcontraceptives at 8%.

**Other AvailablePermanent Birth Control Methods**

***Tubal Ligation.******  ***Tubal ligationis the most common form of permanent birth control used by women in the UnitedStates according to the CDC’s 2002 National Survey of Family Growth. Itcombines high effectiveness with no required user compliance and a very lowrisk of long-term side effects. However, the difficulty in accessing thefallopian tubes makes it necessary to perform incisional surgery to perform theprocedure. The two most common methods of tubal ligation are laparoscopic tuballigation and tubal ligation performed by mini-laparotomy or laparotomy. Thesemethods of tubal ligation have a one-year effectiveness rate of approximately99.5% and a five-year effectiveness rate of approximately 98.7%.

Laparoscopic tubal ligation, the least invasive methodof tubal ligation, requires one to two punctures to be made in the abdomen andcarbon dioxide gas to inflate the abdomen to improve visibility and access forthe surgeon. The fallopian tubes are then ligated by cutting or cauterizing, orby mechanical occlusion using clips or rings. Because laparoscopic tuballigation requires penetration of the abdomen, 97% of laparoscopic tuballigations are performed under general anesthesia. The typical surgicalprocedure takes approximately 45 minutes and is followed by four to five hoursof recovery time in a hospital setting. Women typically return to normalactivities four to six days after a laparoscopic tubal ligation. Tubal ligationby laparotomy is a more invasive method of tubal ligation due to a moreextensive incision and is associated with a higher rate of complications andlonger 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 tuballigation by either laparoscopy or laparotomy, and reported that majorcomplications occurred in 1.6% to 5.7% of the cases. The most frequent majorcomplication with laparoscopy was unintended major surgery due to unexpectedbleeding, hematoma formation or stomach/bowel perforation. The majorcomplications reported with laparotomy were fever morbidity andre-hospitalization due to pelvic abscess, pulmonary abscess, pulmonary embolusand bowel obstructions.

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

In addition to the complications reported in thepublic research literature, a report entitled Summary of Safety andEffectiveness for the Filshie Clip PMA, which is available on the FDA’swebsite, also noted the following complications: pelvic pain (35.7%), menstrualpattern changes (12.3%), back/shoulder pain (6.0%), nausea/vomiting (4.0%) andheadache (3.0%).

***Vasectomy.******  ***Vasectomy is ahighly effective method of male birth control that is performed in a doctor’soffice with local anesthesia and typically takes about 20 minutes. The vasdeferens is ligated or resected and the cut ends are typically cauterized orclipped. Patients are observed for approximately 20 minutes before release andare encouraged to use an ice pack for approximately 4 hours to reduceswelling. Support devices are recommended for two days. Before relying on thevasectomy for birth control, men are encouraged to be tested 12 weeks after theprocedure for the presence of sperm and to use alternate forms of birth controlduring the 12 week period. Side effects of vasectomy include bleeding,infection and chronic pain syndrome.

**Other AvailableTemporary Birth Control Methods**

***Oral contraceptivesand drug delivery systems.******  ***Birth controlpills and other hormone delivery systems offer temporary birth control towomen. Birth control pills contain female hormones and require a dailypill-taking regimen in order to stop the ovaries from releasing eggs. Accordingto Contraceptive Technology, 18th revised edition, the birth control pill has a“perfect use” failure rate of 0.3% but a “typical use” failure rate of 8.0% inthe first year of use. This method has a relatively high failure rate becauseof imperfect user compliance, an inherent problem with many methods oftemporary birth control. Many physicians will not prescribe birth control pillsto women over the age of 35 who smoke cigarettes because of the potential forserious side effects. Some of the risks associated with the pill are anincreased risk of heart attack, stroke and blood clots.

Other forms of temporary hormonal birth controlinclude injectable hormones, such as Depo-Provera and Lunelle, implantable hormones,such as Implanon, vaginal rings, such as NuvaRing, and patches, such asOrthoEvra. All work to inhibit ovulation and/or inhibit sperm from entering theuterus. All have high effectiveness rates, but some, such as the ring and thepatch, still require a high level of user compliance, and injectables requireperiodic re-injections. All have undesirable side effects, such as menstrualcycle changes, weight gain, headache, nausea and breast tenderness. Thosecontaining estrogen, such as Lunelle, NuvaRing and OrthoEvra, may increase therisk of blood clots, heart attack and stroke.

***Condoms anddiaphragms.******  ***Condoms are male contraceptives thatmay also protect against sexually transmitted diseases. Diaphragms are soft,flexible, cup-shaped products that are placed inside of a woman’s vagina andover the cervix in order to prevent the sperm from entering the uterus andfertilizing the egg. Although condoms and diaphragms have very limited sideeffects, these methods have relatively high first-year failure rates primarilydue to imperfect user compliance. According to Contraceptive Technology, 18threvised edition, the first-year “typical use” failure rates are 15% for condomsand 16% for diaphragms.

***Intrauterine devices (IUDs).******  ***IUDs are small devices thatare placed in a woman’s uterus to prevent fertilization of the egg. Theycontain either copper, as in Paragard, or hormones, as in Mirena, which is alsoknown as an intrauterine system. According to Contraceptive Technology, 18threvised edition, IUDs 

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have a first yearfailure rate of 0.1% to 0.8%. However, the use of IUDs among United Stateswomen has been low in recent years, representing only approximately 1.3% ofcontraceptive users. Potential side effects from IUDs include menstrual cyclechanges, infection, cramping, expulsion and uterine perforation.

***The Essure Product***

We developed the *Essure* systemin response to what we perceived as a market need for a permanent, lessinvasive and less costly alternative to tubal ligation.

The *Essure*micro-insert is designed to be placed into each fallopian tube during a singleprocedure using a hysteroscope, an instrument that allows visual examination ofthe cervix and uterine cavity, and our minimally invasive tubal access deliverysystem. The delivery system is a disposable plastic handle with a thumb-wheelthat is connected to our proprietary guidewire and catheter system. Themicro-insert is constructed of a stainless steel inner coil, a dynamic outercoil made from a nickel titanium alloy, called Nitinol, and a layer ofpolyethylene terephthalate, or polyester fibers, wound between the inner coils.All of these materials have been used in the body for a variety of differentapplications, including cardiovascular surgery, for many years. Nitinol, ashape-memory metal, has been used in cardiovascular and peripheral vascularstents. Polyester fiber, proven to promote tissue in-growth, has been used in avariety of other medical applications, including artificial heart valves andvascular grafts. Stainless steel has been used in numerous long-term medicalapplications. An *Essure* micro-insert is deployedinto each of the woman’s fallopian tubes using a hysteroscope. Using thehysteroscope for guidance, the delivery catheter is guided through the uterusand the opening of the fallopian tube. Once the physician has properlypositioned the delivery system in the fallopian tube, the physician releasesthe micro-insert. When released, the micro-insert automatically expands to thecontours of the fallopian tube. Over a three-month time frame, the polyesterfibers within the micro-insert elicit a localized, benign tissue in-growth thatoccludes, or blocks, the fallopian tubes, thereby preventing pregnancy.

On July 17, 2003, we announced introduction of anew delivery catheter for the *Essure* system,the “coil catheter,” in the United States, Australia and Canada. A clinicalstudy, performed in Australia, demonstrated a higher placement rate with thecoil catheter than with the previous delivery catheter. In the clinical study,101 of 103 patients achieved bilateral placement. These placements wereperformed by 5 investigators, most of whom had extensive experience with the *Essure* system. This translates to a statistical bilateralplacement rate, at appropriate confidence levels, of 95%. The *Essure* system is being marketed with this claim inAustralia, Canada and the European Union. Any claim in the United States thatwould change the 86% first procedure bilateral placement rate, which was basedon the original version of the *Essure* deliverycatheter as studied in the Pivotal Trial, was subject to approval by the FDA.In March 2005, we filed a PMA supplement with the FDA in order to obtainapproval to early terminate our post-approval study and recognize the findingsfrom that study on our label. In September 2005, we received such approvalfrom the FDA. Although the treatment of the total number of patients requiredby the FDA had not been completed, the data obtained for the study provided uswith the ability to request an early termination. In November 2005, wefiled a PMA supplement with the FDA in order to obtain approval to modify the *Essure* Physician and Patient labeling to reflect a 94.6%first procedure bilateral placement rate based on results of the post-approvalstudy. In October 2006, we received such approval from the FDA.

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

In addition, the *Essure*procedure has proven to have high patient satisfaction in our clinical trials.Clinical data submitted to the FDA in our Annual Report to PMA shows that PhaseII study patients’ 

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tolerance to wearing the *Essure* device up to four years was rated as “good” to “excellent”in 99% of women at all visits through November 2003. Among women from ourPivotal trial who have worn the micro-inserts up to three years, at least 97%reported their comfort with the *Essure* deviceas “good” to “excellent” at all visits. Satisfaction was rated “somewhatsatisfied” to “very satisfied” in at least 98% of visits through two years. Atthree-year follow-up (reporting as of November 2003), 92% of womenreported their overall satisfaction as “somewhat satisfied” to “very satisfied.”Excluding the day of the *Essure*placement procedure, 92% of women in our clinical trials who were employedreturned to work in one day or less.

We didnot conduct a clinical trial to compare the *Essure*procedure to laparoscopic tubal ligation. We believe, however, based on currentdata from our Pivotal trial and published reports on laparoscopic tuballigation, that the *Essure*placement procedure has the following key advantages over laparoscopic tuballigation:
|                                         | **Essure  Procedure**                                       | **Tubal  Ligation**                               |
|-----------------------------------------|-------------------------------------------------------------|---------------------------------------------------|
| Procedure                               | Transcervicalà  Non-incisional                         | Incisionalà  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                                          |

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*                    *Excluding the day of procedure*

We believe that the *Essure* device and the *Essure*procedure offer the following important benefits to patients, physicians,hospitals and payers:

**Benefits topatients**

·       Norisks associated with incisions and use of general or regional anesthesia.

·       Rapidreturn to regular activities of one to two days as compared to four to six daysfor laparoscopic tubal ligation.

·       Four-yeareffectiveness rate of 99.80% and five-year effectiveness rate of 99.74%. Thelatter was demonstrated in a small portion of women undergoing clinicalstudies. Five year follow up for all patients in clinical trials is ongoing.

·       Norisks associated with hormones, which are used in hormone-based contraception.

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·       No recurring management ofcontraception usage as compared to non-permanent contraception methods, such asthe birth control pill, implants and injectables.

**Benefits tophysicians and hospitals**

·       Shortand relatively easily performed procedure.

·       Norisks associated with incisions and use of general or regional anesthesia.Although the percentage of office-based procedures is growing, the majority ofthe *Essure* placement procedures arecurrently performed in hospital operation rooms or surgery centers usingconscious sedation (such as IV sedation) combined with a local anesthesia (suchas a paracervical block). General anesthesia is not typically used unlessrequired by hospital protocol, or if the physician intends to perform someconcomitant procedure that requires general anesthesia, or if requested by thepatient. We believe over time, as the experience and comfort level of thephysicians increase, the majority of *Essure*procedures will be done in an ambulatory surgical center or physician officewith less anesthesia.

·       May beperformed in a less resource-intensive environment. *Essure*procedures are currently performed in various settings including hospitaloperating rooms, ambulatory surgery centers and physician offices.

·       Elimination of costsrelated to the use of general or regional anesthesia and post-operativehospital stays.

**Benefits to payers**

·       Eliminationof costs related to the use of general or regional anesthesia andpost-operative hospital stays. Currently, the majority of the *Essure* procedures are performed using conscious sedation,such as IV sedation with a local anesthesia. General anesthesia is nottypically used unless required by hospital protocol, if requested by thepatient, or based on the experience and comfort level of the physician.

·       Eliminationof the costs associated with an operating room.

·       Potential to reduceunplanned pregnancies, which are costly to payers.

**PatientConsiderations**

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

·       Thewoman must be certain that she desires permanent birth control, because the *Essure* procedure is not reversible.

·       Likeall methods of birth control, the *Essure*procedure is not 100% effective. We expect that patients will reportpregnancies from time to time. There have been pregnancies related to improperplacement of the *Essure* device, failure to followproper protocol by either physicians or patients and luteal phase pregnancies(pregnancies occurring prior to the *Essure*micro-insert placement). One or more of these may also be due to productfailure.

·       Forthree or more months after the *Essure*procedure, a temporary method of birth control must be used in combination withthe *Essure* device.

·       Threemonths post-procedure, U.S. patients are required to return for ahysterosalpingogram, or HSG, which calls for contrast dye to be injected intothe uterus to confirm occlusion of both fallopian tubes and verify satisfactorymicro-insert location. Outside of the U.S., patients are 

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required to return for apelvic X-ray at three months post-procedure with a subsequent HSG if devicelocation on the initial radiographic image appears suspicious.

·       Notall women who undergo the *Essure*procedure will achieve successful placement of both micro-inserts.Approximately 1 out of every 7 women in the *Essure* Pivotaland Phase II clinical studies did not achieve successful placement of bothmicro-inserts during the first placement procedure. Some of these women whochose to undergo a second procedure achieved successful placement of bothmicro-inserts during the second procedure, and subsequently were able to relyon the *Essure* device for contraception. We havesubsequently introduced a new delivery catheter for the *Essure*system, the “coil catheter”, which demonstrated a higher placement rate in ourclinical study performed in Australia. In the clinical study, 101 of 103patients achieved bilateral placement with the coil catheter, which translatedto a statistical bilateral placement rate, at appropriate confidence levels, of95%. Further, based on the findings of a post-approval study performed in thecommercial setting, up to 1 out of every 12 women may not achieve successfulplacement of both micro-inserts during the first placement procedure.

·       The*Essure* procedure is newer than otherprocedures and therefore does not yet have long-term safety and effectivenessdata as compared to other procedures.

·       Removalof the *Essure* micro-inserts requires surgery;and removal is not intended for procedure reversal since the *Essure* system is not reversible.

As with all medicalprocedures, there are risks associated with the *Essure*device and the *Essure* procedure. Because thereare no abdominal incisions or punctures and general or regional anesthesia istypically not required, the risks associated with the *Essure*procedure are more typical of hysteroscopic procedures and are of a lesserseverity than those of procedures that require invasion of the abdominalcavity. This is typified by the minor nature of most of the adverse eventsreported in our clinical trials to date. The most frequent risk with the *Essure* procedure is the inability to rely on themicro-insert for contraception, due primarily to lack of micro-insert placementand less frequently to misplacement of the micro-insert. Based on data gatheredin our clinical trials, adverse events, which prevented reliance on the *Essure* device for contraception, were reported as follows:failure to place 2 micro-inserts in first procedure (14%), initial tubalpatency (3.5%), expulsion (2.2%), perforation of fallopian tube (1.5%), orother unsatisfactory device location (0.6%). All of the patients in the Pivotaland Phase II clinical studies who experienced tubal patency at the 3-monthHSG were found to have bilateral occlusion at a repeat HSG performed atapproximately 6 months after the *Essure*procedure. In addition, all of the patients in the Pivotal clinical study whochose to undergo a second *Essure*procedure following a micro-insert expulsion achieved successful micro-insertplacement and were subsequently able to rely on *Essure*for contraception. The majority of women report mild to moderate painimmediately after the *Essure*procedure. The most frequent adverse events and side effects reported as aresult of the hysteroscopic procedure to place the micro-inserts were asfollows: cramping (29.6%), pain (12.9%), nausea/vomiting (10.8%),dizziness/fainting (8.8%) and spotting/vaginal bleeding (6.8%). Hypervolemia,an increase in blood volume, occurred in <1% of cases. During the first yearof reliance on the *Essure* systemfor 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 (painful intercourse) (3.6%). All other events occurredin less than 3% of women. In addition, most women reported spotting for anaverage of three days post-procedure, and one-third reported pain on the dayfollowing the procedure, with little pain reported on subsequent days. Also,occurrences of back/abdominal/other pain, headache, gas/bloating and transientmenstrual changes were reported. Persistent pain was not reported by any women,and persistent menstrual changes were reported in less than 2% of women, withvirtually equal percentages of women reporting heavier than normal menstrualflow and lighter than normal menstrual flow.

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***Our Clinical Progress***

We commenced a Phase II clinical study of safety andpreliminary effectiveness of the *Essure* devicein November 1998 and a Pivotal, or Phase III, trial of the *Essure* device in May 2000. The number of women in whomat least one of two *Essure*micro-inserts was placed totaled 682 between the two clinical trials. At threemonth follow-up, 647 women began relying on the *Essure*device as method of permanent birth control. The clinical endpoints of thestudy include safety, effectiveness and patient satisfaction.

In April 2002,based on data from our trials, we submitted our PMA application to the FDA,which was granted an expedited review. In November 2002, we receivedformal notification from the FDA for the approval of the *Essure*device. The following table summarizes placement procedure data from our twoclinical trials as of October 2002:
|                                                                                                                                | ** ** | **Pivotal Trial** | ** ** | **Phase II Study** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------------|
| Number of women  undergoing a placement procedure                                                                              |       | 518                    |       | 227                          |
| % of women with  micro-inserts placed in both fallopian tubes after 1st attempt                                           |       | 86%                    |       | 86%                          |
| % of women with  micro-inserts placed in both fallopian tubes after 2nd attempt        |       | 90%                    |       | 88%                          |
| Average hysteroscopic  procedure time for placement of micro-inserts                                                           |       | 13  minutes            |       | 18  minutes                  |
| “Good” to “Excellent”  rating of patient tolerance of procedure                                            |       | 88%                    |       | 89%                          |
| Adverse event rates preventing reliance on the Essuredevice                                                                    |       | 3.0%*                  |       | 3.0%                         |

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                 * *Does not include the ninewomen who were able to rely on the Essure device after a successful secondprocedure.*

Based on clinical trial data, the *Essure*device has been demonstrated to be 99.80% effective at three years offollow-up. As of January 2005, we accumulated sufficient patient follow-updata from the Phase II and Pivotal clinical trials for a four and five yeareffectiveness claim. We filed a PMA supplement with the FDA in March 2005for a four and five year effectiveness claim consistent with the three-yearclaim. In September 2005, we received approval from the FDA to earlyterminate our post-approval study and recognize the findings from that study onour label. Although the treatment of the total number of patients required bythe FDA had not been completed, the data obtained for the study provided uswith the ability to request an early termination. In November 2005, wefiled a PMA supplement with the FDA in order to obtain approval to modify the *Essure* Physician and Patient labeling to reflect a 94.6%first procedure bilateral placement rate based on results of the post-approvalstudy. In October 2006, we received such approval from the FDA.

The clinical trial data filed with the FDA on the PMAsupplement supports an extension of the effectiveness rate of the *Essure* system to 99.80% after four years and 99.74% afterfive years of follow-up, from the previously approved 99.80% at three years.The five-year effectiveness was demonstrated in a small portion of womenundergoing clinical studies. Five year follow up of all patients in clinicaltrials is ongoing.

Our clinical trials arestill ongoing, and the clinical trial statistics presented may change as longerterm follow-up data from the women participating in the trials is gathered,audited and analyzed, or if the FDA requests that calculations be performed ina different manner than presented in our PMA application.

**SALES AND MARKETING**

On November 6, 2002, we received FDA approval tomarket the *Essure* device in the United States. Theachievement of this major milestone enabled us to begin an aggressive marketingand sales campaign 

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in the United States. Weare distributing the *Essure* devicein the United States through our direct sales force.

Our sales and marketing strategy is to market the *Essure* device primarily to gynecologists while buildinginterest and awareness among consumers and general practitioners. Through theuse of public relations and targeted advertising, we intend to increaseawareness of the *Essure* procedure among consumers,general practitioners and the broader medical community. In this regard, weconduct regional advertisement in a variety of magazines, such as *Parents* and *Self* and we continue to attend meetings for the AmericanAssociation of Gynecologic Laparoscopists (AAGL) and American College ofObstetricians and Gynecologists (ACOG) organizations and women’s health caresocieties. We also continue to conduct a variety of marketing programs todevelop awareness and promote the product.

During 2004, we began a direct-to-consumer campaign inthe Chicago area that incorporated direct mail, print media and radioadvertising. We have opened two new websites for physicians and patients andhave established a call center for patients that are seeking additionalinformation about the *Essure*procedure and who wish to be referred to physicians that are trained to performthe *Essure* procedure. Physicians that werefer our patients to are those that have chosen to participate in our *Essure* Accredited Practice program aimed at providing anoptimal patient experience.

We are also increasing the size of our sales force soas to increase our call frequency on physicians. Among other responsibilities,our sales representatives are attempting to increase penetration andutilization of the *Essure*procedure, as well as to facilitate the movement of the *Essure*procedure to the office environment.

In order to focus ourresources domestically, we decided to market and sell our product in Australiathrough a third party distributor which resulted in closing down our directoperations in January 2005. In January 2004, we completed the sale ofour wholly-owned French subsidiary for a nominal amount to an investor groupcomprised of our former French management team, and signed a long-termexclusive distribution agreement for the *Essure* devicewith the acquiring group for the European, Middle East and African markets. Thesale agreement includes a call option that is intended to enable us torepurchase the French company. The distribution agreement was intended to allowus to conserve our resources by eliminating the funding requirements necessaryto develop those markets so that we can focus on the larger U.S. market.****In February 2007, we amended the call option anddistribution agreement with our French distributor. The amendment provided thatwe will exercise the call option sometime between January 1, 2008 and January 2,2009, subject to the satisfaction of certain conditions. In connection withagreeing to exercise the call option under these circumstances,  we concurrently amended the distributionagreement such that we will increase the price at which we sell the *Essure* device to our French distributor and that we will notexercise the call option in 2007.

**PHYSICIAN TRAINING**

We have identified, educated and trained qualifiedgynecologists in the *Essure*procedure through a combination of presentations at major medical conferences,hands-on simulation and preceptored procedures with a clinician experienced inour *Essure* procedure. In order to completetraining, we proposed and the FDA agreed that we have a professional trainer inattendance during a physician trainee’s initial cases, usually three to five,to observe appropriate technique and to sign off the physician for theprocedure.

In early 2003, we targetedlarge-group gynecological practices in the United States with the goal oftraining, inclusive of preceptorship, approximately 700 physicians by the endof 2003. During the second quarter of 2003, we started to focus on one-on-onetraining sessions for new physicians who have pre-scheduled *Essure* cases. This is to accelerate the training process andto control training costs. As of December 31, 2006, the increase ofphysicians that have been trained or that are in the process of training 

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has beencommensurate with the increase in sales. Our accomplishment in obtaining thenumber of physicians trained provides us with a strong referral base withinmajor metropolitan areas we have targeted, and we believe also creates theleverage to help us gain additional reimbursement coverage. However, weunderstand that a strong base of trained physicians does not necessarilycorrelate to an increase in revenue proportionately.

**REIMBURSEMENT**

Obtaining physician fee and device reimbursement forthe *Essure* procedure is an important steptoward successful commercialization of the *Essure* systemin the United States and internationally. Regardless of the country and itstype of reimbursement system, physician advocacy of our product, together withstudies demonstrating clinical and cost effectiveness, is required to obtainadequate reimbursement.

In the last two years, we focused on gainingadditional insurance coverage for the *Essure*procedure, which despite our  previoussuccess, remains a significant barrier to stronger growth. In July 2005,we obtained approval from UHC, which serves more than 18 million people acrossthe United States. As with all healthcare plans, coverage varies and isdependent upon the individual’s specific benefit plan. In February 2006 wealso received approval from Cigna, which serves approximately 10 million peopleacross the United States and is the final major private payer from whom werequired a coverage decision. In 2007, we intend to continue our effort toeducate payers of the cost-effectiveness of our product and to establishfurther programs to help physicians to navigate reimbursement issues.

InAugust 2004, the Australian Department of Health, Medical Services AdvisoryCommittee, or MSAC, division recommended against public reimbursement for the *Essure* procedure, citing insufficient evidence for safety,effectiveness and cost effectiveness. The overall market for femalesterilization in Australia is very small and we believe that our marketpenetration will remain limited by the MSAC decision until such time as we areable to submit sufficient long-term data to obtain public reimbursement.

**United States**

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

**International**

Reimbursement systems vary significantly by countryand sometimes by region, and reimbursement approvals must be obtained on acountry-by-country basis. Many international markets have government-managedhealth care systems that determine reimbursement for new devices andprocedures. In most markets, there are private insurance systems as well asgovernment-managed systems.

In 2004 and 2005, we received several positiveresponses from government and private agencies relating to reimbursement, whichwe believe will help us to speed up the acceptance of the *Essure*

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procedure by doctors andpatients. In 2004, we also received one unfavorable government response, theMSAC decision, that we do not consider material to our future financial resultsor expectations for the world-wide acceptance of the *Essure*procedure by doctors and patients. We believe that the overall market forfemale sterilization in Australia is very small and that our market penetrationin that country will remain limited by the MSAC decision until we are able tosubmit sufficient long-term data to obtain public funding.

In Europe, consultants areassisting us in developing a strategic plan to obtain reimbursement in a numberof European countries. In France, we obtained official reimbursement undercertain conditions for the *Essure* devicein February 2005 for the term of two years with the Haute Autorité deSanté, or HAS. This conditional approval requires the procedure to be reservedfor patients who have a potential laparoscopic risk. In addition, it requires afollow up to demonstrate the safety of the *Essure* device,for which we are conducting a multicenter study. The results of this study werefiled with the HAS at the end of 2006, upon which a final reimbursementposition is expected during 2007.

**MANUFACTURING**

Our product, the *Essure* device,is manufactured by Accellent, Inc. (formerly known as Venusa, Ltd.), orAccellent, located in Mexico and the United States. The manufacturing facilitywas approved by the FDA in April 2004 and we transitioned the majority ofour commercial production to Accellent by the end of 2004. In November 2005,we signed a new renewable agreement for three years with Accellent for themanufacturing and procurement of inventory. Since November 2005, we havebeen producing product in manufacturing volumes to meet sales forecasts anddemands. We are currently working with Accellent to increase our production ofvolumes to meet the current sales and future demands. We intend to maintainonly limited manufacturing activity at our headquarters in Mountain View,California.

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

Our manufacturing facilityand Accellent’s manufacturing facilities are subject to periodic inspection byregulatory authorities. Our quality management system is subject to FDA Part 820—QualitySystem Regulations. These regulations require that we conduct our productdesign, testing, manufacturing and quality control activities in conformancewith these regulations and that we maintain our documentation and records ofthese activities in a prescribed manner. Our manufacturing facility is licensedby the California Department of Health Services, Food and Drug Branch and isregistered with the FDA. In addition our manufacturing facility has receivedEN/ISO 13485 Quality Management Systems certification and our quality system isin compliance with the European Union Medical Device Directive 93 /42/EEC,allowing us to affix the CE Mark to our products after assembling appropriatedocumentation. EN/ISO 13485 Quality Management Systems standards have beendeveloped to harmonize standards for the design, manufacturing and distributionof medical devices. Quality operations have been developed to comply withworldwide regulatory requirements that companies know the standards of qualityon a worldwide basis.

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**RESEARCH AND DEVELOPMENT**

Our research anddevelopment activities are performed by a product development, processengineering, intellectual property and regulatory/clinical research staff.Research and development expenses for 2006, 2005 and 2004 were approximately$4.4 million, $4.3 million and $4.1 million, respectively. We intendto continue to focus our research and development efforts on the development ofnew or alternative product designs and enhancements along with management ofthe on-going clinical trials. It is R&D’s goal to launch productenhancements over the coming years, which are intended to result in a lowercost of the device, improved ease of use of the *Essure*system and simplified packaging systems.

**INTELLECTUALPROPERTY**

Our policy is to protect our proprietary positionaggressively by, among other things, filing United States and foreign patentapplications to protect technology, inventions and improvements that areimportant to the development of our business. In addition to the patentprotection we have obtained in our license from Target Therapeutics, a divisionof Boston Scientific Corporation, we have filed device and method patents forthe use of our product in new clinical applications and have pursued patentsfor several of our other inventions and developments. As of January 30,2007, we had 19 published U.S. patent applications, 26 U.S. issued patents, and25 foreign and/or international patent applications pending and 59 issuedforeign patents. Our issued patents include claims relevant to transcervicalfallopian tube occlusion devices and methods, guidewire manipulation, aguidewire design, fallopian tube visualization, electrosurgical instruments anda delivery mechanism for a tubal occlusion device. The pending applicationsdescribe various aspects of our proprietary tubal access platform technology,including claims specific to our *Essure* tubalocclusion device.

We obtained an exclusive license in the field ofreproductive physiology to technology developed by Target Therapeutics. Inaddition, we have granted to Target Therapeutics an exclusive license to ourtechnology in certain fields of interventional medicine outside of reproductivephysiology. Our exclusive license of Target Therapeutics’s technologyencompasses certain technology developed by Target Therapeutics as of February 1,1996. We do not have any preferential rights to technology developed by TargetTherapeutics after that date. The license from Target Therapeutics includespatents which relate to the design of its micro-catheters (the initial patentfor which expired in June 2006), certain aspects of guidewire design andother important aspects of micro-catheter, guidewire and micro-coiltechnologies. In addition, should any of our Target Therapeutics technology befound to infringe upon a third party’s patent rights, it may affect our abilityto develop, market and sell additional products in the future. Finally, TargetTherapeutics has the right to terminate our license if we materially breach theterms of the license. If the Target Therapeutics license were terminated, itmight affect our ability to develop, market and sell additional products in thefuture.

We believe that we are free to make and sell ourproduct, and that our product and its intended use does not infringe any validpatent rights of any other party. However, a third party, Ovion, Inc., (asubsidiary of American Medical Systems Holdings, Inc), or Ovion, brought to ourattention a patent and certain claims from a pending patent application ownedby it. Ovion indicated it believes that the claims of its patent andapplication cover *Essure* and its use. On October 23,2003, we entered into a settlement agreement with Ovion pursuant to which wereceived a sole, worldwide license to Ovion’s patent rights relative to the *Essure* system, and Ovion may not grant any additional suchlicenses to other parties. The settlement agreement provided for a cash paymentof $2.0 million in the fourth quarter of 2003 as a prepaid royalty, and alicense fee of $2.0 million payable in our common stock in equal installmentsin the first and second quarters of 2004. We are obligated to pay 3.25% of theaccumulative revenue derived from sale of the *Essure*system in excess of $75.0 million as royalty for a period of ten yearsstarting from the date of settlement. In accordance with the terms of thesettlement agreement, our prepaid royalties will be fully 

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amortized when cumulativenet sales of *Essure* system reach$136.5 million, thereby resulting in an effective royalty rate of 1.47%.We are amortizing the prepaid royalties to cost of goods sold using thiseffective rate. Prepaid royalties were approximately $0.9 million and $1.5million as of December 31, 2006 and 2005, respectively. Ovion was not granted any rights to our intellectualproperty pursuant to the settlement agreement. The settlement agreement wasapproved by the U.S. District Court for the Northern District of California on November 6,2003.

Although we have reached asettlement agreement with Ovion, we still believe that some or all of Ovion’sclaims should be included within our own patents, and we requested that the PTOdeclare an interference. An interference is a proceeding within the PTO todetermine which party was the first to invent, and which party is therebyentitled to ownership of, the claims. We believe that we filed our patentapplications for the *Essure* devicebefore Ovion filed the application that issued as its patent, and that we areentitled to any patentable claims now appearing in their patent that cover ourproduct. We do not know whether the PTO will declare an interference, whetherwe invented our product prior to Ovion’s date of invention, or whether we willprevail in an interference proceeding if it is declared by the PTO. Futureroyalties might be avoided by a favorable interference ruling before the patentoffice, which might occur if interference is declared and if we are found tohave priority of invention.

**GOVERNMENTREGULATION**

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

**United StatesRegulation**

The manufacture and sale of our product are subject toextensive regulation by numerous governmental authorities, principally the FDAas well as state and foreign agencies. In particular, the FDA regulates theresearch, clinical testing, manufacturing, safety, labeling, storage, recordkeeping, advertising, distribution, sale and promotion of medical devices inthe United States. The FDA requires that all medical devices introduced to themarket either be preceded by a pre-market notification clearance under Section 510(k) ofthe Federal Food, Drug & Cosmetic Act, or an approved PMA. A PMAapplication is approved when the FDA has determined that we have submittedclinical trial data and manufacturing quality assurance information to prove itis safe and effective for its labeled indications, or for devices that are notof the same type or substantially equivalent to a device in commercialdistribution prior to 1976. The *Essure* deviceis regulated by the FDA and received FDA approval for commercialization in theUnited States on November 6, 2002. If we or Accellent, our third partymanufacturer, do not comply with applicable regulatory requirements, we may besubject to warning letters, fines, injunctions, civil penalties, recall orseizure of products, total or partial suspension of production, withdrawal ofapprovals and criminal prosecution, among other penalties.

The FDA imposes numerousrequirements with which medical device manufacturers must comply in order tomaintain regulatory approvals. FDA enforcement policy strictly prohibits thepromotion of approved medical devices for uses other than those for which thedevice is specifically approved by the FDA. We and Accellent, will be requiredto adhere to applicable FDA and other regulations, including testing, controland documentation requirements. Ongoing compliance with the Quality SystemsRegulations and other applicable regulatory requirements will be monitoredthrough periodic inspections by federal and state agencies, including the FDAand the California Department of Health Services, as well as foreign healthauthorities. In July 1994, our San Carlos facility was inspected by theCalifornia Department of Health Services, and we were subsequently granted aCalifornia medical device manufacturing license. In February 1997, ourfacility was inspected by the California Department of Health Services, and wewere granted a California drug manufacturing license. In March 1997, wewere 

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inspectedby 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 asa result, received our PMA approval in November 2002. As part of theconditions of approval, we are required to provide data annually to the FDA inorder to gather long-term safety and effectiveness data on the *Essure* system. We are also required to conduct a postapproval study in the United States with certain newly trained physicians toevaluate placement rates. We are required to provide information to the FDA ondeath or serious injuries which our medical devices have allegedly caused orwith which they have been associated, as well as product malfunctions thatwould likely cause or contribute to death or serious injury if the malfunction wereto recur. If the FDA believes that a company is not in compliance with the lawor regulations, it can institute proceedings to detain or seize products, issuea recall, enjoin future violations and assess civil and criminal penaltiesagainst the company, its officers and its employees. We are also subject toregulation by the United States Occupational Safety and Health Administrationand by other government entities. Regulations regarding the manufacture andsale of our product are subject to change. We cannot predict what impact, ifany, such changes might have on our future ability to manufacture, market anddistribute the *Essure* system.

**Internationalregulation**

Sales of medical devicesoutside of the United States are subject to international regulatoryrequirements that vary widely from country to country. The time required toobtain clearance required by foreign countries may be longer or shorter thanthat required for FDA clearance, and requirements for licensing may differsignificantly from FDA requirements. The *Essure* systemis listed with Australia’s Therapeutic Goods Agency. The European Union haspromulgated rules which require manufacturers of medical products toobtain the right to affix to their products the CE Mark, an international symbolof adherence to quality assurance standards and compliance with applicableEuropean Union Medical Device Directives. We received permission to affix theCE Mark to the *Essure* device in February 2001.In Canada, we received clearance from Health Canada to market the *Essure* system in Canada in November 2001. Somecountries in which we currently operate or contemplate to operate either do notcurrently regulate medical devices or have minimal registration requirements.However, these countries may develop more extensive regulations in the futurethat could delay or prevent us from marketing the *Essure*system in these countries.

**COMPETITION**

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

We are aware of a companythat is in the clinical stages of development for non-incisional permanentcontraception devices. In addition, new competition and products may arise dueto mergers or acquisitions performed by external parties and other companiesmay develop products that could compete with the *Essure*system. Moreover, the medical device industry is characterized by rapidand significant technological change. The length of time required for productdevelopment and regulatory approval impacts remarkably a company’s competitiveposition. As a result, our success will depend in part on our ability torespond promptly to medical and technological changes through the developmentand commercialization of new products. Competitive factors may render the *Essure* system obsolete or noncompetitive or reduce demandfor the *Essure* system.

**PRODUCT LIABILITYAND INSURANCE**

The manufacture and saleof medical products involve an inherent risk of exposure to product liabilityclaims and product recalls. We currently maintain product liability insurancewith coverage limits of 

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$10.0 millionper occurrence and an annual aggregate maximum of $10.0 million, which webelieve is comparable to that maintained by other companies of similar sizeserving similar markets. However, there can be no assurance that productliability claims in connection with clinical trials or sale of our product willnot exceed such insurance coverage limits, which could have a material adverseeffect on us, or that such insurance will continue to be available oncommercially reasonable terms or at all. Insurance is expensive and in thefuture may not be available on acceptable terms, if at all. A successfulproduct liability claim or series of claims brought against us in excess of ourinsurance coverage or a recall of our product could have a material adverseeffect on our business, financial condition and results of operations.

**EMPLOYEES**

As of December 31, 2006, we have 181 full-timeemployees, consisting of 22 in manufacturing, 14 in research and development,116 in sales and marketing and 29 in general and administrative functions. Wegenerally depend on a number of key management, sales and marketing and technicalpersonnel. The loss of the services of one or more key employees could delaythe achievement of our development and marketing objectives. Our success willalso depend on our ability to attract and retain additional highly qualifiedmanagement, sales and marketing and technical personnel to meet our growthgoals. We face intense competition for qualified personnel, many of whom areoften subject to competing employment offers, and we do not know whether wewill be able to attract and retain such personnel.

None of our employees are represented by a labor unionor covered by a collective bargaining agreement, and we believe our employeerelations are good.

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**ITEM 1A. RISKFACTORS**

*In addition to the other information in this Form 10-K,the following factors should be considered carefully in evaluating Conceptusand our business. This Form 10-K contains forward-looking statementswithin the meaning of section 27A of the Securities Act of 1933, as amended andsection 21E of the Securities Exchange Act of 1934, as amended. Some of theforward-looking statements can be identified by use of forward-looking wordssuch as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,”“approximates,” “intends,” “plans,” or “estimates,” or the negative of thesewords, or other comparable terminology. The discussion of financial trends,strategy, plans or intentions may also include forward-looking statements. Forward-lookingstatements involve risks and uncertainties that could cause actual results todiffer materially from those projected. Although it is not possible to predictor identify all such risks and uncertainties, they may include, but are notlimited to, the following factors. The readers should not consider this list tobe a complete statement of all potential risks and uncertainties.*

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

Notwithstanding FDAapproval to market the *Essure* systemin November 2002, the *Essure* systemis a novel product compared to other products in the contraception market,which is dominated by procedures that are well established among physicians andpatients and are routinely taught to new physicians. As a result, we believethat recommendations and endorsements by physicians will be essential formarket acceptance of our product. We do not know whether physicians andpatients will accept our product or whether we will be able to obtain theirrecommendations or endorsements in sufficient amounts to be profitable. Webelieve that physicians will not use a product unless they determine, based onclinical data and other factors, that it is an attractive alternative to othermeans of contraception and that it offers clinical utility in a cost-effective manner. Physicians aretraditionally slow to adopt new products and treatment practices, partlybecause of perceived liability risks. We are dependent on the *Essure* system, which is currently our only commercialproduct. If the *Essure* system does not achievesignificant market acceptance among physicians, patients and healthcare payers,even if reimbursement levels are sufficient and necessary U.S. andinternational regulatory approvals are maintained, we may never achievesignificant revenues or profitability.

***We have a limited history of operation with the Essuresystem and since inception, have had a negative cash flow from operations andincurred operating losses. We expect to incur operating losses for theforeseeable future and we may never achieve or maintain profitability.***

We have a limited historyof operation with the *Essure* systemand since our inception in 1992, we have had a negative cash flow fromoperations and have incurred operating losses, including operating losses of$19.8 million in fiscal year 2006, $22.7 million in the fiscal year 2005 and$26.6 million in fiscal 2004. We expect to continue to incur significantoperating expenses and net losses as we continue sales and marketing efforts inthe United States. Our net loss will continue until sufficient revenues can begenerated to offset these expenses. These losses have caused and will cause ourstockholders’ equity and net current assets to decrease. We may not be able togenerate these revenues, and we may never achieve profitability. Our failure toachieve and sustain profitability would negatively impact the market price ofour common stock and our ability to satisfy our obligations in the future.

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

In September 2005, we received FDA approval toterminate our post-approvalstudy with physicians newly trained in performing the *Essure* procedure due to the positive placement data obtainedto date. The purpose of the post-approvalstudy, required by FDA as a condition of the November 2002 approvalof the 

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*Essure*system, was to determine the rate of successful bilateral placements of the *Essure* micro-insertsat first attempt with a large number of newly trained physicians who werenot part of the previous clinical studies. Although treatment of the totalnumber of patients required by FDA had not been completed, the dataobtained provided us with the ability to request an early termination of thestudy. Because of the FDA ruling, the PMA Supplement submitted in March 2005has been reclassified as a Final Report. The results of the post-approval study demonstratedan improvement in placement rates from those obtained in the pivotal study. In November 2005,we filed a PMA supplement with the FDA in order to obtain approval to modifythe *Essure* Physician and Patient labeling toreflect a 94.6% first procedure bilateral placement rate based on results ofthe post-approval study. InOctober 2006, we received such approval from the FDA.

Nevertheless, the long-term results of using the *Essure* device will not be available for several years. Iflong-term studies orclinical experience indicate that the *Essure* systemis less effective or less safe than our current data suggest, we may notachieve or sustain market acceptance and/or we could be subject to significantliability.

***Our advertising campaigns may not be successful.***

Our advertising programs,which are aimed at increasing consumer awareness for our product, are generallyexpensive and may have limited success, if any. We have recently increased thenumber and extent of these advertising programs to make more women aware of the*Essure* procedure. Such campaigns requireconsumers to make contact with an *Essure* trainedphysician, often involving a referral from their primary care physician, and tothen be provided information regarding birth control options by the physician,be preauthorized for insurance reimbursement and then be scheduled for theprocedure. Many of these steps are not within our control, and the programs maynot result in revenue generation commensurate with their costs.

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

We may in the futureacquire one or more technologies, products or companies that complement ourbusiness. We may not be able to effectively integrate these into our businessand any such acquisition could bring additional risks, exposures and challengesto our company. In addition, acquisitions may dilute our earnings per share,disrupt our ongoing business, distract our management and employees, increaseour expenses, subject us to liabilities and increase our risk of litigation,all of which could harm our business. If we use cash to acquire technologies,products or companies, it may divert resources otherwise available for otherpurposes. If we use our common stock to acquire technologies, products orcompanies, our stockholders may experience substantial dilution. If we fail tomanage any expansion or acquisition, our business could be impaired.

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

The medical device industry is highly competitive andis characterized by rapid and significant technological change. The length oftime required for product development and regulatory approval plays animportant role in a company’s competitive position. As we commercialize the *Essure* system, we expect to compete with:

·       othermethods of permanent contraception, in particular tubal ligation;

·       othermethods of non-permanent contraception, including devices such as intrauterinedevices, or IUDs, vaginal rings, condoms and prescription drugs such as thebirth control pill, injectable and implantable contraceptives and patches; and

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·       othercompanies that may develop permanent contraception devices that are similar toor otherwise compete with the *Essure* system.

We are aware of a companythat is in the clinical stages of development for non-incisional permanentcontraception devices. In addition, new competition and products mayarise due to mergers or acquisitions completed by others. Our competitors maybe acquired by companies with greater corporate, financial, operational, salesand marketing resources, and more experience in research and development thanwe have. We cannot assure you that our competitors will not succeed indeveloping or marketing technologies or products that may render the *Essure* system obsolete or noncompetitive or reduce demandfor the *Essure* system. For example, a December 2006press report linked a decline in the price of our common stock with theannouncement that a competitor had asked the FDA to approve its permanent birthcontrol product. In February 2007 that competitor announced entering intoa definitive merger agreement with a well capitalized medical device company.We may not have the financial resources, technical expertise, marketing,distribution or support capabilities to compete successfully in the future.

***We, our contract manufacturer and our subcontractorsmay not meet regulatory quality standards applicable to our manufacturingprocesses, which could have an adverse effect on our business.***

As a medical device manufacturer, we are required toregister with the FDA and are subject to periodic inspection by the FDA forcompliance with the FDA’s Quality System Regulation (QSR) requirements, whichrequire manufacturers of medical devices to adhere to certain goodmanufacturing practice regulations, including testing, quality control anddocumentation procedures. In addition, the federal Medical Device Reportingregulations require us to provide information to the FDA whenever there isevidence that reasonably suggests that a device may have caused or contributedto a death or serious injury or, if a malfunction were to occur, could cause orcontribute to a death or serious injury. Compliance with applicable regulatoryrequirements is subject to continual review and is rigorously monitored throughperiodic inspections by the FDA. Our contract manufacturer, component suppliersand other subcontractors are also required to meet certain standards applicableto their manufacturing processes.

In April 2004, wereceived FDA approval to begin manufacturing the *Essure*product at Accellent, Inc., or Accellent, formerly named Venusa, our third-party subcontractor located inMexico. We transitioned almost all of our internal manufacturing operations toAccellent by the end of 2004 to manufacture the components and assemble ourproduct. Similarly, we have subcontracted with Sterigenics Internationalto handle the sterilization of our products. We cannot assure you that we, ourcontract manufacturer, component suppliers or other subcontractors will be ableto maintain compliance with all regulatory requirements. The failure by us orcontract manufacturer, component suppliers or other subcontractors to achieveor maintain compliance with these requirements or quality standards may disruptour ability to supply products sufficient to meet demand until compliance isachieved or, in the case of our contract manufacturer, component supplier orsubcontractor, until a new manufacturer, supplier or subcontractor has beenidentified and evaluated. In addition, our failure to comply with applicableregulations could result in sanctions being imposed on us, including fines,injunctions, civil penalties, failure of regulatory authorities to grantmarketing approval of our products, delays, suspension or withdrawal ofapprovals, license revocation, seizures or recalls of products, operatingrestrictions and criminal prosecutions, any of which could harm our business.Furthermore, we cannot assure you that if we find it necessary to engage newmanufacturers, suppliers or subcontractors to satisfy our businessrequirements, that we will be able to locate new manufacturers, suppliers orcontractors who are in compliance with regulatory requirements. Our failure todo so could have a material adverse effect on our business.

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***We may experience disruption in supply due to ourdependence on our contract manufacturers to supply our commercial productrequirements and our inability to obtain suppliers of certain components forour products.***

Our suppliers mayencounter problems during manufacturing due to a variety of reasons, includingfailure to follow specific protocols and procedures, failure to comply withapplicable regulations, equipment malfunctions, labor shortages orenvironmental factors. In addition, we and our third party manufacturerpurchase both raw materials used in our product and finished goods from varioussuppliers, and we rely on a single source supplier for certain components ofour product. Although we anticipate that we have adequate sources of supplyand/or inventory of these components to handle our production needs for theforeseeable future, if we or our contract manufacturer are unable to secure ona timely basis sufficient quantities of the materials we depend on tomanufacture our products, if we encounter delays or contractual or otherdifficulties in our relationships with these suppliers, or if we cannot findsuppliers at an acceptable cost, then the manufacture of our products may bedisrupted, which could increase our costs and have a material adverse effect onour business.

***Our agreements and contracts entered into withpartners and other third parties may not be successful.***

We signed in the past and may pursue in the future contractsand agreements with third parties that would assist our marketing,manufacturing, selling and distribution efforts. For example, in January 2004,we completed the sale of our wholly-owned French subsidiary for a nominal amount to an investorgroup comprised of our former French management team, and signed a long-termexclusive distribution agreement for the *Essure*device with the acquiring group, Conceptus SAS, for certain markets. The saleagreement includes a long-termcall option that is intended to enable us to repurchase Conceptus SAS. In February 2007, we amended the call optionand distribution agreement with our French distributor. The amendment providedthat we will exercise the call option sometime between January 1,2008 and January 2, 2009, subject to the satisfaction of certainconditions. In connection with agreeing to exercise the call option under thesecircumstances,  we concurrently amendedthe distribution agreement such that we will increase the price at which wesell the  *Essure*device to our French distributor and that we will not exercise the call optionin 2007.

In addition, in January 2005,we decided to market and sell our product in Australia through a third partydistributor and closed down our direct operations. We cannot assure you thatthese agreements or arrangements or any others entered into in the future willbe successful.

***Government or third party reimbursement for the Essureprocedure may not be available or may be inadequate, which would limit ourfuture product revenues and delay or prevent our profitability.***

Market acceptance of the *Essure*system in the United States and in international markets will depend in partupon the availability of reimbursement within prevailing healthcare paymentsystems. Reimbursement systems in international markets vary significantly bycountry and sometimes by region, and reimbursement approvals must be obtainedon a country-by-countrybasis. Many international markets have government managed health care systemsthat 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 physicianadvocacy of our product will be required to obtain reimbursement.

Availability and extent ofcontinued reimbursement will depend, at least in part, on the clinical and costeffectiveness of our product. We cannot assure you that reimbursement for ourproduct will continue to be available in the United States or in internationalmarkets under either government or private reimbursement systems, or thatphysicians will support and advocate reimbursement for use of our product forall indications intended by us. In November 2006, The Centers for Medicareand Medicaid Services, or CMS, published the 2007 Physician Fee and Five YearReview final rule. This rule impacts a variety of 

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medicalprocedures. In the final rule, the physician global fee for the *Essure* procedure is reduced to $2,017 for a Medicarenon-adjusted national average. The rule also reduces the global paymentover a 4-year period by approximately 30%. At the same time, the 2007Hospital Outpatient Final Rule (HOPPS) increased outpatient hospitalpayments and ambulatory surgery center payments were increased by 7% and 112%,respectively. We have also had reimbursement reductions in France and have hadcoverage declined in Australia. We may be unable to obtain or maintainreimbursement in any country within a particular time frame, for a particularamount, or at all, which would limit our future product revenues and delay orprevent our profitability.

***We may not maintain regulatory approvals for theEssure system, which would delay or prevent us from generating productrevenues, and would harm our business and force us to curtail or ceaseoperations.***

Numerous governmentauthorities, both in the United States and internationally, regulate themanufacture and sale of medical devices, including the *Essure*system. In the United States, the principal regulatory authorities are the FDAand corresponding state agencies, such as the California Department of HealthServices. The process of obtaining and maintaining required regulatoryclearances is lengthy, expensive and uncertain.

***We have received FDA approval to market the Essuresystem in the United States. If we lose that approval or fail to comply withexisting or future regulatory requirements, it would delay or prevent us fromgenerating further product revenues.***

Sales of medical devices outside of the United Statesare subject to international regulatory requirements that vary widely fromcountry to country. The time required to obtain clearance required by foreigncountries may be longer or shorter than that required for FDA clearance, andrequirements for licensing may differ significantly from FDA requirements. Manycountries in which we currently market or intend to market the *Essure* system either do not currently regulate medicaldevices or have minimal registration requirements; however, these countries maydevelop more extensive regulations in the future, which could delay or preventus from marketing the *Essure* systemin these countries.

The FDA and certain foreign regulatory authoritiesimpose numerous requirements with which medical device manufacturers mustcomply in order to maintain regulatory approvals. FDA enforcement policystrictly prohibits the promotion of approved medical devices for uses otherthan those for which the device is specifically approved by the FDA. We arerequired to adhere to applicable FDA regulations, such as QSR, and similarregulations in other countries, which include testing, control anddocumentation requirements. Ongoing compliance with QSR and other applicableregulatory requirements are monitored through periodic inspections by federaland state agencies, including the FDA and the California Department of HealthServices, and by comparable agencies in other countries.

If we fail to comply withapplicable regulatory requirements, we may be subject to, among other things,warning letters, fines, injunctions, civil penalties, recall or seizure ofproducts, total or partial suspension of production, refusal of the governmentto grant pre-marketclearance or pre-market approval for devices, withdrawal of approvals andcriminal prosecution, any of which could negatively impact our business.

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

Our operations may be directly or indirectly affectedby various broad state and federal healthcare fraud and abuse laws. Such lawsinclude the federal Anti-KickbackStatute and related state anti-kickback laws, which prohibit anyperson from knowingly and willfully offering, paying, soliciting or receivingremuneration, directly or indirectly, to induce or reward either the referralof an individual, or the 

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furnishing, purchasing,leasing or ordering of, or arranging for or recommending the furnishing,purchasing, leasing or ordering of an item or service, for which payment may bemade under federal healthcare programs, such as Medicaid programs. The federalStark law and self referral prohibitions under analogous state laws restrictreferrals by physicians and, in some instances, other healthcare providers,practitioners and professionals, to entities with which they have indirect ordirect financial relationships for furnishing of designated health services.These healthcare fraud and abuse laws are subject to evolving interpretationsby various state and federal enforcement and regulatory authorities. Undercurrent interpretations of the federal false claims act and certain similarstate laws, some of these laws may also be subject to enforcement in a qui tamlawsuit brought by a private party “whistleblower,” with or without theintervention of the government.

If our past or presentoperations are found to be in violation of these laws and not protected under astatutory exception or regulatory safe harbor provision to the applicable fraudand abuse laws, we, our officers or our employees may be subject to civil orcriminal penalties, including large monetary penalties, damages, fines,imprisonment and exclusion from federal healthcare program participation,including the exclusion of our products from use in treatment of Medicaid orother federal healthcare program patients. If federal or state investigationsor enforcement actions were to occur, our business and financial conditionwould be harmed.

***Our intellectual property rights may not providemeaningful commercial protection for our product, which could enable thirdparties to use our technology, or very similar technology, and could impair ourability to compete in the market.***

We rely on patent, copyright, trade secret andtrademark laws to limit the ability of others to compete with us using the sameor similar technology in the United States and other countries. However, asdescribed below, these laws afford only limited protection and may notadequately protect our rights to the extent necessary to sustain anycompetitive advantage we may have. The laws of some foreign countries do notprotect proprietary rights to the same extent as the laws of the United States,and many companies have encountered significant problems in protecting theirproprietary rights abroad. These problems can be caused by the absence of rules andmethods for defending intellectual property rights.

We will be able to protect our technology fromunauthorized use by third parties only to the extent that they are covered byvalid and enforceable patents or are effectively maintained as trade secrets.The patent positions of companies developing medical devices, including ourpatent position, generally are uncertain and involve complex legal and factualquestions concerning the enforceability of such patents against allegedinfringement. Recent judicial decisions have established new case law and areinterpretation of previous patent case law, and consequently we cannot assureyou that historical legal standards surrounding the questions of infringementand validity will be applied in future cases. In addition, legislation may bepending in United States Congress that, if enacted in its present form, maylimit the ability of medical device manufacturers in the future to obtainpatents on surgical and medical procedures that are not performed by, or as apart of, devices or compositions that are themselves patentable. Our ability toprotect our proprietary methods and procedures may be compromised by theenactment of this legislation or any other limitation or reduction in thepatentability of medical and surgical methods and procedures. Changes in eitherthe patent laws or in interpretations of patent laws in the United States andother countries may therefore diminish the value of our intellectual property.

We own, or control through licenses, a variety ofissued patents and pending patent applications. However, the patents on whichwe rely may be challenged and invalidated, and our patent applications may notresult in issued patents. Moreover, our patents and patent applications may notbe sufficiently broad to prevent others from practicing our technologies orfrom developing competing products. We also face the risk that others mayindependently develop similar or alternative technologies or design around ourpatented technologies.

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We have taken security measures to protect ourproprietary information, especially proprietary information that is not coveredby patents or patent applications. These measures, however, may not provideadequate protection of our trade secrets or other proprietary information. Weseek to protect our proprietary information by entering into confidentialityagreements with employees, collaborators and consultants. Nevertheless,employees, collaborators or consultants could still disclose our proprietaryinformation and we may not be able to protect our trade secrets in a meaningfulway. If we lose any employees, we may not be able to prevent the unauthorizeddisclosure or use of our technical knowledge or other trade secrets by thoseformer employees despite the existence of a nondisclosure and confidentialityagreement and other contractual restrictions designed and intended to protectour proprietary technology. In addition, others may independently developsubstantially equivalent proprietary information or techniques or otherwisegain access to our trade secrets.

Our ability to competeeffectively will depend substantially on our ability to develop and maintainproprietary aspects of our technology. Our issued patents, any future patentsthat may be issued as a result of our United States or foreign patentapplications, or the patents under which we have license rights may not offerany degree of protection against competitive products. Any patents that may beissued 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 infringingthird-party intellectual property rights, our prospects will suffer.***

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

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

The medical device industry has been characterized byextensive litigation regarding patents and other intellectual property rights,and companies in the industry have used intellectual property litigation togain a competitive advantage. We may become a party to patent infringementclaims and litigation or interference proceedings declared by the United StatesPatent and Trademark Office, or PTO, to determine the priority of inventions.The defense and prosecution of these matters are both costly and timeconsuming. We may need to commence proceedings against others to enforce ourpatents, to protect our trade secrets or know-how or to determine theenforceability, scope and validity of the proprietary rights of others. Theseproceedings would result in substantial expense to us and significant diversionof effort by our technical and management personnel.

A third party, Ovion, Inc., Ovion, which is now asubsidiary of American Medical Systems, or AMS, brought to our attention apatent and certain claims from a pending patent application owned by it. Ovion 

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indicated that it believesthat the claims of its patent and application cover the *Essure*system and its use. On October 23, 2003, we entered into a settlementagreement with Ovion pursuant to which we received a sole, worldwide license toOvion’s patent rights relative to the *Essure* system,and Ovion may not grant any additional such licenses to other parties. Thesettlement agreement provided for the payment of a royalty to Ovion that willbe equal to 3.25% of the cumulative net sales of the *Essure*system in excess of $75.0 million for a period of no longer than ten years. Inaddition, the settlement agreement provided for a cash payment of $2.0 millionin the fourth quarter of 2003 as a prepaid royalty, and a license fee of $2.0million payable in our common stock in equal installments in the first andsecond quarters of 2004. Ovion was not granted any rights to our intellectualproperty pursuant to the settlement agreement. The settlement agreement wasapproved by the U.S. District Court for the Northern District of California on November 6,2003.

Although we have reached a settlement agreement withOvion, we still believe that some or all of Ovion’s claims should be includedwithin our own patents and we have requested that the PTO to declare aninterference. An interference is a proceeding within the PTO to determine whichparty was the first to invent, and which party is thereby entitled to ownershipof the claims. We believe that we filed our patent applications for the *Essure* system before Ovion filed the application that issuedas its patent, and that we are entitled to any patentable claims now appearingin their patent that cover our product. We do not know whether the PTO willdeclare an interference, whether we invented our product prior to Ovion’s dateof invention, or whether we will prevail in an interference proceeding if it isdeclared by the PTO. If the PTO declares an interference in our favor and weare found to have priority of invention, we may avoid having to pay Ovionfuture royalties on the sales of our product.

An adverse determination in new litigation orinterference proceedings to which we are or may become a party could subject usto significant liabilities to third parties or require us to seek licenses fromthird parties. Although patent and intellectual property disputes in themedical device area have often been settled through licensing or similararrangements, costs associated with such arrangements may be substantial andcould include ongoing royalties. We may be unable to obtain necessary licenseson satisfactory terms, if at all. Adverse determinations in a judicial oradministrative proceeding or failure to obtain necessary licenses could preventus from manufacturing and selling the *Essure* system.

One of the patentsincluded in our license from Target Therapeutics, a division of BostonScientific Corporation, has been the subject of reexamination proceedings inthe PTO and an infringement lawsuit by Target Therapeutics.  We are not a party to this lawsuit. The patentis directed to variable stiffness catheters for use with guidewires, as mightbe used in our future products. Although the PTO reaffirmed the patent withamended claims and the lawsuit was settled, the patent could be challenged orinvalidated in the future. If this patent is invalidated, our ability to preventothers from using this proprietary technology would be compromised.

***Our future liquidity and capital requirements areuncertain.***

As we commercialize the *Essure*system on a wide scale basis, we may require additional financing and thereforemay in the future seek to raise additional funds through bank facilities, debtor equity offerings or other sources of capital. Any additional equityfinancing may be dilutive to stockholders, and debt financing, if available,may involve restrictive covenants and interest expenses that will affect ourfinancial results. Additional funding may not be available when needed or onterms acceptable to us. If we are unable to obtain additional capital, we maybe required to delay, reduce the scope of or eliminate our selling andmarketing activities. Our future liquidity and capital requirements will dependupon many factors, including, among others:

·       therate of product adoption by doctors and patients;

·       obtaininggovernment and third-party reimbursement for the *Essure*procedure;

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·       theliquidity of private insurance systems, as well as the timeliness of paymentsof government management reimbursement systems;

·       ourability to improve our days sales outstanding;

·       theresources devoted to increasing manufacturing capacity to meet commercialdemands;

·       ourability to reduce our cost of sales;

·       theresources devoted to developing and conducting sales and marketing anddistribution programs;

·       theprogress and cost of product development programs; and

·       the potential requirementto make royalty payments subject to the Ovion-Conceptus settlement agreement.

***The fluctuation of our quarterly results may adverselyaffect the trading price of our common stock.***

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

·       theextent to which the *Essure* systemgains market acceptance;

·       therate at which physicians are trained to perform the *Essureprocedure*

·       thetiming of sales of our products and services;

·       actionsrelating to reimbursement matters;

·       increasesin sales and marketing, product development or administration expenses;

·       therate at which we establish U.S. and international distribution or marketingpartners and the degree of their success;

·       introductionof competitive products; and

·       costsrelated to acquisitions of technology or businesses

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

***Health care reformmay limit our return on our product.***

The levels of revenue andprofitability of medical device companies may be affected by the efforts ofgovernment and third party payers to contain or reduce the costs of health carethrough various means. In the United States, there have been, and we expectthat there will continue to be, a number of federal, state and privateproposals to control health care costs. These proposals may contain measuresintended to control public and private spending on health care, as well as toprovide universal public access to the health care system. If enacted, theseproposals may result in a substantial restructuring of the health care deliverysystem. Significant changes in the health care system in the United States arelikely to have a substantial impact over time on the manner in which we conductour business and could have a material adverse effect on our business,financial condition and results of operations.

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***We may be exposedto product liability claims, and we have only limited insurance coverage.***

The manufacture and saleof medical products involve an inherent risk of exposure to product liabilityclaims and product recalls. We currently maintain product liability insurancewith coverage limits of $10.0 million per occurrence and an annual aggregatemaximum of $10.0 million, which we believe is comparable to that maintained byother companies of similar size serving similar markets. However, we cannotassure you that product liability claims in connection with clinical trials orcommercial sales of the *Essure* systemwill not exceed such insurance coverage limits or that such insurance willcontinue to be available on commercially reasonable terms, or at all. Insuranceis expensive and in the future may not be available on acceptable terms, if atall. A successful product liability claim or series of claims brought againstus in excess of our insurance coverage, or a recall of our product, could causeour stock price to fall.

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

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

***We are required torecognize expense for stock-***based compensation related to employee stock options andother share-based payment awards,and we cannot assure you that the expense that we are required to recognizemeasures accurately the value of our share-based payment awards, and therecognition of this expense could cause the trading price of our common stockto decline.

Medical technologycompanies like ours have a history of using broad based employee stock optionprograms to hire, incentivize and retain our workforce in a competitivemarketplace. Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R),“Share-BasedPayment.” SFAS No. 123(R) established accounting for stock-based awards exchanged foremployee services. Accordingly, stock-based compensation cost is measured atgrant date, based on the fair value of the award which is computed using theBlack-Scholes option valuation model, and is recognized as expense over theemployee requisite service period. We previously applied AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related Interpretations and provided the required pro formadisclosures of SFAS No. 123, “Accounting for Stock-Based Compensation.” The adoption of SFAS No. 123(R)had a significant impact on our consolidated statement of operations for 2006as we were required to expense the fair value of our stock options rather thandisclosing the impact on our consolidated result of operations within ourfootnotes in accordance with the disclosure provisions of SFAS No. 123.The application of SFAS 123(R) requires the use of an option pricing modelto determine the fair value of share-basedpayment awards. This determination of fair value is affected by our stock priceas well as assumptions regarding a number of highly complex and subjectivevariables. These variables include, but are not limited to, our expectedstock price volatility over the term of the awards, and actual and projectedemployee stock option exercise behaviors. Option pricing models were developedfor use in estimating the value of traded options that have no vesting orhedging restrictions and are fully transferable. Because our employee stockoptions have certain characteristics that are significantly different fromtraded options, and because changes in the subjective assumptions canmaterially affect the estimated value, in management’s opinion the existingvaluation models may not provide an accurate measure of the fair value of ouremployee stock options. Although the fair value of employee stock options isdetermined in accordance with SFAS 123(R) and Staff Accounting Bulletin107 using the Black-Scholes

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option-pricing model, that value may notbe indicative of the fair value observed in a willing buyer/willing sellermarket transaction. As a result of the adoption of SFAS 123(R), beginning withfiscal 2006, our earnings were lower than they would have been had wenot been required to adopt SFAS 123(R). This will continue to be the case forfuture periods. We cannot predict the effect that this adverse impact on ourreported operating results will have on the trading price of our common stock.In addition, this could impact our ability to utilize broad based employeestock plans to reward employees and could result in a competitive disadvantageto us in the employee marketplace.

***Future changes infinancial accounting standards or practices or existing taxation rules orpractices may cause adverse unexpected revenue fluctuations and affect ourreported results of operations.***

A change in accountingstandards or practices or a change in existing taxation rules or practicescan have a significant effect on our reported results and may even affect ourreporting of transactions completed before the change is effective. Newaccounting pronouncements and taxation rules and varying interpretationsof accounting pronouncements and taxation practice have occurred and may occurin the future. In July 2006, the Financial Accounting Standards Board, orFASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109,” or FIN 48,which clarifies the accounting for uncertainty in income tax positions. ThisInterpretation requires that we recognize in our financial statements theimpact of a tax position if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. Theprovisions of FIN 48 are effective on January 1, 2007, with the cumulativeeffect of the change in accounting principle, if any, recorded as an adjustmentto opening retained earnings. We are currently evaluating the impact ofadopting FIN 48 on our financial position, cash flows, and results ofoperations. Changes to existing rules, including the adoption of FIN 48, or thequestioning of current practices may adversely affect our reported financialresults or the way we conduct our business.

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

**In February 2007 we issued anaggregate principal amount of $86,250,000 of our 2.25% convertible senior notesdue 2027. The net share settlement feature of the notes may reduce ourliquidity. If the notes are convertible, then upon conversion, holders willreceive cash and, if applicable, shares of our common stock based on an initialconversion rate, subject to adjustment, of 35.8616 shares per $1,000 principalamount of notes (which represents an initial conversion price of $27.89 pershare), in certain circumstances. Because we must settle at least a portion ofour conversion obligation in cash, the conversion of notes may significantlyreduce our liquidity.**

**On each of February 15, 2012, February 15,2017 and February 15, 2022, holders of the notes may require us topurchase, for cash, all or a portion of their notes at 100% of their principalamount, plus any accrued and unpaid interest to, but excluding, that date. If afundamental change occurs, holders of the notes may require us to repurchase,for cash, all or a portion of their notes. In addition, upon conversion of thenotes, we must pay the principal return in cash. We may not have sufficientfunds to pay the interest, purchase price, repurchase price or principal returnwhen due. In addition, the terms of any borrowing agreements which we may enterinto from time to time may require early repayment of borrowings undercircumstances similar to those constituting a fundamental change. Theseagreements may also make our repurchase of notes, or the cash payment due uponconversion of the notes, an event of default under the agreements. If we failto pay interest on the notes, to repurchase the notes or to pay the cashpayment due upon conversion when required, we will be in default under theindenture for the notes.**

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**Asadjusted to include the sale of the notes our total consolidated long-term debtas of December 31, 2006 would have been approximately $86.25 million. Inaddition, the indenture for the notes will not restrict our ability to incuradditional indebtedness. Our level of indebtedness could have importantconsequences on our future operations, including:**

·       makingit more difficult for us to meet our payment and other obligations under thenotes and our other outstanding debt;

·       resultingin an event of default if we fail to comply with the financial and otherrestrictive covenants contained in any debt agreements that we may have, whichcould result in all of our debt becoming immediately due and payable;

·       reducingthe availability of our cash flow to fund working capital, capitalexpenditures, acquisitions and other general corporate purposes, and limitingour ability to obtain additional financing for these purposes;

·       limitingour flexibility in planning for, or reacting to, and increasing ourvulnerability to, changes in our business, the industry in which we operate andthe general economy; and

·       placing us at a competitivedisadvantage compared to our competitors that have less debt or are lessleveraged.

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

**Protections against unsolicitedtakeovers in our rights plan, charter and bylaws may reduce or eliminate ourstockholders’ ability to resell their shares at a premium over market price. Wehave a stockholders rights plan which expires on February 27, 2012. Ourrights plan may prevent an unsolicited change of control of our company.Our  rights plan may adversely affect themarket price of our common stock or the ability of stockholders to participatein a transaction in which they might otherwise receive a premium for their shares.In addition, the issuance of preferred stock or common stock upon exercise ofrights issued under the plan could dilute the voting, liquidation and othereconomic rights of our stockholders and make it more difficult for a thirdparty to acquire us.**

**Our charter and bylaws containprovisions relating to issuance of preferred stock, special meetings ofstockholders and advance notification procedures for stockholder proposals thatcould have the effect of discouraging, delaying or preventing an unsolicitedchange in the control of our company. Our charter provides for our board ofdirectors to be divided into three classes of directors, serving staggeredthree-year terms. The classified board provision could have the effect ofdiscouraging a third party from making a tender offer or attempting to obtaincontrol of us.**

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

**If a “fundamentalchange” (as defined in the indenture for our 2.25% convertible senior notes due2027 ) occurs, holders of the notes will have the right, at their option, torequire us to repurchase all or a portion of their notes. In the event of a “make-wholefundamental change,” we also may be required to increase the conversion rateapplicable to the notes surrendered for conversion in connection with thatmake-whole fundamental change. In addition, the indenture for the notesprohibits us from engaging in certain mergers or acquisitions unless, amongother things, the surviving entity assumes our obligations under the notes.These and other provisions, including the provisions of our charter documentsand**

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**Delawarelaw, could prevent or deter a third party from acquiring us even where theacquisition could be beneficial to our security holders.**

**ITEM 1B. UNRESOLVEDSTAFF COMMENTS.**

None.

**ITEM 2. PROPERTIES**

We are headquartered inMountain View, California where we lease a building occupying approximately58,242 square feet of office, research and development and manufacturing space.The lease agreement has an expiration date of June 15, 2009. We believethat our current facilities are adequate for our immediate needs and that wewill be able to renew our lease or obtain additional space as needed.

**ITEM 3. LEGALPROCEEDINGS**

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

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of ourstockholders during the fourth quarter of the fiscal year ended December 31,2006.

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

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

| ** **                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| **Year Ended December 31,  2006:** |       |     |       |    |       |
| Fourth Quarter                          |       | $        | 23.34      |    | $          | 16.85 |   |
| Third Quarter                           |       | $        | 18.40      |    | $          | 11.35 |   |
| Second Quarter                          |       | $        | 15.84      |    | $          | 12.32 |   |
| First Quarter                           |       | $        | 16.97      |    | $          | 11.72 |   |
| **Year  Ended December 31, 2005:** |       |     |       |    |       |
| Fourth Quarter                          |       | $        | 15.95      |    | $          | 8.84 |   |
| Third Quarter                           |       | $        | 12.24      |    | $          | 5.65 |   |
| Second Quarter                          |       | $        | 8.17       |    | $          | 5.09 |   |
| First Quarter                           |       | $        | 8.70       |    | $          | 6.84 |   |

 

As of February 28, 2007, there were 136stockholders of record and the last reported sale price of our common stock on February 27,2007 was $18.78.

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

**Unregistered Salesof Equity Securities and Use of Proceeds**

In the fourth quarter of 2006, the Company repurchased12,000 shares of restricted common stock at par value in accordance with theterms of a restricted stock agreement. These shares are recorded as treasurystock.

| **ISSUER PURCHASES OF EQUITY SECURITIES**             | ** ** |
|-------------------------------------------------------|------------|
| Period                                                | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Program** | ** ** | **Maximum  Number of  Shares That  May Yet Be  Purchased  Under This  Program** | ** ** |
| October 1,  2006 through October 31, 2006   |       |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
| November 1,  2006 through November 30, 2006 |       |   | 12,000 |   |   |   | $ | 0.003 |   |   |   | — |   |   |   | — |   |   |
| December 1,  2006 through December 31, 2006 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| **TOTAL**                                             | ** ** | ** ** | **12,000** |   | ** ** | ** ** | **$** | **0.003** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **—** |   |   |

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(1)          *The Companypurchased a total of 12,000 shares of restricted stock during the last quarterof year 2006 from former employees in accordance with the terms of theRestricted Stock Purchase Agreements relating to such shares.*

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**Performance Graph**

The following graphcompares the five years cumulative total stockholder return for the Company’scommon stock, assuming reinvestment of all dividends, for the period from December 31,2001 to December 31, 2006 to that of the Nasdaq Stock Market—U.S. Indexand the Nasdaq Medical Equipment Index for the period from December 31,2001 to December 31, 2006. The graph assumes that $100 was invested on December 31,2000 in the Company’s Common Stock and in each of the comparative indices.

$100 invested on 12/31/01 in stock or index—includingreinvestment of dividends.Fiscal year ending December 31.

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** **

**ITEM 6. SELECTEDCONSOLIDATED FINANCIAL DATA**

Thefollowing table presents selected consolidated financial data of Conceptus, Inc.This historical data should be read in conjunction with the attachedconsolidated financial statements and the related notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”appearing in Item 7 of this Form 10-K. The selected consolidatedstatement of operations data for the years ended December 31, 2006, 2005and 2004 and the consolidated balance sheet data as of December 31, 2006and 2005 are derived from our audited consolidated financial statements and therelated notes, which are included elsewhere in this Form 10-K. Theselected consolidated statement of operations data for the years ended December 31,2003 and 2002 and the consolidated balance sheet data as of December 31,2004, 2003 and 2002 are derived from our audited consolidated financialstatements and the related notes, which are not included in this Form 10-K.
|                                                                                 | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006(1)**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                                                       |       | $                                                                  | 41,900     |   | $ | 21,169 |   | $ | 11,612 |   | $ | 7,700 |   | $ | 1,650 |   |
| Cost of goods  sold                                                             |       | 14,027                                                             |       | 8,396 |   | 7,112 |   | 6,587 |   | 3,142 |   |
| Gross profit  (loss)                                                            |       | 27,873                                                             |       | 12,773 |   | 4,500 |   | 1,113 |   | (1,492 | ) |
| Operating  expenses:                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                                                        |       | 4,366                                                              |       | 4,264 |   | 4,067 |   | 6,048 |   | 8,230 |   |
| Selling, general and administrative                                             |       | 43,318                                                             |       | 31,255 |   | 27,075 |   | 35,256 |   | 23,417 |   |
| Total operating expenses                                                        |       | 47,684                                                             |       | 35,519 |   | 31,142 |   | 41,304 |   | 31,647 |   |
| Operating loss                                                                  |       | (19,811                                                            | )          | (22,746 | ) | (26,642 | ) | (40,191 | ) | (33,139 | ) |
| Interest and other income, net                                                  |       | 1,324                                                              |       | 945 |   | 573 |   | 663 |   | 629 |   |
| Net loss                                                                        |       | $                                                                  | (18,487    | ) | $ | (21,801 | ) | $ | (26,069 | ) | $ | (39,528 | ) | $ | (32,510 | ) |
| Basic and diluted  net loss per share                                           |       | $                                                                  | (0.64      | ) | $ | (0.82 | ) | $ | (1.05 | ) | $ | (1.83 | ) | $ | (1.71 | ) |
| Weighted-average shares  used in computing basic and diluted net loss per share |       | 28,993                                                             |       | 26,725 |   | 24,754 |   | 21,565 |   | 18,968 |   |

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(1)          *We adopted SFAS 123(R) on January 1, 2006 and have includedemployee based stock-based compensation in our results of operations in 2006.*
|                                        | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                             | ** ** | **(in thousands)**    | ** ** |
| **Consolidated Balance Sheet  Data:**  | ** ** | ** **            |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents  and short term |       |                  |       |   |   |   |   |   |   |   |   |
| investments(2)                         |       | 25,838                |       | $ | 32,492 |   | $ | 32,271 |   | $ | 30,863 |   | $ | 70,734 |   |
| Working capital                        |       | 26,079                |       | 34,589 |   | 32,165 |   | 27,751 |   | 68,272 |   |
| Total assets                           |       | 39,751                |       | 47,409 |   | 42,177 |   | 41,850 |   | 77,295 |   |
| Long-term  clinical liabilities        |       | —                |       | — |   | — |   | 193 |   | 217 |   |
| Accumulated  deficit                   |       | (223,617              | )          | (205,130 | ) | (183,329 | ) | (157,260 | ) | (117,732 | ) |
| Total stockholders’  equity       |       | 31,014                |       | 40,171 |   | 36,994 |   | 33,737 |   | 70,714 |   |
|                                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(2)          *Includesrestricted cash of $69,000 at December 31, 2005, 2004, 2003 and 2002*

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and related notes thereto. This discussion containsforward-looking statements that involve risks and uncertainties such as limitedoperating and sales history; the uncertainty of market acceptance of ourproduct; dependence on obtaining and maintaining reimbursement; effectivenessand safety of our product over the long-term; our ability to obtain andmaintain the necessary governmental clearances or approvals to market ourproduct; our ability to develop and maintain proprietary aspects of ourtechnology; our ability to manage our expansion or any acquisition; ourdependence on suppliers intense competition in the medical device industry; theinherent risk of exposure to product liability claims and product recalls andother factors referenced in this Form 10-K. Our actual results coulddiffer materially from those expressed or implied in these forward-lookingstatements as a result of various factors, including those discussed in “RiskFactors” and elsewhere in this Form 10-K.*

**Overview**

We develop, manufactureand market the *Essure*® permanent birth control system, an innovativeand proprietary medical device for women that was approved for marketing in theUnited States in November 2002 by the United States Food and DrugAdministration, or FDA. The *Essure* systemuses a soft and flexible micro-insert that is delivered into a woman’sfallopian tubes to provide permanent birth control by causing a benign tissuein-growth that blocks the fallopian tubes. A successfully placed *Essure* micro-insert and the subsequent tissue growthprohibits the egg from traveling through the fallopian tubes and thereforeprevents fertilization.

*The EssureProcedure*

The *Essure*procedure is typically performed as an outpatient procedure and is intended tobe a less invasive and a less costly alternative to tubal ligation, the leadingform of birth control in the United States and worldwide. Laparoscopic tuballigation and tubal ligation by laparotomy typically involve abdominal incisionsand/or punctures, general or regional anesthesia, four to ten days of normalrecovery time and the risks associated with an incisional procedure. The *Essure* procedure does not require cutting or penetrating theabdomen, which lowers the likelihood of post-operative pain due to theincisions/punctures, and it can be performed in an outpatient setting withoutgeneral or regional anesthesia. In the Pivotal trial of the *Essure* system, 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 dischargedapproximately 45 minutes after the *Essure*procedure. No overnight hospital stay is required. Furthermore, the *Essure* system is effective without drugs or hormones. Thereis a three-month waiting period after the procedure during which the woman mustuse another form of birth control while tissue in-growth occurs. At 90 daysfollowing the procedure, the patient completes a follow-up examination called ahysterosalpingogram, or HSG, which can determine whether the device was placedsuccessfully and whether the fallopian tubes are occluded.

We believe that the *Essure*system is also an attractive alternative to tubal ligation for physicians,hospitals and payers. The *Essure* systemis a less invasive permanent birth control option for physicians to offer totheir patients; hospitals are able to utilize their facilities more costeffectively with the *Essure*procedure compared with tubal ligation, and payers are able to experience costreductions resulting from the elimination of overhead and procedural costsrelated to anesthesia and post-operative hospital stays associated with tuballigations. We also believe the *Essure* systemis a viable alternative to other temporary methods of birth control being usedwhen there is no intention of having children in the future. In addition,payers may also benefit from the reduction of unplanned pregnancies associatedwith non-permanent 

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methods of birth controlused by patients who have chosen to avoid the drawbacks of traditionalpermanent birth control methods but who may elect to use the *Essure* system.

Published reports estimate that 700,000 tubal ligationprocedures are performed each year in the United States. We intend to tap intothis market and establish the *Essure*procedure as the gold standard for permanent birth control.

The *Essure* systemis currently being marketed in multiple countries. In November 2002 wereceived approval from the FDA to market the *Essure*system in the United States. In 2001, we were given approval to affix the CEMark to the *Essure* system, indicating that the *Essure* system is certified for sale throughout the EuropeanUnion, subject to compliance with local regulations such as registration withhealth ministries and/or particular requirements regarding labeling or distribution. In1999, the *Essure* Permanent Birth Control systemwas listed with Australia’s Therapeutic Goods Administration, which allows usto market and sell the *Essure* systemin Australia. In December 2004, we made the decision to terminate ourdirect subsidiary operations in Australia and convert to an independentdistributor. This decision was largely a cost reduction measure due to of thesmall size of the Australian market and our inability to manage a directoperation to a cash-flow positive position. We have entered into a distributionagreement and the transition was completed in January 2005. In Canada, wereceived clearance from Health Canada to market the *Essure*system in Canada in November 2001. We currently have distributors inAustralia, Canada and France, which covers Europe, Middle East, Africa, Mexico,Central America and South America.

On February 27, 2007,we entered into an amendment to the Share Purchase and Call Option Agreementdated January 17, 2004 between Conceptus, Conceptus SAS, or SAS, and thePurchasers party thereto and an amendment to the Distribution Agreement betweenthe Conceptus and SAS, dated January 17, 2004. Pursuant to the amendmentto the Share Purchase and Call Option Agreement, we agreed to exercise our calloption to acquire SAS sometime between January 1, 2008 and January 2,2009 subject to the satisfaction of certain closing conditions and also agreednot to exercise the call option in 2007. Pursuant to the amendment to theDistribution Agreement, SAS agreed to increase the price it pays to us for the *Essure* product.

*Effectiveness ofthe Essure System*

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

In September 2005, wereceived approval from the FDA to terminate our post-approval study withphysicians who were newly trained in performing the *Essure*procedure due to the positive placement data obtained. The purpose of thepost-approval study, required by the FDA as a condition of the November 2002approval of the *Essure* system, was to determinethe rate of successful bilateral placements of the *Essure*micro-inserts at first attempt with a large number of newly trained physicianswho were not part of the previous clinical studies. Although treatment of thetotal number of patients required by FDA had not been completed, the dataobtained to date provided us with the opportunity to request that the FDApermit an early termination of the study. Because of the FDA ruling, the PMASupplement submitted in March 2005 has been re-classified as a FinalReport. The results of the post-approval study demonstrated an improvement inplacement rates from those obtained in the pivotal study and we will seek toobtain a new placement rate claim for the product using this new data. In November 2005, we filed a PMA supplementwith the FDA in order to obtain approval to modify the *Essure*Physician and Patient 

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labeling to reflect a 94.6% first procedure bilateralplacement rate based on results of the post-approval study. In October 2006,we received such approval from the FDA.

*Penetration*

We require physicians tobe preceptored for between 3 and 5 cases by a certified trainer before beingable to perform the procedure independently. As of December 31, 2006, theincrease of physicians that have been trained or that are in the process oftraining has been commensurate with the increase in sales. The level of salesfor the *Essure* system, particularly in thisearly period of adoption, is highly dependent on the number of physicianstrained to perform the procedure. However, we understand that a strong base oftrained physicians does not necessarily correlate to an increase in revenueproportionately. Furthermore, there are no revenues associated with thetraining activities. We do not charge a fee for the activity and no commitmentarises for the physician from the preceptorship. Physician training is providedupfront and we have no obligation subsequent to the initial training. Trainingcosts have not been significant from inception to-date.

*Reimbursement ofthe Essure Procedure*

Market acceptance of the *Essure*system depends in part upon the availability of reimbursement within prevailinghealthcare payment systems. We believe that physician advocacy of ourproduct will be required to continue to obtain reimbursement. As of December 31,2006, we have received positive reimbursement decisions for the *Essure* procedure from most private insurers and 40 of the 51Medicaid programs in the country. We intend to continue our effort to educatepayers of the cost-effectiveness of our product, and to establish furtherprograms to help physicians to navigate reimbursement issues.

In July 2005, the UnitedHealthcare Group, or UHC,approved the *Essure* procedure forreimbursement. In addition, in February 2006, we received coverage from CIGNACorporation, or Cigna. As with all healthcare plans, coverage will vary and isdependent upon the individual’s specific benefit plan.

Effective January 1, 2007, the Centers forMedicare and Medicaid Services, or CMS, the Medicare National unadjusted averagepayment for hysteroscopic sterilization, the CPT code, is $433 when performedin a hospital and $2,017 when performed in a physician’s office. This comparesto a Medicare national average payment for tubal ligation, the current standardof care for permanent female sterilization, of $370. In addition, in the CMSFinal Rule for the 2007 Outpatient Prospective Payment System (or OPPS),which assigns hospital outpatient reimbursement amounts, the CPT code wasassigned a Medicare National Average of $2,642. In 2007, the CPT code was movedfrom Group 4 which had a national average reimbursement of $633 to Group 9which has a national average reimbursement of $1,339. We believe these valuesare very favorable for the *Essure*procedure and will help in establishing increased utilization of the deviceamongst doctors. We expect that the new code, once the process to establish itat all private payers that have given a favorable coverage decision iscomplete, will significantly ease the burden on a physician’s office inobtaining reimbursement for the *Essure*procedure and accelerate the coverage of the *Essure*procedure by private insurance companies and Medicaid. This process is notautomatic following receipt of the new CPT code, however, and we anticipatecontinuing to focus on reimbursement issues for sometime in the future, both tosecure our code and payment schedule into the payers’ databases, as well as tohelp the physician negotiate a favorable contract for payment off thatschedule.

In mid-August 2004,the MSAC division recommended against public funding for the *Essure* procedure, citing insufficient evidence for safety,effectiveness and cost effectiveness. The overall market for femalesterilization in Australia is very small and we believe that our marketpenetration will remain limited by the MSAC decision until such time as we areable to submit sufficient long-term data to obtain public funding.

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*Adoption of theEssure System*

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

First, we are focused on obtaining favorable coveragedecisions from payers representing the private paying and state-paying Medicaidsystems. We are also focused on getting the CPT code and payment scheduleimplemented at all of the payers that have given a coverage decision. Untilsuch time as the code is completely implemented and all major payers haveprovided a coverage decision, we have developed a field based tacticalreimbursement group aimed at educating the physician and office staff regardingpayer procedures following a declined claim, including appeals and petitioningprocedures. Typically a newly covered product will go through a period whereclaims are either inadvertently declined or are paid at the incorrect amount. Ineither instance, the physician is reluctant to perform additional proceduresuntil payment has been secured for earlier cases, causing a decline inutilization. Our tactical reimbursement focus is intended to give the physicianand his/her staff the tools to ensure that claims will ultimately be paid andthereby encourages the physician to continue performing the *Essure* procedure despite reimbursement issues. This tacticalreimbursement group is generally targeting specific accounts with the aim ofeventually meeting with all of our accounts so as to provide them with theknowledge of how to file and follow up on claims on a payer by payer basis.

Second, we are expanding our sales territories andchannels of distribution so as to increase our call frequency on physicians.From January 1, 2006 to December 31, 2006, we added a substantialnumber of sales positions and are expecting to add more in 2007.****Also, we have included regional distributors of women’sgynecology products to our marketing efforts. Among other responsibilities, oursales representatives are attempting to increase penetration and utilization ofthe *Essure* procedure, as well as tofacilitate the movement of the *Essure*procedure to the in the office environment.

Third, we have entered into certain strategicagreements in the past and we may explore such opportunities in the future. Weintend for these agreements to provide us with the ability to increaseawareness, gain market presence and credibility, accelerate our ability totrain doctors, as well as expand our market opportunity by driving adoptionamong a group of physicians not previously targeted by our marketing programs.The success of these joint marketing campaigns will depend upon theeffectiveness of our sales force training programs, market demand for *Essure* procedures in conjunction with the products marketedby strategic partners and the efforts and commitment of strategic partners to theprogram. We cannot be certain how successful these programs will be, if at all.

Fourth, we are attempting to increase patientawareness, so as to increase the number of women that will ask for informationabout the *Essure* procedure. We may achieve this throughradio campaigns, direct mail and print media (magazine) advertisements aimed atincreasing consumer awareness.

Lastly, as appropriate we intend to make labelingimprovements to our product as well as physical product enhancements to enhancethe adoption of the *Essure*procedure. This may involve working with the various regulatory agencies aroundthe world that regulate the sale and labeling of medical devices to provideupdates to claims such as effectiveness and placement rates. Where appropriate,we will make physical improvements to the product for improvedmanufacturability or for the ease of use by the physician.

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We have experiencedsignificant operating losses since inception and, as of December 31, 2006,had an accumulated deficit of $223.6 million. We will continue to expendsubstantial resources in the selling and marketing of the *Essure*system in the United States and abroad. Due to the unpredictable nature ofthese activities, we do not know whether we will achieve or sustainprofitability in the future. We will continue to be in a net loss positionuntil sufficient revenues can be generated to offset expenses. In December 2006we filed a Registration Statement on Form S-3, through which we maysell from time to time any combination of debt securities, common stock,preferred stock and warrants, in one or more offerings, with an initialoffering price not to exceed $150,000,000. In February 2007, wecompleted a convertible debt offering for an aggregate principal amount of$86,250,000 of our 2.25% convertible senior notes due 2027. In the future,depending upon a variety of factors, we may need to raise additional fundsthrough bank facilities, debt or equity offerings or other sources of capital.Additional financing may not be available when needed or on terms acceptable tous.

**CRITICAL ACCOUNTINGESTIMATES AND POLICIES**

We followaccounting principles generally accepted in the United States of America, orGAAP, in preparing our financial statements. As part of this work, we must makemany estimates and judgments about future events. These affect the value of theassets and liabilities, contingent assets and liabilities and revenues andexpenses reported in our financial statements. We believe these estimates andjudgments are reasonable and we make them in accordance with policies based oninformation available at the time. However, actual results could differ fromour estimates and could require us to record adjustments to expenses orrevenues material to our financial position and results of operations in futureperiods. We believe our most critical accounting policies, estimates andjudgments include the following:

·       RevenueRecognition;

·       Stock-BasedCompensation Expense;

·       Excessand Obsolete Inventory;

·       Allowancefor Doubtful Accounts;

·       WarrantyObligation;

·       Impairmentof Long-Lived Assets;

·       ContingentLiabilities; and

·       Income Taxes.

***Revenue Recognition***

Ourrevenue is primarily comprised of the sale of our *Essure*system. We recognize revenue in accordance with the Securities and ExchangeCommission, or SEC, Staff Accounting Bulleting No. 104, “RevenueRecognition in Financial Statements”, or SAB 104. Under this standard, thefollowing four criteria must be met in order to recognize revenue:

1.                Persuasiveevidence of an arrangement exists;

2.                Delivery hasoccurred;

3.                Our selling priceis fixed or determinable; and

4.                Collectibility isreasonably assured.

The four revenue recognition criteria and otherrevenue related pronouncements are applied to our sales as described in thefollowing paragraphs.

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We recognize revenues from our *Essure*system when we ship the device. We recognize revenue upon shipment of thesystem as we have no continuing obligations subsequent to shipment. We do notaccept returns of the *Essure* system.We obtain written authorizations from our customers for a specified amount ofproduct at a specified price and the price is not dependent on actual *Essure* procedures performed.

We have international distributors in France,Australia and Canada. We recognize revenues upon shipment for sales throughthese distributors as we have no continuing obligations subsequent to shipment.Generally, our distributors are responsible for all marketing, sales, trainingand warranty for the sale of the *Essure* devicein their respective territories. Our standard terms and conditions do notprovide price protection or stock rotation rights to any of our distributors.In addition, our distributor agreements do not allow the distributor to returnor exchange the *Essure* system and the distributoris obligated to pay us for the sale regardless of their ability to resell theproduct.

Additionally, we require physicians to be preceptoredbetween 3 and 5 cases by a certified trainer before being able to perform theprocedure independently. There are no revenues associated with the trainingactivities. We do not charge a fee for the activity and no commitment arisesfor the physician from the preceptorship. Physician training is providedupfront and we have no obligation subsequent to the initial training. Trainingcosts have not been significant from inception to-date.

We assess the creditworthiness of all customers in connection with their purchases. We onlyrecognize revenue when collectibility is reasonably assured.

***Stock-Based Compensation Expense***

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

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option valuation model with theweighted average assumptions shown in Note 2 of our Notes to our ConsolidatedFinancial Statements. The Black-Scholes option valuation model requires the inputof highly subjective assumptions, including the expected life of thestock-based award and the stock-price volatility. The assumptions used incalculating the fair value of share-based compensation represent management’sbest estimates, but these estimates involve inherent uncertainties and theapplication of management’s judgment. As a result, if other assumptions hadbeen used, our stock-based compensation expense could have been materiallydifferent. In addition, we are required to estimate the expected forfeiturerate and only recognize expense for those shares expected to vest. If ouractual forfeiture rate is materially different from our estimate, theshare-based compensation expense could be materially different.

The expected term of the options granted is derivedfrom historical data on employee exercise and post-vesting employmenttermination behavior. The risk-free interest rate for periods equal to theestimated life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. Expected volatility is based on historicalvolatility of our stock.

As stock-based compensation expense recognized in theConsolidated Statement of Operations is based on awards ultimately expected tovest, it is reduced for estimated forfeitures. SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures are estimated based on historical experience. In 

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our pro forma informationrequired under SFAS No. 123 for the periods prior to fiscal 2006, weaccounted for forfeitures as they occurred.

We elected to adopt themodified prospective application method as provided by SFAS No. 123(R).Accordingly, during the period ended December 31, 2006, we recordedstock-based compensation for shares granted prior to, but not yet vested as ofthe adoption date based on the grant date fair value estimated in accordancewith the original previsions of SFAS No. 123, and therefore, we did notrestate previously reported amounts. Stock-based compensation expense for allshare-based payment awards granted on or after January 1, 2006 is based onthe grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

***Excess and Obsolete Inventory***

Inventories are stated atthe lower of cost or market, cost being determined on the first-in, first-outmethod. Inventory reserves are recorded when conditions indicate that theselling price may be less than the cost. Reserves for potentially excess andobsolete inventories are provided based on historical experience and currentproduct demand. Once established, the original cost of the inventory less therelated inventory reserve represents the new cost basis. Reversal of thesereserves is recognized only when the related inventory has been scrapped orsold. We have not experienced any significant write-off of potentially excessand obsolete inventories in the past. If actual market conditions are lessfavorable than those projected by management, additional inventory writedownsmay be required and gross margin could be adversely impacted. As of December 31,2006, 2005 and 2004, our reserves were approximately $0.1 million, $0.2 millionand $0.4 million, respectively.

***Allowance for Doubtful Accounts***

We assess the credit worthiness of our customers on anongoing basis in order to mitigate the risk of loss from customers not payingus. However, we account for the possibility that certain customers may not payus by maintaining an allowance for doubtful accounts. We perform ongoing creditevaluations of our customers and adjust credit limits based upon paymenthistory and the customer’s current credit worthiness, as determined by ourreview of their current credit information. We continuously monitor collectionsand payments from our customers and maintain our allowance for doubtfulaccounts based upon our historical experience and any specific customercollection issues that we have identified. Our exposure to credit losses maychange as we increase our receivables. Changes in customer type and mix, aswell as domestic and international economic climate, will also impact potentialcredit losses. Despite the significant amount of analysis used to compute therequired allowance, if the financial condition of our customers were todeteriorate, resulting in an impairment of our ability to make payments,additional allowances may be required. As of December 31, 2006, 2005 and2004, our allowance for doubtful accounts totaled approximately $167,000, $106,000and $62,000, respectively.

***Warranty Obligation***

We provide for theestimated cost or our product warranties at the time revenue is recognized. Werecord a liability for the estimated future costs associated with warrantyclaims, which is based upon historical experiences and our estimate of thelevel of future costs. Warranty costs are reflected in the statement ofoperations as a cost of goods sold. Warranty expense will increase as and if weincrease our net sales. Warranty reserve rates may change if we changemanufacturing process or change our third-party manufacturing contractor.Should actual costs differ from historical experience, increases in warrantyexpense may be required. Warranty reserves as of December 31, 2006, 2005and 2004 were approximately $209,000, $70,000 and $68,000, respectively.

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***Impairment ofLong-Lived Assets***

We account for theimpairment of long-lived assets in accordance with SFAS 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.” We evaluate the carryingvalue of our long-lived assets, consisting primarily of our property andequipment and the *Essure* license acquired from apatent litigation settlement in 2003 (See Note 10 to ConsolidatedFinancial Statements), whenever certain events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable. Suchevents or circumstances include a prolonged industry downturn, a significantdecline in our market value or significant reductions in projected future cashflows.

Significant judgments andassumptions are required in the forecast of future operating results used inthe preparation of the estimated future cash flows, including profit margins,long-term forecasts of the amounts and timing of overall market growth and ourpercentage of that market, groupings of assets, discount rates and terminalgrowth rates. In addition, significant estimates and assumptions are requiredin the determination of the fair value of our tangible long-lived assets,including replacement cost, economic obsolescence, and the value that could berealized in orderly liquidation. Changes in these estimates could have amaterial adverse effect on the assessment of our long-lived assets, therebyrequiring us to write down the assets. Our net long-lived assets as of December 31,2006, 2005 and 2004 included property and equipment of $2.9 million, $2.7million and $1.3 million, respectively, and other identifiable intangibleassets of $1.4 million, $1.6 million and $1.8 million, respectively.

***ContingentLiabilities***

We account forcontingencies in accordance with SFAS No. 5, “Accounting for Contingencies”,which requires that an estimated loss from a loss contingency shall be accruedwhen information available prior to issuance of the financial statementsindicates that it is probable that an asset has been impaired or a liabilityhas been incurred at the date of the financial statements and when the amountof the loss can be reasonably estimated. Accounting for contingencies such aslegal and income tax matters requires us to use our judgment. We believe that ouraccruals for these matters are adequate. Nevertheless, the actual loss from aloss contingency might differ from our estimates.

***Income Taxes***

We account for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes.”Under this method, deferred tax assets and liabilities are determined based onthe difference between the financial statement and tax bases of assets andliabilities using the enacted tax rates in effect for the year in which thedifferences are expected to affect taxable income. As part of the process ofpreparing our consolidated financial statements, we are required to estimateour income taxes. This process involves estimating our actual current taxexposure together with assessing temporary differences that may result in deferredtax assets. Valuation allowances are established when necessary to reducedeferred tax assets to the amounts expected to be realized. We must assesswhether it is “more likely than not” that our deferred tax assets will berecovered from future taxable income and to the extent we believe that recoveryis not likely, we must establish a valuation allowance. At December 31,2006 we evaluated the need for a valuation allowance for our deferred taxassets. Due to our cumulative pre-tax losses and the current uncertainty of ourability to realize our deferred tax assets a valuation allowance, in an amountequal to our deferred tax assets was recorded.

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**RESULTS OF OPERATIONS**

**2006 results compared to 2005 (in thousands, exceptpercentages)**
|                                                      | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2006-2005** | ** ** |
| ** **                                           | ** ** | **Amount**                         | ** ** | **%(a)** | ** ** | **Amount** | ** ** | **%(a)** | ** ** | **% Change** | ** ** |
| Net sales                                            |       | $                                  | 41,900     |   |   | 100 | % |   | $ | 21,169 |   |   | 100 | % |   |   | 98 | % |   |
| Gross profit                                         |       | 27,873                             |       |   | 67 | % |   | 12,773 |   |   | 60 | % |   |   | 118 | % |   |
| Research &  development expenses            |       | 4,366                              |       |   | 10 | % |   | 4,264 |   |   | 20 | % |   |   | 2 | % |   |
| Selling,  general & administrative expenses |       | 43,318                             |       |   | 103 | % |   | 31,255 |   |   | 148 | % |   |   | 39 | % |   |
| Net loss                                             |       | 18,487                             |       |   | 44 | % |   | 21,801 |   |   | 103 | % |   |   | (15 | )% |   |
|                                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           *expressed as a percentage of total net sales*

**Net Sales**

Net sales were$41.9 million in 2006, of which 91% were from the United States, 8% werefrom Europe, and 1% were from other regions. Net sales were $21.2 millionin 2005, of which 88% were from the United States, 10% were from Europe, and 2%were from other regions.

Thefollowing table summarizes the above information related to net sales bygeographic region in a tabular format:

|                          | **Years Ended  December 31,** |
|--------------------------|-----------------------------------------|
|                     | **2006**                                | **2005** |
| Net sales (in thousands) | $41,900                                 | $21,169 |
| United States of America | 91%                                     | 88% |
| Europe                   | 8%                                      | 10% |
| Other                    | 1%                                      | 2% |

 

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

The increase in net salesof $20.7 million or 98% is the result of continued commercialization ofthe *Essure* system worldwide, and reflectsthe increasing numbers of physicians entering and completing training in theuse of the procedure and higher utilization by trained physicians. We alsoinstituted a domestic price increase during the first quarter of 2006. As of December 31,2006, the increase of physicians that have been trained or that are in theprocess of training has been commensurate with the increase in sales. Ouraccomplishment in obtaining the number of physicians trained is very importantbecause it provides us with a strong referral base within major metropolitanareas we have targeted. We understand that a strong base of trained physiciansdoes not necessarily correlate to an increase in revenue proportionately.Furthermore, there are no revenues associated with the training activities. Wedo not charge a fee for the activity and no commitment arises for the physicianfrom the preceptorship. Physician training is provided upfront and we have noobligation subsequent to the initial training. Training costs have not beensignificant to us from inception to-date.

We expect to see highersales of our *Essure* system in 2007 as wecontinue to increase the number of sales representatives in order to provide evengreater depth of physician coverage, which in turn we expect will increasephysician utilization and the number of physicians performing the *Essure* procedure in both the hospital and the office setting.Second, we will continue to increase our programs aimed at raising patientawareness of the *Essure*procedure, such asadvertising with physicians and internet marketing.

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***Gross Profit***

Cost of goods soldincreased by $5.6 million to $14.0 million in 2006 as compared to$8.4 million in 2005. Gross profit increased $15.1 million to $27.9million from $12.8 million in 2005. Our gross profit percentage was 67%and 60% for the years ended December 31, 2006 and 2005, respectively. Ourgross profit percentage improved throughout the year ended December 31,2006 and was 69% in the fourth quarter of 2006, as compared to 62% in thefourth quarter of 2005. The improvement in gross profit percentage wasprimarily the result of the impact of higher volumes on relatively fixedmanufacturing costs, lower contractual prices from our third-party manufacturerbeginning in fiscal year 2006 and a domestic price increase instituted duringthe first quarter of 2006.

We anticipate grossmargins will improve throughout 2007 due to lower per-unit costs on highervolume, however, our gross profit margin will vary as our sales mix changes.Increases in sales of our devices through distributors in international marketswill tend to decrease our overall gross profit margin.

***Research andDevelopment***

Researchand development expenses, increased by $0.1 million to $4.4 million in 2006 ascompared to $4.3 million in 2005. The primary reason for theincrease results from $0.5 million increase in stock-based compensation due tothe application of FAS 123(R) and from expenditures related to productdevelopment, clinical affairs and regulatory activities. Our goal in Researchand Development is to launch product enhancements over the coming years, whichare intended to result in improved ease of use and clinical performance andlower cost of the *Essure* system. We expect toidentify and hire additional research and development personnel in fiscal year2007 to staff our planned research and development activities, and we expectthat these costs will increase in the future in order to maintain our leadingposition in the market for permanent female birth control.

***Selling, Generaland Administrative***

Selling, general andadministrative expenses increased by $12.0 million to $43.3 million in2006 as compared to $31.3 million in 2005. The primary reason for theincrease results from higher payroll expenditures of $5.1 million due to theexpansion of our U.S. field sales force in 2006, which is meant to provide uswith more selling time to focus on physician penetration. Additionally,increases in selling, general and administrative expenses were a result of $1.0million in headcount increases in departments other than sales, $4.7 millionincrease in stock-based compensation due to the application of FAS 123(R),higher travel expenses of $0.5 million, higher recruiting expenses of $0.2million, increase in depreciation and amortization of $0.2 million and $1.8million in marketing programs and campaigns to increase physician education andpatient awareness, partially offset by $1.2 million in lower consulting services,$0.1 million in lower legal and audit fees and $0.2 million in lower rentexpense. We expect selling, general and administrative expenses to increase inthe future as we expect to hire additional sales professionals and to supportpatient awareness with increasing radio advertising.

***Other Income andExpenses***

Interest and other incomeand expenses of $1.3 million increased by $0.4 million in 2006compared to $0.9 million in 2005. The increase is due to higher interestincome in 2006 due to higher interest rates applied to the investmentsportfolio. We expect higher interest income in 2007 as a result of investingthe proceeds of our convertible senior note offering, completed in February 2007,at a rate in excess of the coupon rate.

***Income Taxes***

We have not recorded anyincome tax expense for 2006 and 2005 due to our recurring losses. At December 31,2006 we had deferred tax assets of approximately $84.9 million. At December 31,2006 we 

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evaluatedthe need for a valuation allowance for our deferred tax assets. Due to ourcumulative pre-tax losses and the current uncertainty of our ability to realizeour deferred tax assets a valuation allowance, in an amount equal to ourdeferred tax assets was recorded.

**2005 results compared to 2004 (in thousands, exceptpercentages)**

| ** **                                           | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005-2004** | ** ** |
|                                                      | ** ** | **Amount**                         | ** ** | **%(a)** | ** ** | **Amount** | ** ** | **%(a)** | ** ** | **% Change** | ** ** |
| Net sales                                            |       | $                                  | 21,169     |   |   | 100 | % |   | $ | 11,612 |   |   | 100 | % |   |   | 82 | % |   |
| Gross profit                                         |       | 12,773                             |       |   | 60 | % |   | 4,500 |   |   | 39 | % |   |   | 184 | % |   |
| Research &  development expenses            |       | 4,264                              |       |   | 20 | % |   | 4,067 |   |   | 35 | % |   |   | 5 | % |   |
| Selling,  general & administrative expenses |       | 31,255                             |       |   | 148 | % |   | 27,075 |   |   | 233 | % |   |   | 15 | % |   |
| Net loss                                             |       | 21,801                             |       |   | 103 | % |   | 26,069 |   |   | 225 | % |   |   | (16 | )% |   |
|                                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           *expressed as a percentage of total net sales*

***Net Sales***

Net sales were$21.2 million in 2005, of which 88% were from United States, 10% were fromEurope, and 2% were from other regions. Net sales were $11.6 million in2004, of which 85% were from United States, 11% were from Europe and 4% werefrom other regions.

Thefollowing table summarizes the above information related to net sales bygeographic region in tabular format:

|                          | **Years Ended  December 31,** |
|--------------------------|-----------------------------------------|
|                     | **2005**                                | **2004** |
| Net sales (in thousands) | $21,169                                 | $11,612 |
| United States of America | 88%                                     | 85% |
| Europe                   | 10%                                     | 11% |
| Other                    | 2%                                      | 4% |

 

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

The increase in net salesof $9.6 million or 82% was the result of continued commercialization ofthe *Essure* system in the United States,where we have a higher price than our sales to our European distributor.

In early 2003, we targetedgroups of gynecological practices with the goal of training, inclusive ofpreceptorship. As of December 31, 2005, the increase of physicians that havebeen trained or that are in the process of training has been commensurate withthe increase in sales.

***Gross Profit***

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

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***Operating Expenses***

Research and developmentexpenses, which include clinical, regulatory and product development, increasedby $0.2 million to $4.3 million in 2005 as compared to $4.1 million in2004. Research and development expenditures fluctuate in relation to productdevelopment, clinical affairs and regulatory activities.

Selling, general andadministrative expenses increased by $4.2 million to $31.3 million in 2005as compared to $27.1 million in 2004. The primary reason for the increaseresulted from higher expenditures in $2.2 million for the expansion of our U.S.field sales force by approximately 22 sales representatives during 2005, whichwas meant to provide us with more selling time to focus on physicianpenetration. Additionally, increases in selling, general and administrativeexpenses were a result of $0.8 million in headcount increase in departmentsother than sales, $0.7 million for the accrual of bonuses for 2005, $0.7 millionin the creation of a new department in sales, $0.5 million in trainingprograms, expenditures of $0.3 million related to the move of our headquartersto new facilities located in Mountain View, California, $0.3 million inconsulting fees for the development and enhancement of our internet website,$0.3 million in legal expenditures, $0.1 million in sales consulting and $0.1million in recruiting of new sales employees, offset by $0.9 million in lowersales expenditures in Australia, lower expenses of $0.5 million in sales andtraining related to the termination of the agreement with Gynecare, $0.2 forthe reduction of Sarbanes-Oxley compliance and technology consulting fees andlower marketing expenses of $0.2 million. In addition, we had limited internationalexpenditures in 2005, since we completed the divestiture of our Frenchsubsidiary in January 2004 and the closure of our direct operations inAustralia in January 2005. From the latter, all severance costs werecompletely paid out at the end of January 2005.

***Other Income andExpenses***

Interest and other incomeand expenses of $0.9 million increased by $0.3 million in 2005compared to $0.6 million in 2004. The increase was due to higher interestincome in 2005 due to higher interest rates applied to the investmentsportfolio.

***Income Taxes***

As a result of our netloss of $21.8 million, we incurred no income tax expense in 2005. As of December 31,2005, we had net operating loss carryforwards for federal and state income taxpurposes of approximately $192.4 million and $107.6 million, respectively. Inaddition, at December 31, 2005, we had federal and state research creditcarryforwards of approximately $2.4 million and $2.3 million, respectively.Utilization of the net operating losses and credits may be subject to asubstantial annual limitation due to the ownership change provisions of theInternal Revenue Code of 1986, as amended. The annual limitation may result inthe expiration of net operating losses and credits before utilization and inthe event we have had a change of ownership, utilization of the carryforwardscould be restricted.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In July 2006, theFASB issued Financial Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109”, or Fin 48,which is a change in accounting for income taxes. FIN 48 specifies how taxbenefits for uncertain tax positions are to be recognized, measured, andderecognized in financial statements; requires certain disclosures of uncertaintax matters; specifies how reserves for uncertain tax positions should beclassified on the balance sheet; and provides transition and interim-periodguidance, among other provisions. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006 and as a result, is effective for us inthe first quarter of fiscal 2007. We are currently evaluating the impact of FIN48 on our consolidated financial statements.

In September 2006,the SEC issued Staff Accounting Bulletin, or SAB, No. 108 regarding the processof quantifying financial statement misstatements. SAB No. 108 states thatregistrants should use both a 

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balancesheet approach and an income statement approach when quantifying and evaluatingthe materiality of a misstatement. The interpretations in SAB No. 108contain guidance on correcting errors under the dual approach, as well asprovide transition guidance for correcting errors. This interpretation does notchange the requirements within SFAS No. 154, “Accounting Changes and ErrorCorrections—a replacement of APB No. 20 and FASB Statement No. 3” forthe correction of an error on financial statements. SAB No. 108 iseffective for annual financial statements covering the first fiscal year endingafter November 15, 2006. We adopted this interpretation on December 31,2006. The adoption of the provisions of SAB No. 108 did not have amaterial impact on our financial position and results of operations.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” This standarddefines fair value, establishes the framework for measuring fair value inaccounting principles generally accepted in the United States of America andexpands disclosure about fair value measurements. This pronouncement appliesunder other accounting standards that require or permit fair valuemeasurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We will be required toadopt SFAS No. 157 in the first quarter of 2008. We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determinedthe impact on our consolidated financial statements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” which permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 will be effective forus on January 1, 2008. We are currently evaluating the impact of adoptingSFAS 159 on our financial position, cash flows, and results of operations.

**LIQUIDITY AND CAPITAL RESOURCES**

We have experienced significant operatinglosses since inception. As of December 31, 2006 we had an accumulateddeficit of $223.6 million. We have financed our operations since inceptionprimarily through equity financings. In February 2004 we completed aprivate placement of approximately 3.0 million shares of common stock at $8.50per share. Our net proceeds were approximately $23.9 million, after deductingoffering costs and commissions. In addition, in August 2005, we finalizeda private placement of approximately 3.2 million shares of common stock at aprice of $7.20 and $8.10 per share. Our net proceeds, which were approximately$22.9 million after deducting offering costs, were being used to fundoperations. In December 2006 we filed a Registration Statement on Form S-3,through which we may sell from time to time any combination of debt securities,common stock, preferred stock and warrants, in one or more offerings. Theaggregate initial offering price of all securities sold will not exceed$150,000,000. In February 2007, we completed a convertible debt offeringfor an aggregate principal amount of $86,250,000 of our 2.25% convertiblesenior notes due 2027. Refer to “Subsequent Events” on Note 12 for adescription of the notes. In the future, depending upon a variety of factors,we may need to raise additional funds through bank facilities, debt or equityofferings or other sources of capital. Additional financing may not beavailable when needed or on terms acceptable to us.

As of December 31, 2006, we had cash,cash equivalents and short-term investments of $25.8 million, compared to $32.5million at December 31, 2005, which also included a restricted cashbalance of $69,000. The decrease of $6.7 million is primarily due to the $8.7million of cash used in operating activities and capital expenditures of $1.4million, partially offset by the proceeds of approximately $3.4 million fromthe exercise of options to purchase common stock and the issuance of sharesunder the Employee Stock Purchase Plan.

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**Operating Activities**

Netcash used in operating activities was $8.7 million in 2006, $21.4 millionin 2005 and $24.7 million in 2004. Net cash used in operating activities in2006 was primarily related to:

·       Netloss of $18.5 million;

·       Non-cashrelated items of $7.5 million corresponding primarily to stock basedcompensation and  depreciation andamortization of fixed assets;

·       Planneddecrease of inventories of $2.9 million;

·       Increasein accounts receivable of $2.5 million. We monitor our accounts receivableturnover closely to ensure that receivables are collected timely and haveestablished a credit and collection policy to facilitate our collection processand reduce our credit loss exposure. Our worldwide day’s sales outstanding asof December 31, 2006 was 50 days, which represents a decrease of 5 dayscompared to December 31, 2005. We expect to grow our business and increaseour revenues and to continue to use cash received from collection ofoutstanding receivables to fund our operations;

·       Cashgenerated from a decrease in other assets of $0.6 million; and

·       Generated$1.2 million of cash from increases in accrued compensation and other accruedliabilities primarily due to the growth of our sales force and the accrual ofour company-wide employee bonus plan.

We expect cash usage inoperating activities in the future to decrease.

**Investing Activities**

Net cash used in investingactivities in 2006 was $4.1 million. The outflow of cash was primarily relatedto purchase of investments of $22.0 and capital expenditures of $1.4 million,offset by the maturities of investments of $19.2 million.

Our capital expendituresin 2006, 2005 and 2004 were $1.4 million, $2.3 million and $0.5 million,respectively. In 2006, 2005 and 2004, capital expenditures were primarilyrelated to leasehold improvements in our new facility, website development aspart of our marketing campaign to increase consumer awareness and softwaremanagement tool development to help us to gather meaningful data for managementanalysis and to gain a better understanding of our customers and our market.

**Financing Activities**

Net cash provided byfinancing activities was $3.4 million in 2006 compared to $23.9 million in2005. The net cash provided by financing activities in 2006 consisted ofapproximately $3.4 million of proceeds from the exercise of stock options andemployee stock purchase plan shares. In 2005, the net cash provided byfinancing activities consisted primarily of a private placement of commonstock, from which we received net proceeds of $22.9 million. An additional$1.0 million consisted of proceeds from the exercise of stock options andemployee stock purchase plan shares.

**Cash Requirements, Contractual Obligations andCommitments**

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

Thefollowing table discloses aggregate information about our contractualobligations and the periods in which payments are due as of December 31,2006 (in thousands):

| ** **                   | ** ** | **Payments due by period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
| Operating lease  obligations |       | $                          | 1,581      |   |   | $ | 619 |   |   |   | $ | 955 |   |   |   | $ | 7 |   |   |
| Clinical trial  obligations  |       | 1,898                      |       |   | 316 |   |   |   | 1,072 |   |   |   | 510 |   |   |
| Total                        |       | $                          | 3,479      |   |   | $ | 935 |   |   |   | $ | 2,027 |   |   |   | $ | 517 |   |   |

 

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On October 23, 2003,we entered into a settlement agreement with Ovion pursuant to which we receiveda sole, worldwide license to Ovion’s patent rights relative to the *Essure* system for ten years, and Ovion may not grant anyadditional such licenses to other parties. In exchange for such license, wewere required to pay a license fee of $2.0 million payable in our commonstock in equal installments in the first and second quarters of 2004. In January 2004,we paid $1.0 million in common stock to Ovion, and we made another paymentof $1.0 million in common stock to Ovion in April 2004. In addition,the settlement agreement provided for a cash payment of $2.0 million inthe fourth quarter of 2003 as a prepaid royalty. We are obligated to pay 3.25%of the accumulative revenue derived from sale of the *Essure*system in excess of $75.0 million as royalty for a period of ten yearsstarting from the date of settlement. In accordance with the terms of thesettlement agreement, our prepaid royalties will be fully amortized whencumulative net sales of *Essure* systemreach $136.5 million, thereby resulting in an effective royalty rate of1.47%. We are amortizing the prepaid royalties to cost of goods sold using thiseffective rate. Prepaid royalties were approximately $0.9 million and $1.5million as of December 31, 2006 and 2005, respectively.

With gross marginimprovements and expenditures in sales generating activities, we expect toreduce our net loss in the future, while having positive cash flows. In the future, depending upon a variety offactors, we may need to raise additional funds through bank facilities, debt orequity offerings or other sources of capital.

In February 2007, we issued  an aggregate principal amount of $86,250,000of our 2.25% convertible senior notes due 2027. Refer to “Subsequent Events” onNote 12 for a description of the notes.

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

·       Resourcesdevoted to establish sales, marketing and distribution capabilities;

·       Therate of product adoption by doctors and patients;

·       Ourdetermination to acquire or invest in other products, technologies  and businesses;

·       Themarket price of our common stock as it affects the exercise of stock optionsand the conversion terms of our convertible debt; and

·       Theinsurance payer community’s acceptance of and reimbursement for the *Essure*procedure.

In addition, in February 2007 we amended the calloption agreement with our French distributor. The amendment provided that wewill exercise the call option sometime between January 1, 2008 andJanuary 2, 2009, subject to the satisfaction of certain conditions.

**Off-BalanceSheet Arrangements.****  **Wedo not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future material effect on our financial condition,changes in our financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources as of December 31,2006.

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**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discusses our exposure to market riskrelated to changes in interest rates and foreign currency exchange rates. Theseexposures may change over time as business practices evolve and could have amaterial adverse impact on our financial results.

*InterestRate Risk:*   We have been exposed to interest raterisk through interest earned on holdings of available-for-sale marketablesecurities. Interest rates that may affect these items in the future willdepend on market conditions and may differ from the rates we have experiencedin the past. The fair value of our investment portfolio or related income wouldnot be significantly impacted by changes in interest rates since we reduce thesensitivity of our results of operations to these risks by maintaining aninvestment portfolio, which is primarily comprised of highly rated, marketablesecurities. We do not hold or issue derivatives, commodity instruments or otherfinancial instruments for trading purposes. Please see “Subsequent Events” inNote 12 in regards to our Call Spread Transactions entered into in connectionwith our convertible note offering in February 2007.

*Foreign Currency ExchangeRisk:*   All of our expenses and our revenues aretypically denominated in United States dollars. As a result, we have lowexposure for currency exchange risks and foreign exchange losses have beenminimal to date. We do not enter into forward exchange contracts to hedgeexposure denominated in foreign currencies or any other derivative financialinstruments for trading or speculative purposes. In the future, if ourassessment of our foreign currency exposure changes, we may consider hedgingtransactions for risk mitigation.

**ITEM 8.**                CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financialstatements are set forth in this Annual Report on Form 10-Kbeginning on page 48.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

(a)           *Evaluation of Disclosure Controls andProcedures:*

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and in reaching a reasonable level of assurance, managementis required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

As of December 31, 2006, the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand our Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures. Based on the foregoing, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective.

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(b)          *Management’sAnnual Report on Internal Control Over Financial Reporting:*

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

Internal controlover financial reporting refers to the process designed by, or under thesupervision of, our Chief Executive Officer and Chief Financial Officer, andeffected by our board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles, and includes those policies andprocedures that:

(1)   Pertain tothe maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company;

(2)   Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and

(3)   Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting as of December 31, 2006 based on theframework in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission, or COSO. Based on thatevaluation, our management concluded that our internal control over financialreporting was effective as of December 31, 2006.

Management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included elsewhere herein.

(c)           *Changes inInternal Control Over Financial Reporting:*

There has been no changein the company’s internal controls over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

*InherentLimitations of Internal Controls*

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

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

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**PART III**

Certain information requiredby Part III is incorporated by reference from our definitive proxystatement (or Proxy Statement), for our annual meeting of stockholders to beheld on June 6, 2007, which will be filed within 120 days after theend of our fiscal year pursuant to Regulation 14A, and the informationincluded therein is incorporated by reference to the extent detailed below.

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item, insofar as itrelates to directors and officers, will be contained in our Proxy Statement inconnection with our 2007 Annual Meeting of Stockholders, which we anticipatewill be filed no later than 120 days after the end of our fiscal yearpursuant to Regulation 14A, under the captions “Election of Directors” and“Management”. Information required by this item as to compliance with Section 16(a) ofthe Securities Exchange Act of 1934 will be contained in the our ProxyStatement under the caption “Section 16(a) Beneficial Owner ReportingCompliance,” and is hereby incorporated by reference into this report.

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

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this item is incorporated by reference from the information under thecaption “Executive Compensation” in our Proxy Statement.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information requiredby this item is incorporated by reference from the information under thecaption “Security Ownership of Certain Beneficial Owners and Management” and “SecuritiesAuthorized for Issuance Under Equity Compensation Plans” in  our Proxy Statement.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredby this item is incorporated by reference from the information under thecaption “Certain Relationships and Related Transactions” in our ProxyStatement.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this item is incorporatedby reference from the information under the caption “Principal Accountant Feesand Services” in our Proxy Statement.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

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

(1)         Report of IndependentRegistered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2006and 2005

Consolidated Statements of Operations for the YearsEnded December 31, 2006, 2005 and 2004

Consolidated Statements of Stockholders’ Equity forthe Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the YearsEnded December 31, 2006, 2005 and 2004

Notes toConsolidated Financial Statements

(2)         Financial StatementSchedule

The following financial statement schedule ofConceptus, Inc. for the years ended December 31, 2006, 2005 and 2004is filed as part of this Form 10-K and should be read in conjunctionwith Conceptus, Inc.’s Consolidated Financial Statements.

Schedule II—Valuation and Qualifying Accounts

Other scheduleshave been omitted because the information required to be set forth therein isnot 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  |       | Amended and Restated  Certificate of Incorporation of Registrant. Incorporated by reference to the  Registrant’s Registration Statement on Form SB-2, as amended (File  No. 33-99890-LA), which became effective on February 1, 1996. |
|  3.2  |       | Certificate of Amendment  to Amended and Restated Certificate of Incorporation of Registrant.  Incorporated by reference to the Registrant’s Registration Statement on  Form S-3 (File No. 333-89266) filed on June 4, 2002.          |
|  3.3  |       | Bylaws of Registrant.  Incorporated by reference to the Registrant’s Registration Statement on  Form SB-2, as amended (File No. 33-99890-LA), which became  effective on February 1, 1996.                                            |
|  3.4  |       | Amendment to the Bylaws  of the Registrant. Incorporated by reference to Exhibit 3.4 of the  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2003.                                                           |
|  3.5  |       | Amendment to the Bylaws  of the Registrant dated April 8, 2004. Incorporated by reference to  Exhibit 3.5 of the Registrant's Annual Report on Form 10-K for the  year ended December 31, 2005.                                       |
|  3.6  |       | Amendment to the Bylaws  of the Registrant dated April 6, 2006. Incorporated by reference to  Exhibit 3.2 filed in response to Item 5.3 of the Registrant's Report  on Form 8-K filed on February 5, 2007.                       |
|  4.1  |       | Indenture between  Conceptus, Inc. and Wells Fargo, National Association, dated February 12,  2007. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K  filed on February 12, 2007.                                          |

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|  4.2 |   | Supplemental Indenture  No. 1, including the Form of 2.25% Convertible Senior Notes due 2027, between  Conceptus, Inc. and Wells Fargo, National Association, dated February 12,  2007. Incorporated by reference to Exhibit 4.2 to the Registrant's Form  8-K filed on February 12, 2007.          |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1      |   | Form of Indemnification  Agreement for directors and officers. Incorporated by reference to the  Registrant’s Registration Statement on Form SB-2, as amended (File  No. 33-99890-LA), which became effective on February 1, 1996.                                                             |
| 10.2*     |   | Amended and Restated  1993 Stock Plan. Incorporated by reference to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2000.                                                                                                                                           |
| 10.3*     |   | 1995 Employee Stock  Purchase Plan. Incorporated by reference to the Registrant’s Registration  Statement on Form SB-2, as amended (File No. 33-99890-LA), which  became effective on February 1, 1996.                                                                                        |
| 10.4*     |   | 1995 Directors’ Stock  Option Plan. Incorporated by reference to the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1995.                                                                                                                                            |
| 10.5*     |   | Eighth Amended and  Restated 2001 Equity Incentive Plan. Incorporated by reference to the  Registrant's Definitive Proxy Statement on Schedule 14A filed on April 24,  2006.                                                                                                                                  |
| 10.6*     |   | Amended and Restated  2002 Non-Qualified Stock Option Plan. Incorporated by reference to the  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2002.                                                                                                                        |
| 10.7*     |   | Amended and Restated  2002 Non-Qualified Stock Option Plan. Incorporated by reference to the  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2005.                                                                                                                        |
| 10.8*     |   | Form of Senior  Management Amended and Restated Change of Control Agreement. Incorporated by  reference to Exhibit 10.7 of the Registrant's Report on Form 10-K for  the year ended December 31, 2004.                                                                                                   |
| 10.9*     |   | Change of Control  Agreement dated as of April 27, 2004 by and between Registrant and  Gregory Lichtwardt. Incorporated by reference to Exhibit 10.8 of the  Registrant's Report on Form 10-K for the year ended December 31,  2004.                                                           |
| 10.10*    |   | Change of Control  Agreement dated as of May 13, 1997 by and between Registrant and Kathryn  A. Tunstall. Incorporated by reference to the Registrant’s Quarterly Report  on Form 10- Q  for the quarter ended June 30, 1997.                                                             |
| 10.11     |   | License Agreement dated  December 28, 1992 between the Registrant and Target Therapeutics Inc.  Incorporated by reference to the Registrant’s Registration Statement on  Form SB-2, as amended (File No. 33-99890-LA), which became  effective on February 1, 1996.                       |
| 10.12     |   | Settlement and License  Agreement between Ovion, Inc., William S. Tremulis and Jeffrey P.  Callister and Conceptus, Inc. dated November 6, 2003. Incorporated by  reference to the Registrant’s Amendment to its Annual Report on  Form 10-K/A for the year ended December 31, 2003. |
| 10.13     |   | Sublease Agreement for  the premises located at 331 East Evelyn, Mountain View, California.  Incorporated by reference to the Registrant's Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005.                                                                                      |

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| 10.14  |   | Landlord Consent to  Sublease for the premises located at 331 East Evelyn, Mountain View,  California. Incorporated by reference to the Registrant's Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005.                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15  |   | Amended and Restated  Preferred Shares Rights Agreement, dated as of February 26, 2007,  between the Registrant and Mellon Shareholder Services, L.L.C., including the  Certificate of Designation of Rights, Preferences and Privileges of  Series A Participating Preferred Stock, the form of Rights Certificate  and the Summary of Rights attached thereto as Exhibits A, B and C,  respectively. Incorporated by reference to Exhibit 1.1 filed in response  to Item 1 of the Registrant's Report on Form 8-K filed on February 27,  2007. |
| 10.16+ |   | Exclusive U.S.  Co-Promotion Agreement, dated as of October 30, 2003, by and between the  Registrant and Gynecare Worldwide Division of Ethicon, Inc. Incorporated by  reference to Exhibit 1 of the Registrant’s Report on Form 8-K filed  on March 1, 2004.                                                                                                                                                                                                                                                                                         |
| 10.17+ |   | Amended Share Purchase  and Amended Call Option Agreement, dated as of January 17, 2004, by and  between Mr. Yves Guillemain d’Echon et al. and the Registrant.  Incorporated by reference to Exhibit 2 of the Registrant’s Report on  Form 8-K filed on March 1, 2004.                                                                                                                                                                                                                                                           |
| 10.18  |   | Contract Manufacturing  Agreement, dated as of June 20, 2003, between the Registrant and Venusa,  Ltd. (now Accellent, Inc.) Incorporated by reference to Exhibit 10.26 of  the Registrant’s Annual Report on Form 10-K for the year ended December 31,  2003.                                                                                                                                                                                                                                                                                   |
| 10.19+ |   | Supplier Agreement dated  November 7, 2005 between the Registrant and Accellent Corp. Incorporated  by reference to Exhibit 10.34 of the Registrant's Annual Report on  Form 10-K for the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                               |
| 10.20* |   | Letter Agreement by and  between the Company and Gregory E. Lichtwardt dated November 12,  2003. Incorporated by reference to Exhibit 10.29 of the Registrant’s  Annual Report on Form 10-K for the year ended December 31, 2003.                                                                                                                                                                                                                                                                                                           |
| 10.21* |   | Employment Agreement  between Mark M. Sieczkarek and Conceptus, Inc. executed September 30,  2004. Incorporated by reference to Exhibit 10.1 of the Registrant’s  Report on Form 8-K filed on October 5, 2004.                                                                                                                                                                                                                                                                                                                                   |
| 10.22  |   | Letter Agreement between  Ric Cote and Conceptus, Inc. executed March 25, 2004. Incorporated by reference  to Exhibit 10.2 of the Registrant’s Quarterly Report on 10-Q for the  Quarter Ended March 31, 2004.                                                                                                                                                                                                                                                                                                                                        |
| 10.23* |   | Employment Commencement  Nonstatutory Stock Option Agreement between Ric Cote and Conceptus, Inc.  executed April 5, 2004. Incorporated by reference to Exhibit 4.2 of  the Registrant’s Registration Statement on Form S-8.                                                                                                                                                                                                                                                                                                                          |
| 10.24* |   | Stand-Alone Restricted  Stock Purchase Agreement between Ric Cote and Conceptus, Inc. executed  April 5, 2004. Incorporated by reference to Exhibit 4.3 of the  Registrant’s Registration Statement on Form S-8.                                                                                                                                                                                                                                                                                                                                      |
| 10.25* |   | Relocation bonus  agreement dated October 28, 2005 between the Registrant and Ulric Cote.  Incorporated by reference to Exhibit 10.40 of the Registrant's Annual Report  on Form 10-K for the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                          |
| 10.26  |   | Form of Stock  Appreciation Right Agreement under Conceptus, Inc. Amended and Restated 2001  Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to the  Registrant's Form 8-K filed on February 6, 2007.                                                                                                                                                                                                                                                                                                                                               |

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| 10.27 |   | Form of Restricted Stock  Unit Award Agreement under Conceptus, Inc. Amended and Restated 2001 Equity  Incentive Plan. Incorporated by reference to Exhibit 10.2 to the  Registrant's Form 8-K filed on February 6, 2007. |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28 |   | Amendment to Share  Purchase and Call Option Agreement, each dated as of January 17, 2004,  by and between Mr. Yves Guillemain d’Echon et al. and the  Registrant on February 27, 2007.                         |
| 10.29 |   | Amendment to Conceptus  SAS Distribution Agreement, dated as of January 17, 2004, by and between  Mr. Yves Guillemain d’Echon et al. and the Registrant on  February 27, 2007.                                  |
| 14.1  |   | Code of Ethics.  Incorporated by reference to Exhibit 14.1 of the Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2003.                                                                     |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                               |
| 24.1  |   | Power of Attorney (See  Page 87 of this Report).                                                                                                                                                                                    |
| 31.1  |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |
| 31.2  |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |
| 32.1  |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |
| 32.2  |   | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |

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*                    Managementcontract or compensatory plan or arrangement.

+                Confidentialtreatment has been requested with respect to certain portions of this Exhibit byorder from the Securities and Exchange Commission or requested.

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**CONCEPTUS, INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                              | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                     |       |     | 59         |   |   |
| Consolidated  Balance Sheets, December 31, 2006 and 2005                                                |       |     | 61         |   |   |
| Consolidated Statements of Operations for Years Ended  December 31, 2006, 2005 and 2004                 |       |     | 62         |   |   |
| Consolidated  Statements of Stockholders’ Equity for Years Ended December 31, 2006,  2005 and 2004 |       |     | 63         |   |   |
| Consolidated Statements of Cash Flows for Years Ended  December 31, 2006, 2005 and 2004                 |       |     | 64         |   |   |
| Notes to Consolidated Financial Statements                                                                   |       |     | 65         |   |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

To Board of Directors and Stockholders ofConceptus, Inc.:

We have completedintegrated audits of Conceptus Inc’s consolidated financial statements and ofits internal control over financial reporting as of December 31, 2006, inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Our opinions, based on our audits, are presented below.

**Consolidatedfinancial statements and financial statement schedule**

In our opinion, the consolidated financial statementslisted in the index appearing under Item 15 present fairly, in allmaterial respects, the financial position of Conceptus, Inc. and itssubsidiaries at December 31, 2006 and December 31, 2005, and the resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule appearing under Item 15 on page 86presents fairly, in all material respects, the information set fourth thereinwhen read in conjunction with the related consolidated financial statements.These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

As discussed inNote 2 of the consolidated financial statements, the Company changed themanner in which it accounts for share-based compensation for the year endedDecember 31, 2006.

**Internal controlover financial reporting**

Also, in our opinion, management’s assessment,included in Management’s Annual Report on Internal Control Over FinancialReporting appearing under Item 9A, that the Company maintained effectiveinternal control over financial reporting as of December 31, 2006 based on*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2006,  based on criteria established in *Internal Control—Integrated Framework* issued by the COSO. TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of the Company’sinternal control over financial reporting based on our audit. We conducted ouraudit of internal control over financial reporting in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. An audit of internal control overfinancial reporting includes obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, and performingsuch other 

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procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company;and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

/s/ PricewaterhouseCoopersLLP

San Jose, CaliforniaMarch 15, 2007

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**ITEM1.**                CONSOLIDATEDFINANCIAL STATEMENTS

**CONCEPTUS, INC.**

**CONSOLIDATED BALANCESHEETS**

**(Inthousands, except share and per share amounts)**
|                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Assets**                                                                                                                                                 |       |                  |       |   |   |
| Current assets:                                                                                                                                            |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                  |       | $                     | 3,238      |   | $ | 12,573 |   |
| Short-term investments                                                                                                                                     |       | 22,600                |       | 19,850 |   |
| Restricted cash                                                                                                                                            |       | —                |       | 69 |   |
| Accounts receivable, net of  allowance for doubtful accounts of $167 and $106 at December 31, 2006  and 2005, respectively                            |       | 6,976                 |       | 4,519 |   |
| Inventories                                                                                                                                                |       | 610                   |       | 3,392 |   |
| Other current assets                                                                                                                                       |       | 1,064                 |       | 1,110 |   |
| Total current assets                                                                                                                                       |       | 34,488                |       | 41,513 |   |
| Property and equipment, net                                                                                                                                |       | 2,917                 |       | 2,743 |   |
| Intangible assets, less  accumulated amortization of $650 and $450 at December 31, 2006 and 2005,  respectively                                       |       | 1,350                 |       | 1,550 |   |
| Other assets                                                                                                                                               |       | 996                   |       | 1,603 |   |
| **Total assets**                                                                                                                                           | ** ** | **$**                 | **39,751** | ** ** | **$** | **47,409** | ** ** |
| **Liabilities and stockholders’ equity**                                                                                                              |       |                  |       |   |   |
| Current liabilities:                                                                                                                                       |       |                  |       |   |   |
| Accounts payable                                                                                                                                           |       | $                     | 2,903      |   | $ | 2,798 |   |
| Accrued compensation                                                                                                                                       |       | 3,909                 |       | 3,052 |   |
| Other accrued liabilities                                                                                                                                  |       | 1,597                 |       | 1,074 |   |
| Total current liabilities                                                                                                                                  |       | 8,409                 |       | 6,924 |   |
| Other accrued liabilities                                                                                                                                  |       | 190                   |       | 314 |   |
| Deferred rent                                                                                                                                              |       | 138                   |       | — |   |
| Total liabilities                                                                                                                                          |       | 8,737                 |       | 7,238 |   |
| Commitments and contingencies (Notes 6 and 10)                                                                                                             |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                 |       |                  |       |   |   |
| Preferred stock:                                                                                                                                           |       |                  |       |   |   |
| $0.003 par value, authorized  3,000,000 shares; no shares issued or outstanding at December 31, 2006  and 2005                                        |       | —                |       | — |   |
| Common stock and additional paid-in capital:                                                                                                               |       |                  |       |   |   |
| $0.003 par value,  50,000,000 shares authorized, 29,270,545 and 29,051,804 shares issued and  outstanding at December 31, 2006 and 2005, respectively |       | 254,631               |       | 246,359 |   |
| Deferred stock-based  compensation                                                                                                                         |       | —                |       | (1,058 | ) |
| Accumulated deficit                                                                                                                                        |       | (223,617              | )          | (205,130 | ) |
| Treasury Stock, 91,752 and  77,863 shares, at cost, at December 31, 2006 and 2005, respectively                                                  |       | —                |       | — |   |
| Total stockholders’ equity                                                                                                                            |       | 31,014                |       | 40,171 |   |
| **Total  liabilities and stockholders’ equity**                                                                                                       | ** ** | **$**                 | **39,751** | ** ** | **$** | **47,409** | ** ** |

 

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

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**CONCEPTUS, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Inthousands, except per share amounts)**
|                                                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                                                                                 |       | $                                           | 41,900     |   | $ | 21,169 |   | $ | 11,612 |   |
| Cost of goods  sold                                                                                                       |       | 14,027                                      |       | 8,396 |   | 7,112 |   |
| Gross profit                                                                                                              |       | 27,873                                      |       | 12,773 |   | 4,500 |   |
| Operating  expenses:                                                                                                      |       |                                        |       |   |   |   |   |
| Research and development                                                                                                  |       | 4,366                                       |       | 4,264 |   | 4,067 |   |
| Selling, general and administrative                                                                                       |       | 43,318                                      |       | 31,255 |   | 27,075 |   |
| Total operating  expenses                                                                                                 |       | 47,684                                      |       | 35,519 |   | 31,142 |   |
| Operating loss                                                                                                            |       | (19,811                                     | )          | (22,746 | ) | (26,642 | ) |
| Interest and  other income and expenses:                                                                                  |       |                                        |       |   |   |   |   |
| Interest and other income                                                                                                 |       | 1,346                                       |       | 952 |   | 598 |   |
| Interest and other expenses                                                                                               |       | (22                                         | )          | (7 | ) | (25 | ) |
| Net loss                                                                                                                  |       | $                                           | (18,487    | ) | $ | (21,801 | ) | $ | (26,069 | ) |
| Basic and diluted net loss per share                                                                                      |       | $                                           | (0.64      | ) | $ | (0.82 | ) | $ | (1.05 | ) |
| Weighted-average shares used in computing basic and  diluted net loss per share        | ** ** | 28,993                                      | ** ** | 26,725 | ** ** | 24,754 | ** ** |

 

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

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**CONCEPTUS, INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**(Inthousands, except share amounts)**
|                                                                                        | ** ** | **Common Stock  & Additional  Paid-In Capital** | ** ** | **Deferred  Stock-Based** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**                                                         | ** ** | **Amount**                | ** ** | **Compensation**                      | ** ** | **Income (Loss)** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| Balances as of  December 31, 2003                                                      |       | 21,817,066                                                         |       | $                         | 190,971    |                                  |       | $                      | —     |                          |       |   | $ | 26 |   |   |   | $ | (157,260 | ) |   |   | $ | 33,737 |   |   |
| Issuance of common  stock for cash upon exercise of options                            |       | 415,417                                                            |       | 2,532                     |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 2,532 |   |   |
| Issuance of common  stock for cash from employee stock purchase plan                   |       | 12,273                                                             |       | 88                        |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 88 |   |   |
| Issuance of common  stock in connection with Ovion settlement                          |       | 177,595                                                            |       | 2,000                     |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 2,000 |   |   |
| Private placement  of common stock, net of issuance costs of $1,518                    |       | 2,995,000                                                          |       | 23,939                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 23,939 |   |   |
| Issuance of stock  options to consultants for services                                 |       | —                                                             |       | 261                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 261 |   |   |
| Deferred  stock-based compensation related to restricted stock grants                  |       | 312,020                                                            |       | 2,169                     |       |                                  | (2,169     | )                      |       |                          |       |   |   |   |   |   |   |   | — |   |   |
| Amortization of  deferred stock-based compensation related to restricted stock grants  |       | —                                                             |       | —                    |       |                                  | 532        |                   |       |                          | —     |   |   |   | — |   |   |   | 532 |   |   |
| Cumulative  translation adjustments                                                    |       | —                                                             |       | —                    |       |                                  | —     |                   |       |                          | (26        | ) |   |   | — |   |   |   | (26 | ) |   |
| Net loss                                                                               |       | —                                                             |       | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | (26,069 | ) |   |   | (26,069 | ) |   |
| Purchase of  treasury stock                                                            |       | (72,000                                                            | )          | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Balances as of  December 31, 2004                                                      |       | 25,657,371                                                         |       | 221,960                   |       |                                  | (1,637     | )                      |       |                          | —     |   |   |   | (183,329 | ) |   |   | 36,994 |   |   |
| Issuance of common  stock for cash upon exercise of options                            |       | 143,997                                                            |       | 780                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 780 |   |   |
| Issuance of common  stock for cash from employee stock purchase plan                   |       | 45,070                                                             |       | 248                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 248 |   |   |
| Private placement  of common stock, net of issuance costs of $125                      |       | 3,186,389                                                          |       | 22,882                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 22,882 |   |   |
| Issuance of stock  options to consultants for services                                 |       | —                                                             |       | 221                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 221 |   |   |
| Deferred stock-based  compensation related to restricted stock grants                  |       | 24,840                                                             |       | 268                       |       |                                  | (268       | )                      |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Amortization of  deferred stock-based compensation related to restricted stock grants  |       | —                                                             |       | —                    |       |                                  | 847        |                   |       |                          | —     |   |   |   | — |   |   |   | 847 |   |   |
| Net loss                                                                               |       | —                                                             |       | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | (21,801 | ) |   |   | (21,801 | ) |   |
| Purchase of  treasury stock                                                            |       | (5,863                                                             | )          | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Balances as of  December 31, 2005                                                      |       | 29,051,804                                                         |       | 246,359                   |       |                                  | (1,058     | )                      |       |                          | —     |   |   |   | (205,130 | ) |   |   | 40,171 |   |   |
| Issuance of common  stock for cash upon exercise of options                            |       | 290,700                                                            |       | 2,872                     |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 2,872 |   |   |
| Issuance of common  stock for cash from employee stock purchase plan                   |       | 94,009                                                             |       | 514                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 514 |   |   |
| Reversal of  overpayment on stock issuance costs                                       |       | —                                                             |       | 8                         |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 8 |   |   |
| Stock-based  compensation for consultants’ services                               |       | —                                                             |       | 292                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 292 |   |   |
| Grants of  restricted stock to employees and directors                                 |       | 28,500                                                             |       | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Stock-based compensation  related to restricted stock, SSR/SAR and stock option grants |       | —                                                             |       | 4,351                     |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 4,351 |   |   |
| Stock-based  compensation related to employee stock purchase plan                      |       | —                                                             |       | 235                       |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 235 |   |   |
| Deferred  stock-based compensation related to restricted stock grants                  |       | —                                                             |       | —                    |       |                                  | 1,058      |                   |       |                          | —     |   |   |   | — |   |   |   | 1,058 |   |   |
| Cancellation of  restricted stock awards                                               |       | (184,000                                                           | )          | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Purchases of  treasury stock                                                           |       | (13,889                                                            | )          | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Treasury stock  issuances                                                              |       | 3,421                                                              |       | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Net loss                                                                               |       | —                                                             |       | —                    |       |                                  | —     |                   |       |                          | —     |   |   |   | (18,487 | ) |   |   | (18,487 | ) |   |
| Balances as of  December 31, 2006                                                      |       | 29,270,545                                                         |       | $                         | 254,631    |                                  |       | $                      | —     |                          |       |   | $ | — |   |   |   | $ | (223,617 | ) |   |   | $ | 31,014 |   |   |

 

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

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**CONCEPTUS, INC.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(In thousands)**
|                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities**                                    |       |                             |       |   |   |   |   |
| Net loss                                                                     |       | $                                | (18,487    | ) | $ | (21,801 | ) | $ | (26,069 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                             |       |   |   |   |   |
| Depreciation and amortization of property, plant and  equipment              |       | 1,191                            |       | 886 |   | 1,159 |   |
| Amortization of intangibles .                                                |       | 200                              |       | 200 |   | 200 |   |
| Stock compensation expense                                                   |       | 6,154                            |       | 1,089 |   | 793 |   |
| Allowance for (recovery of) doubtful accounts                                |       | 61                               |       | 44 |   | (102 | ) |
| Inventory reserves                                                           |       | (144                             | )          | (147 | ) | 152 |   |
| Loss on retirement of fixed assets                                           |       | 4                                |       | 26 |   | 63 |   |
| Changes in  operating assets and liabilities:                                |       |                             |       |   |   |   |   |
| Accounts receivable                                                          |       | (2,518                           | )          | (2,497 | ) | (383 | ) |
| Inventories                                                                  |       | 2,926                            |       | (1,223 | ) | 508 |   |
| Other current assets                                                         |       | 46                               |       | (173 | ) | (459 | ) |
| Other assets                                                                 |       | 607                              |       | 205 |   | 430 |   |
| Accounts payable                                                             |       | 105                              |       | 85 |   | (33 | ) |
| Accrued compensation .                                                       |       | 639                              |       | 1,705 |   | (1,344 | ) |
| Other accrued liabilities                                                    |       | 523                              |       | 386 |   | 328 |   |
| Deferred revenue                                                             |       | 14                               |       | (141 | ) | 101 |   |
| Net cash used in  operating activities                                       |       | (8,679                           | )          | (21,356 | ) | (24,656 | ) |
| **Cash  flows from investing activities**                                    |       |                             |       |   |   |   |   |
| Purchase of investments .                                                    |       | (21,950                          | )          | (85,900 | ) | (38,250 | ) |
| Maturities of investments                                                    |       | 19,200                           |       | 96,250 |   | 33,000 |   |
| Restricted cash                                                              |       | 69                               |       | — |   | — |   |
| Capital expenditures                                                         |       | (1,369                           | )          | (2,333 | ) | (513 | ) |
| Net cash provided  by (used in) investing activities                         |       | (4,050                           | )          | 8,017 |   | (5,763 | ) |
| **Cash  flows from financing activities**                                    |       |                             |       |   |   |   |   |
| Issuance of common stock from company stock plans .                          |       | 3,386                            |       | 1,028 |   | 2,620 |   |
| Reversal of overpayment on stock issuance costs.                             |       | 8                                |       | 22,882 |   | 23,939 |   |
| Net cash provided  by financing activities                                   |       | 3,394                            |       | 23,910 |   | 26,559 |   |
| Effect of exchange rate changes on cash                                      |       | —                           |       | — |   | 18 |   |
| Net increase  (decrease) in cash and cash equivalents .                      |       | (9,335                           | )          | 10,571 |   | (3,842 | ) |
| Cash and cash  equivalents at beginning of year                              |       | 12,573                           |       | 2,002 |   | 5,844 |   |
| Cash and cash  equivalents at end of year                                    |       | $                                | 3,238      |   | $ | 12,573 |   | $ | 2,002 |   |
| Supplemental  information:                                                   |       |                             |       |   |   |   |   |
| Cash paid for:                                                               |       |                             |       |   |   |   |   |
| Interest                                                                     |       | $                                | 22         |   | $ | 7 |   | $ | 14 |   |
| Non-cash  activities                                                         |       |                             |       |   |   |   |   |
| Issuance of  common stock in connection with acquisition of license          |       | $                                | —     |   | $ | — |   | $ | 2,000 |   |

 

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

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**CONCEPTUS, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 Organization,Ownership and Business

Conceptus, Inc. (“Conceptus” or the “Company”)was incorporated in the state of Delaware on September 18, 1992 to design,develop and market minimally invasive devices for reproductive medicalapplications. We manufacture and market the *Essure*® system,an innovative medical device and procedure designed to provide a non-incisionalalternative to tubal ligation, the leading form of contraception worldwide. The*Essure* device is a unique andproprietary micro-insert designed to be deployed permanently into eachfallopian tube using our minimally invasive transcervical tubal access cathetersystem. Clinical studies have shown that the *Essure*device induces an occlusive tissue response. Our catheter systems are based ontechnology initially developed and used by Target Therapeutics, Inc. (“Target”),a business unit of Boston Scientific Corporation (“BSC”), and licensedexclusively to Conceptus in the field of reproductive physiology.

In April 2000, we established a wholly ownedsubsidiary, Conceptus (Australia) Pty Limited, in New South Wales, Australia (“ConceptusAustralia”) for the distribution and commercialization of the *Essure* system in that region. In December 2001, weestablished a wholly owned subsidiary, Conceptus SAS (“Conceptus France”), inFrance for the distribution and commercialization of the *Essure*system in Europe.

In January 2004, we completed the sale of ourwholly owned French subsidiary for a nominal amount to an investor groupcomprised of its former French management team and signed a long-term exclusivedistribution agreement for the *Essure* systemwith the acquiring group for the European, Middle East and African markets. Thesale agreement includes a long-term call option that is intended to enable usto repurchase the French company. The contract was amended in September 2004to include the territories of Mexico, Central America and South America. Thetransaction did not have any material financial impact to our consolidatedfinancial statements. In February 2007, we amended the call option anddistribution agreement with our French distributor. Refer to Note 12 “SubsequentEvents” for information regarding this amendment. In December 2004, we decidedto close down our direct operations in Australia and sell our product through athird party distributor. As a result, costs related to the closure wererecorded in 2004 as selling, general and administrative expense and includedapproximately $22,000 for impaired fixed assets and $183,000 of terminationbenefits for the five employees, which were completely paid out on January 31,2005. As of December 31, 2006, all fixed assets have been disposed of andthe dissolution of the legal entity has been performed.

We have a limited historyof operations and have incurred significant operating losses since inception.We will continue to be in a net loss position until sufficient revenues can begenerated to offset expenses. We raised approximately $23.9 million and $22.9million, after deducting offering costs, in 2004 and 2005, respectively, tohelp fund our operations. In December 2006 we filed aRegistration Statement on Form S-3, through which we may sell fromtime to time any combination of debt securities, common stock, preferred stockand warrants, in one or more offerings, with an initial offering price not toexceed $150,000,000. In February 2007, we completed a convertibledebt offering for an aggregate principal amount of $86,250,000 of our 2.25% convertiblesenior notes due 2027. In the future, depending upon a variety of factors, wemay need to raise additional funds through bank facilities, debt or equityofferings or other sources of capital. Any additional equity financing may bedilutive to stockholders, and debt financing, if available, may involverestrictive covenants. Additional funding may not be available when needed oron terms acceptable to us. If we are unable to obtain additional capital, wemay be required to delay, reduce the scope of or eliminate our research anddevelopment programs or reduce our sales and marketing activities.

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**2.**                 Summaryof Significant Accounting Policies

**Basis ofConsolidation and Foreign Currency Translation**

The consolidated financial statements include our accountsand those of our wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated.

Functional Currency:  We had a wholly owned foreign subsidiary inAustralia, which we decided to close down in December 2004, as well as awholly owned subsidiary in France, which was divested in January 2004. Inpreparing our consolidated financial statements for fiscal year 2004, weapplied the translation methodology set forth by the Statement of FinancialAccounting Standard No. 52 (“SFAS 52”). The former subsidiaries maintainedtheir accounting records in their respective local currencies and ourfunctional currency was identified as the United States dollars. Statement ofFinancial Accounting Standard (SFAS)No. 52 provides guidance for thedetermination of the functional currency in which our judgment is essential inassessing the consideration of all relevant economic facts and circumstancesaffecting the subsidiary. Currency gain and loss is reported under interest andother income in the consolidated statement of operations. In 2004, net currencygains were $38,000.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The primary estimates underlying our financial statementsinclude reserves for obsolete and slow moving inventory, allowance for doubtfulaccounts receivable, product warranty, and assumptions regarding variables usedin calculating the fair value of our equity awards, impairment reserves forlong-lived assets, income taxes and contingent liabilities. Actual resultscould differ from those estimates.

**Concentration ofCredit Risk and Other Risks and Uncertainties**

We invest cash that is not required for immediateoperating needs principally in a diversified portfolio of financial instrumentsissued by institutions with strong credit ratings. By policy, the amount ofcredit exposure to any one institution, with the exception of U.S. governmentbacked securities, is limited.

Our net sales to date consist mainly of productrevenues from physicians, hospitals and distributors located in Australia,Canada, Europe, Latin America and the United States of America. We do notrequire collateral and provide for estimated credit losses based on customercredit assessment.

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

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Thefollowing table summarizes customers with greater than 10% of our net sales forthe years ended December 31, 2006, 2005 and 2004:

|                        | **Years Ended**

** ** |
|------------------------|----------------------------------|
| ** **

** ** | **2006**                         | **2005** | **2004** |
| Customer A

      | —                           | 10% | 11% |

 

The following table summarizes customers withoutstanding accounts receivable balance greater than 10% of our totaloutstanding accounts receivable as of December 31, 2006 and 2005.

|                        | **Years Ended**

** ** |
|------------------------|----------------------------------|
| ** **

** ** | **2006**                         | **2005** |
| Customer A

      | 13%                              | 15% |

 

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

We are subject to riskscharacteristic of the medical device industry, including but not limited touncertainty of market acceptance of products, reimbursement from insurancecarriers and government agencies, compliance with government regulations andprotection of proprietary technology, product liability and the need to obtainadditional financing. Certain components that meet our requirements areavailable only from a limited number of suppliers. The rapid rate oftechnological change and the necessity of developing and manufacturing productswith short life cycles may intensify these risks. The inability to obtaincomponents as required or to develop alternative sources, if and as required inthe future, could result in delays or reductions in product shipments, whichcould have a material adverse effect on our business, financial condition andresults of operations.

**Cash, CashEquivalents and Investments**

We consider all highly liquid investments withmaturity from date of purchase of three months or less to be cash equivalents.We maintain deposits with two financial institutions in the U.S. and invest ourexcess cash in money market funds, commercial paper, corporate notes, municipalbonds and government securities, which bear minimal risk. At times, thesedeposits may be in excess of federally insured amounts. Short-term investmentsgenerally consist of municipal bonds, corporate notes and U.S. Treasuryobligations.

The short-term investment portfolio is comprised ofavailable-for-sale investments, which are carried at estimated fair value, withthe unrealized gains and losses, if material, reported in stockholders’ equityuntil realized. The fair values for marketable debt investments are based onquoted market prices. At December 31, 2006 and 2005, the fair value ofinvestments approximates cost. Realized gains and losses, computed using thespecific identification cost method, were immaterial for the periods presented.Interest and dividends on investments classified as available-for-sale areincluded in interest and other income.

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As of December 31, 2006 and 2005, we held auctionrate securities of approximately $22.6 million and $19.9 million and classifiedthe entire amount as short-term investments. Moreover, we classify all of ourshort-term investments as current using the approach defined by the AccountingResearch Bulleting No. 43. Accordingly, these securities represent theinvestment of funds available for current operations. We do not have a statedexpectation to sell such securities within one year or within the normaloperating cycle. Nonetheless, these securities are available for use, ifneeded, for current operations.

As of December 31,2005, we held approximately $10.6 million in Commercial Paper with an originalmaturity less than 90 days. These highly liquid investments have beenclassified as cash equivalents due to their characteristics of being readilyconvertible to known amounts of cash and so near to their maturity that theypresent insignificant risk of changes in value because of interest ratechanges. We also held auction rate securities as of December 31, 2005 ofapproximately $19.9 million and classified the entire amount as short-terminvestments.

**Restricted Cash**

As of December 31,2005, we had a restricted cash balance of $69,000, which represented twocertificates of deposit held under a letter of credit related to an equipmentlease. The certificate of deposit expired in 2006 and was not required to berenewed under the lease agreement.

**Inventories**

Inventories are stated atthe lower of cost or market. Cost is based on actual costs computed on afirst-in, first-out basis. Reserves for potentially excess and obsoleteinventory are made based on our analysis of inventory levels and future salesforecast.

**Property andEquipment**

Property and equipment arestated at cost less accumulated depreciation and amortization. Depreciation andamortization of property and equipment are calculated using the straight-linemethod over the estimated useful lives of the respective assets, generallythree years. Leasehold improvements are amortized over the lesser of the leaseterm or the estimated useful lives of the related assets. External direct costsof material and services consumed in website development during the applicationdevelopment stage are capitalized. Capitalized website costs are amortizedusing the straight-line method over the estimated useful life of three years**.**Maintenance and repairs are charged to operations asincurred. These costs were not significant for the years 2006 and 2005.

**Intangible Assets**

Intangible assets as of December 31,2006 and 2005 are comprised of a technology license obtained as a result of thesettlement of a patent litigation with Ovion, Inc. (See Note 10). Thelicense was acquired at a cost of $2.0 million in October 2003, which waspaid in our common stock, in equal installments in the first and secondquarters of 2004, and has an expected useful life of ten years from the date ofsettlement. Amortization expense of $200,000 has been classified as cost ofgoods sold on our consolidated statement of operations for each of the yearsended December 31, 2006, 2005 and 2004 and is measured using thestraight-line method. Estimated future amortization expense for each of theyears ended December 31, 2007 through 2012 is $200,000 per year and$150,000 for the year ended December 31, 2013.

**Other Assets**

Other assets as of December 31,2006 are principally comprised of the $0.9 million prepaid royaltyremaining of the $2.0 million cash payment that we made to Ovion, Inc.as part of the settlement of a patent litigation suit (See Note 10). Thesettlement agreement provided for the payment of a royalty to 

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Ovionthat will be equal to 3.25% of the cumulative net sales of the *Essure* device in excess of $75.0 million for a periodof no longer than ten years. In accordance with the terms of the settlementagreement, our prepaid royalties will be fully amortized when cumulative netsales of the *Essure* device reach$136.5 million, thereby resulting in an effective royalty rate of 1.47%.We are amortizing the prepaid royalties to cost of goods sold over our netsales using this effective rate.

**Impairment ofLong-Lived Assets**

We account for theimpairment of long-lived assets in accordance with Statement of FinancialAccounting Standard, or SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” We evaluate the carrying value of ourlong-lived assets, consisting primarily of property and equipment and the *Essure* license acquired from a patent litigation settlementin 2003, whenever certain events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. When such an eventoccurs, we determine whether there has been impairment by comparing the anticipatedundiscounted future net cash flow to the related asset’s carrying value. Suchevents or circumstances include, but are not limited to, a prolonged industrydownturn, a significant decline in market value or significant reductions inprojected future cash flows.

**Fair Value ofFinancial Instruments**

For financial instrumentsconsisting of cash and cash equivalents, short-term investments, accountsreceivable, accounts payable and accrued liabilities included in our financialstatements, the carrying amounts approximate fair value due to their shortmaturities. Estimated fair values for short term investments, which aredisclosed elsewhere, are based on quoted market prices for the same or similarinstruments.

**Warranty**

Weoffer warranties on our product and record a liability for the estimated futurecosts associated with warranty claims, which is based upon historicalexperience and our estimate of the level of future costs. Warranty costs arereflected in the statement of operations as a cost of goods sold. Areconciliation of the changes in our warranty liability for the years ended December 31,2006 and 2005 follows (in thousands):

| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Balance at the  beginning of the period           |       | $                                     | 70         |   | $ | 68 |   |
| Accruals for warranties  issued during the period |       | 436                                   |       | 162 |   |
| Settlements made  in kind during the period       |       | (297                                  | )          | (160 | ) |
| **Balance at the end of the  period**             | ** ** | **$**                                 | **209**    | ** ** | **$** | **70** | ** ** |

 

**Revenue Recognition**

Product revenue is recognized when title and risk ofownership has been transferred, provided that persuasive evidence of anarrangement exists, the price is fixed and determinable, remaining obligationsare insignificant and collectibility is reasonably assured. Revenue fromproduct sales to distributors is recognized in the same manner as product salesto customers. We do not currently accept product returns from customers ordistributors. Where appropriate, provision is made for estimated warranty costsrelating to product sales at the time revenue is recognized. Non-recurringpayments from contractual arrangements are deferred and recognized as revenueis earned based on an appropriate basis and time frame such as when servicesare performed or the term of the contract.

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We require that a hospitalhave at least one physician preceptored for generally between 3 and 5 cases bya certified trainer before being able to perform the procedure independently. Thereare no revenues associated with the training activities. We do not charge a feefor the activity and no commitment arises for the physician or from us from thepreceptorship. Physician training is provided upfront and we have no obligationsubsequent to the initial training. Training costs have not been significantfrom inception to-date.

**Research andDevelopment**

Research and developmentcosts are expensed as incurred.

**Advertising Costs**

Advertising costs areexpensed as incurred. Total advertising expenses were approximately $0.8million, $1.4 million and $1.5 million in the years ended December 31,2006, 2005 and 2004, respectively.

**Stock-Based Compensation**

Effective January 1, 2006, we adopted theprovisions of SFAS No. 123(R), “Share-Based Payment”, which establishesaccounting for stock-based awards exchanged for employee services. Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, and is recognized on a straight line basis as expense overthe employee requisite service period, which is generally the vesting period.We previously applied Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations and provided therequired pro forma disclosures of SFAS No. 123, “Accounting forStock-Based Compensation”.

We elected to adopt themodified prospective application method as provided by SFAS No. 123(R).Accordingly, during the period ended December 31, 2006, we recordedstock-based compensation for shares granted prior to, but not yet vested as ofthe adoption date based on the grant date fair value estimated in accordancewith the original disclosure provisions of SFAS No. 123, and therefore, wedid not restate previously reported amounts. Stock-based compensation expensefor all share-based payment awards granted or modified on or after January 1,2006 is based on the grant date fair value estimated in accordance with theprovisions of SFAS No. 123(R).

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***Prior to the adoption of SFAS No. 123(R)***

Priorto the adoption of SFAS No. 123(R), we accounted for employee stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25(or “APB 25”), “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for its stock-based compensation plans, aspermitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” (or “SFASNo. 123”) and as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123”.The pro-forma information for the years ended December 31, 2005 and 2004were as follows:

| ** **                                                                                                         | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                                                         | ** ** | **2005**                                    | ** **  | **2004** | ** ** |
| Net loss, as  reported                                                                                             |       | $                                           | (21,801     | ) | $ | (26,069 | ) |
| Add: Stock-based  employee compensation expense included in  reported net loss                                     |       | 847                                         |        | 532 |   |
| Less: Total stock-based employee compensation  expense determined under the fair value based method for all awards |       | (5,482                                      | )           | (7,742 | ) |
| Pro forma net  loss                                                                                                | ** ** | **$**                                       | **(26,436** | **)** | **$** | **(33,279** | **)** |
| Basic and diluted  net loss per share                                                                              |       |                                        |        |   |   |
| As reported                                                                                                        | ** ** | **$**                                       | **(0.82**   | **)** | **$** | **(1.05** | **)** |
| Pro forma                                                                                                          | ** ** | **$**                                       | **(0.99**   | **)** | **$** | **(1.34** | **)** |

We calculated thefair value of each option on the date of grant using the Black-Scholes methodas prescribed by SFAS No. 123. The assumptions used were as follows:

| ** **                       | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|
| ** **                       | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Expected term (in  years)        |       | 4.0                                     |       | 4.0 |   |
| Average risk-free  interest rate |       | 4.01                                    | %          | 3.30 | % |
| Average-volatility  factor       |       | 0.6                                     |       | 0.7 |   |
| Dividend yield                   |       | —                                  |       | — |   |

 

***Impact of the adoption of SFAS No. 123(R)***

We elected to adopt the modified prospectiveapplication method as provided by SFAS No. 123(R). Accordingly,compensation expense recognized for the fiscal year ended December 31,2006 reflects the twelve months’ share of: (a) compensation cost for allshare-based payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, (b) compensation cost for allshare-based payments granted subsequent to December 31, 2005, based on thegrant-date fair value estimated in accordance with the provisions of SFAS No. 123(R) and(c) compensation cost for stock-based awards granted to non-employees.Previously reported amounts have not been restated.

The following table sets forth the total stock-basedcompensation expense resulting from stock options, nonvested stock awards,stock appreciation rights and 1995 Employee Stock Purchase Plan (the “Plan”)included in the Consolidated Statements of Operations (in thousands):

 

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| ** **                                          | ** ** | **Year Ended  December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|
| Cost of goods  sold                                 |       |                                         | $          | 128 |   |   |
| Research and  development                           |       |                                         | 656        |   |   |
| Selling, general  and administrative                |       |                                         | 5,370      |   |   |
| **Total  stock-based compensation expense**         | ** ** | ** **                                   | **$**      | **6,154** | ** ** | ** ** |
| **Effect on basic and diluted net  loss per share** | ** ** | ** **                                   | **$**      | **(0.21** | **)** | ** ** |

 

No income tax benefit has been recognized relating tostock-based compensation expense and no tax benefits have been realized fromexercised stock options. There was no cash flow impact from the adoption ofSFAS 123(R) in the year ended December 31, 2006, except as disclosedfor stock-based compensation expense.

*StockOptions and Stock Appreciation Rights:*   Duringthe year ended December 31, 2006, we granted 594,500 stock options andstock appreciation rights, with an estimated total grant-date fair value ofapproximately $3.9 million and a grant date weighted-average fair value of$6.56 per share. We recorded approximately $4.2 million of stock basedcompensation expense for stock options and stock appreciation rights during theyear ended December 31, 2006. This stock based compensation includedexpenses of approximately $3.4 million for all unvested options granted priorto the adoption of SFAS 123(R) in the year ended December 31, 2006.

As of December 31, 2006, there was unrecognizedcompensation cost of approximately $5.7 million for total stock-basedcompensation related to stock options and stock appreciation rights, net offorfeitures. This cost is expected to be recognized over a weighted-averageamortization period of 1.1 years.

During the year endedDecember 31, 2005, we granted 575,100 stock options, for which stock-basedcompensation expense was not recognized during that period.

*Employee Stock PurchasePlan (ESPP):*   The compensation cost in connectionwith the plan for the year ended December 31, 2006 was approximately $235,000.The grant date weighted-average fair value was $3.89 per share. During the yearended December 31, 2006, we issued 94,009 shares under the ESPP, for whichstock-based compensation expense was not recognized.

*Restricted Shares andRestricted Stock Units:*   In connection withrestricted shares and restricted stock units granted, we recorded stockcompensation representing the fair market value of our common shares on thedates the awards were granted. This stock compensation is being recorded ascompensation expense on a straight-line basis over the vesting periods of theunderlying stock awards. During the year ended December 31, 2006, we recordedapproximately $1.4 million of such compensation expense. The grant dateweighted-average fair value was $18.78 per share.

During fiscal year 2006,we did not grant shares of common stock to any of our consultants. In fiscalyears 2005 and 2004, the grants to consultants in exchange for services were of70,000 and 40,000 shares, respectively. In accordance with EITF 96-18“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services”, we have recordedcompensation expense related to these stock options. We re-measure the fairvalue of the options as they vest and recognize changes in fair value ascompensation in the period. We recorded stock based compensation expense ofapproximately $292,000 during the year ended December 31, 2006 inconnection with our grants to consultants.

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As of December 31,2006, there was an unrecognized compensation cost of approximately $943,700related to nonvested restricted shares and restricted stock units, net offorfeitures. This cost is expected to be recognized over a weighted-averageamortization period of 0.6 years for restricted stock awards and 0.5 years forrestricted stock units.

During the year ended December 31,2005 we recorded approximately $847,000 of restricted stock compensationexpense.

***Valuationassumptions***

Thefair value of stock-based awards was estimated using the Black-Scholes modelwith the following weighted-average assumptions for the year ended December 31,2006:

| ** **                       | ** ** | **Stock Option and  Stock Appreciation  Right Plans** | ** ** | **Employee Stock  Purchase Plan** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Expected term (in  years)        |       |                                                                      | 3.66       |                                        |       |   | 0.61 |   |   |
| Average risk-free  interest rate |       |                                                                      | 4.78       | %                                           |       |   | 5.08 | % |   |
| Average  volatility factor       |       |                                                                      | 53.7       | %                                           |       |   | 45.0 | % |   |
| Dividend yield                   |       |                                                                      | —     |                                        |       |   | — |   |   |

* *

*Expected Term:*   Ourexpected term represents the period for which our stock-based awards areexpected to be outstanding and was determined based on historical experience ofsimilar awards, giving consideration to the contractual terms of thestock-based awards and vesting schedules.

*Expected Volatility:*   Weused historical volatility based on the expected term of the awards, which isconsistent with our assessment that the historical volatility for such periodis more representative of future stock price trends than any other type ofvolatility. The calculation was based on a simple-average method, using areasonably sufficient number of price observations, in accordance with SFAS No. 123(R) andStaff Accounting Bulleting No. 107, “Share-Based Payment” (“SAB 107”).

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

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

As stock-basedcompensation expense recognized in the Consolidated Statement of Operations forthe year ended December 31, 2006 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based on historical experience. In our pro formainformation required under SFAS No. 123 for the periods prior to fiscal 2005,we accounted for forfeitures as they occurred.

Refer to Note 7 “Incentive and Stock Plans” for adescription of our awards.

**Income Taxes**

We account for income taxes under SFAS No. 109, “Accountingfor Income Taxes.” Under the liability method, deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax bases of assets and liabilities using the enacted tax ratesin effect for the year in which the differences are expected to affect taxableincome. Valuation allowances are established when necessary to reduce deferredtax assets to the amounts expected to be realized. At December 31, 2006 weevaluated the need for a valuation allowance for our deferred tax assets. Dueto our cumulative pre-tax losses and the current uncertainty of our ability torealize our deferred tax assets a valuation allowance, in an amount equal toour deferred tax assets was recorded.

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**Net Loss Per Share**

Basic net loss per shareis calculated using the weighted average number of shares of common stockoutstanding. Diluted net loss per share includes the impact of potentiallydilutive securities. However, due to our net loss position, basic and dilutednet loss per share are both computed using the weighted average number ofcommon shares outstanding.

The following tablesets forth the computation of basic and diluted net loss per share (inthousands):

| ** **                                                                                                        | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                        | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Denominator:**                                                                                                  |       |                          |       |   |   |   |   |
| Weighted-average  number of common shares outstanding                                                             |       | 29,251                        |       | 26,972 |   | 24,962 |   |
| Less:  Weighted-average unvested and restricted common shares                                                     |       | 258                           |       | 247 |   | 208 |   |
| Weighted-average number  common shares outstanding used in computing basic and diluted net loss per  common share | ** ** | **28,993**                    | ** ** | **26,725** | ** ** | **24,754** | ** ** |

 

The followingoutstanding options, stock appreciation rights and restricted stock shares,which could potentially dilute basic net loss per share in the future wereexcluded from the computation of diluted net loss per share, as their effect wouldhave been antidilutive (in thousands):

| ** **                                         | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding  options and stock appreciation rights |       | 3,499                         |       | 3,514 |   | 3,550 |   |
| Unvested  restricted stock awards                  |       | 78                            |       | 255 |   | 240 |   |
| Restricted stock                                   |       | 255                           |       | — |   | — |   |
| Employee Stock Purchase  Plan                      |       | 27                            |       | 47 |   | 15 |   |
| **Total**                                          |       | 3,859                         |       | 3,816 |   | 3,805 |   |

 

**Segment Informationand Sales by Geographic Region**

We operate in one business segment, which encompassesall geographical regions. We use one measurement of profitability and do notsegregate our business for internal reporting. As of December 31, 2006,2005 and 2004, 96%, 97% and 95%, respectively, of all long-lived assets weremaintained in the United States of America.

Net sales by geographicregion, based on shipping location of our customer, are as follows:

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales (in  thousands) |       | $                                           | 41,900     | ** ** | $ | 21,169 | ** ** | $ | 11,612 |   |
| United States of  America |       | 91                                          | %          | 88 | % | 85 | % |
| Europe                    |       | 8                                           | %          | 10 | % | 11 | % |
| Other                     |       | 1                                           | %          | 2 | % | 4 | % |
|                           |            |                                             |            |  |  |  |  |  |  |  |

 

**Comprehensive Income (Loss)**

Comprehensive income(loss) generally represents all changes in stockholders’ equity except thoseresulting from investments or contributions by stockholders. Our unrealizedgains on available-for-sale securities, and cumulative translation adjustment,if material, represent the components of comprehensive loss that are excludedfrom the net loss. These components are not significant, individually or inaggregate, for the years ended December 31, 2006, 2005 and 2004.

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**Recent Accounting Pronouncements**

In July 2006, theFASB issued Financial Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”),which is a change in accounting for income taxes. FIN 48 specifies how taxbenefits for uncertain tax positions are to be recognized, measured, andderecognized in financial statements; requires certain disclosures of uncertaintax matters; specifies how reserves for uncertain tax positions should beclassified on the balance sheet; and provides transition and interim-periodguidance, among other provisions. FIN 48 is effective for fiscal years beginningafter December 15, 2006 and as a result, is effective for us in the firstquarter of fiscal 2007. We are currently evaluating the impact of FIN 48 on ourconsolidated financial statements.

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin(“SAB”) No. 108 regarding the process of quantifying financial statementmisstatements. SAB No. 108 states that registrants should use both abalance sheet approach and an income statement approach when quantifying andevaluating the materiality of a misstatement. The interpretations in SAB No. 108contain guidance on correcting errors under the dual approach, as well asprovide transition guidance for correcting errors. This interpretation does notchange the requirements within SFAS No. 154, “Accounting Changes and ErrorCorrections—a replacement of APB No. 20 and FASB Statement No. 3” forthe correction of an error on financial statements. SAB No. 108 iseffective for annual financial statements covering the first fiscal year endingafter November 15, 2006. We adopted this interpretation on December 31,2006. The adoption of the provisions of SAB No. 108 did not have amaterial impact on our financial position and results of operations.

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).This standard defines fair value, establishes the framework for measuring fairvalue in accounting principles generally accepted in the United States ofAmerica and expands disclosure about fair value measurements. Thispronouncement applies under other accounting standards that require or permitfair value measurements. Accordingly, this statement does not require any newfair value measurement. This statement is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. Wewill be required to adopt SFAS No. 157 in the first quarter of 2008. Weare currently evaluating the requirements of SFAS No. 157 and have not yetdetermined the impact on our consolidated financial statements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”) which permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 will be effective forus on January 1, 2008. We are currently evaluating the impact of adoptingSFAS 159 on our financial position, cash flows, and results of operations.

**3.**                 Investments (inthousands)

| ** **                  | ** ** | **Cost and Estimated  Fair Value  December 31,** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| Cash and cash  equivalents: |       |                                                  |       |   |   |
| Cash                        |       | $                                                     | 1,838      |   | $ | 274 |   |
| Commercial Paper            |       | —                                                |       | 10,664 |   |
| Money market funds          |       | 1,400                                                 |       | 1,635 |   |
|                        |       | $                                                     | 3,238      |   | $ | 12,573 |   |
| Short-term investments:     |       |                                                  |       |   |   |
| Municipal bonds             |       | $                                                     | 22,600     |   | $ | 19,850 |   |
|                        |       | $                                                     | 22,600     |   | $ | 19,850 |   |

 

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At December 31, 2006and 2005, the amortized cost basis of the available-for-sale investmentsrepresents the fair value of the investments due to their short maturities.Gross realized gains and losses from the sale of securities classified asavailable-for-sale were not material for the years ended December 31,2006, 2005 and 2004.

As of December 31,2006, we held auction rate securities of approximately $22.6 million andclassified the entire amount as short-term investments. Moreover, we classifyall of our short-term investments as current using the approach defined by theAccounting Research Bulletin No. 43. Accordingly, these securitiesrepresent the investment of funds available for current operations. Managementdoes not have a stated expectation to sell such securities within one year orwithin the normal operating cycle. Nonetheless, these securities are availablefor use, if needed, for current operations.

**4.**                 Inventories (inthousands)

| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials    |       | $                     | 159        |   | $ | 122 |   |
| Work-in-progress |       | 292                   |       | 1,940 |   |
| Finished goods   |       | 159                   |       | 1,330 |   |
| Total            | ** ** | **$**                 | **610**    | ** ** | **$** | **3,392** | ** ** |

 

**5.**                 Property andEquipment (in thousands)

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Machinery and equipment                          |       | $                     | 1,230      |   | $ | 1,812 |   |
| Equipment, tooling  and furniture and fixtures   |       | 3,280                 |       | 2,032 |   |
| Software                                         |       | 3,079                 |       | 2,619 |   |
| Leasehold  improvements                          |       | 775                   |       | 704 |   |
|                                             |       | 8,364                 |       | 7,167 |   |
| Less: accumulated  depreciation and amortization |       | (5,447                | )          | (4,424 | ) |
| Property and equipment,  net                     | ** ** | **$**                 | **2,917**  |   | **$** | **2,743** | ** ** |

 

Property and equipmentdepreciation and amortization expenses for the years 2006, 2005 and 2004 wasapproximately $1.2 million, $0.9 million and $1.2 million, respectively.

**6.**                 Commitments andContingencies

In June 2005, weentered into a Sublease Agreement with Verisity Design, Inc. for therelocation of our headquarters to 331 East Evelyn, Mountain View, California.The agreement was subject to the Master Landlord’s consent within 45 days afterdelivery of and receipt by Master Landlord of the executed Sublease. On July 19,2005, SFERS Real Estate, the Master Landlord, and Verisity Design, Inc.signed a Landlord Consent Agreement allowing the Sublease Agreement between usand Verisity Design, Inc. We are recognizing the rent expense on astraight-line basis over the life of the lease.

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Inaddition to the lease agreement for the facility located in Mountain View, wehave certain operating leases on a telephone system and copiers. These leaseshave terms expiring from October 2007 through December 2011. Rentexpense for all leases was approximately $623,000, $790,000 and $604,000 forthe years ended December 31, 2006, 2005 and 2004, respectively. Aggregateminimum annual lease commitments under all leases are as follows (in thousands):

| 2007                                   |       | $     | 619       |       |
|----------------------------------------|------------|-------|-----------|------------|
| 2008                                   |       | 620   |      |
| 2009                                   |       | 323   |      |
| 2010                                   |       | 12    |      |
| 2011                                   |       | 7     |      |
| **Total operating leases  commitment** | ** ** | **$** | **1,581** | ** ** |

 

In 2003, we entered into asettlement agreement with Ovion Inc. (see Note 10). Pursuant to thesettlement agreement, we were required to pay a license fee of$2.0 million payable in our common stock in equal installments in thefirst and second quarters of 2004. In January 2004, we paid$1.0 million in common stock to Ovion and made another payment of$1.0 million in common stock to Ovion in April 2004. In addition, thesettlement agreement provided for a cash payment of $2.0 million in thefourth quarter of 2003 as a prepaid royalty. We are obligated to pay 3.25% ofour cumulative revenue derived from sale of the *Essure*products in excess of $75.0 million as royalty for a period of ten yearsstarting from the date of settlement.

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

We have entered intoindemnification agreements with our directors and officers that may require usto indemnify our directors and officers against liabilities that may arise byreason of their status or service as directors or officers, other thanliabilities arising from willful misconduct of a culpable nature; to advancetheir expenses incurred as a result of any proceeding against them as to whichthey could be indemnified; and to make good faith determination whether or notit is practicable for us to obtain directors and officers insurance. Wecurrently have directors and officers insurance.

Inaddition, we have obligations related to our Phase II clinical study andPivotal trial, as follows (in thousands):
|                             | ** ** | **Payments due by period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
| Clinical trial  obligations |       | $                                         | 1,898      |   |   | $ | 316 |   |   |   | $ | 1,072 |   |   |   | $ | 510 |   |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

**7.**                 Incentiveand Stock Plans

***Employee StockPurchase Plan***

In November 1995, ourBoard of Directors adopted the Employee Stock Purchase Plan (ESPP). The ESPPbecame effective November 29, 1995. At that time, 200,000 shares werereserved for issuance under the ESPP. The ESPP permits participants to purchasecommon stock through payroll deductions of up to 10% of an employee’s annualbase earnings. The purchase price per share is equal to 85% of the fair 

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marketvalue per share on the participant’s entry date into the offering period or, iflower, 85% of the fair market value per share on the semi-annual purchase date.In March 2004, the Board of Directors approved an amendment to the ESPP toincrease the number of shares of common stock reserved for issuance by 150,000shares. The stockholders approved this amendment in June 2004, to beeffective July 1, 2004. In March 2006, our Board of Directorsapproved an amendment to the ESPP to increase the number of shares of CommonStock reserved for issuance by 160,000 shares. This amendment was approved bythe stockholders in June 2006. As of December 31, 2006, 343,280shares had been issued under the ESPP and 166,720 shares were available forfuture issuance.

***Company StockOption Plans***

InAugust 2002, the Board of Directors approved the 2002 Non-Qualified StockOption Plan (“2002 Plan”) and amendments to the 2002 Plan were approvedby the Board in March 2003. Under the Amended and Restated 2002 Plan,non-qualified stock options and stock purchase rights may be granted only tothe following classes of persons: (i) except as provided in (ii) below,consultants and employees who are not our officers or directors, and (ii) newlyhired employees (including employees who will become our officers or directors)and who have not previously been employed by us and with respect to whomoptions are to be granted as an inducement essential to such employees’entering into employment contracts with us. The 2002 Plan was enacted toaddress the increased hiring done during the second half of 2002, primarily inour U.S. sales, professional education and marketing functions. The maximumaggregate number of shares that may be issued upon exercise of options or stockpurchase rights is 1,500,000 shares. In December 2005, the Board ofDirectors approved an amendment and restatement of the 2002 Plan to provide afair market value established upon the closing price on the day of the grantrather than the previous trading day. This amendment became effectiveimmediately after approval and did not require stockholder approval.

Under the terms of the2002 Plan, options may be granted with different vesting terms from time totime and all options under the 2002 Plan expire ten years after grant. Theoptions may include provisions permitting exercise of the option prior to fullvesting. As of December 31, 2006, there were no shares that were exercisedprior to full vesting.

In March 2001, theBoard of Directors approved the 2001 Equity Incentive Plan (“2001 Plan”)allowing granting of stock options and restricted stock to employees, directorsand consultants. The 2001 Plan provides for the grant of options, restrictedstock, stock appreciation rights, performance share awards, dividendequivalents awards, stock payment awards, stock purchase rights and restrictedstock unit awards to our employees, directors and consultants. The 2001 Planwas originally adopted by the Board of Directors on March 21, 2001 with atotal of 1,000,000 shares of common stock reserved for issuance thereunder, andwas approved by the stockholders in May 2001. In March 2002, theBoard of Directors approved an amendment and restatement of the 2001 Plan toincrease the shares reserved for issuance thereunder by an additional 1,000,000shares, bringing the aggregate number reserved for issuance to 2,000,000 sharesof common stock, and to provide for automatic grants of non-qualified stockoptions to non-employee directors as had been provided under the 1995 Director’sStock Option Plan. The stockholders approved this amendment and restatement in May 2002.In April 2003, the Board of Directors approved the Second Amended andRestated 2001 Plan to increase the size of the formula grants to non-employeedirectors and to prohibit repricing. The stockholders approved this amendmentand restatement in June 2003. In March 2004, the Board of Directorsapproved the Third Amended and Restated 2001 Plan to reduce the size of theautomatic grants of stock options to non-employee directors and to provide forautomatic grants of restricted stock to non-employee directors and to increasethe shares of Common Stock reserved for issuance thereunder by an additional500,000 shares, bringing the aggregate number reserved for issuance to2,500,000 shares of common stock. The stockholders approved this amendment andrestatement in June 2004. In November 2004, the Board of Directorsapproved the Fourth Amended and Restated 2001 Plan to provide for the grant ofrestricted stock units and stock 

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appreciationrights. In January 2005, the Board of Directors approved the Fifth Amendedand Restated 2001 Plan to provide for a change in the number of shares to beautomatically granted to non-employee directors under the plan. In December 2005,the Board of Directors approved the Sixth Amended and Restated 2001 Plan toestablish that the price of future grants be based on the closing price of ourstock on the date of grant, rather than the previous trading day. In February 2006,the Board of Directors approved the Seventh Amended and Restated 2001 Plan toprovide for the increase the annual grant of restricted stock for directorsfrom 2,000 shares to 2,500 shares. In April 2006, the Board of Directorsapproved the amendment to the Eighth Amended and Restated 2001 Plan to increasethe shares of Common Stock reserved for issuance thereunder by an additional1,500,000 shares, bringing the aggregate number reserved for issuance to4,000,000 shares of Common Stock. This amendment was approved by thestockholders in June 2006.

Under the terms of the2001 Plan, incentive stock options may be granted only to employees withexercise prices not less than the fair market value of the common stock on thedate of grant. Stock options and stock appreciation rights may be grantedwith different vesting terms from time to time but generally provide forvesting of at least 20% of the total number of shares per year. All options andstock appreciation rights under the 2001 Plan expire ten years after grant, andfive years in the case of a grant to a 10% stockholder. Stock appreciationrights are to be settled in stock. Stock options may include provisionspermitting exercise of the option prior to full vesting. As of December 31,2006, there were no shares that were exercised prior to vesting. To the extentthat the aggregate fair market value of the shares subject to a holder’sincentive stock options exceeds $100,000, the excess options will be treated asnon-qualified stock options.

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

In July 1993, the Board of Directors adopted the1993 Stock Plan (the “1993 Plan”), and amendments to the 1993 Plan were adoptedby 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 optionsup to 3,075,000 shares of common stock in the aggregate. Stock options grantedunder the 1993 Plan may be either incentive stock options or non-qualifiedstock options and can be granted to employees, distributors, consultants anddirectors. Incentive stock options may be granted to employees with exerciseprices of no less than the fair market value and non-qualified options may begranted at exercise prices of no less than 85% of the fair market value of thecommon stock on the date of grant, as determined by the Board of Directors. Theoptions expire no more than 10 years after the date of grant. Options may begranted with different vesting terms from time to time but generally providefor vesting of at least 25% of the total number of shares per year. The optionsmay include provisions permitting exercise of the option prior to full vesting.Any unvested shares so purchased shall be subject to repurchase by us at theoriginal exercise price of the option. Such repurchase rights generally lapseat a minimum rate of 25% per year from the date the option was granted. As ofDecember 31, 2006, there were no shares that are subject to repurchase.

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In April 2004, the Board of Directors approved anonqualified stock option grant for 125,000 shares of our common stock and agrant of 36,000 shares of restricted stock for Mr. Ulric E. Cote as astand-alone inducement grant in connection with his initial commencement ofemployment with us as Vice President, Sales. In December 2005, the Boardof Directors approved a nonqualified stock option grant of 100,000 shares ofour common stock for Ms. Patricia Gray as a stand-alone inducement grantin connection with her initial commencement of employment with us as VicePresident, R&D and Operations. Stockholder approval was not required forany of these grants.

As of December 31, 2006, 68,996 shares remainedas available for grant under the 2002 Plan, 1,478,115 shares remained asavailable for grant under the 2001 Plan, no shares remained available for grantunder the 1993 Plan and no shares remained available for grant under theDirector’s Plan.

Asummary of the activity of our 1993, 2001 and 2002 Plans, the 1995 Directors’Plan and stand alone grant activity is as follows:
|                                                               | ** ** | ** **                            | ** ** | **Awards Outstanding** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Shares  Available  For Grant** | ** ** | **Awards  Outstanding**     | ** ** | **Weighted-  Average Exercise  Price** | ** ** |
| Balance at December 31, 2003                             |       | 324,235                               |       | 4,216,180                   |       |   | $ | 11.71 |   |   |
| Additional authorized(a)                                      |       | 661,000                               |       | —                      |       |   | — |   |   |
| Options granted(a)                                            |       | (886,618                              | )          | 886,618                     |       |   | 9.91 |   |   |
| Restricted stock grants(a)                                    |       | (312,020                              | )          | 312,020                     |       |   | — |   |   |
| Restricted stock  issuances(a)                                |       | —                                |       | (312,020                    | )          |   | — |   |   |
| Options exercised                                             |       | —                                |       | (415,417                    | )          |   | 5.98 |   |   |
| Options cancelled                                             |       | 1,137,037                             |       | (1,137,037                  | )          |   | 14.74 |   |   |
| Shares repurchased                                            |       | 72,000                                |       | —                      |       |   | — |   |   |
| Options expired                                               |       | (124,828                              | )          | —                      |       |   | — |   |   |
| Balance at December 31, 2004                             |       | 870,806                               |       | 3,550,344                   |       |   | 10.96 |   |   |
| Additional authorized(b)                                      |       | 100,000                               |       | —                      |       |   | — |   |   |
| Options granted(b)                                            |       | (575,100                              | )          | 575,100                     |       |   | 8.71 |   |   |
| Restricted stock grants                                       |       | (24,840                               | )          | 24,840                      |       |   | — |   |   |
| Restricted stock issuances                                    |       | —                                |       | (24,840                     | )          |   | — |   |   |
| Options exercised                                             |       | —                                |       | (143,997                    | )          |   | 5.42 |   |   |
| Options cancelled                                             |       | 467,696                               |       | (467,696                    | )          |   | 12.78 |   |   |
| Shares repurchased                                            |       | 5,863                                 |       | —                      |       |   | — |   |   |
| Options expired                                               |       | (140,113                              | )          | —                      |       |   | — |   |   |
| Balance at December 31, 2005                             |       | 704,312                               |       | 3,513,751                   |       |   | 10.62 |   |   |
| Additional authorized                                         |       | 1,500,000                             |       | —                      |       |   | — |   |   |
| Options granted                                               |       | (594,500                              | )          | 594,500                     |       |   | 14.99 |   |   |
| Restricted stock awards and  restricted stock units granted   |       | (291,999                              | )          | 291,999                     |       |   | — |   |   |
| Restricted stock awards  issued                               |       | —                                |       | (28,500                     | )          |   | — |   |   |
| Options exercised(c)                                          |       | —                                |       | (294,121                    | )          |   | 9.77 |   |   |
| Options cancelled and  expired(d)                             |       | 206,699                               |       | (314,717                    | )          |   | 13.53 |   |   |
| Restricted stock awards and  restricted stock units cancelled |       | 192,710                               |       | (192,710                    | )          |   | — |   |   |
| Restricted stock awards  expired                              |       | (184,000                              | )          | 184,000                     |       |   | — |   |   |
| Shares repurchased                                            |       | 13,889                                |       | —                      |       |   | — |   |   |
| Balance  at December 31, 2006                            |       | 1,547,111                             |       | 3,754,202                   |       |   | $ | 11.17 |   |   |

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(a)           Includes stand-aloneinducement grants options and restricted stock for 161,000 shares.

(b)           Includes stand-aloneinducement grant options for 100,000 shares.

(c)            Includes treasury stockissuances of 3,421 shares.

(d)          Includesstand-alone inducement plan cancellations of 83,334 shares.

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Asummary of the activity for the year ended December 31, 2006 of stockoptions and stock appreciation rights is as follows:
|                                                | ** ** | **Options  and Stock  Appreciation  Rights  Outstanding** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|
| Balance  outstanding at December 31, 2005 |       |                                                           | 3,513,751  |                                        |       |                            | $          | 10.62 |   |   |   |   |
| Grants                                         |       |                                                           | 594,500    |                                        |       |                            | 14.99      |   |   |   |   |
| Exercises                                      |       |                                                           | (294,121   | )                                           |       |                            | 9.77       |   |   |   |   |
| Cancelled and  expired                         |       |                                                           | (314,717   | )                                           |       |                            | 13.53      |   |   |   |   |
| Balance  outstanding at December 31, 2006 |       |                                                           | 3,499,413  |                                        |       |                            | 11.17      |   |   | $ | 35,442,114 |   |
| Exercisable at  December 31, 2006         |       |                                                           | 2,324,106  |                                        |       |                            | $          | 10.82 |   |   | $ | 24,336,927 |   |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at December 31, 2006:
|                                             | ** ** | **Options Outstanding** | ** ** | **Options Vested  and Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Options  Outstanding**                      | ** ** | **Weighted  Average  Contractual  Remaining  Life (years)** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Options  Vested  and  Exercisable** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** |
| $1.25 - $ 7.58                         |       |                         | 370,871    |                                          |       |   | 4.46 |   |   |   | $ | 4.61 |   |   | 333,222 |   |   | $ | 4.39 |   |   |
| $7.69 - $ 8.32                         |       |                         | 224,884    |                                          |       |   | 8.11 |   |   |   | 8.01 |   |   | 116,990 |   |   | 8.06 |   |   |
| $8.40 - $ 8.94                         |       |                         | 417,886    |                                          |       |   | 7.89 |   |   |   | 8.93 |   |   | 205,695 |   |   | 8.94 |   |   |
| $9.00 - $ 9.76                         |       |                         | 261,661    |                                          |       |   | 4.31 |   |   |   | 9.42 |   |   | 225,526 |   |   | 9.45 |   |   |
| $9.95 - $ 9.95                         |       |                         | 630,000    |                                          |       |   | 6.29 |   |   |   | 9.95 |   |   | 462,000 |   |   | 9.95 |   |   |
| $9.96 - $13.11                              |       |                         | 470,494    |                                          |       |   | 7.20 |   |   |   | 12.37 |   |   | 329,889 |   |   | 12.38 |   |   |
| $13.29 - $14.20                             |       |                         | 351,487    |                                          |       |   | 6.89 |   |   |   | 13.59 |   |   | 230,457 |   |   | 13.66 |   |   |
| $14.28 - $14.76                             |       |                         | 388,548    |                                          |       |   | 8.64 |   |   |   | 14.71 |   |   | 128,016 |   |   | 14.63 |   |   |
| $14.95 - $21.40                             |       |                         | 354,082    |                                          |       |   | 6.25 |   |   |   | 17.38 |   |   | 267,311 |   |   | 16.96 |   |   |
| $21.80 - $22.93                             |       |                         | 29,500     |                                          |       |   | 5.71 |   |   |   | 21.97 |   |   | 25,000 |   |   | 21.80 |   |   |
| $1.25 - $22.93                              |       |                         | 3,499,413  |                                          |       |   | 6.69 |   |   |   | $ | 11.17 |   |   | 2,324,106 |   |   | $ | 10.82 |   |   |
|                                             |            |                              |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average exercise price for options vestedand exercisable at December 31, 2005 was $10.88 per share.

We have reserved 5,208,557 shares of our common stock,which may be issued with respect to outstanding options at December 31,2006. We had reserved 3,963,547 shares of our common stock as of December 31,2005 and there were 1,999,589 options vested and exercisable as of December 31,2005.

During fiscal year 2006,we did not grant shares of common stock to any of our consultants. In fiscalyears 2005 and 2004, the grants to consultants in exchange for services werefor 70,000 and 40,000 shares, respectively. In accordance with EITF 96-18“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services”, we have recordedcompensation expense related to these stock options. We re-measure the fairvalue of the options as they vest and recognize changes in fair value asexpense in the period.

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***Restricted Stock***

Restrictedstock awards and restricted stock unit activity for the year ended December 31,2006, is as follows:

| ** **                                             | ** ** | **Shares  and Units** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------------------|------------|
| Nonvested stock  outstanding at December 31, 2005 |       | 254,848                    |       |                                                     | $          | 9.41 |   |   |
| Grants                                                 |       | 291,999                    |       |                                                     | 18.78      |   |   |
| Vested                                                 |       | (7,178                     | )          |                                                     | 7.33       |   |   |
| Cancellations                                          |       | (206,599                   | )          |                                                     | 10.02      |   |   |
| Nonvested stock  outstanding at December 31, 2006 |       | 333,070                    |       |                                                     | $          | 17.29 |   |   |

 

***Retirement Savings Plan***

Under our retirementsavings plan (“401K Plan”), employees may elect to defer up to 15% of theirtotal compensation, not to exceed the amount allowed by applicable InternalRevenue Service regulations. There were no employer contributions to the 401KPlan for the years ended 2006, 2005 and 2004.

**8.**                 Stockholder’sEquity

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

As part of the settlement agreement withOvion Inc. (see Note 10), we were required to pay $2.0 millionin common stock for a license fee. The obligation was paid in equalinstallments in January and April 2004 for a total of 177,595 sharesof common stock.

In February 2004, we completed a privateplacement of approximately 2,995,000 shares of common stock at $8.50 per share,based upon a negotiated discount to market. Our net proceeds, after fees andother offering costs totaling $1.5 million, were approximately$23.9 million.

In August 2005, we closed the sale of a privateplacement of approximately 3,200,000 shares of common stock at $7.20 per shareto institutional investors and $8.10 per share to officers and directors. Ournet proceeds, after fees and other offering costs totaling approximately $0.1million, were approximately $22.9 million.

In 2006, 2005 and 2004, werepurchased 13,889, 5,863,  and 72,000shares, respectively, of restricted common stock at par value in accordancewith the terms of a restricted stock agreements. These shares, net of treasurystock grants in 2006 of 3,421 shares, are recorded as treasury stock.

**9.**                 IncomeTaxes

We have recorded no income tax expense for any of theyears presented in the Consolidated Statement of Operations due to ourrecurring losses. As of December 31, 2006, we had net operating loss carryforwards for federal and state income tax purposes of approximately$205.5 million and $118.7 million, respectively. If not utilized,these carryforwards will begin to expire starting in 2008 for federal purposesand 2012 for state tax purposes. In addition, at December 31, 2006, we hadboth federal and state research credit carry forwards of approximately$2.5 million, respectively. If not utilized, the 

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federal tax carryforwardwill begin to expire in 2008, while the state carryforward does not expire.Utilization of the net operating losses and credits may be subject to asubstantial annual limitation due to the ownership change provisions of theInternal Revenue Code of 1986, as amended. The annual limitation may result inthe expiration of net operating losses and credits before utilization and inthe event we have a change of ownership, utilization of the carryforwards couldbe restricted.

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

Deferred income taxes reflect the net effects of taxcarryforward and temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amount used for incometax purposes.

Significantcomponents of our deferred tax assets as of December 31, 2006 and December 31,2005 are as follows (in thousands):

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Net operating  loss carryforwards     |       | $        | 72,400     |     | $          | 68,500 |   |
| Research credits                      |       | 4,100    |       | 3,900    |       |
| Capitalized  research and development |       | 5,900    |       | 5,400    |       |
| Other—net                        |       | 2,500    |       | 1,600    |       |
| Less: valuation  allowance            |       | (84,900  | )          | (79,400  | )          |
| Net deferred tax assets               |       | $        | —     |     | $          | — |   |

 

Because of our lack of earnings history andanticipated future losses, the deferred tax assets have been fully offset by avaluation allowance. The increase in the valuation allowance was approximately$5.5 million and $8.0 million during 2006 and 2005, respectively.

Thereconciliation between our effective tax rate on income from continuingoperations and the statutory tax rate is as follows (in thousands):

| ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. federal  statutory income tax rate |       | $        | (6,286     | )        | $          | (7,412   | )          | $ | (8,863 | ) |
| Other permanent  items                  |       | 117      |       | 79       |       | 59       |       |
| Stock based  compensation               |       | 693      |       | 127      |       | (452     | )          |
| Other                                   |       | (186     | )          | (255     | )          | (313     | )          |
| Valuation  Allowance                    |       | 5,662    |       | 7,461    |       | 9,569    |       |
| Total income taxes                      |       | $        | —     |     | $          | —   |       | $ | — |   |

 

**10.**          LegalProceedings

A third party, Ovion, Inc. (“Ovion”), brought toour attention a patent and certain claims from a pending patent applicationowned by it. Ovion indicated it believed that the claims of its patent andapplication covered the *Essure* systemand its use. On October 23, 2003, we entered into a settlement agreementwith Ovion pursuant to which we received a sole, worldwide license to Ovion’spatent rights relative to the *Essure* system,and Ovion may not grant any additional such licenses to other parties. Thesettlement agreement provided for a cash payment of $2.0 million in the fourthquarter of 2003 as a prepaid royalty, and a license fee of $2.0 million payablein our common stock in equal installments in the first and second quarters of2004. In addition, the settlement agreement provided for the payment of a 

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royalty to Ovion that willbe equal to 3.25% of the cumulative net sales of the *Essure*system in excess of $75.0 million for a period of no longer than ten years. Inaccordance with the terms of the settlement agreement, our prepaid royaltieswill be fully amortized when cumulative net sales of *Essure*system reach $136.5 million, thereby resulting in an effective royaltyrate of 1.47%. We are amortizing the prepaid royalties to cost of goods soldusing this effective rate. Prepaid royalties were approximately $0.9 millionand $1.5 million as of December 31, 2006 and 2005, respectively.Ovion was not granted any rights to our intellectual property pursuant to thesettlement agreement. The settlement agreement was approved by the U.S.District Court for the Northern District of California on November 6,2003.

Despite the settlement agreement with Ovion, webelieve that some or all of Ovion’s claims should be included within our ownpatents and, therefore, requested that the Patent and Trademark Office (“PTO”)declare an interference, which represents a proceeding within the PTO todetermine which party was the first to invent and which party is therebyentitled to ownership of the claims. We believe that we filed our patentapplications for the *Essure* devicebefore Ovion filed the application that issued as its patent and that we areentitled to any patentable claims now appearing in their patent that cover the *Essure* product. We have no knowledge whether the PTO willdeclare an interference, whether we invented our product prior to Ovion’s dateof invention, or whether we will prevail in an interference proceeding if it isdeclared by the PTO. Future royalties might be avoided by a favorableinterference ruling before the patent office, which might occur if interferenceis declared and if we are found to have priority of invention.

From time to time, we areinvolved in legal proceedings arising in the ordinary course of business. Webelieve there is no other litigation pending that could have, individually orin the aggregate, a material adverse effect on our financial position, resultsof operations or cash flows.

**11.**          RelatedParties

There were no significantrelated party transactions in 2006. During fiscal year 2005, we paid $22,500 toFlorence Comité, a member of the Board of Directors, for the termination of aconsulting agreement. There were no significant related party transactions in2004.

**12.**          SubsequentEvents

In February 2007, we issued an aggregateprincipal amount of $86,250,000 of our 2.25% convertible senior notes due 2027.These notes bear a 2.25% interest per annum on the principal amount, payablesemiannually in arrears on February 15 and August 15 of each year,beginning on August 15, 2007. Interest will accrue on the notes from andincluding February 12, 2007 or from and including the last date in respectof which interest has been paid or provided for, as the case may be, to, butexcluding, the next interest payment date or maturity date, as the case may be.The notes will mature on February 15, 2027, unless earlier redeemed,repurchased or purchased by us or converted. The notes will be convertible intocash and, if applicable, shares of our common stock based on an initialconversion rate, subject to adjustment, of 35.8616 shares per $1,000 principalamount of notes (which represents an initial conversion price of approximately$27.89 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amountof the note and our common stock in respect of such note’s conversion value inexcess of such principal amount. The Notes are convertible only in thefollowing circumstances: (1) if the closing sale price of our common stockexceeds 120% of the conversion price during a period as defined in theindenture; (2) if the average trading price per $1,000 principal amount ofthe Notes is less than or equal to 97% of the average conversion value of theNotes during a period as defined in the indenture; (3) upon the occurrenceof specified corporate transactions; (4) if we call the Notes forredemption and (5) at an time on or after December 15, 2011 to andincluding February 15, 2012 and anytime on or after February 15,2025. Upon a change in control or termination of trading, holders of the Notesmay require us to repurchase all or a portion of their Notes for cash at arepurchase price equal to 100% of the principal amount, plus any accrued andunpaid interest.

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In connection with the issuance of the Notes, weentered into separate convertible note hedge transactions and separate warranttransactions to reduce the potential dilution upon conversion of the Notes(collectively referred to as the “Call Spread Transactions”). As a result ofthe Call Spread Transactions, we do not anticipate experiencing an increase inthe total shares outstanding from the conversion of the Notes unless the priceof our common stock appreciates above $36.47 per share, effectively increasingthe conversion premium to us to $36.47. We purchased call options to cover approximately3.1 million shares of our common stock (subject to adjustment in certaincircumstances), which is the number of shares underlying the Notes. Inaddition, we sold warrants permitting the purchasers to acquire up toapproximately 3.1 million shares of our common stock (subject to adjustment incertain circumstances).

In February 2007, weamended the call option and distribution agreement with our French distributor.The amendment provided that we will exercise the call option sometime between January 1,2008 and January 2, 2009, subject to the satisfaction of certainconditions. In connection with agreeing to exercise the call option under thesecircumstances, we concurrently amended the distribution agreement such that wewill increase the price at which we sell the *Essure*device to our French distributor and that we will not exercise the call optionin 2007.

**13.**          QuarterlyInformation (unaudited)

**Supplementary Data**

**Quarterly Results of Operations (Unaudited)**
|                                                                                 | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **December 31,  2006**      | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| Net Sales                                                                       |       |                             | $          | 12,922 |   |   |   | $ | 11,013 |   |   |   | $ | 10,003 |   |   |   | $ | 7,962 |   |   |   | $ | 6,767 |   |   |   | $ | 5,499 |   |   |   | $ | 5,032 |   |   |   | $ | 3,871 |   |   |
| Cost of goods sold(1)                                                           |       |                             | 4,007      |   |   |   | 3,486 |   |   |   | 3,651 |   |   |   | 2,883 |   |   |   | 2,568 |   |   |   | 1,999 |   |   |   | 2,102 |   |   |   | 1,727 |   |   |
| Gross profit                                                                    |       |                             | 8,915      |   |   |   | 7,527 |   |   |   | 6,352 |   |   |   | 5,079 |   |   |   | 4,199 |   |   |   | 3,500 |   |   |   | 2,930 |   |   |   | 2,144 |   |   |
| Operating  expenses:                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development(1)                                                     |       |                             | 1,067      |   |   |   | 1,030 |   |   |   | 1,069 |   |   |   | 1,200 |   |   |   | 1,244 |   |   |   | 1,145 |   |   |   | 909 |   |   |   | 966 |   |   |
| Selling, general and  administrative(1)                                         |       |                             | 12,118     |   |   |   | 10,265 |   |   |   | 10,935 |   |   |   | 10,000 |   |   |   | 7,687 |   |   |   | 7,618 |   |   |   | 8,213 |   |   |   | 7,737 |   |   |
| Total operating  expenses                                                       |       |                             | 13,185     |   |   |   | 11,295 |   |   |   | 12,004 |   |   |   | 11,200 |   |   |   | 8,931 |   |   |   | 8,763 |   |   |   | 9,122 |   |   |   | 8,703 |   |   |
| Operating loss                                                                  |       |                             | (4,270     | ) |   |   | (3,768 | ) |   |   | (5,652 | ) |   |   | (6,121 | ) |   |   | (4,732 | ) |   |   | (5,263 | ) |   |   | (6,192 | ) |   |   | (6,559 | ) |   |
| Interest and other income  and expenses                                         |       |                             | 339        |   |   |   | 329 |   |   |   | 323 |   |   |   | 333 |   |   |   | 334 |   |   |   | 260 |   |   |   | 161 |   |   |   | 190 |   |   |
| Net loss                                                                        |       |                             | $          | (3,931 | ) |   |   | $ | (3,439 | ) |   |   | $ | (5,329 | ) |   |   | $ | (5,788 | ) |   |   | $ | (4,398 | ) |   |   | $ | (5,003 | ) |   |   | $ | (6,031 | ) |   |   | $ | (6,369 | ) |   |
| Basic and diluted net loss  per share                                           |       |                             | $          | (0.13 | ) |   |   | $ | (0.12 | ) |   |   | $ | (0.18 | ) |   |   | $ | (0.20 | ) |   |   | $ | (0.15 | ) |   |   | $ | (0.18 | ) |   |   | $ | (0.24 | ) |   |   | $ | (0.25 | ) |   |
| Weighted average shares used in computing basic and diluted net loss  per share |       |                             | 29,153     |   |   |   | 29,034 |   |   |   | 28,918 |   |   |   | 28,860 |   |   |   | 28,741 |   |   |   | 27,218 |   |   |   | 25,453 |   |   |   | 25,687 |   |   |

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(1)          Weadopted SFAS 123(R) on January 1, 2006 and have included employeebased stock-based compensation in our quarterly results of operations in 2006.

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**Conceptus, Inc.**

**Schedule II**

**Schedule of Valuation andQualifying Accounts**

**(Inthousands)**
|                                     | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charges to  Expenses or  Other Accounts** | ** ** | **Deductions** | ** ** | **Balance at End  of Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|----------------|------------|----------------------------------------------|------------|
| Year Ended  December 31, 2004: |       |                                           |       |                                                       |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts     |       |                                           | $          | 164                                                        |       |           |       | (102                                         | )          |   |   | — |   |   |   | $ | 62 |   |   |
| Reserve for inventories             |       |                                           | $          | 228                                                        |       |           |       | 152                                          |       |   |   | — |   |   |   | $ | 380 |   |   |
| Year Ended  December 31, 2005: |       |                                           |       |                                                       |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts     |       |                                           | $          | 62                                                         |       |           |       | 44                                           |       |   |   | — |   |   |   | $ | 106 |   |   |
| Reserve for inventories             |       |                                           | $          | 380                                                        |       |           |       | (147                                         | )          |   |   | — |   |   |   | $ | 233 |   |   |
| Year Ended  December 31, 2006: |       |                                           |       |                                                       |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts     |       |                                           | $          | 106                                                        |       |           |       | 61                                           |       |   |   | — |   |   |   | $ | 167 |   |   |
| Reserve for  inventories            |       |                                           | $          | 233                                                        |       |           |       | 136                                          |       |   |   | 280 |   |   |   | $ | 89 |   |   |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized in the City of MountainView, California on this 15 day of March 2007.
|        | 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 personwhose signature appears below constitutes and appoints Mark Sieczkarek andGregory E. Lichtwardt, his or her attorney-in-fact, each with the power ofsubstitution, for him in any and all capacities, to sign any amendments to thisReport on Form 10-K, and to file the same, with exhibits thereto andother documents in connection therewith with the Securities and ExchangeCommission, hereby ratifying and confirming all that said attorney-in-fact, orhis substitute or substitutes may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, thisReport has been signed below by the following persons in the capacities and onthe dates indicated.

 
| Signature                 | ** ** | **Title**                               | ** ** | **Date**            |
|---------------------------|------------|-----------------------------------------|------------|---------------------|
| /s/ MARK M. SIECZKAREK    |       | President, Chief  Executive Officer and |       | March 15, 2007 |
| (Mark M. Sieczkarek)      |       | Director (Principal Executive Officer)  |       |                |
|                      |       |                                    |       |                |
| /s/ GREGORY E. LICHTWARDT |       | Executive Vice President, Treasurer and |       | March 15, 2007 |
| (Gregory E. Lichtwardt)   |       | Chief Financial Officer                 |       |                |
|                      |       |                                    |       |                |
| /s/ MICHAEL A. BAKER      |       | Director                                |       | March 15, 2007 |
| (Michael E. Baker)        |       |                                    |       |                |
|                      |       |                                    |       |                |
| /s/ THOMAS F. BONADIO     |       | Director                                |       | March 15, 2007 |
| (Thomas F. Bonadio)       |       |                                    |       |                |
|                      |       |                                    |       |                |
| /s/ ANNETTE BIANCHI       |       | Director                                |       | March 15, 2007 |
| (Annette Bianchi)         |       |                                    |       |                |
|                      |       |                                    |       |                |
| /s/ ROBERT V. TONI        |       | Director                                |       | March 15, 2007 |
| (Robert V. Toni)          |       |                                    |       |                |
|                      |       |                                    |       |                |
| /s/ KATHRYN A. TUNSTALL   |       | Director                                |       | March 15, 2007 |
| (Kathryn A. Tunstall)     |       |                                    |       |                |
|                      |       |                                    |       |                |
| /s/ PETER L. WILSON       |       | Director                                |       | March 15, 2007 |
| (Peter L. Wilson)         |       |                                    |       |                |

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                  |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28           |       | Amendment to Share  Purchase and Call Option Agreement, each dated as of January 17, 2004,  by and between Mr. Yves Guillemain d’Echon et al. and the Registrant  on February 27, 2007. |
| 10.29           |       | Amendment to Conceptus  SAS Distribution Agreement, dated as of January 17, 2004, by and between  Mr. Yves Guillemain d’Echon et al. and the Registrant on  February 27, 2007.          |
| 23.1            |       | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                       |
| 24.1            |       | Power of Attorney (See  Page 87 of this Report).                                                                                                                                                            |
| 31.1            |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                       |
| 31.2            |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                       |
| 32.1            |       | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                       |
| 32.2            |       | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                       |

 

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